Context
Emily Shepperd, FCA Chief Operating Officer, delivered a speech at the BIBA Conference on 16th May 2024, which began with an analogy about eco-systems involving wolves and deers and a phenomenon known as trophic cascade. Trophic cascade occurs when predators (such as wolves) moderate the behaviour of their prey and enhance the survival of the next level down and are indirect interactions that have a powerful effect which can control entire ecosystems. The analogy ultimately asks whether brokers want to see themselves as wolves, responsibly wielding their power for the benefit of the financial ecosystem.
Key points to note and next actions
The FCA does not underestimate the volume of business brokers bring to the market, or the power brokers have to connect customers with the right products and services.
Shepperd highlighted that brokers brought c £105.5bn in gross written premiums last year. This is over £30bn higher than 2 years ago (£74bn), when Sheldon Mills addressed the same conference. Last year, the insurance brokerage and agent market was worth £17.4 billion – 10% higher than the previous year. This shows a healthy demand for broker services. Shepperd stated the key to the long-term survival of broking “will be maintaining and enhancing that value to your customers and the wider financial ecosystem”.
While Shepperd says she is a believer in ‘if it ain’t broke, don’t fix it’; if changes are required because not to make them would harm customers, then do the right thing and make those changes to ultimately protect the business. The September Dear CEO letters, covering Multi-occupancy building insurance (MOBI) and GAP, were highlighted as reasons why the FCA’s rules are important as there were signs that aspects of the commission model were broken (for MOBI,a lack of transparency for leaseholders and for GAP, 6% of premium paid in claims, with 70% paid in commission).
Cyber harm and climate change were noted as posing risks for the sector, and a focus on building operational resilience in response to these were discussed in the section of the speech on anticipating risk and mitigating harm. However, one risk the FCA says cannot be under-estimated is non-financial misconduct and company culture; when culture goes wrong, it very much affects the bottom line and the FCA sees consistent evidence of poor governance and culture leading directly to poor customer outcomes. Firms should have processes and procedures to protect staff; employees must feel safe to speak out without fear of reprisals and all reported incidents should be taken seriously. Any signs of poor behaviour should be addressed and senior staff need to set good examples: tone from top is critical.
The UK insurance industry services customers across the world and the FCA wants regulation that works for everyone, from individual consumers purchasing motor insurance to large corporations arranging complex insurance contracts, and for everything in between.
Last year, the FCA made some important changes to limit the rules that apply where insurance was arranged through overseas brokers and for customers outside the UK. However, the FCA won’t do anything to risk the essential protections the rules provide for consumers and SMEs. Noting that the FCA could simplify things for everyone, Shepperd notes that it will have more to say on this in the near future, stating that it could be better at communicating its intentions or reasoning for regulations.
The FCA wants firms to continue to engage, provide feedback, and tell the FCA what it has got wrong and right.