Understanding the role of the regulator in the time of crisis
An outline of the principles and guidance from financial regulators to protect the interest of its customers.
Responsibilities of the regulators
During a crisis, many firms and organisations will be looking to regulators to provide much needed guidance and information. For the insurance sector, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) ensure that certain responsibilities are identified and maintained, including contributing to the securing of an appropriate degree of protection for policyholders.
The way the FCA have handled their approach to the coronavirus pandemic so far is by remaining consistent to encourage the maintenance of responsibilities and accountability, as applied by the Insurance Distribution Directive (IDD) and Senior Managers and Certification Regime (SM&CR). Without being been ultra-prescriptive, attention has been drawn to known policies that need reviewing. To achieve this effectively they have been reminding firms of their obligations by using the FCA handbook, such as their Business Principles, Systems and controls, and Code of conduct.
During these unprecedented times, the FCA and Chancellor have managed to respond quickly to what’s going on. As this is unchartered territory, no one can say with certainty that they know how long this is going to go on for and what the long-term impact will be on individual customers. If they already knew the answers it would be easier to make decisions. However, by reviewing existing policies and remaining compliant, progressive steps are being made to help provide more certainty to customers.
Not every single policy needs to be reassessed, as this can create unnecessary paperwork when many personal lines are still fit for purpose. However, if you’re unable to service that insurance (eg boiler service repair) then how a policy wording can be triggered should be revised. If you can’t offer contractual benefits then you can’t expect a customer to pay for services not provided. If repairs are not sourced through insurance, then many won’t have sufficient personal funds to repair or replace (especially those who may consider themselves ‘vulnerable’). Regulators do not want firms profiting due to the coronavirus and will be examining closely those who refuse to pay out claims due to small technicalities or circumstances beyond the customers’ control.
Putting customers first
The FCA have also reminded insurers to be mindful of vulnerable customers. There are those who were already experiencing financial difficulties as well as those who have become vulnerable since the pandemic began. People’s circumstances are changing all the time, meaning some will find it difficult to keep up with payments as well as ensuring their cover is kept up to date. How firms are treating their customers will also come under scrutiny from regulators, making sure people are being treated fairly.
To effectively monitor how insurers are responding, regulators need to consider areas where insurers aren’t giving customers what they need. This can be achieved by observing a spike in customer complaints or a trend in types of rejected claims. Firms should not be ignoring issues that are affecting their customers, being mindful of trends so that products and customer profiles can be reassessed accordingly. If monitoring reveals that profitability has a higher ratio than paid claims, something needs to examined. However, the FCA must maintain a good balance of rigorous measures versus allowing the sector to profit so that the burden is not placed solely on the retail consumer.
While rules and regulations provide a framework for people to be able to make decisions, it needs to be noted that flexibility also needs to be factored in. Through no fault of the individual, situations change. Some may find that their policy wordings no longer reflect their current situation due to lockdown restrictions. Others may also find themselves underinsured due to new factors changing the value of what they need to cover.
The stress at individual consumer lever and across certain sectors should be recognised and reviewed appropriately in line with the cover originally intended. No longer having adequate cover should not be treated the same as an intentional act of fraud. Poor cashflow will affect how people pay for their insurance premiums or premium finance products.
Interpreting the guidance
The FCA are regularly publishing updates on their guidance and recommendations. This requires firms and individuals to keep up to date with the latest information and understanding how any changes may affect them. Consultation periods are also becoming shorter as guidance and rules are trying to react quickly. The sector is still being given the chance to respond with firms still agreeing with core values.
UK regulation is based on principles with the FCA reminding the sector of those principles, and how to apply them in a fair and honest way. But these are principles, not 'rules'. There is no exact way of doing something, which gives firms the freedom and responsibility of deciding how to apply these principles, for example when to offer payment holidays or the interpretation of cover. By taking reasonable steps as senior managers, guidance and the SM&CR equip people to work out how to deal with customers in reasonable way, with recommended considerations. It is up to managers to decide how to implement this as it is expected that insurance firms should continue to act 'professional' and not have to wait for the FCA to always instruct on what 'good' looks like. But post-crisis, if it is determined that they have not been taking these principles seriously then the regulator will take action.
Scaling down consultations has allowed regulators more resources to observe inappropriate action so that they can be quick to react. Some customers will be unaware they are being caused harm at the moment (eg paying for high premiums they do not need). Litigation, enforcement and customer harm occurs during a crisis, whether it is intentional or not. But while the FCA are already taking action, investigations and enforcement could take place for months or years after the crisis. If action is not taken against the firms causing and exacerbating that harm then political action may then be taken against the regulator.
Authored by CII
The Chartered Insurance Institute (CII), the leading professional body for the global financial services profession, exists to promote higher standards of integrity, technical competence and business capability. With over 115,000 members in more than 150 countries, the CII is the world's largest professional body dedicated to insurance and financial services.
Our membership covers all disciplines within the insurance industry (claims, broking, underwriting), those working in the life and pensions sector, the mortgage advice market and financial advisers (under the Personal Finance Society brand).
Our Royal Charter requires us "to secure and justify the confidence of the public" in our members and in the insurance and financial services sector.
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