Back to school – Short- and long-term strategic challenges for your business
With summer behind us and schools and offices starting to go back to something approaching normal, it’s back to real life this month with a bump. Here at Sicsic Advisory we like to go back to school at this time of year too, by exploring the key topics in the forthcoming regulatory agenda and the strategic challenges facing firms into the next calendar year – and beyond.
This year sees an unprecedented level of regulatory change. New leadership at the FCA has resulted in a regulator prepared to innovate, adapt, and be both decisive and assertive.
This FCA is becoming ever more data driven, following the path of the PRA. The aim is to command a much stronger grasp of the market, and use it to ratchet up standards. With the recent BI court case we see a regulator prepared to assert its authority, make tough decisions, and follow them through. It is adapting, willing to do things differently, and moving quicker than ever before.
All of this ambition for change is laid out in the FCA’s business plan, and financial firms would do well to sit up and listen. Companies need to gear up to deal with a data hungry regulator by ramping up collection and analysis capacity; they need to be strengthening governance; and they need to be building and aligning compliance and legal functions to make sure they stay within both the letter and spirit of regulations.
And there is a lot of new regulation to grapple with.
In this timeline snapshot of four of the most pressing regulatory themes it’s possible to see just how much work companies are facing over the next few months and years. In most cases what’s going to be involved in meeting these new standards and targets isn’t just a course redirection but a fundamental change to business structures, operations, processes and culture.
The Consumer Duty consists of a newly worded Principle about treating customers fairly, supported by cross cutting rules to ensure the avoidance of foreseeable harm to customers, allowing them to pursue their financial objectives, and acting in ‘good faith’ towards them. The four outcomes the regulator is looking for are around customer communication, design of products and services, customer services, and fair value on price.
The second consultation is due in December, with the new rules to be published by July 2022. While it may look like familiar territory for many, digging into these concepts now and laying governance groundwork is key. What does the regulator mean by foreseeable harm, good faith, and fair value? What data will be needed to prove them, and how it can be analysed and presented? There is more work here than there appears at first glance, and we are recommending firm to perform an initial gap analysis and be ready to engage activity on the second consultation in order to shape the final rules.
The most widely reported part of the pricing practices rules for general insurance companies is the ‘price-walking ban’, stopping discrimination by tenure and ensuring existing customers are offered the same deals as new customers, in terms of both price and incentives such as vouchers or discounts. But it is the rules on product governance that reach further into the core of the business, and will require complex fair value assessments on all products and policies – including premium finance – and across the entire distribution chain. The co-ordination of data going across not just departments but organisations is going to be incredibly complex.
These evaluations will then have to be done on an annual cycle for all products, requiring a significant investment in time and resources.
Companies should be at the final stages of their preparations for the entry into force on 1 October of the FCA rules on systems and controls, premium finance and product governance. By the end of the year they will also have to follow the new rules on price-walking and auto-renewals. All of this is likely to fundamentally alter the market, and getting it right, right now ,will not only future-proof firms, but put them ahead on a brand new curve.
Firms have until March 2022 to implement their operational resilience framework, with a transitional period until March 2025 to allow Firms to operate within their impact tolerances. Companies who think their historical operational risk or compliance-based approach is enough, need to look again. This isn’t about the survival of a firm, it’s about the resilience of the market.
Organisations are expected to identify their important business services, set impact tolerance levels for disruption, plan back-up resources and test their ability to remain within impact tolerances against a range of adverse events. They are also expected to develop internal and external communications strategies.
These requirements will have significant consequences on resource allocation and cost base. Findings will need to be used to steer the company’s strategic approach in many operational areas, and many will need to be completely re-thought.
Financial firms are being invited to do their part to tackle the biggest challenge of our generation, and the next. That means thinking about both what damage they’re doing to the planet, and what damage the planet is likely to do to their balance sheet.
The PRA are leading the regulatory way here, and this time last year they were not impressed by progress to date. By the end of the year they will require firms to embed consideration of climate changes into their governance arrangements, incorporate climate risk into financial risk management, use climate scenario analysis to inform business strategy – and then develop an approach to disclose financial risk. The stakes are very high.
The FCA’s work is less well advanced, but no less challenging, and focus on disclosure. With rules set to be finalised by the end of the year, large firms will be required to deliver their first annual climate report by January 2022, smaller firms by January 2023. Within these reports life insurers will have to publish their overall approach to climate change risks and opportunities, with portfolio level disclosers on the level of carbon emissions across their assets, and the carbon intensity of their investees.
Much of this data doesn’t exist, is going to be hard to collect, and could have business-critical implications. Looking at investments now is vital – before prices plunge or competitors snap up investment opportunities.
All of these major regulatory areas cross over and interlace. It is only by looking at the bigger picture that it’s possible to see the sheer breadth of strategic change that’s going to be required – and it is this timeline that needs to be used to engage with every Board. We don’t know how these will all be supervised, or sanctioned. We do know that in five years’ time, successful companies will look very different in terms of strategy, structure, investments and operations.
Now is the time to look at the direction of travel, think beyond compliance, embrace challenges, re-imagine whole businesses, and really lean into these changes – not chafe against them.
For more information and discussion with Michael Sicsic, alongside senior advisors and experienced industry professionals Hugh Savill and Sue Mallender, you can watch the full webinar here in the member’s area on our website.
You can learn more about the topics above from our guides:
General Insurance Pricing Practices