REG Reviews
1st May 2024
Last month, the FCA urged motor finance firms to allocate sufficient resources, financial institutions expedited technology adoption to tackle regulatory hurdles, underinsurance presented a pivotal challenge for brokers, and insurers came under the spotlight concerning environmental and social responsibilities.
Read these articles and many more as we bring you all the important news and views in the insurance and financial services world…
On April 12th, the Financial Conduct Authority (FCA) wrote a reminder to motor finance firms urging them to always maintain adequate financial resources.
After banning discretionary commission arrangements (DCA) in 2021 which incentivised brokers to increase the interest rate a client pays to their motor finance, firms have been proceeding differently to solve for the adverse impact of the DCA on financial resources, including the increase in complaints.
While the regulatory body has acknowledged firms’ constructive engagement, other companies have failed to give early notice of their inability to plan for unexpected operational costs and pay adequate complaints compensation due to a lack of funds.
This written statement is to ensure that consumers are always treated fairly in line with the Consumer Duty and Fair Value laws that the FCA has issued.
Additionally, the purpose of adequate financial resources falls under the FCA’s Threshold Conditions and Principles of Businesses, which ensures firms have the adequate funds.
Thus, the FCA expects motor finance firms’ financial resources assessment to be proactive, considering all risks and liabilities the company is faced with.
The FCA also adds; “You should ensure that your financial statements are accurate and up to date. This includes considering issues relevant to your firm. For example, relevant Financial Ombudsman Service decisions that may impact your firm, pertinent court judgments and any other issues identified from your internal review of historical motor finance commission arrangements.”
In response to the FCA’s review, Lloyds has blocked £450m of its budget to account for the DCA’s impact in case the financial regulator carries further investigation on the 24th of September 2024.
Climate change has been of utmost concern for companies and consumers equally for many years now. With the disastrous impacts that oil spills, overfishing, mass production and many other activities have on our planet and humans alike, there is a pressing need to act swiftly to take the necessary steps and avert the worst-case scenario.
This applies to insurance companies too, but the latest ShareAction 2024 report titled “Insuring Disaster”, has exposed insurance leaders’ failure to address environmental and human rights issues accordingly in their investment and business plans.
ShareAction has ranked 65 of the world’s biggest insurance firms’ across a range of environmental and social issues.
Many of them are still underwriting new fossil fuel projects, ignoring all the catastrophes that come with them such as species loss, uncontrollable CO2 emissions and more.
Share Action confirms that the insurance sector has an important investment power; “Insurance companies are among the wealthiest institutions on Earth.”
Unfortunately, the report concludes that environmental and social policies implemented by insurance firms are weak.
In fact, 50% of the ranked insurers received a grade E or F based on 30 attributes used to assess their approach to social issues, climate change and biodiversity, while only 7 received a grade B. This is a true disappointment to the insurance sector’s investment and underwriting plans.
Moreover, less than 25% of insurers have published a transition plan that goes over their investment and underwriting activities, with the majority lacking restrictions on oil and gas expansions in their investment/underwriting portfolios.
Also, 30% of insurers ranked scored 0 for policies that support biodiversity.
Lloyd’s has also performed poorly when it comes to environmental and social policies. ShareAction found that the proportion of global fossil fuel underwriting paid to Lloyd’s syndicates alone is 9%.
The report also points out insurers’ failure to consider human and labour rights when making underwriting and investment decisions that impact communities around the globe.
ShareAction incites the industry to take climate and human rights matters more seriously and take adequate action to prepare long term plans to address these issues.
Commenting on the report’s findings, Head of Financial Sector Research at ShareAction, Claudia Gray, said; “This report reveals the insurance sector’s abject failure to live up to its responsibilities to protect both people and planet. They have both a moral duty and business opportunity to adopt responsible investments and underwriting activities.”
Brokers in the UK are getting increasingly concerned about underinsurance challenges among their clients according to a recent Broker Barometer survey carried out by Aviva.
In fact, 73% of brokers stated that they are not comfortable with how underinsured their clients are, citing inflation as the main reason.
Moreover, Aviva notes that brokers were successful at educating and helping their customers understand how higher inflation affects cover levels. Not to mention that more than 50% of firms surveyed also admit that their reason for reducing insurance coverage is to cut costs.
Jason Chambers, Innovation Director at Aviva points out the impact of underinsurance on both brokers and their customers, saying; “The underinsurance challenge for brokers has evolved. A few years ago, brokers were being urged to educate their customers on the impact of inflation and supply chain issues on their sums insured and indemnity periods.”
