In 2017, the UK’s financial services’ regulator, the Financial Conduct Authority (“FCA”), imposed fines totaling over £229 million for misconduct by regulated businesses and individuals.
Whilst 2017 did not see a return to the number or size of fines imposed by the FCA in 2014/2015 (which saw billions of pounds of fines following interbank rate and FX related misconduct), the year did see a tenfold increase in FCA fines from those imposed in 2016, just over £22 million. This may signify an upward trend in FCA disciplinary action and a possible increase in the size and number of regulatory disputes for all financial services’ businesses in the UK, including participants in the insurance industry.
The Insurance Industry
There was no public FCA disciplinary activity in the insurance industry in 2017 until early December, when fines were issued for breaches of FCA rules relating to conflicts of interest, culture/governance and unfair treatment of customers in the general insurance and protection sector in the context of insurer-owned brokers. Some commentators in the industry have gone as far as to suggest that increased regulatory scrutiny of insurer-owned brokers has led to increased divestment of broking interests by insurers in the UK. The number of insurer-owned brokers in the UK has certainly reduced from the high day of the 2000s, but whether that has anything to do with increased regulatory activity is not entirely clear.
In keeping with the trend seen amongst global regulators in 2017, it is highly unlikely that the FCA’s appetite for flexing its enforcement and disciplinary muscles will diminish in the year ahead. The FCA continues to pursue it “credible deterrence” policy, taking tough, targeted public action taken against regulatory misconduct as a way of changing market behavior. The FCA has already said that the era of big fines is not at an end and that if it sees conduct worthy of a big fine then it will vigorously pursue offenders. This because the FCA knows that enforcement action generates publicity and therefore it uses individual cases to send wider messages about what it regards as “good” and “bad” market conduct to the regulated community.
It may feel like FCA enforcement activity has been a little quieter in recent months. But, the FCA’s Head of Enforcement, Mark Steward, has said that there is a lot going on behind the scenes at the regulator. In September 2017, Mr Steward announced that there has been a 75% increase in the number of FCA investigations, primarily because of three factors:
- More investigations into capital market disclosures, where there have been poor practices that could mislead the market and even become market abuse.
- The extension in scope of the reporting regime brought about by the Market Abuse Regime that has seen more participants reporting more data especially around suspicious transactions.
- The FCA’s change in approach when deciding whether to open an investigation, which sees more investigations, opened that may not end up in formal disciplinary action.
Therefore, the message is to watch this space for more fines, more ‘naming and shaming’ as we move into the New Year across all regulated industries. At least some of the 75% increase in FCA investigations in 2017 will almost inevitably translate into disciplinary action against firms and individuals in 2018. Possible areas to watch for enforcement action in 2018 may include the fall-out from FCA’s review of pricing practices in the general insurance market in the UK, the implementation of the Insurance Distribution Directive and the FCA’s continued focus across all sectors on senior management responsibility for a firm’s activities and combating financial crime.