The Future of Conduct Regulation

As we moved full steam ahead into 2020, there was a good opportunity to reflect on the future of conduct regulation in the context of a post-Brexit world, a renewed political agenda and a leadership change in progress at the top of the FCA.

All of this has changed since the ABI event on the ‘future of conduct regulation’ was planned and it shows just how long a few months can be in today’s world. It won’t come as a surprise that the Coronavirus pandemic has re-focused the mind of industry leaders, risk professionals and regulators in the here and now, with all efforts currently on managing the impact of the crisis.

Indeed, we need to only look back to the financial crisis of 2008, where we can expect a similar or even larger transformative effect of the current crisis to shape conduct regulation as we know it today.

So, in this context, it will be a good opportunity to step back and reflect on the trends that will shape the future of conduct regulation, and outline what the industry and firms can do in anticipation of what is coming. This is the ambition of the event organised by the ABI and sponsored by Huntswood on the 12^th of May.

In the past few months, the FCA has covered this topic in several communications, giving us some clues about its future direction of travel. Also, the most recent FCA business plan provided some additional elements to enrich this reflection.

In addition to the necessary adaptations required in a post-Brexit world, and the potential opportunity for the FCA to drive change in their own framework, we have identified 3 themes we believe will form part of the basis of the future of conduct regulation.

1. Individual accountability and conduct standards

The focus on individual accountability originated in the 2008 crisis and has driven vast reform in the UK, with the recent extension of SM&CR to all financial services firms last December. Other countries are pushing a similar agenda; and international standards setters are supporting such initiatives.

However, it is fair to say that we are still in the early days of such an approach and we have not yet seen the full effect in the industry. We will argue that the real test will be in the embedding in the next couple of years and the impact on culture and governance for the insurance industry.

2. Outcomes based regulation

Previously, we were used to “customer outcomes” being part of the FCA agenda. It now seems that we have moved into a completely different level by having the overall regulatory approach driven by outcomes rather than rules. The recent FCA business plan is an illustration of this transition, which clearly sets out the future approach by Chris Woolard, the interim CEO of the FCA.

We have been speaking for years about practices that are acceptable or not. Given we now find ourselves operating within an outcomes based regime, it will open a completely new reflexion of what society as a whole will accept as desirable outcomes for the insurance sector. It goes without saying that this can be a moving target.

We are starting to see this evolution as part of the response to the Covid-19 crisis; and the focus on the outcome despite what the rules of the game were at the time of the outbreak. This is not an insignificant step change and we believe that such a shift in focus is reliant on an industry response in order to engage with the regulators, shape the outcomes we want for the market and consumers, and be in a position to measure such outcomes.

3. Consumer behaviours

One of the main tools that regulators have used around the consumer protection agenda is “disclosure” to allow customers to make an informed decision.

We now have sufficient evidence that disclosure alone falls short of resolving some difficult issues, and consumers do not always behave like policy makers would expect.

So, we foresee regulators focusing even more on “real” consumer behaviours and designing policy and remediation that will be deeply rooted in behavioural economics.

The evolution of technology is an opportunity for firms to embrace this change and really understand consumer behaviours and adapt their approach to it. This is an area where we will expect the industry to take the lead, as it gets to the heart of their business models and puts them in a position to engage with the regulators.

At the virtual conference on May 12^th, we would like to engage with these 3 themes and explore further on how the industry can respond and be part of the change we see coming – with substantial change being the only certainty moving forwards