Introduction
Thank you for your introduction Emmanuel. I am very pleased to have the opportunity to speak here today. Next week the Financial Conduct Authority will pass the milestone of its first 100 days. So this is a good time to reflect on where we have come from, where we are going, and how we want to work with you.
Importance of the insurance market
You don’t need me to tell you about the important and unique role insurance plays in the daily lives of millions of people. We all want an insurance industry that is sustainable, innovative and competitive; one that customers can trust; so they can have confidence that the everyday services they need are provided in a straightforward way. Put simply, this means that a successful market is built on delivering on the commitments you make to your customers in a fair and transparent way.
That’s what I am here to talk about today. Insurance brokers are fundamental to a healthy, competitive and diverse insurance sector. We want to help maintain and grow the market’s reputation through effective, forward-looking and proportionate conduct regulation. Again, put simply, a good business, supported by good regulation.
The three Rs
Although I’m old enough to still think of the three Rs as reading, writing and arithmetic, this conference moves this on and bills the three Rs as ‘regulation, regulation and regulation’.
Throughout the day you will hear lots of opinions on a range of important regulatory topics.
In my time as head of insurance I have always valued the diverse and healthy debate at events like this. I am sure Steve White and the other speakers will raise many important points in their sessions, and they are right to do that. We are here to listen to all your views and to continue building the constructive dialogue we have with you. I see that dialogue as being vital in building a shared view of what good looks like in a market that works well for consumers.
To do that, I would like to talk about my own ‘three Rs’ that specifically relate to the future of insurance broking.
These are:
- restoring trust and confidence in the insurance sector
- re-evaluating how you do business in the context of the new regulatory landscape and an ever-challenging operating environment, and
- resolving to work with you to deliver a market that works well in the interests of customers.
Restoring trust and confidence
I want to particularly focus on restoring trust and confidence, because it is a fundamental theme right across financial services. Trust in financial services has been critically damaged over the last few years. When you consider the variety and number of scandals it is easy to see why customer confidence is so low.
LIBOR, Payment Protection Insurance and interest rate swaps may seem a world away from what you do daily as insurance brokers. But to the person in the street it doesn’t necessarily seem that way.
I certainly don’t see it that way, for a simple reason. When things go wrong it tends to reflect badly on all financial services. Customers interact with all financial services every day; to bank, to borrow and to save for retirement, as well as to protect themselves with insurance. You are part of a bigger picture.
I accept the insurance industry hasn’t been as deeply scarred by the financial crisis as banks. But that doesn’t tell the whole story. Our customer research indicates that the insurance industry may be critically misunderstood by its customers, and worse, customers lack confidence in insurers and at best see buying insurance as a necessary evil; transactional business rather than one that can add value to their lives.
For example, our work on motor legal expenses insurance suggests there is little or no relationship between customers and motor insurance providers. This research included brokers. So it isn’t only a challenge for insurers.
We have a shared agenda
Addressing this type of mismatch, closing that gap, needs to be a priority for all of us - we have a shared agenda - we all want customers to see the value in insurance and buy it with confidence.
This is not a time to be complacent, or accept the status quo. It is a time to learn and understand how and why things can go wrong and work collectively to put that right.
The questions and challenges we face are deceptively simple:
- What do we need to do to better understand customers, what do we need to do to win back their trust and confidence?
- How can insurance brokers show the value they add by keeping the customer at the heart of their business model?
- How will we measure success?
Answering fundamental questions like these is far from straightforward in a world where firms are subject to extreme revenue pressure, ferocious competition, a war for the best talent and, in personal lines, an almost obsessive focus on price.
We all know these are testing times. But merely recognising that isn’t enough - the future viability of your businesses and the sector as a whole will be defined by how you respond to these challenges.
To do that we need to reframe the discussion about insurance brokers’ role in the financial system; to focus on the value that you add to your customers; to concentrate on what is important to the millions of customers you serve.
People need confidence and trust that you will act with fairness and integrity. They need to feel their fair and reasonable expectations are at the centre of how the insurance market operates. And, most importantly, they expect you to demonstrate this through the way you treat your customers, the way you behave towards each other, and how you operate in the market. This is what the FCA means by ‘conduct’.
We are not afraid to actively promote what you do. When we see something positive we will highlight it. Working with you is a fundamental part of restoring and enhancing trust. However, at the same time, we will be very clear and quick to act where we find areas for improvement.
We realise this is likely to be a long journey. As you will know from your own client relationships, trust grows slowly and can be lost quickly. It has to be earned, nurtured and maintained through integrity, fairness and professionalism.
