First impressions were puzzling. The FCA’s strategy document for 2022 to 2025 looked and read more like a rather long marketing brochure. And its business plan for 2022/23 looked and read more like a management information pack. Lots of interesting things are said in both, and repeated several times. Lots of determination is present, but often in a nebulous direction.
That latter issue may be down to the regulator’s focus changing from sectors and processes, to outcomes. This is quite a significant pivot and clearly, they’ll need plenty of determined to deliver on it. Yet a close read of both documents makes me think that delivery will be difficult at best, pyrrhic at worst.
In this analysis piece, I’m going to explore four implications for insurers arising out of the FCA’s strategy and business plan. This covers both the plans themselves and the knock-on effects that are likely to spin out of their implementation. How individual insurers emerge out of this will come down to how they can recognise and respond to the implications as they emerge and develop. The word ‘rocky’ comes to mind.
The Lens of Ethics and Trust
As ever, the lens through which I’ll be doing this will be that of ethics and trust. This gives you a radar that is wider than compliance, yet one that picks up on issues that have challenged just how effective the three lines of defence have been for insurers.
What this lens tells me is that the FCA will struggle to deliver its strategy, yet will defend its performance in increasingly embattled circumstances. Insurers will find themselves stuck between the regulator and increasingly assertive consumer advocates. The reality that exists between ethics and compliance will thus become more defined. Those insurers who have the vision and capabilities to navigate their businesses through such troubled waters will have a much more stable environment in which to attract both customers and employees.
The Focus on Outcomes
One word will sum up the FCA approach over the next few years: outcomes. This is a regulator who wants to be outcomes driven. This should be no surprise, given that it also has an ambition to be a data driven regulator. You can see in both the strategy and business plan that the two go hand in hand. Outcomes need to be measured and data delivers the numbers to be measured. So while the strength of their emphasis on outcomes may surprise some, it’s largely a reflection of just how central data is to their plans.
Yet I would challenge the regulator with a rather obvious question. If you had been doing five years ago what you want to be doing now, would you have spotted early and addressed the issues that underlay the loyalty penalty campaign, the poverty premium campaign and the recent ethnicity penalty campaign? Nothing in the strategy and business plan tell me that this would have been the case.
History tells us that an outcomes based approach relies on two things. Firstly, the outcomes you measure reflect what you’re looking for. And what you’re looking for reflects the problems you’re interested in addressing. That’s not the same as the problems that need addressing.
Take something like personalisation. It’s the biggest change happening in insurance at the moment, yet I’ve been reliably told that the regulator sees it as a quite natural process for the sector to engage with. There are no problems with it. That’s not what a growing number of people are thinking.
The second thing that an outcomes based approach relies on is being able to see what the data is telling you. If you think back to 2018, the FCA had data about price walking, but didn’t see the problem that Citizens Advice’s loyalty penalty report make clear. The FCA have been looking at discrimination in pricing for at least three years, yet nothing seems to have happened in relation to that. Despite promising all sorts of things to the Treasury Committee in 2019, there’s nothing in either document about discrimination.
Seeing the Issues?
So there’s a looming danger that the FCA will just not see the issues that it isn’t measuring. Meanwhile, others will be measuring those issues, because they’re concerned about them. And so insurers will find themselves caught in the middle of an ‘issues battle’, the outcome of which is more likely than not to decided by the political influence that is brought to bear on it. Not a healthy situation for a transforming market.
Insurers should press the regulator to adopt a more open mind on what outcomes should be measured. It could at least be more open to assimilating the outcomes in relation to insurance that others feel need to be measured. This will come in large part from a transformation in how it engages with and works alongside key external audiences. There are lots of signals that the FCA does work with the markets it regulates, but not enough signals that it is working with representatives of the consumers on whose behalf they regulate.
One further point about outcomes based regulation. Insurers are likely to see reviews (when they happen) becoming shorter and sharper. Fewer reviews will be as extended as say that on price walking. And this will be down to data. It will prime the issue quicker and determine the response the regulator expects the market to have. Insurers need to be able to respond accordingly.
