The 2017/18 business plan has made clear that the FCA intends to shift some of its focus from consumer issues to market structures, incentives and distribution in the GI and Protection sector. Whilst the regulator will continue to monitor and review the issues directly affecting individual and small and medium sized enterprise (SME) consumers, this is a sure sign that it intends to focus more directly on competition issues.
The FCA was given powers to enforce against breaches of competition law, concurrent with the Competition and Markets Authority (CMA), in relation to the provision of financial services In April 2015.
Have we already seen evidence of this shift of focus?
There is, perhaps, already some evidence of the shift of focus. This includes stories in the trade press that the FCA is investigating five insurance brokers over information-sharing in relation to aviation insurance. This was reported on 21 April, a mere three days after the publication of the FCA’s business plan. Whilst the FCA has not publically confirmed the investigation is taking place, it would be the first of its kind in the sector since the regulator received its competition powers in 2015. Its competitions powers enable the regulator to change the structure of the market, to make competition more effective, and these powers mean that the FCA can potentially fine firms up to the equivalent of 10 percent of their annual group global turnover for breach of competition law. These powers are additional to the FCA’s ability to use Financial Services and Markets Act (FSMA) powers in pursuit of its competition objective.
What else can firms expect?
The business plan sets out a number of activities that the FCA will be pursuing which demonstrate this increasing focus on market structures, incentives and distribution. The key activities are summarised below and will take place in the context of the implementation of the Insurance Distribution Directive (IDD) which becomes UK law in February 2018.
- Market study on wholesale insurance market
To assess how effectively competition is working in the wholesale insurance market, the FCA will conduct a wholesale insurance market study. The study will include a focus on how firms are ensuring their practices don’t undermine market integrity or create conduct risks. The market study may result in remedial actions for firms.
- Value in the distribution chain
The FCA will conduct a follow up to its review into the effectiveness of governance and oversight of delegated authority outsourcing. This review identified the potential erosion of the value of a product or service resulting from the length of the distribution chain. The review will focus on understanding the end-to-end relationships in these distribution chains and may lead to further action by the regulator.
- Firms’ pricing practices
Following its September 2016 publication of the Feedback Statement on the use of Big Data in retail general insurance, the FCA plans to undertake discovery work on pricing practices in a limited number of retail general insurance firms with the aim of understanding of how these developments are affecting the market. The work will look at how firms’ pricing approaches and rating factors work in practice, as well as the drivers and the types of systems and data firms use to decide the final price to consumers.
Time lines and possible outcomes
The FCA expects to complete the wholesale market study in 2018/19 with the other two reviews completed by Q1 2018/19. However, it is important for firms to take action now to understand how their practices are likely to match up to regulatory expectations of conduct; this is because most of the regulator’s questions and requests for information will take place over the next 12 months. Examples of actions firms should consider taking include ensuring they:
- understand and are able to articulate clearly how their distribution chain works in practice including pricing strategies
- are able to articulate how they manage conflicts of interest in the distribution chain, and
- are able to articulate how they mitigate risks to market integrity which could result from their conduct and business practices.
Remember, although the FCA will be focusing on understanding whether there is effective competition in the market, it is likely that the root causes of any shortcomings will also receive regulatory focus. This may well include failures in firms’ governance, culture and their approach to managing conflicts of interest.
Bovill helps firms to review and improve the effectiveness of their governance and their approach to managing the full spectrum of conduct risks.