Power brokers: how to transform into the lynchpins of the ecosystem

• Speaker: Emily Shepperd, FCA Chief Operating Officer
• Event: BIBA Conference 2024
• Date: 16 May 2024
• Note: This is a drafted speech and may differ from the delivered version

Key points

• Brokers have the opportunity to wield power responsibly and play a role as engineers of the financial ecosystem
• The industry must show more leadership in evidencing the value that brokers play when designing commissions and on policing non-financial misconduct and promoting healthy work cultures
• We are considering where we can reduce the regulatory burden on brokers, particularly when insurance is placed through overseas brokers 

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I want you to ask yourself one question: do you want to be seen as a wolf or a deer?

Perhaps you have more affinity with a wolf? And perhaps – rightly– some sympathy because wolves have had a raw deal, always cast as the villains in folklore and culture from Little Red Riding Hood to the Wolf of Wall Street.

Deer, on the other hand, have had an enviably easy ride. Deer symbolise virtues such as piety, intuition, happiness, innocence … the fate of Bambi only served to entrench that sense of wide-eyed victimhood.

But be in no doubt, deer can cause devastation across habitats – as rangers at Yellowstone National Park found out.

You see they had killed off the ‘evil’ wolves at Yellowstone in the 1930s. But conservationists were forced to reintroduce them in 1995[2] after the deer population grew rampant and started destroying vegetation.

What happened next astonished observers: The wolves predictably killed some of the deer, helping to control numbers. But more significantly, they also transformed the behaviour of deer, forcing them to split into smaller herds and forage for food. 

The sparse valleys and gorges stripped bare by unimpeded deer started to regenerate, with trees growing five-fold in height in just 6 years.

Beavers, otters, amphibians, songbirds, bald eagles, mice, rabbits, foxes and even grizzly bears surged in number.

Wolves – previously condemned as the evil predators – were hailed as the unexpected engineers and rejuvenators of the ecosystem.

The phenomenon is known as a trophic cascade[3]. It occurs when predators moderate the behaviour of their prey and enhance the survival of the next level down. Trophic cascades are indirect interactions that have a powerful effect and can control entire ecosystems.

Brokers have the power to be engineers

As brokers, you have a powerful effect on our financial services ecosystem.

The numbers don’t lie; you brought about £105.5 billion in gross written premiums last year. When my colleague Sheldon Mills addressed this conference 2 years ago, the number was £74 billion.

Last year, the insurance brokerage and agent market was worth £17.4 billion[4] – a growth of 10% on the previous year.

That growth of your market and the premiums you wrote is staggering and shows that at a time when much human-driven expertise is facing an existential threat from automation, there is a healthy demand for the services of brokers.

The key to your long-term survival will be maintaining and enhancing that value to your customers and the wider financial ecosystem.

Remember, the wolves were banished from Yellowstone for the perception that they were cavalier predators.

They were reintroduced once other species had a chance to get nearer the top of the food chain.

And the wolves are now cherished: their power is respected but it is also kept in balance.

Crucially, their contribution ensures better stability in the ecosystem.

Pre-empting problems 

When I was invited to speak here today, I was encouraged to talk about any new regulations on the horizon that could affect the industry.

As someone who hails from an industry background – my most recent role before joining the FCA was at a major insurer – I am a believer in ‘if it ain’t broke, don’t fix it’.

However, if a change is required because not to embark on it would harm customers, then to me it is a way of protecting the business.

By the way, you can all relax, I am not about to announce a raft of new rules or regulations.

I am however going to point out why we have the rules we do and why we wrote to many insurance CEOs in September over 2 areas of concern.

When we examined multi-occupancy building insurance[5] – known as MOBI – and guaranteed asset protection (GAP) insurance, there were signs that some aspects of the broker commission model were potentially … well … broken.

We made clear that for MOBI insurance, leaseholders needed more transparency. Intermediaries should show the value they bring.

And in the sale of GAP insurance, our data showed that only 6p in every pound of premium is used to pay claims – and 70p goes on commission.

That raises a question about whether this amounts to fair value, and it is one we have written to firms about. 

Anticipating risk and mitigating harm

We understand that you too are operating in a volatile market and although selling risk is part of your bread and butter, it also poses a threat to you too.

As an aside, I was pleased to see that regulatory changes were only counted as the seventh biggest risk[6] facing the insurance sector!

The risks of cyber harm and climate change pose bigger risks for the sector, and it is right that you focus on building your operational resilience in response to these.

Indeed, one of the areas where we found the insurance sector falling short when we looked at the imbedding of the Consumer Duty[7] was in management information systems.

But I have confidence that this is something the sector can overcome. Your livelihood is based on data. Systems that don’t just serve customers but demonstrate HOW you serve customers are worth investing in.

The challenges that were once the future are now clearly in the present, from climate change to driverless cars and AI.

These pose not just risks but also opportunities for innovation and for brokers who will be able to point their clients to a greater range of new products that should be fit for the future.

We are working with other regulators[8] to formulate a coordinated response to AI, for example. For now, we do not envisage any stand-alone new regulations to cover AI in financial services: where the risks are with the underwriter or technology, they will be the same risks. There are existing regulations that we feel cover the challenges – for now – but as always, we keep things under review.