That is why you have a new conduct regulator - the Financial Conduct Authority - to help with that process.
Re-evaluate - What the FCA means for you in a changing world
This brings me to my second ‘R’ – re-evaluate.
I would like you to re-evaluate how you do business in the context of the new regulatory landscape.
To help you better understand what this means I will set out our key aims, how we supervise the insurance sector and why that will feel different.
Our aim
Our remit is very straightforward - to make the market work well. That means a market that works well for both participants and customers. This should be in all our interests – profits for good firms; exits for bad ones.
We want to see a sustainable sector – with firms competing for business by offering better services, better value and the types of products clients want and need: a market where the successful firms are the ones that respond most effectively to customers’ genuine needs.
Insurance brokers have a particularly important part to play in delivering innovation and choice for customers. For example, brokers provide expertise and access in niche markets where customers may have difficulty obtaining cover through mainstream channels, or for commercial business where experience, insight and advice is critical to placing a complex risk.
Proportionate, good regulation should help drive progress in this area.
Our regulatory approach
To make markets work well we have a new style of regulation – not just new formal powers embodied in legislation, but a new approach to regulation.
Not regulation through the rear-view mirror – but forward-looking regulation that asks:
- What are the current and future trends that impact the broker model?
- What are the key drivers of profitability?
- Which lines or activities are growing or shrinking?
- Where is product change or innovation driving?
- And fundamentally, what does this mean for customers – does this show that the market is working well, are customers at the heart of a firm’s business?
Being forward-looking means regulation based on judgement, not box-ticking.
For example:
- Not is this sale compliant with a set of narrow rules, but is the outcome good for my customer?
- Not just whether a firm has an adequate governance structure and control frameworks, but is the culture right?
So that is what to expect from our regulatory approach – forward looking, market-intuitive and judgement-based supervision.
How we supervise insurance brokers
Focus on senior management
Our style of supervision increases the focus on senior management and firms’ culture. This is our approach for firms of all sizes - we expect you to demonstrate that your customers are at the heart of your business model. Senior management teams set the culture of their firms, so we test that the strategy and tone set at the top align with good customer outcomes.
In our supervisory work, we look at how this affects customers where it really matters. We do this through undertaking more customer research and mystery shopping, and through our firm risk assessments, where we focus on key issues and risks to customers and markets.
Enhanced analysis of the sector and insurer and brokers’ business models
We gather and use a wide range of data, information and intelligence to enhance our insights into the market. We consider current and future environmental challenges, changing dynamics, and wider regulatory and legislative developments.
Our analysis of the sector feeds into our analysis of insurance business models. This helps to deliver informed insights into how business models are driving and managing risks.
So we can get to problems early, we consider, on a forward-looking basis, the key customer risk drivers inherent in business models; where in the value chain current and prospective detriment could occur, and how it could manifest itself.
A fundamental part of this will be testing the viability of business plans and strategies in the context of the wider market and risks that are posed to customers.
Product design and distribution
For example, we combine the outputs of our business model analysis with customer and market intelligence to inform our view of product design. Our experience of product mis-selling has been that products designed for a specific market or group of customers were sold beyond their original design parameters. This is also an area where incentives can drive poor outcomes.
By putting more responsibility on providers to ensure that products only reach the customers they were designed for – and that they function as expected – there should be fewer incidents of major customer harm.
The FCA goes further than before in challenging providers on the value-for-money of their products and services and checking that charging and remuneration structures can ensure good outcomes for customers.
If necessary, we are ready to intervene directly – for example, by restricting the use of specified product features or the promotion of particularly high risk product types to some or all customers.
We are also continuing our work on sales incentives and reviewing how firms are acting on the guidance we published to help firms avoid creating and operating incentives schemes that drive mis-selling.
Thematic work
We are already making a real difference through our thematic projects.
Thematic work is fundamental to the way we supervise the general insurance market. We undertake thematic projects to assess current and future risks in relation to a particular issue or product. This may be across a number of firms, within a specific part of the sector, or at market level.
Our recent projects on mobile phone insurance, motor legal expenses insurance and premium finance characterise our approach – working with the insurance industry and its customers to deliver better outcomes for customers.
At the recent BIBA Conference, Martin Wheatley announced[2] a major thematic project we are undertaking this year into personal lines claims. This work will focus on household and travel and responds to increasing customer complaints about the claims process. The project will explore the extent to which the customer as a claimant is at the heart of insurers’ business models.
We are encouraged by the positive way firms, trade associations and customer groups have responded to these projects. For mobile phone insurance and motor legal expenses insurance firms have engaged strongly and changed the way they operate as a result of our feedback.
