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Good insurance business # 2 - 鈥楿nhealthy roots鈥 of London market culture

On 6 January 2020 the Financial Conduct Authority (鈥淔颁础鈥) published a 鈥楧ear CEO鈥 letter directed in particular at 鈥渋nsurers 鈥 and 鈥 insurance intermediaries鈥 about 鈥渢he issue of non-financial misconduct, [which] continues to be prevalent 鈥︹

27 January 2020

On 6 January 2020 the Financial Conduct Authority (鈥淔颁础鈥) published a 鈥楧ear CEO鈥 letter directed in particular at 鈥insurers鈥nd鈥nsurance intermediaries鈥 about 鈥渢he issue of non-financial misconduct, [which] continues to be prevalent鈥

The letter refers to 鈥recent, publicised incidents of non-financial misconduct in the wholesale general insurance sector鈥 without specifying what these are. From other references in the letter, it seems inevitable that the FCA is including Lloyd鈥檚 of London鈥檚 publication in September 2019 of findings from a survey where:

  • one in five 摆谤别蝉辫辞苍诲别苍迟蝉闭鈥do not believe people have equal opportunities regardless of gender
  • "8%鈥ad witnessed sexual harassment over the previous [year], however just 45% said they would feel comfortable raising a concern
  • 24% had observed excessive consumption of alcohol during the past [year]
  • 22%鈥ave seen people in their organisation turn a blind eye to inappropriate behaviour.

These findings were followed by a 鈥楧ear CEO鈥 letter from the Prudential Regulation Authority (鈥淧搁础鈥) in November 2019, which stated:

Recent public reports [of] sexual harassment and bullying鈥

  • [show] that [鈥淟ondon market鈥漖 firms have鈥o improve aspects of corporate culture and individual behaviour鈥摆补苍诲闭鈥
  • raise broader questions about whether firms are promoting a culture where staff feel able to speak up about poor practices or unidentified risks within their organisations鈥

In December 2019 the PRA imposed 鈥special requirements鈥 on Lloyd鈥檚 as to its systems and controls for whistleblowing following Lloyd鈥檚鈥 failure to maintain a particular whistleblowing 鈥渉别濒辫濒颈苍别鈥.

It is assumed that the FCA鈥檚 letter is not referring to any media reports of ongoing legal proceedings that include (as yet undetermined) allegations of harassment, discrimination and victimization as to a whistleblower of sexual harassment/assault following excessive alcohol consumption at one or more corporate social events.

Instead it seems more likely the FCA has in mind two reported cases in the last two years that have raised questions about insurance market culture and senior manager behaviour:

In Alesco 鈥搗- Bishopsgate Insurance Brokers [2019] EWHC 2839 (QB) the judge described:

  • the nature of competition between insurance market participants, and how their employees are regarded and treated, as: 鈥Either you play for the team, or you are part of the enemy鈥; and
  • a culture in which an individual who was 鈥hard-nosed鈥, and 鈥苍辞迟鈥别苍蝉颈迟颈惫别鈥 鈥was more likely to thrive鈥.

Brown & ors 鈥搗- Neon [2018] EWHC 2137 held that a firm鈥檚 management had taken an 鈥涡苍飞补谤谤补苍迟别诲鈥 decision to report to a regulator alleged 鈥渕isconduct鈥 by certain employees who had resigned, when management鈥檚 investigations and evidence were inadequate, such that the allegation and report was 鈥without justification鈥.

In any event, the upshot of the FCA鈥檚 letter is a call for 鈥a fundamental change in culture鈥, including the way firms 鈥handle鈥iscrimination, harassment, victimisation and bullying...鈥

As the PRA did in its letter, the FCA links 鈥lack of diversity and inclusion鈥 with: 

  • ineffective handling of 鈥non-financial misconduct鈥, and
  • firms鈥 failure to create 鈥an environment in which it is safe to speak up, the best talent is retained, the best business choices are made, and the best risk decisions are taken.

