REG Reviews

REG Reviews – March 2023

1st March 2023

Welcome To The March Edition of REG Reviews

Last month, reinsurers’ policy inflations began to destabilise the market, the treasury forecast the introduction of the digital pound, and the FCA urged financial services to commit to Consumer Duty, whilst calling out the whole insurance market to action allegiance to ESG commitments.

Read these articles and many more, as we bring you all the important news and views from the insurance and financial services world.

Industry News​

Investigations show the FCA and PRA have missed statutory deadlines in their authorisation processes. From April to September 2022, the FCA approved only 41.3% of cases on time. Broker authorisation has also seen delays, with average wait times rising to 224 days. Critics argue the slow process is frustrating, and TheCityUK calls for the FCA to improve efficiency.


FCA Called to Address Record High Authorisations

Investigations into the FCA’s and PRA’s authorisation process detailed how the parties have missed statutory requirements in at least two of the four authorisation processes.  

The biggest concerns arise from the authorisations of approved persons, where the FCA reported they only approved 41.3% of cases within the target times, from April to September 2022.

A Freedom of Information request by Insurance Age has also revealed that FCA authorisation for brokers looking to trade general insurance businesses has further increased from 164 to 224 days on average, as of 31st October 2022.

Waiting times for approved firms stood at 237 days for sign-off in 2022, compared to 174 in 2021.  

The refused pool fell from 240 days in 2021, to 149 in 2022, However, considering only 3 firms were rejected in the period, over interpreting this data should be avoided.

Subsequently, brokers are voicing their annoyance at the FCA’s ponderous approach to authorisations.   

Criticising the process, Managing Director of The Yorkshire Broker, argued that the main challenge of getting started was predominantly due to the elongated authorisation process from the regulator, which “was difficult and frustrating.”  

Moreover, a significant decline in the volumes of firm approvals from 121 in 2021 to 70 in 2022 was reported.

On the contrary, the authorisation period for approving C-Suite positions has stabled, with the period shortening to 91 days in 2022 from 104 days.  

TheCityUK’s CEO, Miles Celic, has urged the FCA to adopt a more efficient mindset, to avoid competitors succeeding them. Celic called out the FCA for being complacent in their approach and recommended that “an efficiency gear shift in regulatory culture would help to strengthen” their position.  

In response, the FCA argued their “robust” operations ensure protection to consumers and market integrity, however acknowledged that “there were factors which meant an increased assessment time for some applications.” 

These factors include: 

  • Increased scrutiny at the gateway.  
  • Incomplete or poor-quality applications which needed material extra work by the applicant.  
  • Increased volumes of applications in key areas like approved person status as a result of the expansion of the Senior Managers and Certification Regime. 

Recent enhancements to the FCA’s authorisation team have included the appointment of two Senior Directors and 95 more members of staff.   

In summary, TheCityUK declared in their report that expectations of improving key processes for firm authorisations, variation of permission, change in control and Senior Manager functions are required to boost the market. 

REG Roundup

While it is clear that robust operations around granting individuals or firms authorisation are vital to ensure confidence in the UK financial services market, the delays facing applicants during a period in which the UK is stepping out into a post Brexit market give a less than ideal impression.

The reasons stated by the FCA for these delays also raises more questions than answers, given the implementation of the Senior Managers and Certification Regime was destined to produce an increase in applications for approved persons, one may assume that this increase could be planned for in advance.

With all this being said, it does appear that positive steps are being taken by the FCA to rectify the delays which applicants are facing, with the addition of further staff. In addition to this, a recommendation made by TheCityUK in their report, of improved automation of the application process and further integration of internal systems, could lead to significant efficiency gains. This would, of course, be a welcome boost to those businesses wishing to transact financial services in the UK.

A Google TAG and Mandiant report shows a 250% increase in cyber-attacks on Ukraine in 2022. NATO phishing attacks rose 300%, tied to Russian-backed groups. The conflict has reshaped cybercriminal activity, with heightened targeting of Ukraine by state and non-state actors.


