Earlier this week, FCA Director of Supervision Clive Adamson gave a speech at the Building Societies Association in which he argued that properly effective regulation and sustainable businesses go hand in hand. This speech sheds light on the FCA’s approach to business models and conduct and will be as relevant to insurers as building societies.

Adamson points to three elements of the new regulatory architecture to illustrate what the FCA has achieved in its first year as conduct regulator. Firstly, with dual-regulation, the FCA and PRA are able to focus on their respective conduct and prudential objectives without needing to compromise. Secondly, Adamson argues that the FCA has made some effective interventions across all sectors of the financial services industry. Thirdly, Adamson notes the ‘sea of change in the attention being paid to the conduct agenda’.

The FCA welcomes that conduct is now firmly on the agenda of executive management and boards and has seen evidence that firms are realising the benefit of good conduct performance in terms of building consumer trust and a positive reputation for fairness. The FCA accepts that it can do more to show that it is ‘a predictable, consistent, and measured regulator’. Adamson acknowledges that the FCA’s approach is not always successful, as the controversial announcement in March of a review into legacy business in the life insurance sector proved.

Outcome-focused approach

Essentially, the FCA is focused on making markets work so that retail consumers achieve fair outcomes and wholesale markets operate with integrity. The FCA’s approach is based on an ‘outcomes-focused philosophy’ adopting a three-stage model:

  1. Looking at markets as a whole to see whether they are working in the interests of consumers and determine whether a lack of competition calls for structural solutions.
  2. Using thematic work to look at specific problems where the right outcomes are not being achieved and where changes in firms’ behaviour may be needed.
  3. Investigating individual firms for key drivers of potentially poor conduct behaviour.

Directly linked to this philosophy is the FCA’s focus on how firms, particularly the largest firms with the biggest consumer and market footprint, are putting customers interests and market integrity at the heart of the business. This means looking at the business model, culture and front-line activities such as product design and governance. In short, the regulator is focusing less on how the business is controlled and more on how it is run. Fair treatment of customers, Adamson argues, cannot be reduced to ‘a risk to be managed’ or solved by a tick-box compliance function. The FCA has seen various measures adopted by firms as they get to grips with the new regulatory approach and Adamson suggests the key elements are rooted in the business model and firm culture.

Business model

Adamson states that the challenge for all financial services firms is to evolve current business models into ones that are demonstratively ‘safer’. From a conduct perspective, features of a ‘safer’ business model include:

  • A lower cost base meaning there is less pressure for marginal income growth to support an inflated cost base.
  • Not overly relying on profits from back book customers to subsidise new customers.
  • Avoiding high degrees of cross-subsidisation between products.
  • Not relying on products that are highly profitable or involve rapid growth rates.


Good conduct performance is closely aligned with culture. The key drivers that re-enforce the right conduct-focused culture are: clear and ongoing leadership from the top; constant re-enforcement of firm values and culture; incentive structures; and effective performance management and penalties. Adamson calls on firms to develop ‘a more hard-edged embedding of business practices’ that define how decisions will be made throughout the organisation.

Product design and governance

As the FCA has discussed previously, good product design should cover the following elements: understanding the needs of particular customer groups, considering what a fair outcome means for a particular product, stress testing in different scenarios, value for money, how a product will be sold, whether sales processes exploit consumers’ behavioural biases, and how post-sale services are designed. In terms of product governance, the FCA expects boards to understand how and where the firm makes money, what the conduct implications are and how outcomes are tracked across the product lifespan, in addition to maintaining oversight of control functions.

While this speech does not raise any new regulatory issues, it does provide a useful guide to what the FCA expects firms, particularly at board level, to be considering both in terms of retail customers and wholesale activities. It also provides some clarity on what the FCA is seeking from firms’ business models and highlights those features that might be indicative of an ‘unsafe’ model for regulatory purposes.

Please view our briefing on the key issues that insurers should consider when designing and distributing products

For further information:

FCA one year on – effective regulation goes hand-in-hand with sustainable businesses