Lloyd’s and the London Market, your time has come

With Lloyd’s, London market and wholesale broker accountability drawing the regulator’s attention in recent weeks, Michael Sicsic, managing director of Sicsic Advisory and former Financial Conduct Authority head of supervision, considers what this means for firms.

This is the year for Lloyd’s and London Market.

Last November, the FCA’s new head of wholesale general insurance, Charlotte Cross, published a second Dear CEO portfolio letter.

Addressed to Lloyd’s and London Market insurers, the tone and areas of concern raised were similar to a letter to London Market Intermediaries and Managing General Agents (LLMI) brokers earlier in the month.

Taken together they leave firms in little doubt that the FCA’s focus on the potential harm caused by complex supply chains and poor governance has been sharpened and the regulator is ready to hold individuals accountable. Lloyd’s and the London Market: your time has come.

Cross, who joined the FCA 18 months ago, after almost 20 years at an insurer, warns that the FCA “will be proactively looking for indicators of high-risk firms” for each area of harm it identifies and that it will act if firms and individuals do not meet expectations.

Many of the areas highlighted in the seven-page letter flow back to conduct, accountability and responsibility.

This year the FCA will start to enforce SM&CR for brokers. That means there are only a few months remaining before the consequences of not getting it right could be felt acutely. While insurers have lived with SM&CR for longer, the focus on accountability is a good reminder for all firms in the Lloyd’s and London market that their interlinked ways of working can’t afford a weak link in the chain.

In our experience most brokers have some way to go to be confident of passing a review ahead of the 31 March deadline for submitting their certified population and ensuring conduct rules training for all employees.

One area where firms should focus is to make sure senior managers have clear individual ownership of different business lines and activities. Given its observation that business models that employ “elongated distribution chains, with poor product oversight both in design and purpose” cause “direct customer harm”, then having robust governance procedures and documented Chinese walls is all the more important to prevent conflicts of interest.

Cross also reiterates that firms should not use past FCA approval as a proxy for passing the fit and proper test. Indeed, the FCA expects that in large firms some individuals will not meet the fit and proper standards and should be removed from certified roles.

The link between culture, conduct, and governance and oversight is crucial to understand. Good governance frameworks make the difference between a nice-sounding mission statement and everyone in an organisation consistently understanding what behaviour is expected of them.

Lots of people intuitively “get” culture and its importance, but when you ask them to define or explain it, they struggle. That makes it hard to measure.

The reality is there is no one size fits all – there is no standard of culture with specific attributes. From a regulatory perspective, the FCA’s focus and language has tended to centre on having a healthy culture, which means whether what a firm says it wants to do in its purpose, mission and strategy, is what ends up happening. That’s very much measurable through outcomes, both for customers and people.

The themes and concerns for brokers and insurers in both letters have a lot in common, which makes it interesting to examine where one part of the sector receives an additional warning.

In the passage on the hardening market, Cross expects insurers and intermediaries to work together to explain why premiums may be rising while available cover may be reducing. In the latest insurer letter she goes further to single out the FCA’s work on business interruption insurance, warning “that the meaning of terms and the consequent effects for coverage in policies are unclear for many customers”. Whatever the Supreme Court ruling, the FCA has seen hundreds of thousands of business customers with a product that was either unsuitable or that they didn’t understand. It will be on high alert for more of the same.

For brokers, the additional focus is on financial resilience and a reminder that the FCA is the prudential regulator for intermediaries, as well as supervising conduct for both brokers and insurers. Some examples of requirements that the FCA has recently requested, more frequent reporting on liquidity metrics, formalisation of wind down plan as per their updated guidance, additional focus on client money and financial resources assessment.

Ownership, oversight and good governance are the pillars that run through all of this. But in 2021 the buck stops will stop at the top – and with a person.

This article was originally published by Insurance Post