Surge in Russian Cyber Attacks Against Ukraine

In a new report by Google’s Threat analysis Group (TAG) and Mandiant, it was revealed that cyber-attacks on Ukraine have surged by 250% in 2022 compared to 2020. 

The attacks followed closely with the military attack on Ukraine in 2022 and have since persisted, targeting the Ukrainian Government, military entities, as well as critical infrastructure, utilities, public services, and media sectors.  

Mandiant stated that there had been “more destructive cyber-attacks in Ukraine during the first four months of 2022 than in the previous eight years, with attacks peaking around the start of the invasion.” 

Additionally, the report revealed a 300% spike in phishing attacks aimed at NATO countries at around the same. These attacks have been associated with a Belarusian government-backed group called PUSHCHA, which has also been linked to Russia.  

TAG’s, Shane Huntley, commented; “Russian government-backed attackers have engaged in an aggressive, multi-pronged effort to gain a decisive wartime advantage in cyberspace, often with mixed results.”

The report also suggests that that the Kremlin have also been attempting to change the public opinion by undermining the Ukrainian government, decreasing international support for Ukraine and trying to increase domestic support for Russia, by running overt and covert operations. 

The tech company commented; “GRU-sponsored actors have used their access to steal sensitive information and release it to the public to further a narrative or use that same access to conduct destructive cyber-attacks or information operations campaigns.” 

The war has caused a split in criminal hacking groups based on political allegiance, with some groups even shutting down.

It has been described as a “notable shift in the Eastern European cybercriminal ecosystem”, as it becomes harder to identify the financially motivated groups and the state backed ones. 

This can be seen by looking at one group, UAC-0098, which has now started using its malware to target Ukraine in ransomware attacks. 

Chinese government-backed attackers have also been observed focusing the target on Ukraine and Western Europe, with aims of gathering intelligence. 

Huntly commented; “It is clear cyber will continue to play an integral role in future armed conflict, supplementing traditional forms of warfare.”  

This follows warnings by the Computer Emergency Response Team of Ukraine (CERT-UA) of phishing emails detected in the weeks leading up to the start of the war, have focused on organisations and institutions. The emails appear to be critical security updates but actually contain malware that allow for remote desktop control.  

Recorded Future, a cyber security firm, stated in their recent report that; “Despite Russia’s conventional military setbacks and its failure to substantively advance its agenda through cyber operations, Russia maintains its intent to bring Ukraine under Russian control.”

The Treasury and BoE are exploring a digital pound, possibly launching by 2025. The new currency would work with existing money, with a spending cap to prevent misuse and enhance payment efficiency.


Digital Pound Proposal Announced by Treasury

The Treasury and the Bank of England (BoE) have suggested an increased likelihood of a state-backed digital pound in the second half of this decade, as a new “trusted and accessible” method of payment in the digital age for use by households and businesses for everyday payments.

However, the earliest we may see this digital currency is 2025, with Hunt stating; “We want to investigate what is possible first, whilst always making sure we protect financial stability.”

On 7th February 2023, a formal consultation was started by the Treasury and the BoE, drawing upon assessments of the case for a retail central bank digital currency (CBDC) and detailing how the e-currency would be held in digital ‘wallets’ by banks.

As part of their preparatory work, the parties have insisted that the currency would not be a replacement of current money, but work alongside and be interchangeable with cash and bank deposits.

Cryptocurrencies are not backed by a central bank and therefore can be volatile, whereas the digital pound is likely to maintain the value of The Pound. 

Reassurance that the public, experts, and organisations are at the heart of future digital financial decisions has been stated, with stakeholders being urged to respond to the Consultation by 7th June 2023, to ensure nationwide value alignment.

If approved, the currency would need a significant investment to launch, and initially there is likely to be limitations on the amount of digital currency Britons would be able to hold in their ‘wallet’.

