“Intervention” seems to be the word of the moment at 25 The North Colonnade. Whether it’s “early intervention” or “product intervention”, acting quickly and decisively as soon as a risk is identified is seen as fundamental to the FCA’s new approach to regulation. As a result, insurers need to be alive to the possibilities of intervention in all its forms.
The continuous fallout of the Payment Protection Insurance (PPI) affair highlights the need for the FCA to become a more proactive regulator than the FSA had been before it, tackling issues at an earlier stage. This change in philosophy was set out in the “Journey to the FCA” mission statement document (published in October 2012):
“it can be much more effective to intervene early; to pre-empt and prevent widespread harm to consumers from happening in the first place, rather than clear up after the event.”
Early intervention covers a range of powers, both formal and informal, that the FCA can use to combat a potential threat to market integrity or where there is a significant risk of consumer detriment. In particular, we’re seeing the FCA make increasing use of its ability to require a firm to “voluntarily” make changes in order to deal with a potential threat. I say “voluntarily”, because this voluntary agreement is often likely to be coupled with the threat of formal enforcement action in order to provide some level of incentive for the firm to comply. Arguably the most high profile example of an early intervention was the voluntary agreement entered into last year by the payday lender Wonga. The FCA had concerns that Wonga was not taking adequate steps to assess a customers’ ability to meet payments in a sustainable manner. As a consequence, Wonga “voluntarily” agreed to write-off £220m of customer debt, change its lending criteria and appoint a skilled person to review the new lending decision platform.
More recently, Affinion International Limited reached a voluntary agreement with the FCA over concerns about the way in which card security products were sold to customers. Affinion agreed to put in place a compensation scheme in the form of a Scheme of Arrangement (subject to creditor approval) which could benefit two million customers.
The FCA used their early intervention powers 21 times in 2013-14 to tackle ongoing risks to customers and markets. Martin Wheatley, in the FCA’s 2014-15 Business Plan noted,
“we have used our powers to make interventions in the market place to ensure the interests of consumers are put first… there must be no let up in the pace of our activities for 2014-2015”.
I think we can safely say that the FCA’s emphasis on early intervention is not going to wane.
Although much of the FCA’s early interventions work is opaque, Her Majesty’s Treasury, in its final report on the “Review of enforcement decision making at the financial services regulators”, recommends that more information should be published about such actions. In my view, increased transparency would be helpful for insurers as it would allow them to understand the types of issues within the industry that concern the regulator and how they are dealt with (in circumstances where a formal enforcement process has not been initiated).
The FCA’s new product intervention powers are becoming an increasingly important part of its regulatory toolkit. The powers, which are somewhat draconian, enable the FCA to make product intervention rules (which may last for up to 12 months) without consultation, where it considers it necessary or expedient to do so in order to advance its consumer protection or competition objectives. The FCA used these powers for the first time in 2014, to restrict firms from distributing contingent convertible securities to the retail market on the grounds that these products are complex with investment risks which are “exceptionally challenging to evaluate and model”. The FCA took the view that the ban enabled consumers to be protected, whilst allowing the market for these securities to develop for professional and institutional investors.
What does this mean for insurers?
I would advise insurers to be prepared to deal with any form of early intervention by the FCA, including having a policy in place which sets out the actions to be taken in a “dawn raid” scenario (which is often how an early intervention will commence). Additionally, insurers should have in mind their Principle 11 obligations, the requirement to deal with the regulators in an open and cooperative way, which should help lead to a productive outcome in early intervention with least reputational damage and assist with the firm’s on-going relationship with the FCA. That being said, insurers should be prepared to hold the line in the event that the FCA’s demands are disproportionate or unreasonable – often not an easy approach to take in practice.
In my view, product intervention is an area of which insurers should take specific note, particularly those providing general retail insurance products. There has not yet been a high profile example of intervention in the insurance industry, but given the historical issues with PPI, this is an area in which the FCA will not hesitate to intervene if necessary. The most likely scenario where the FCA would intervene is where a product is failing to meet the needs of customers or is otherwise not fit for purpose.
In order to prevent this, insurers should have robust procedures in place in respect of product governance. In particular, compliance should focus on the firm’s product design processes to make sure that the products meet the demands and needs of the target market and customer outcomes are being sufficiently monitored (to identify and address the risk of any customer detriment). Being able to demonstrate that it has such systems and controls in place, will assist an insurer in staying on the right side of the FCA and away from the regulatory spotlight.