As things stand, the FCA鈥檚 view is that the industry risks fostering a 鈥Poor culture 摆迟丑补迟闭鈥can lead directly to harm to consumers, market participants, employees and markets.

The letter puts the insurance industry on notice of the FCA鈥檚 鈥focus on 4 key drivers鈥[for] healthy cultures鈥:

  • leadership;
  • purpose;
  • approach to rewarding and managing people; and
  • governance, systems and controls.

In relation to each of the above, the FCA emphasizes the importance of the Senior Managers & Certification Regime (鈥沦惭颁搁鈥):

As part of our approval of senior managers, an assessment of fitness and propriety will be completed. This looks at factors including competence and capability, honesty, integrity and reputation, and we will consider any known relevant issues of non-financial misconduct. In particular, a senior manager鈥檚 failure to take reasonable steps to address non-financial misconduct could lead us to determine that they are not fit and proper. We expect firms and [their] Boards 鈥 to take this into account when considering the suitability and performance of (potential) senior managers and other senior leaders.

The FCA does acknowledge 鈥the widespread commitment to culture change being shown across the market, including the initiative being taken by鈥loyd鈥檚 and several leading firms.鈥 The letter however makes it clear that such efforts are plainly not, from the FCA鈥檚 perspective, making sufficient improvements across the industry as a whole.

In order to accelerate the improvement of the culture within the insurance industry and individual firms the FCA states it is going to 鈥convene a CultureSprint [i.e., as per the FCA鈥檚 website, 鈥an event bringing together a range of experts from multi-disciplinary perspectives to work together in teams, exploring ideas and developing solutions to problems鈥鈥漖

  • specifically for the insurance sector in Q2 2020
  • looking at psychological safety [i.e., as per the FCA鈥檚 website, quoting 鈥Harvard academic Amy Edmondson鈥he willingness to express an opinion in the workplace...鈥欌赌漖鈥

The FCA also expects 鈥all firms to review [the] letter and share it with [their] senior executive committee and Board (or equivalent). If [firms] identify gaps or shortcomings between our expectations and your current arrangements, we expect [firms] to act promptly to address them.鈥

The current expansions in both generalized and detailed/verified reports of psychological (and other) ill health seem set to have huge ramifications for the standards by which insurance market business will come to be judged. Practical questions for firms include:

  • do they recognize the symptoms of unhealthy culture; will firms be willing to go beyond treating the symptoms so as to eliminate or prevent the causes (eg software might exclude abusive language from emails, and calls can be recorded and reviewed for corrective action, but what about direct conversations)?
  • must policies as to personal behaviour/inter-personal dealings, and/or effecting or responding to whistleblowing, be stricter in their substance, application and enforcement?
  • where previous policies were not strictly, or perhaps inadequately, applied or enforced, must retrospective steps be taken if only to put individuals more clearly on notice that, say, further misconduct will result in a more robust response?; on this point firms might wish to consider the FCA鈥檚 longstanding approach to the re-opening of inadequately handled matters, such as complaints about 鈥榩ayment protection insurance鈥)
  • are firms willing to risk losing 鈥榮tars鈥 who might be good at their jobs but bad for the performance of less vaunted colleagues?
  • can firms conceive of and foster a corporate culture, and management structures and mechanisms (eg reporting lines, remuneration and promotion incentives) in which more junior personnel can speak up to and about senior personnel without fear of any adverse consequence; could such changes:
  • create a new 鈥榩ower dynamic鈥 in firms, and what could the risks of this be; and
  • improve or damage commercial performance; could there be a shorter-term sacrifice for longer term market advantage?

Above all, will the changes sought by regulators disadvantage the London and UK insurance markets vis-a-vis international competitors, customers and investors, or will - as regulators suggest - improving psychological health increase the 鈥榖ottom line鈥 sustainably over the longer term?

This article was originally published by Thomson Reuters Regulatory Intelligence on 23 January 2020.

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