When the Financial Conduct Authority (FCA) took over from the Financial Services Authority (FSA) as regulator of the insurance sector last year, its chief executive Martin Wheatley stressed that it would be a very “different animal” from its predecessor. Specifically the new regulator, he said, would be more pre-emptively interventionist, more focused on root causes in corporate culture, and more concerned with outcomes than with literal compliance.
Despite the FCA’s attempts to differentiate its agenda, many insurance firms have yet to take on board the full implications. The continuation of many elements of the FSA’s emphasis on Treating Customers Fairly (TCF), including the so-called six outcomes, has hardly helped dispel confusion. There seems a real danger now that insurance people have simply replaced the TCF mantra with that of conduct risk, which they now recite back faithfully to the regulator without appreciating its true implications.
There are worrying signs that firms are mistaking conduct risk for some kind of TCF Mk II,
As a firm that provides not only training on regulation and compliance, but also compliance consultancy, we have a good insight into how UK insurance companies and brokers are responding to the new regulatory regime. There are worrying signs that firms are mistaking conduct risk for some kind of TCF Mk II, and that some of the same mistakes are being made all over again. The message clearly got through that TCF was something to be considered at board level. But in practice that sometimes simply meant that TCF appeared just above AOB on board meeting agendas.
TCF was never meant to be an add-on or a filter applied at the rear end of business processes. Rather than making it a distinct agenda item, the point was to review the compatibility of every aspect of the firm’s activities with the imperative of treating customers fairly. If that was true with TCF, it’s more than ever so with conduct risk. Rather than talking endlessly about the importance of conduct risk or identifying it as a “new risk class”, insurance businesses should be interrogating their entire business model to assess its implications for customers, business partners, employees and shareholders – and the market in which the firm operates.
It is about asking: how do we make money, how do we generate competitive advantage, how, in every sense, do we do business – and what does this mean for everyone with whom our business brings us in contact. The new regulator is looking for nothing less than business models into which a consideration of conduct risk (including good old TCF) is built at every stage in the process.
It is that far-reaching, but also that simple. Much of the commentary on conduct risk needlessly over-engineers the concept, when getting back to business model basics is at the heart of it.
In its damning report on the RBS miss-selling saga, the FCA noted how financial institutions’ business models and strategies gradually, and at least partly unconsciously, evolved from making money whilst providing a social good to simply mining customer bases for new ways of generating revenue. There was no single point at which a memo went out saying “fleece the lot of them”, but equally no culturally entrenched mechanism for ensuring fair treatment at every stage in the business process.
It is this all-encompassing emphasis on fair and ethical conduct that insurance firms must now be able to demonstrate. That means changing, not just the language you use, but the fundamentals of your business practices and operations.