The outcome of the test case brought by the FCA on behalf of policyholders holding insurance with 8 insurers has been well reported by the insurance and legal profession. Our interest is not in reviewing the basis of the judgement, nor in discussing the merits of the arguments raised by either side. Those issues are now settled by the decision of the High Court.

Our interest lies in the instructions now given by the FCA to Insurers with outstanding claims to resolve and the way those instructions may be enforced in the context of the current regulatory environment. The FCA have taken a number of different actions since the onset of the pandemic, all designed to reduce the risk of harm to consumers. In the context of the BI case, we are looking at 3 core areas within the broad umbrella of conduct risk:

• Product governance
• Treating customers fairly – with specific reference to PRIN6 – “A firm must pay due regard to the interests of its customers and treat them fairly.”
• Culture

Background

When the pandemic first began to have a fundamental affect on the way customers behaved in the context of the risks insured under typical policies of insurance, the FCA quickly warned Insurers to look at whether or not the policies continued to meet their needs. Manufacturers of products, insurers, MGAs and brokers alike, with an effective product governance process would, in all likelihood, already have begun the process of reviewing their policies prior to this warning. In reality, many had probably not done so and the FCA issued a deadline of 3rd December by which it expected all firms to act. With no initial requirement to provide any form of positive confirmation, initial reactions might have been that the consequences of inaction were likely to be very minor.
Then in December, the FCA began a sample review of firms, looking to establish how effective their product governance processes were at responding to the pandemic. There has been no formal announcement of the work by the FCA, the firms involved have not publicly identified themselves, and when we do get any form of response from the FCA publicly, it is very possible it will be the announcement of something more formal as a review of product governance processes.
That is the background against which we view the latest instructions from the FCA in their ‘Dear CEO’ letter of 22nd January 2021.

What next

The impact of the pandemic will be felt by our country for decades to come. There are the very obvious emotional impacts as well as those that will fundamentally change our way life and business. Insurance firms will not be immune from that and whilst it is difficult to predict all the consequences, our existing regulatory regime and action by the regulator gives us many clues.

Product Governance

Back in November, I wrote an article entitled “Product Governance – Not Just a Pandemic Process”. I looked back at a series of previous articles I have written on the subject of product governance and considered how the FCA might use the pandemic to test the effectiveness of its rules and level to which they were being implemented. My strong recommendation to firms at the time was not to ignore the FCA’s 3rd December deadline, despite the apparent lack of any enforcement taking place. It now transpires there is some assessment of compliance taking place and I do expect further action on this point.

PRIN 6 – Customers’ Interests

The FCA has taken unprecedented action to help minimise the risk of harm to customers. I can’t recall ever seeing a regulator act as the FCA has done in bringing the BI test case and then instructing all firms how it expects them to act before, during and after the decision has been delivered by the Supreme Court. Right now the FCA is firmly focussed on concluding the claims as quickly as possible, reaching finality for customers, whether that is defined by a claim being paid or declined.
As we have seen with the FCA approach to Product Governance though, I strongly suspect that we will, in due course, see some form of review by the FCA into the way firms have actually implemented their instructions and guidance. Firms should proceed on the basis they will be asked to evidence and justify their actions. This is likely to be lead with a reminder to firms that the rules have changed since the introduction of IDD and they all now face a positive obligation to act and act a manner which is in the best interests of policyholders.

Culture

Culture in financial services firms is an increasing area of focus. It’s a topic that the FCA have been increasingly focussed on, without the normal formality of Market Studies, Consultation Papers, Formalised Guidance and changes to the handbook – yet. In a webinar on “leading healthy cultures in a post-Covid world” in September 2020, Jonathan Davidson (Executive Director of Supervision for Retail and Authorisations) discussed:

• • lessons learned from the initial period of lockdown;
  • how leadership roles and styles may have evolved; and
  • what leadership skills are needed to navigate through and out of a crisis.

This may not constitute formal FCA policy yet, but it is a reasonable indicator that culture will be one of the key tools through which the FCA seek to learn lessons from the pandemic and further mitigate risks of consumer harm.
Firms should not be surprised if the FCA (and for insurers the PRA) utilise their approach to conduct to measure how the Board and Executives responded to Covid 19 and the FCA guidance on BI and other claims. Did they act proactively or reactively? We Action Items raised at Board after full discussion of the issues? Were there changes in approach and/or philosophy to dealing with the issues being raised for all stakeholder – be they customer, employees, regulators or third parties?

Conclusions

If your firm is already engaged with the FCA as part of the Product Governance review initiated in December, you will almost certainly have a very good idea of the areas in which your firm met expectations, and any areas where there is scope for improvement. From what we have seen there is a balance between the two and not everyone has achieved that balance.

For those not involved, and for all firms considering how they have met their PRIN 6 and Culture obligations, now is a good time to ask yourself the following questions:

• Did your firm’s product governance process respond expeditiously to the macro and micro environmental changes brought about by the pandemic?
• Did you complete your product governance reviews by 3rd December 2020?
• Have you reviewed your ongoing PROD processes to be more active and substantive? Was there a need to change from form over substance?
• Have you conducted any form of review of your processes for communicating with customers based on lessons learned from the pandemic, with specific regard to PRIN 6?
• Would an independent assessment of the way your senior leadership team responded to the pandemic conclude that your firm has what the FCA might refer to as a ‘purposeful and positive culture’?

These are not questions asked in any attempt to determine innocence or guilt – they are questions firms should be asking of themselves to establish if, and to what extent, that firm needs to undertake any remedial action to improve its own conduct and demonstrate that it has the best interests of its customers at the heart of the way it acts.

We anticipate that we will see further action on these matters from the FCA over the coming months and our advice to firms is to make sure the conduct their own review of their performance in preparation for that.

ICSR has been helping firms manage their conduct risk, including their response to product governance and PRIN 6 (Customers’ Interests) from the days before the pandemic took hold. If you would like to have a discussion about the way your firm meets its conduct risk obligations, please do speak with myself or a member of the ICSR team.

Kenneth Underhill

Director
Implement Compliance Solutions & Resources