Regulatory Outlook 2024: Insights from Sicsic Advisory’s Briefing with Matt Brewis
At the beginning of each year, we review the strategic challenges facing the UK insurance market.
This January, we were delighted to be joined by the FCA’s Director of Insurance, Matt Brewis, who set out his supervisory strategy for the insurance sector in four portfolio letters published last September, aligned with the FCA business plan. Our team of experts were in discussion with Matt Brewis to review the market-wide priorities for the sector.
Key take outs:
- Fair Value assessments feedback imminent
- Premium finance “a really important and needed product” but concerns persist on fair value provided – interest rates and pricing differential with annual premium
- Cap on commissions ruled out, but doubts about fair value of percentage-based commissions leaving firms with work to do to satisfy the regulator
- FCA is working with trade bodies to refine the definition of SMEs and wholesale markets to review the scope of Consumer Duty
- Increased use of data to identify outliers for regulatory focus
- Firms should look at the updated FOS approach to total loss settlements
In 2021 the FCA set out a clear ambition to become an innovative, assertive and adaptive regulator, led by data and technology. And it’s done exactly that.
2023 saw a crystallisation of its approach with several high-profile interventions and policy initiatives including on multi-occupancy buildings, GAP insurance and Appointed Representatives. Consumer Duty came into force at the end of July.
As the FCA data analysis grew, so too did the number of s166 reviews. Eight were opened across general insurance and protection in the six months to September 2023, compared with just 1 for the entire year before that.
2024 will largely follow the same themes, but the imperative to do things right is higher, as regulatory scrutiny of new initiatives grows.
Firms are adapting to a new rhythm of attestations and reports (see below) while the first board reports on Consumer Duty are due by the end of July. They must assess whether firms are delivering good outcomes for customers and agree actions where there is evidence of poor outcomes, or of risks to poor outcomes.
Matt Brewis, Director of Insurance, sets out the FCA’s key focus areas clearly in Portfolio letters, with consistent themes across the closely-linked supervisory portfolios. As he joined Sicsic Advisory’s Regulatory Briefing, he explained that those priorities can also be dialled up. The affordability of home and motor premiums, and support for lower income households, is something the FCA will “lean into, given the state of the market,” he said.
Here are some of the key considerations for firms and insights from Matt Brewis from our regulatory briefing:
Spotting the odd one out
With an insurance team of 90-100 people and 6,000 firms to supervise, it’s impossible for the FCA to have interactions with all firms. The 20 largest firms have dedicated pro-active supervisors, but the vast majority are supervised on a reactive basis as issues arise.
Whistleblowers and consumer reports can be a trigger, but it is largely data which guide the regulator’s focus.
If the FCA sees significant changes in the information it monitors through FOS complaints data and regulatory returns, for example, the firm “jumps up our list”, Brewis said.
The FCA has been developing its approach to identify outlier firms with potential issues for a number of years, and this has matured and developed at both a firm and product level.
It was data on complaints and the value measures, for instance, which identified GAP insurance as a product which may be failing to provide fair value to customers.
Firms should therefore have clarity about key indicators of customer outcomes – and their position in the market.
Commissions focus is beyond multi-occupancy buildings
Consumers standards got an upgrade with the Consumer Duty. Firms now need to evidence good customer outcomes, not just fair outcomes. The FCA’s policy statement on multi-occupancy buildings insurance in September was a shot across the bow on how this applies to percentage-based broker remuneration.
While that case was an extreme example with unusually entangled conflicts of interest in the distribution chain, it was the first time the FCA directly spoke about broker remuneration models through the lens of fair value since the Consumer Duty came into force.
The core questions all firms should be asking themselves is whether they can justify a rise in their remuneration simply because the value of the premium has risen. If there is no additional service, and the cost to serve hasn’t increased, how do you justify commission that bears little relation to the work undertaken?
While Brewis didn’t say that firms must move away from a commission-based model, he suggested the industry should reflect on the structure of remuneration. “Where commission is a flat percentage, I don’t know how you demonstrate fair value,” he said. “Sometimes you’re not going to make much money, sometimes you’ll make loads of money depending on what you’re insuring.”
Brewis said that brokers “add significant value” in many cases but that there should be “greater clarity as to what consumers are getting for the services they are paying for.”
Asked if this would lead the FCA to become a pricing regulator, Brewis was clear that it wouldn’t. “I don’t want to be responsible for setting prices,” he said. “It leads to poor outcomes in many different ways. If I say it’s 20%, there will be those who increase their rates because FCA says it’s ok.” Conversely, firms that incur more costs because they spend more time with clients, may end up leaving the market.
Operational resilience dominoes
For Brewis, 2024 is the year of firms and the FCA to finalise their preparations and get ready for March 2025. This is an important area for the FCA but to date, it’s been more reactive – for example to cyber events.
Firms are advised to examine their own important business services and impact tolerances. Brewis noted the need to get to grips with their own providers and their providers’ providers. The concentration of insurtechs banking with Silicon Valley Bank illustrated this point last year, with many firms reliant on the same supplier.
Clarifying the FCA’s stance on premium finance, Brewis said: “Premium finance is important. Not everybody can afford a lumpy payment in one go. Without that service people can’t insure their homes and belongings or go to work in their car.”
The FCA accepts that the provision of the service is not free to provide, but their concerns centre around rates that have no relation to interest rates.
Brewis pointed out that while credit card borrowing fees had followed interest rates upwards in the last year, the cost of premium finance had actually decreased – indicating that there is “no correlation between the cost of the product and what’s being charged.”
More broadly the FCA is concerned about firms using add-ons such as premium finance to compensate for core products making a loss, as it is under this scenario that financially vulnerable customers who are more likely to use premium finance indirectly subsidise customers who pay annually.
Lessening the burden of regulation
Asked where the FCA is considering paring back, Brewis said the regulator is working with trade associations to reduce the regulatory burden on the smallest firms.
“Fair Value assessments are really important and offer real value to the market. How can we simplify them for the smallest firms where the regulatory burden appears to be proportionately significantly greater based on feedback?” Brewis said. “What can we do to make life easier without taking away from our inherent aim of protecting consumers and making markets work well?”
The FCA is also planning to clarify the distinction between consumers and SMEs, and insurance sophisticated buyers. “For a number of reasons, our consumer regulation has bled into wholesale markets in a way that’s not that helpful,” Brewis said. “It’s important that we’re able to draw a line to say that if you’re dealing with a sophisticated company then Consumer Duty is necessary and some of the protections aren’t necessary.”
Towards continuous improvement
The FCA will soon publish good and poor practices of fair value assessments. It will be mainly focused on the general insurance sector, as it has been governed by product rules the longest, but the findings should be relevant across financial services.
This will be invaluable in the current regulatory landscape.
With fair value running through the core of so many regulatory assessments, ensuring good customer outcomes is even more critical to successful business models. Getting it right matters, and that is a matter not just for regulatory teams but for their board members who must sign their names on those attestations.
Michael Sicsic concluded that the regulator is delivering on its promise to be more assertive and noted its transparent focus. And while Brewis doesn’t want to be a price regulator, the FCA is an accidental business model regulator because the issues they look at are core to the business. So these regulatory priorities should be on the board agenda, moving regulatory compliance away from tick box to a strategic matter. This means keeping an eye on changes in the regulatory landscape.
Sicsic Advisory’s Regulatory Forecast can help firms and their boards keep abreast of conditions on key regulatory priorities.
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