Cunliffe detailed how a spending cap between £10,000 – £20,000 would be placed on users, to avoid the exploitation of the e-money system as a form of wealth storage.

The parties insist introduction of the digital pound is necessary to preserve future financial stability and also promote; “innovation, choice, and efficiency in payments.”

Laith Khalaf, Head of Investment Analysis at AJ Bell commented on the reduction in payment fees; “If a digital pound can streamline the payments infrastructure behind card payments, the fees merchants are charged could come down, making it easier and cheaper for them to process small payments.”

However, the sophisticated technology behind these types of currencies have ensued worries about financial control. CBDCs can be programmed to control consumer spending. China’s digital Yuan prototype has been developed with expiration dates of use, meaning consumers lose their money if they do not spend within the programmed timeframe.

Abilities to dictate purchase decisions and track and monitor spending would also be feasible through a central digital currency.

The main concerns arise from ensuring adequate consumer protection, as digital wallets hosted through third parties such as technology companies and crypto players, spark risk of vulnerability amid the ever-increasing threat and sophistication of cyber criminals.

For now, a technical blueprint will be constructed by the parties, with feedback from the consultation aiding the proposed development, with key focus on consumer and financial protection.

Amid geopolitical and environmental instability, reinsurers are tightening coverage and increasing costs, leaving insurers and customers with higher premiums and less financial protection.


Reinsurers' Policy Inflations Plunge Market into Adversity

In the wake of the Ukranian war and pressurising climate change movement, reinsurers are prioritising their financial stability, at the expense of the wider insurance market and its customers. 

Reinsurers have started to retaliate following the volatile and unprecedented political and environmental state. 

Increased premiums and retracted coverage are forecasted by the market to spiral insurers and claimants into a depressive state. 

What started as late and undesirable annual policy renewal negotiations, has now furthered to inflated and risky policies for insurers and customers. 

In a turn of events, fuelled by the unstable economy, reinsurers have increased prices, whilst removing certain aspects of coverage in the event of natural catastrophes and lines exposed to the Russo-Ukrainian war. 

Reinsurance losses from stranded aircrafts, damaged ships and other catastrophes from the Ukraine war, which has yielded billions of dollars in pay-outs from firms, has powered the reinsurance sphere to double down on coverage to avoid multiple and further claim sufferings.  

This has ensued knock-on effects in the wider market chain, with protection and indemnity insurers mirroring policy cancellations covering conflict-related losses in Russia, Belarus, Ukraine and Moldova. 

In other areas, insurers have been left to rewrite policies without reinsurance backing, at the expense of their financial protection. 

Insurers are therefore increasingly being left vulnerable, without risk-averse policies protecting them. 

Policyholders are also subsequently being met with increased policy premiums, as a result of insurers upping prices to reflect the vicious changes from above. 

In a market that’s already suffering immensely from rising costs, the de-bunking of protection from reinsurers has left the market and its cliental vulnerable to immense pay-outs, resulting in unprofitability and running the risk of customers cancelling policies due to consistently rising premiums.  

Some of the market argue these renewal changes are only temporary and have been introduced as a direct result to the unstable and uncertain economy. 

However, S&P Analysts contend; “The structural changes that took place during the January renewals will be long lasting because it will be hard for reinsurers to move back on their new attachment points.” 

The FCA is urging firms to prioritize ESG and corporate social responsibility, following reports that many global insurers are not fully committed to these principles.


FCA Actions Allegiance to Market-Wide ESG Commitments

At a time when it’s been reported by PWC that only 35% of global insurers declare their organisation’s strategy is “significantly focused” on all three pillars of ESG, the FCA has released a discussion paper actioning firms to ensure sustainability and wider corporate social responsibility become a top priority in business decisions.  

This follows the FCA’s ESG commitment in December last year, where the regulator formed its environmental, social and governance advisory committee to help implement market urgency at aligning with sustainable responsibility.  