One risk that cannot be under-estimated is non-financial misconduct and company culture. Remember, non-financial conduct is misconduct. 

Sometimes talking about culture can seem woolly – but be in no doubt, when culture goes wrong, it very much affects the bottom line. We see consistent evidence that poor governance and poor culture leads directly to poor customer outcomes.

In September, we issued our portfolio letter to the wholesale insurance market which warned that this market had a long way to go in having an inclusive culture.

Areas for improvement included tackling discrimination, harassment, victimisation, bullying and non-financial misconduct.

In February this year, we followed this up with a survey[9] of around 600 insurers and intermediaries to try and understand the scale of non-financial misconduct and the controls firms had in place for detecting and handling these cases.

Firms should have processes and procedures to protect their staff and employees must feel safe to speak out without fear of reprisals. All reported incidents should be taken seriously.

Firms need to address any signs of poor behaviour and senior staff need to set good examples: tone from top is critical.

On the other hand, we can’t be too prescriptive as we regulate a wide range of firms. This is important for us to recognise more widely – we are very conscious that what we do has to be proportionate to firms of all sizes.

That is why we look to firms’ boards and senior management to ensure that their processes support the culture and outcome they want to achieve.

One area we look at very closely is in how you treat customers with vulnerabilities and whether or not there is discriminatory practice.

Getting this right upfront will ensure there are no costly regulations or sanctions further down the line.

Indeed, the insurance sector was a trailblazer when it came to pre-empting some elements of the Consumer Duty. Some of the expectations around fair value were already in place for insurance in 2021 – 2 years before the Consumer Duty came into force. 

You have the potential to lead by example in this area. And thank you for all you have done on the Consumer Duty so far. It required heavy lifting from everyone in industry. 

The Consumer Duty will apply to closed products from this July[10].

We will, at all times, remain pragmatic in our approach to enforcing the Duty. The UK insurance industry services customers across the world. We want regulation that works for individual consumers purchasing motor insurance, for large corporations arranging complex insurance contracts, and for everything in between.

That is why last year – and this is particularly relevant for wholesale insurance – we made some important changes to limit the rules that apply where insurance is arranged through overseas brokers and for customers outside the UK.

Since then, we have been engaging with the industry to further consider how we might make changes to reflect the operation and customer base of the commercial insurance market, give greater clarity on our expectations and avoid duplication and reduce the burden of regulation where appropriate.

We won’t do anything that will risk the essential protections that our rules provide for consumers and SMEs. But we do think we could simplify things for everyone.

We really welcome the constructive engagement we’ve had with the industry, including discussions with BIBA members. We will have more to say in the coming months so watch this space.

Scanning the horizon

We have talked about what you can do better as a sector so it is only fair to focus on how we can improve.

We could be better at communicating our intentions or reasoning for our regulations for a start.

The Consumer Duty, for example, was born after parliament mandated that we consult on rules to have a duty of care to customers. This had cross-party support, so we had to find the most practical way of interpreting what is a wide-ranging piece of legislation.

We have also officially adopted a secondary objective to facilitate economic growth and international competitiveness. We do this by promoting pragmatic regulation that makes investors and consumers trust our markets, by boosting efficiency in our authorisations and other services, by fostering innovation and by driving productivity.

As well as being held to account by parliamentarians during what can only be described as grilling by committee in front of live television cameras – and rightly so – our performance is also measured by new metrics.

And we have recently established a Cost Benefit Analysis Panel[11] that will scrutinise our every regulatory move to make sure it is proportionate. One thing we will keep an eye on is how regulation impacts smaller firms.

My first few years at the FCA have been focused not just on this internal transformation but on authorisations. We have sped these up significantly and have started to introduce automated forms to make the process even more efficient. Between January and March this year, 98.1% of authorisation applications[12] were determined within the statutory deadline. 

We know there have been concerns about our proposals to announce enforcement investigations earlier on in the process.

Our approach is designed to raise transparency about what we are investigating with the aim of reassuring customers and investors, educating firms, encouraging witnesses to come forward and better ensuring we can be held to account.

Clean markets, with effective enforcement, support our international competitiveness.

We recognise that this is a sensitive and emotive issue so we will take time to consider the feedback, engage further with industry and explore thoroughly the concerns and evidence shared with us, with an aim of reaching a broad consensus.

Be assured that we do listen. We are evidence-led so will only act where a failure to do so would cause harm to consumers and undermine the integrity of our markets.

Conclusion

I wanted to end today on a positive note. Our relations with BIBA and your members have strengthened – I would say because of, rather than despite, the honest exchange of views we have had.

That is because healthy relationships can only be built on transparency and honesty and most importantly, engagement.

We do not underestimate the size of the business that you bring to the market. We do not underestimate the power you have to connect customers with the right products and services. And neither must you.

We want you to continue to engage, give feedback, tell us what we have got wrong and – dare I say it – what we have got right.

And whether you are seen as deer or wolves, what matters is that both have an important place in the ecosystem.

Thank you.