Appointed Representatives
One of the few specifically insurance issues that the FCA raises in these documents is that of appointed representatives (ARs). It’s clear that they see distribution through ARs as a significant issue that must be addressed.
Yet this emphasis doesn’t sit comfortably alongside now well established initiatives like Treating Customers Fairly and the Senior Managers and Certification Regime. Surely both initiatives were in their different ways expected to deal with how ARs were being managed by their principals?
Will a pivot from processes to outcomes change this track record? I struggle to see it happening. I can’t work out why, three years ago, the regulator was telling fellow regulators that it was training systems to spot both when and where an intermediary was mis-selling a financial product. If so, then why is it having to reiterate the problem with AR mis-selling and seeking to evidence this with complaints data? The British Steel Pension Scheme is an example of why these questions need to be asked.
Insurers who distribute through ARs can expect some form of short, sharp review into their management systems. I suspect some sort of league table or name and shame tactic could be used to shake up perceptions around how ARs should be managed. The FCA devote a lot of space to ARs in their three year strategy and will want to show both the market and their political masters some results from how it has been addressed.
Insurers should expect to see this in 2022 or early 2023. In a section on ‘dealing with problem firms’, the regulator says that…
“In year 1, we will focus our efforts on dealing with a greater number of problem firms than in previous years.”
The obvious places for insurers to start reviewing their AR arrangement are around performance, reward and monitoring. I would also urge them to think a little wider and launch a serious review of how they are framing, managing and mitigating conflicts of interest. There’s an obvious line that can be drawn between conflicts of interest and outcomes coming out of ARs.
The Two Sides of Data
As I said earlier, a regulator can’t be outcomes orientated without first being data driven. And so when you see page after page of outcome metrics in the FCA’s business plan for 2022/23, this sends one clear message to insurers: the regulator wants your data. Sure, this is going to be dressed up as a ‘RegTech efficiency’ but at the heart of it is what I called back in 2015 ‘panoptic regulation’. The regulator wants to see everything insurers are up to, in as near to real time as possible. This will change insurer/regulator relations and insurers must prepare for this.
The other side of data is of course data ethics and how insurers collect, arrange and use their data and algorithms. Three years ago, the regulator had data ethics as a new cross sector priority. Then it went silent on data ethics, until, in their business plan for 2022/23, they had this to say…
“We are also exploring the concepts of ethics and bias in algorithms and AI to ensure that all technologies - including AI - are used in a responsible way that avoids causing harm to consumers.”
Sure, it’s a big topic, but a regulator still exploring it three years after setting it as a priority feels, well, like they’re quietly nudging it into the long grass. Insurers should not expect it to stay there. And what is more likely than not to kick data ethics back into play will be the Citizens Advice’s ethnicity campaign.
What insurers should prepare for is the possibility that, on the one hand, panoptic regulation makes it feel like the regulator is in the room with you when you’re making decisions. And on the other hand, what they could well be listening for is the data that evidences discriminatory practices. Sure, there’s a number of stages to be gone through before those two things come together. That said, it could be so significant a development that insurers should consider looking at it now, if only to then be able to say ‘here’s the evidence that we don’t do that’.
I’m mindful of one complication here. It’s clear that some big financial services firms are seeking to influence how the regulator frames discrimination in artificial intelligence and the like (such as here). It’s also clear that consumer groups are seeking to do exactly the same thing but from their perspective. The danger is that this could produce a bout of myopic indecision in the regulator. And with something as significant as discrimination, that is not a wise thing to do.
How this ends up is hard to call, but one outcome could be a short sharp review. Those insurers who have already prepared their own data around discrimination will take this in their stride. Those who haven’t will struggle.
Summing Up
There’s a lot of aspiration in the FCA’s strategy and business plan. Nothing wrong with that, but how the reality turns out could spell all sorts of things for insurers. Those who prepare for what might emerge over those three years will navigate with some confidence the troubled waters that I think lie ahead. This means taking a serious look at the three lines of defence, at conflicts of interest, at discrimination controls, at data pipelines, at distribution strategies and more.
The FCA is attempting to pivot. The implications of them not succeeding are almost as significant as them succeeding. So either which way, insurers need to prepare for some interesting times ahead.