Societal expectations for all sectors, including financial services, to act more sustainable were discussed within the paper, after it was revealed in the FCA’s May financial lines survey that 79% of consumers expected businesses to show wider social responsibility instead of just aim to make profit.  

The FCA reported that the number of firms with sustainable goals is increasing, with climate change commitments being the most common objective. 

To meet The Government’s commitment to be the first Net Zero financial centre in the world, more than 550 firms have signed up to the Glasgow Financial Alliance for Net Zero (GFANZ). Following, the UK’s Transition Plan Taskforce (TPT) was launched, aiming to consult on Disclosure Framework for credible transition plans based on GFANZ suggestions.

Both have been highlighted by the FCA for having credible strategies to reach pledges that involve significant changes to governance, culture, people strategies and incentives.    

The FCA commented; “In a field where there are many initiatives taking place, our aim is to help narrow this field and help with highlighting good, evolving practices, if finance is to deliver on its potential to drive positive sustainable change.”    

Consumer needs are changing, and companies failing to promote and embed ESG into their organisational chain risk their profitability. Indeed, a recent PWC report unveiled that 76% of consumers pledge to discontinue their relationship with companies that treat the environment, employees and community in which they operate poorly.   

Moreover, 80% of global investors deem the management of ESG risks as a top priority in investment decision-making.  

In December, Allianz re-stressed the importance of broker’s allegiance to ESG initiatives and working towards reducing their carbon footprint; following their pledge of £100,000 in 2021 when launching their Net Zero Accelerator to support independent brokers meet Net Zero. 

At the 2022 Broker Summit, brokers were cautioned that “doing nothing on ESG is the biggest risk and that they should start thinking about their own operations.”    

The FCA has set a deadline of May 10th 2023 for responses and stated that feedback from the paper will be used to inform their future regulatory approach.

The watch dog added; “We will of course consider proportionality and whether differentiation between firms on the basis of size (or other characteristics) would be needed when deciding on the most appropriate course of action for each of the topics discussed.”

REG Roundup

It is without question that the financial sector needs to play a part in focusing on factors that impact ESG. It allows businesses to build meaningful strategies and goals and is a huge driver for investment. If not adhered to, there can be huge consequences to business reputation.

It is plain to see that there is room for huge improvements in the global insurance sector and those that are not currently focused on all three pillars should re-evaluate their business impact. Businesses can improve their ESG by quite simply working out how ESG is going to provide value. Is it about attracting new talent? Reputational goals? Perhaps there are cost savings involved?

We all need to play a part in cutting greenhouse gas emissions and getting them as close to zero as possible. Focusing on factors such as waste management, water use, and use of natural resources are changes that can be made easily by all, assisting the Net Zero strategy.

Social and Governance criteria should also play a huge role in operations. Training and educating staff, maintaining workplace diversity and equality, and risk management are just some of the factors to comply with. Without a healthy corporate governance function, it can be difficult for businesses to progress to the ‘E’ and ‘S’ realms of ESG and this is really the backbone of the concept.

While ESG performance is important for all businesses, there will be different sector specific risks. Ultimately consumers, investors, and employees expect businesses to show wider social responsibility, instead of merely aiming to make a profit. It is a huge risk for all businesses if they choose not to comply with ESG requirements and if they are not doing so already, they should seek to understand and implement ESG performance strategies right away.

Google launched its AI chatbot Bard, but an error in its first demo led to a 7% drop in Alphabet’s shares, intensifying the AI competition with Microsoft’s new Bing.


AI Arms Race Begins with Launch of ChatGPT Rivals

Following the launch of Open AI’s Chat GPT, other tech giants have started to respond with their own AI powered chatbots.

Google announced the launch of Bard on 6th February 2023, alongside new AI tools for the Google search engine, stating it would be used by testers for a few weeks before being accessible to the public.

LaMDA, Google’s existing large language model was used to develop Bard, which one engineer viewed as being so humanlike that he believes it was a ‘sentient‘.