Launch of the conflicts of interest thematic project
Another area I am keen to explore is conflicts of interest. I am particularly interested in how insurance brokers identify and manage potential conflicts where they receive revenue from both their customers and insurers.
To be absolutely clear, when I talk about revenue received from insurers I do not mean the payment of broking commission in a normal range. I am talking about profit share, volume arrangements and other payments received from insurance companies.
We need to establish whether the flow of this type of revenue from insurers to brokers acting as agent of a customer might:
- unduly influence a broker to recommend an insurer against the customer’s best interest, and/or
- cause a broker to improperly perform its duties to its customer.
That’s why today we are launching a strategic thematic review into how UK insurance brokers manage of conflicts of interest.
Insurance brokers’ business models have changed radically over the last 20 years. Some brokers have shifted from being ‘vanilla’ product distributors to product designers, underwriters and claims handlers through delegated underwriting and claims authorities. An increasing number of brokers now take on many of the value chain functions historically performed by insurers. This means conflicts of interest may have mutated into a very different risk.
The review will focus particularly on SME and microbusiness customers. The SME customer segment is a major employer and the ‘engine room’ of the economy. It is also a mass market – according to the Department for Business, Innovation and Skills there were an estimated 4.8 million private sector businesses in the UK[3] at the start of 2012.
The recent interest rate swaps experience demonstrates that although SME customers can be sophisticated in terms of the businesses they operate, it does not necessarily follow that they are sophisticated buyers of financial products and services.
This work will help us test whether the essential everyday insurance products that those businesses need are designed and delivered fairly. We will look to trade associations such as BIBA and LIIBA to work with us collaboratively as this work progresses.
I will expect my team to deliver its findings, and final recommendations, by the last quarter of this year.
Resolve - working with you to deliver an insurance market that works well in the interests of customers
I would now like to turn to the last of my three Rs – resolve
I have set out the need to restore trust and re-evaluate how you do business in the context of the new regulatory environment.
I am now asking you to resolve to work with us to deliver a market that works well in the interests of customers.
We will work with you, trade associations and the Government. This should mean we are easier to access and work with in important areas like the Insurance Mediation Directive and client money.
We will engage with you and listen to you. We are looking to build a transparent, predictable and productive relationship that supports growth, innovation and the value-added services brokers deliver in a positive way. Our recent transparency Discussion Paper on claims data is a good example of how we will listen to the market, and engage early on important issues.
We will encourage positive behaviours and come down hard on blatantly bad behaviours that bring the market, your market, into disrepute. Although bad behaviours may be a significant minority, the actions of the few can have a disproportionately destabilising impact on the way the market is perceived.
To be more specific, I am asking you to resolve to work with us to:
- get the basics right
- focus on clients, to identify and close any gaps between their legitimate expectations and what you deliver
- recognise where things have or could go wrong, and fix them, and
- let us know about poor behaviour and conduct, through our whistleblowing line.
Getting the basics right
Much of what I have spoken about is work we have already done and work we plan to do. It is also important to focus on the ‘here and now’, and think about today’s challenges.
Our supervisory experience shows the cost to customers where firms don't get the basics right. Our experience also shows how doing the simple things well hugely enhances the customer experience, and increases retention.
With this in mind, I would like to leave you with some questions to reflect on. These are the type of questions our supervisors will be asking you in risk assessments, testing your culture on the ground, and discussing with you at our road shows and workshops:
- How do you demonstrate you identify and manage potential conflicts of interest effectively?
- Is your customer a genuine client, or an upsell opportunity? For example, do you sell add-ons and premium finance fairly?
- How do you make sure products and fees are properly disclosed and well understood by customers?
- Are your staff incentives consistent with delivering good customer outcomes?
- What does your complaints handling say about your culture?
- What due diligence do you undertake when using unrated insurers?
Conclusion
Customers have a bewildering number of ways they can buy insurance. The market is a very different place to where it was 20 years ago, and it will continue to evolve. It has significantly changed since my world of reading, writing and arithmetic.
At the start I set out three R’s – restore trust and confidence, re-evaluate how you do business and resolve to work together with us. We want to see a viable, healthy insurance broking sector where customers have genuine choice from firms and individuals they can trust.
In the context of Emmanuel’s three Rs – regulation, regulation, regulation – it is now down to you show that you put the customer at the heart of your business, to earn that trust through your professionalism and integrity, and show the value that you bring to customers’ insurance choices.
It is down to us to complement that by ensuring that good insurance broking is supported by good regulation – to make sure you and your clients can have confidence the insurance market works well.
Getting this right is in all our interests.