Aviva’s proactive response to these underinsurance issues, along with insurers requiring more accurate data, was to produce a quotation tool that takes advantage of GenAI and Named Entity Recognition to study broker commercial SME presentations. This allowed brokers to produce quotes in no time, according to Aviva.
Aviva elaborated further saying that this technology is powerful enough to both spot gaps and speed up both quotation and underwriting processes, covering more than £800 million in property underinsurance spanning 2000 risks.
Chambers highlighted how important it is for brokers to keep strong relationships with their customers, concluding that; “By making Aviva’s Commercial Insurance Tool available for brokers, we hope to equip them with the necessary tools and information to further strengthen their customer relationships.”
When it comes to insured sums, Aviva found that 40% of brokers say that their customers did not increase their sums insured and only 25% did increase them, which was overly not sufficient.
Different jurisdictions have their own regulatory approaches to stablecoins, which is causing great concern to the Financial Stability Institute (FSI).
In its recent report, the FSI recognises that while stablecoins’ regulatory approaches are similar across countries, there are still noticeable differences in their regulatory regimes that could eventually create inconsistencies and incoordination when overseeing this so-called stable cryptocurrency.
The institute considers this discrepancy as a danger to the global financial stability and urges countries to adopt a universal harmonious regulatory framework.
Moreover, it underscores the importance of the integration of stablecoins with other digital assets like the Central Bank Digital Currencies (CBDCs) to alleviate this financial fragmentation.
Stablecoins are revolutionary and can significantly improve how money is used.
Supporters argue that they offer a wide range of benefits such as:
Yet, this currency has not been as stable as it promised to be. In fact, the FSI has found that Moody’s spotted 600 cases of large fiat-backed stablecoins de-pegging last year.
Also, Chainalysis reports that stablecoins are responsible for most illicit crypto activities and scams.
To address these issues, the FCA has also proposed a set of requirements to be followed by stablecoin issues, among which are complying with the financial market integrity rules and notifying the authority as soon as issuers discover a legal violation, a criminal action, or any other related risks.
So how long could it take authorities to adopt a consistent regulatory framework as suggested by the FSI? And when will we start seeing the framework’s positive impact on the global financial system?
For the first time in over two years, UK car insurance premiums have seen a quarter-on-quarter reduction, this downturn contrasts with the situation reported in February, providing a much-needed relief for motorists.
The early months of 2024 brought an average premium quote down to £941, a decrease from the record high of £995 in the final quarter of 2023, but still a substantial 43% increase from the last year.
This downturn in prices is the first significant reversal after a long period of increases, as reported by the insurance price comparison site Confused.com and broker WTW.
However, this decline did not extend to all drivers, as younger drivers, particularly 17-year-olds, saw a slight increase in their insurance costs, with average annual premiums rising to £2,919.
Historically high costs have been a consequence of inflated claim costs as the price of car parts and second-hand cars increased, leading to some of the worst underwriting losses on insurers in a decade. These factors have driven up premiums substantially over the past two years, intensifying the financial burden on households in the middle of the ongoing cost of living crisis.
Despite recent declines, industry leaders remain cautious. Executives from major insurance companies have noted signs that premium levels are beginning to align more closely with the rate of inflation. Notably, The CEO of Admiral has mentioned that implementing a “small price decrease” was a strategy to attract more business.
During a recent session with the House of Commons Treasury select committee, MPs interrogated industry executives on the rationale behind the steep premium increases, reflecting widespread concern among policyholders.
The outlook that insurance costs are becoming unaffordable was echoed by Angela Eagle, Labour MP, who described the situation as increasingly perceived as a “rip-off.”
This latest update in car insurance pricing may offer some relief, but with costs still significantly higher year-on-year, the industry faces ongoing challenges.
Advanced vehicle technologies and persistent supply chain issues are likely to continue exerting upward pressure on premiums. This situation requires innovation and consumer-focused solutions to keep car insurance affordable for UK drivers.
AI is revolutionising the world in many ways, whether it’s through automating processes, generating content, supporting customers, or analysing data.
While it’s beneficial and used in different cases, AI seriously threatens jobs worldwide and since the release of ChatGPT, many companies have started investing in their AI research but also downsizing their business at the same time.
One recent example of AI’s threat is its impact on call centres. Indeed, the Chief Executive of Indian giant IT firm, Tata Consultancy Services (TCS), that has more than 616000 employees worldwide, admits that Call Centres will soon be replaced by Chatbots, causing many agents to lose their jobs.