Googles Boss, Sundar Pichai, stated; “Bard seeks to combine the breadth of the world’s knowledge with the power, intelligence, and creativity of our large language models.”

The AI bot will start by operating as a lightweight version of LaMDA, which requires less power than the model so more people can use it.

Pichai also commented that Bard will aim to be “bold and responsible”, however it was not released how Google plan to prevent potentially harmful or abusive content that comes with the extensive data within the internet.

However, in an advert used to show the capabilities of Bard, a query was answered incorrectly.

When asked about the James Webb Telescope, the AI chatbot claimed it was the first telescope to take pictures of a planet outside the earth’s solar system, which is incorrect.

This has caused Alphabet, Google’s parent company, to lose 7% in shares, decreasing its market value by £82bn.

In response to the error, a Google Spokesperson stated; “We’ll combine external feedback with our own internal testing to make sure Bard’s responses meet a high bar for quality, safety and roundedness in real-world information”.

This unchecked error may be due to the pressure Google is under to keep up with Microsoft, which has backed Open AI’s ChatGPT since last year, and has recently announced its new version of Bing, which utilises ChatGPT powers.

Moreover, a newly updated version of Bing was launched a day after Bard on 7th February; marking the beginning of an AI arms race between the companies.

Microsoft Boss, Satya Nadella, confirming; “The race starts today. This technology will reshape pretty much every software category that we know.”

Bing now has the capabilities to respond in more detail to search queries, instead of just finding relevant websites and allows users to chat with the AI bot.

The new Bing went live immediately, allowing users a limited number of queries a day.

In 2022, the FCA removed 8,582 financial promotions, 14 times more than in 2021, and issued 1,800 scam alerts. Social media and unauthorised “fin-fluencers” are major focuses in their crackdown.


FCA Interventions on Rogue Financial Promotions Surge

The FCA have revealed that they have amended or removed 8582 financial promotions in 2022, which is 14 times more than in 2021. They have also published over 1800 alerts about scams to help prevent consumers losing money. 

This follows the record-breaking quarter in 2022, when the FCA intervened in 4151 promotions between July and September, which mainly occurred in the retail lending, investments, and banking sectors. 

The regulator has highlighted social media as its main focus when fighting against misleading ads.  

The watchdog has also been working alongside several tech companies to change their advertising policies, with the aim of having promotions from FCA-authorised firms only. However, the FCA has cautioned that tech companies need to do more to protect consumers. 

Additionally, the FCA has explained the higher number of interventions could be explained by the significant improvements to digital tools that are used to identify problem firms and misleading adverts. 

“Fin-fluencers” are also a growing issue, these are unauthorised individuals who advise people on specific investments. Throughout 2022, The FCA also intervened against several of these social media nuisances.

A Director of a regulated firm was caught by the FCA using his personal profile to promote unauthorised traders and products. The Director was blocked by the FCA from using social media to promote financial services and the firm demanded to discontinue any financial promotions. 

New measures to prevent illegal, unfair or misleading promotions were introduced by the FCA in December last year, these will require authorised firms to undergo new screening checks. 

The Executive Director of Markets at the FCA stated; “Our expectations remain the same. Financial promotions must be fair, clear and not misleading.”  

“What has changed is the FCA’s approach. By drawing on better technology, we’re finding poor quality or misleading ads quicker. And where we find them, we’re stepping in to make firms improve them or remove them entirely.”

The regulator voiced concerns that people struggling with finances, especially in the cost-of-living crisis, may be more susceptible to misleading adverts or scams with high risk, unregulated products. 

From July, the Consumer Duty will require firms to demonstrate that they are providing consumers with the information to help them make effective and informed purchasing decisions. 

The FCA warns UK e-money firms of a needed cultural shift to meet new Consumer Duty standards from June, focusing on better customer care and fraud prevention.


