Context
The FCA has issued a Dear CEO letter to the Lloyd’s and London Market Insurers portfolio setting out the key potential risks of harm to customers, together with its expectations of how these potential risks should be mitigated and the strategies for doing so.
This portfolio covers Lloyd’s & London market insurers, re-insurers, P&I clubs and runoff firms. The FCA’s overarching aim in supervising LLM firms is to enable the provision of a wholesale market that works well for its participants and customers and preserves the integrity of the markets.
Key points to note
- The FCA has grouped firms with similar business models into at least 1 of approximately 40 portfolios
- It has developed a series of supervisory strategies to allow effective monitoring of firms along with specific targeting of firms that pose the greatest risk of harm
- The FCA has identified 3 common potential drivers of harm to consumers and will prioritise the supervisory work as follows:
- Ineffective oversight and governance which can result in customers being sold unsuitable products or receiving poor claims outcomes
- Culture and non-financial misconduct where a failure to confront poor behaviour can lead to bullying, discrimination and bias
- Inefficient and poorly controlled general insurance distribution chains which have been a source of substantial and persistent harm to customers
- The FCA has provided some critical components of good governance and oversight:
- Clear accountabilities for those activities which affect outcomes with appropriate delegation and escalation
- Robust risk framework in which key risks of harm are identified, monitored and mitigated by accountable individuals
- Strong and independent board oversight and challenge of key decision-making
- The FCA expects firms’ culture and governance to drive good behaviours and produce fair outcomes, and for individuals to be accountable for their actions:
- All firms are expected to show how they have incorporated the discussion paper Transforming Culture in Financial Services into their thinking on culture and to demonstrate they are working in the interests of their customers https://www.fca.org.uk/publication/discussion/dp18-02.pdf
- The FCA expects firms to meet their obligations when part of a distribution chain as outlined within the Insurance Distribution Directive
- The FCA has also identified other areas of risk as:
- Cyber risk and operational resilience
- Hardening of the market
- EU withdrawal