He also adds that this AI takeover could happen as soon as next year in countries like India and the Philippines where customer help centres have created thousands of jobs over the years.
Moreover, Krithivasan believes that chatbots will be able to examine a customer’s purchase history and perform the work done by call centre agents as clients will increasingly rely on generative AI to solve their queries.
According to Nasscom, more than 5 million individuals work in IT and business process outsourcing in India, a number that generative AI could negatively impact in the future, leading to mass unemployment across the country, but also in the globe.
Moreover, Summi Shah, the CEO and founder of Dukaan, a firm that supports merchants in setting up their online stores, has already made 90% of his support staff redundant, claiming that this decision has improved response and reduced customer support costs by 85%.
Now, many legislators around the world are worried about AI replacing executive and office jobs such as software engineers and marketers, which could in turn impact university courses taken and many other career paths.
So, is Generative AI powerful and smart enough to eradicate all call centres and support teams completely in the future? What about the customer problems that just cannot be solved using generative AI no matter how sophisticated they are? At the end of the day, humans have capabilities that AI can’t replace, including emotional intelligence and understanding other unique customer struggles.
To protect consumers from fraud and other harmful and illegal activities luring the digital insurance landscape, the Honk Kong’s Insurance Authority (IA) alongside the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA) and the Mandatory Provident Fund Schemes Authority (MPFA) have finally released its updated Anti-Scam Consumer Protection Charter 2.0.
To welcome this joint effort in updating the charter, the CEO of IA, Mr Clement Cheung said; “The Charter is a cross-sector initiative that underscores our collective resolve in combatting digital frauds and scams. The IA will strive to maintain a reliable and convenient environment for normal business transactions to be conducted, hence preserving public confidence in the insurance industry.”
According to the Insurance Authority, 230 firms have shown their support for this charter, among which 73 are authorised insurers and licensed insurance broker carriers.
What does this mean for financial institutions and insurance companies?
Despite the charter, the financial industry continuously monitors digital fraud and scams and has enhanced its data security management to actively prevent these crimes.
Moreover, the four financial regulators play a crucial role in raising consumers’ awareness to always protect themselves from illegal digital activities, making this charter a reminder of how important it is for the general public to take the necessary measures to protect their personal information by limiting the amount of data they share online.
The Hong Kong police has reported that it has sent 505,000 scams alerts to the users of the massive Hong Kong online bank payment system Faster Payment System (FPS) between last November and last month.
Shockingly, 30% of these users have ignored these alerts and continued their transactions.
With all these initiatives and resources in place, will consumers act accordingly in the future?
In the escalating battle against ghost broking, an illicit scheme where fraudsters sell fake or invalid insurance policies, innovative methods are being adopted to curb this troubling trend. Notably, law enforcement’s Operation Henhouse 3 has marked a significant advancement in this fight.
During a recent crackdown, police issued nine cease and desist notices across the UK, culminating in 438 arrests and the seizure of assets worth £19 million. This operation underscores a proactive approach in tackling insurance fraud, notably ghost broking, which involves the sale of fraudulent insurance policies.
Meanwhile, the discourse at the Fraud Charter roundtable, hosted by Insurance Times and sponsored by Carpenters Group, emphasised the pivotal role of social media in both spreading awareness of and combating these fraudulent activities.
James Burge from Allianz highlighted the importance of targeting young people; “Targeting education towards young people is all about social media, which is where they end up seeing what ghost brokers advertise and their mates getting insurance that way.”
While social media poses risks by offering a platform that can facilitate ghost broking, it also holds potential as a powerful tool for educational outreach.
Furthermore, the efforts extend beyond police actions. The insurance industry itself is becoming more vigilant. For instance, Fleur Lewis of Covea Insurance shared insights from her educational talks in schools, revealing a general lack of understanding about fraud among students, which these initiatives aim to rectify.
The results from these concerted efforts are substantial. Operation Henhouse alone has brought about a 52% increase in arrests year-over-year, demonstrating the efficacy of enhanced police resources and national collaboration in addressing fraud.
As these operations continue to gain momentum, they not only disrupt fraudulent activities but also promote a broader understanding of the risks associated with ghost broking. This dual approach of enforcement and education is key to safeguarding consumers and maintaining the integrity of the insurance market.