Shift in E-Money Groups’ Controls Demanded to Meet Consumer Duty

The FCA have warned UK E-Money firms that a “significant shift in culture and behaviour” is required to meet demands of the duty of consumer care that is set to come into force this year. 

From June, e-money businesses, alongside 60,000 other financial services companies will be required by law to comply with the new Consumer Duty, which sets the standard that good customer outcomes are central to businesses.

The Financial Services sector is heavily regulated by the FCA and other regulating bodies, alongside protecting consumers of the market from monetary losses by the UK’s Financial Services Compensation Scheme.  

However, e-money groups are not covered by the latter, but will join the rest of the financial services market in adhering to Consumer Duty in July. 

The subset of the sector has been under fire recently for the apparent lack of control in mitigating financial crime and fraud, which has led to a multitude of customers unable to access their account, whilst leaving others openly vulnerable and susceptible to fraudsters amidst insufficient care from operators. 

Matthew Long, the FCA’s Director of Payment and Digital Assets, sent a letter to Chief Executives of e-money Companies on Tuesday 21st February, detailing that e-money firms risk failing adhering to Consumer Duty if a change in customer controls is not a priority. 

Long commented that improved customer care will occur if companies “freeze accounts less frequently, investigating possible frauds faster, communicate better with affected customers and supporting those ‘put in acute financial difficulty’ after having their accounts frozen.”  

Urging specific attention to a common type of fraud, Long’s letter warned against authorised push payment (APP). APP scams occur when a person or business is deceived into sending money to a fraudster posing as a genuine payee. 

With further emphasis on the looming duty of consumer care, Long commented; “Whilst we appreciate that the facts of these can be hard to establish, firms should ensure that their treatment of customers who feel themselves to be victims and are distressed is not unduly harsh or unsupportive.”  

Cautions of over employing chat services to deal with customer complaints has also been addressed by the FCA. Long suggested that physical dealings with customers provide heightened value to consumers as the regulator expects “firms to ensure their contact channels meet their customers’ needs.” 

ASML reports a former employee in China stole data but believes it doesn’t materially impact their business, amidst ongoing US-China tensions over chip technology.


ASML Data Stolen Amid Growing US-China Chip War

The Dutch major computer chip manufacturer, ASML, has claimed that a former employee in China has stolen information. However, they stated they do not believe  “that the misappropriation is material to our business.”   

ASML manufactures machines that make the most advance computer chips and is considered one of the most important firms in the global microchip industry. 

Computer chips, otherwise known as semiconductors, are used in many ways including for phones and military hardware, and are one of the key factors in the dispute between China and the US. 

In their annual report, ASML stated; “We have experienced unauthorised misappropriation of data relating to proprietary technology by a (now) former employee in China.”  

They added; “As a result of the security incident, certain export control regulations may have been violated. We are implementing additional remedial measures in light of this incident.”  

ASML did not identify which regulations may have been violated or the former employee.   

In the ASML annual report in 2021, the company stated that DongFang JingYuan Electron, a Chinese chip manufacturer and software maker, “was actively marketing products in China that could potentially infringe on ASML’s IP rights.”   

DongFang JingYuan Electron denied this and suggested the reports were “inconsistent with the facts.”

More recently in October, Washing revealed that companies exporting chips with any US tools or software would require a license. The US has also called for the Netherlands and Japan to also increase restrictions.   

As of 2019, ASML was banned from selling its most advanced lithography machines, used to print patterns on silicon, to China by the Dutch Government.   

This incident follows an ongoing argument between China and the US over the technology to produce microchips. 

The technology that fuels the industry, which is worth $500bn and is expected to double by 2030, is mainly sourced by the US, who are now trying to prevent China’s access to the technology. 

Chris Miller, Author of Chip Wars, spoke about the arms race between the two countries, he stated “It takes place both in traditional spheres, like numbers of ships, or missiles produced but increasingly, it’s taking place in terms of the quality of Artificial Intelligence (AI) algorithms that can be employed in military systems.”

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