The FCA has issued a Dear CEO letter setting out its views on the key potential risks of harm posed to customers by firms operating in the Lloyd’s and London market (LLM).
The letter issued on 23 November also outlines what strategies and actions the regulator expects firms to implement by way of mitigating the risks identified.
The underlying object of the exercise is to give LLM participants some firm encouragement to look closely at the risks they pose and how they mitigate them.
The FCA stresses that its overarching aim in supervising LLM firms is to ensure the market works well for participants and customers and preserves market integrity.
The FCA’s supervisory strategy involves allocating firms to one or more of around 40 portfolios grouping firms with similar business models.
The regulator says it is now developing a series of supervisory strategies on a portfolio by portfolio basis that enable effective monitoring and allow for specific targeting of firms that pose the greatest risk of harm.
A highly diverse market like the Lloyd’s and London market inevitably comprises a wide variety of firms, large and small, with a wide variety of business models. However the FCA says it has identified three potential drivers of harm that are common to the vast majority of market participants – and on which its supervisory strategy will focus.
- Ineffective oversight and governance potentially leading to customers being sold unsuitable products or receiving poor claims outcomes
- Culture-related issues and non-financial misconduct and a failure to confront poor behaviour potentially leading to bullying, discrimination and bias
- Inefficient and poorly controlled general insurance distribution chains which have previously proved to be a source of substantial and persistent harm to customers.
In relation to the first of these harms, the FCA’s Dear CEO letter identifies some of the critical components of good governance and oversight.
Specifically, the regulator insists LLM firms must have:
- Clear accountabilities for activities which affect outcomes, with appropriate delegation and escalation
- A robust risk framework within which key risks of harm are identified, monitored and mitigated by accountable individuals
- Strong and independent board oversight and an effective process for challenging key decision-making.
In relation to the second of the common harms identified above, the FCA says it expects firms to have a culture and governance structure that drive good behaviours and produce fair outcomes – and that individuals should be properly accountable for the actions they take.
The FCA also stresses that it expects firms to be able to show how they have incorporated its discussion paper Transforming Culture in Financial Services into their thinking on culture, and to demonstrate that they are genuinely working in the interests of their customers.
Other areas of risk for London Market firms identified in the letter include cyber risk, operational resilience, market hardening and the UK’s exit from the EU. The letter also stresses that LLM firms must meet their obligations when part of a distribution chain as outlined in the Insurance Distribution Directive – and address the concerns raised in its thematic report on the General Insurance Distribution Chain from April last year.
For further details on the implications of the FCA’s latest pronouncements on its LLM supervisory approach, or any other compliance-related issues, please contact a member of our expert team on 01925 765777, or email us at firstname.lastname@example.org.