With plans to extend Operation Henhouse into 2025 and ongoing educational efforts, the fight against ghost broking and other forms of insurance fraud is set to intensify, promising safer and more informed choices for consumers.
One thing no insurer or policyholder can predict are extreme weather events. When they hit, they hit hard and both insurance companies and their customers pay the price.
Following extreme weather events related to climate change that ravaged many homes and businesses last year, claims from policyholders have overwhelmed the industry.
In 2023, 37 extreme weather events worldwide have resulted in payouts amounting to $1 Billion each, according to the insurance broker Aon. Among these events, floods, storms and wildfires are the ones that have created the biggest headache for underwriters.
Furthermore, many US insurers have even stopped providing home insurance altogether in areas where extreme weather was devastating.
As of the UK, severe storms have left home insurers stranded, having to pay more than £573 Million in weather damages, an increase of 36% compared to 2022.
Additionally, The Association of British Insurers (ABI) recent figures say that property insurers have paid around £13 million every day in 2023 to support homeowners and companies overcome damages from flooding and thefts.
ABI confirms that extreme weather damage insurance claims hit their worst record.
Louise Clark, Policy Adviser at ABI shared; “Extreme weather events may not feel so rare as they used to as we grapple with a changing climate. Insurers continue to be there for affected homeowners, with payouts hitting record levels after a particularly difficult autumn and winter with seemingly countless storms, from Agnes onwards leading to significant flooding.”
In the rapidly evolving financial landscape, the need for robust regulatory technology has never been more critical. The 2024 Surveillance Benchmarking Survey & Report from 1LoD, co-sponsored by MCO, sheds light on how financial institutions are stepping up their compliance efforts to meet increasing regulatory demands.
Financial leaders are proactively expanding their surveillance capabilities, with a third of banks planning to boost their surveillance budgets within the next year. This strategic increase in funding is primarily in response to regulatory pressures and the urgent need to enhance eCommunications technology—83% of institutions anticipate purchasing new eComms solutions in the next three years.
The shift towards centralised communication repositories is a significant trend. By consolidating communication channels into a single repository, banks aim to streamline the monitoring process and improve data accessibility, allowing for more efficient compliance management and enhanced analysis capabilities, whilst also being able to provide an audit trail for regulators and senior management.
Many financial institutions face challenges with their outdated surveillance systems, which are prone to generating a high volume of false positives. These systems, limited by older technology, struggle to differentiate between genuine threats and nonthreatening anomalies, leading to an overload of alerts. This not only burdens their operational efficiency but also consumes significant resources.
According to a survey reported by MCO, there is widespread uncertainty among compliance professionals about transitioning to newer technologies that promise more accuracy and fewer errors. The transition to new technology must be navigated carefully to avoid introducing new issues while resolving existing ones.
With regulators intensifying their focus and severe consequences of non-compliance, no financial institution is beyond scrutiny. Keith Pyke, MCO’s Director of Solution Sales, underscores the importance of a comprehensive approach to compliance and states that; “Messaging surveillance and retention is just one part of an effective compliance program. Better compliance moves beyond point solutions that surveil communication activities in silos and towards an integrated platform approach that also includes other areas of potential risk.”
Looking ahead, the integration of AI into surveillance systems is expected to revolutionise the field, enhancing the precision of compliance tools and mitigating risks more effectively.
As financial institutions prepare to embrace new technologies, the need to improve and change outdated data practices grows stronger, ensuring that compliance infrastructures can keep up with market demands and regulatory expectations.
“As financial institutions grapple with mounting regulatory pressures, the imperative to adopt new technologies has never been more pressing to effectively meet escalating compliance demands. The proactive shift towards centralising communications and advancing surveillance capabilities underscores a commitment among financial leaders to bolster compliance efforts. However, the full potential of digitisation in managing compliance-related risks extends beyond communication monitoring. This is where regulatory technology (RegTech) emerges as a strategic imperative.
RegTech leverages innovative technologies like artificial intelligence and machine learning to provide a comprehensive solution for managing B2B regulatory, AML and compliance risks associated with trading partners. By automating and streamlining compliance processes, it enhances efficiency, accuracy, and scalability while reducing manual effort and human error. Real-time monitoring and analysis enable proactive risk mitigation and financial crime protection, while enhanced transparency and auditing abilities strengthen regulatory compliance. RegTech’s agile platforms facilitate continuous adaptation to evolving regulatory requirements, ensuring compliance readiness and resilience in dynamic environments. Businesses that embrace intelligent and automated solutions position themselves to gain a competitive edge, accelerate revenue generation, and enhance trade efficiency, all while prioritising safety and security.”
Binance, the largest cryptocurrency exchange globally, is establishing a global headquarters in response to mounting regulatory pressures, announced CEO Richard Teng.
This strategic pivot breaks from the company’s prior stance against having a physical base, emphasising a shift towards compliance and corporate governance.
Historically, Binance thrived without a fixed headquarters, reflecting its decentralised ethos. However, recent legal challenges have spurred a re-evaluation. In 2023, Binance faced severe allegations, including facilitating transactions for sanctioned entities, leading to a $4.3 billion penalty and the resignation of then-CEO Changpeng Zhao.
Additionally, Binance’s challenges have intensified with accusations from Nigerian authorities, who allege that the exchange has played a role in its economic disruptions and have brought forward charges of money laundering and tax evasion.
These accusations extended to Tigran Gambaryan, a US-based compliance executive, resulting in his controversial detainment and trial in Nigeria, which has drawn international attention and criticism. “We are deeply disappointed that Tigran Gambaryan, who has no decision-making power in the company, continues to be detained,” a Binance spokesperson expressed, highlighting the firm’s perspective on the legal process and the actions taken against their employee.
The decision to establish a global headquarters is part of Teng’s broader strategy to realign Binance with global financial regulations. Teng, with his background in regulatory roles including a position at Singapore’s central bank, aims to strengthen anti-money laundering practices and ensure compliance across Binance’s operations.
The exact location of the new headquarters is yet undecided, reflecting the complex considerations of regulatory landscapes, tax implications, and operational logistics.
This move by Binance represents a crucial transformation as it navigates through the complexities of international finance laws and strives to address past criticisms. As the crypto platform redefines its identity, the global financial community watches closely, anticipating the potential impacts on the broader cryptocurrency market and regulatory practices.
The outcome of this pivot could set precedents for how crypto firms operate on the global stage, balancing innovation with compliance.
While artificial intelligence (AI) has paved the way for streamlining routine and repetitive tasks, improving fraud detection, customising products, and freeing time for companies to focus on strategic growth, it has also brought forth an array of concerns where the software is being used for nefarious means.
The rise of deepfake risks has only been increasing, as criminals are taking advantage of technology to harm people and companies. Now, deepfakes are considered as one of the most sophisticated forms of cyber risks.
Deepfakes are a form of identity theft that uses AI to imitate real situations. For example, this could be in the form of impersonation, face copying, face swapping and speech synthesis.
This confuses the victims and makes them take actions that could harm both the business they work for and themselves, such as transferring large sums of money.
According to Bill Cassidy, CIO at New York Life; “There were always fraudulent calls coming in. But the ability for these [AI] models now to imitate the actual voice patterns of an individual giving instructions to somebody with the phone to do something—these sorts of risks are brand new.”
Sumsub’s recent identity fraud report points the increase of deepfake incidents in the fintech sector by a whopping 700% in 2023 compared to the prior year.
In response to these risks, insurance firms offer a relatively new type of insurance, cyber insurance, that covers higher thresholds of liability which could include “costs of investigation, ransom or funds transfer fraud payments, data recovery and restoration, crisis management, business interruption, and liability claims for disclosure of or failure to protect confidential information.”
From an underwriting perspective, insurance carriers are asking their customers to use two-way authentication to strengthen security and stop deepfakes.
To mitigate and prevent these cyber risks, companies must train their employees adequately and put security processes and reading materials in place, without forgetting raising customers’ awareness continuously.
Last month, the FCA urged financial advisors to review retirement income advice processes, whilst raising concerns within the motor sector regarding fair value, Lloyd's predicted generative AI to increase cyber threat risks, the UK Parliament released its much anticipated 'Sexism in the City' report, and REG launched its new Partnerships Programme...
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Last month, the FCA urged companies to ensure Consumer Duty reports are a priority, the UK made headway following the publication of the world's first global guidelines for the secure development of AI technology, the UK government pushed regulators to prioritise economic growth and REG hosted its much anticipated Mind Matters panel event, focused on how we can work together to ensure mens mental health at work is supported...
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Last month, the FCA cracked down on Principal Firms, brokers were seen to be leading the way with Consumer Duty preparation, and with the annual MGAA conference only a few days away, REG sat down with CEO, Michael Keating, to discuss all things MGAA and how the Association is transforming the market for its members. Read these articles and many more, as we bring you all the important news and views from the insurance and financial services world…
