REG Reviews
1st February 2023
Last month, concerns around brokers’ naivety of Consumer Duty were brought to light,
a robot prepares to become a defence lawyer and OpenAI’s ChatGPT has taken the internet by storm
with its revolutionary imprint on the AI landscape.
Read these articles and many more, along with our usual updates from REG and the RegTech sector.
Following the passing of the FCA’s recent new Consumer Duty regulation, which “sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first”, as outlined by the FCA; firms should be agreeing their implementation plans before the rules come into effect on 31st July 2023.
However, despite the urgency from regulators and criticalness for firms to comply with legal obligations, a recent survey from specialist insurer, Ecclesiastical, found that only half of brokers are actually aware of the FCA’s new Consumer Duty rules.
This has been recognised as a “big concern” by compliance experts, as it unveils many brokers are behind obligated requirements to finalise implementation plans before the agreed deadline.
Ecclesiastical’s Commercial Director, Adrian Saunders, declared; “All firms should have an implementation plan in place by now, which should include training to ensure all senior management are aware of the significance of the new Consumer Duty, and their role and obligations in terms of ensuring compliance with the new standards.”
Furthermore, the investigation, which surveyed a selection of 250 brokers across the market, also revealed that three out of five brokers admitted to not understanding how the new regulation will impact their business.
Since these alarming revelations were revealed, the FCA launched a review into 60 of the largest financial services firms across the market, in efforts to understand the preparedness of companies regarding the upcoming regulatory changes.
Investigations revealed that although many firms understand good outcomes and have built complementary outcomes, a large amount of businesses are at risk of failing to implement Consumer Duty accordingly in time for the reform deadline.
Sheldon Mills, Consumer and Competition Chief, recognised the need for further facilitation across the market to ensure appropriate plans are put in to place before the agreed deadline.
He commented; “Given the scale of the reform, we recognise that some firms need to make significant changes. For firms that are further behind in making the necessary changes, there is time to put that right and for them to show they are acting in the spirit of the new Duty.”
The FCA have therefore instructed firms to focus on:
The Consumer Duty rule is one of the biggest regulatory shifts in the financial services industry facing brokers in recent years, which compels brokers to deliver good customer outcomes for retail customers.
Matthew Craney, Compliance Expert at Create Solutions stated that “The FCA has made it fairly clear that if the deadlines are not met, it is not just seen as a breach, but also as a serious rule breach, which is notifiable.”
Brokers could face severe consequences if a shift in attitude and awareness does not occur. Compliance Consultant, Branko Bjelobaba, commented on his surprise at the low level of awareness of the Consumer Duty law amongst brokers.
He continued to insist that; “Everyone needs to raise awareness. That’s the regulator, the trade bodies, the brokers, insurers and the journalists.”
Findings suggest brokers’ incompetence regarding adequate planning for Consumer Duty could be down to the immense pressure the market is under due to having to keep up with a continuous stream of new regulatory requirements.
A staggering 97% of brokers surveyed stated that the volume of regulation is heavily increasing year on year; with 73% arguing that it is too much.
Stuart Randall, Brokerring Founder and CEO argued brokers are “earnest” in their attempts at battling the regulation workload.
Commenting on his observations when meeting with community brokers, he stated that; “They try, and they are all earnest, but it is complicated and difficult. You have one principal and five members staff, so how do they stay on top? The FCA pressure is relentless.”
Nadege Genetay, Partner and Consumer Duty Lead at Sicsic Advisory echoed the FCA’s concerns of alarming non-compliance within the industry, stating; “With six months to go, it is a warning against complacency.”
In a recent survey conducted by BIBA regarding the cost-of-living crisis, it was revealed that cyber insurance was the most affected line. The feedback unveiled that 40% of clients that previously held cover are no longer insuring their cyber risks.
Discouragingly, this comes at a time when BIBA reported in its 2023 Manifesto that SMEs account for 96% of all cyber-attacks; with cyber-criminals often exploiting them to use as a gateway to larger businesses.
On 24th January, BIBA presented the 2023 Manifesto, titled ‘Managing Risk – Delivering Stability’ to the Houses of Parliament. The Manifesto, containing 37 commitments and 32 calls to action, responds to the current cost-of-living pressures and how the insurance market can effectively tackle them.
The Manifesto read; “BIBA is concerned, given the cost-of-living crisis and high rates of inflation, that the financial resilience of both consumers and businesses will come under renewed pressure.”
Responding to the alarming plummet in cyber risk insurance, Graeme Trudgill, BIBA’s Executive Director, said; “It is concerning that businesses are cutting cyber cover when the risk is growing, so we want them to understand the protection and wider everyday support that is available with leading cyber insurance.”
In response to the alarming discoveries, BIBA have urged brokers and businesses to take advantage of the CFC’s cyber insurance scheme to enhance their protection and risk mitigation against prevailing cyber-threats.
The Cyber Risk Guide, published in December 2022, covers the threat landscape that targets small businesses and aims to help brokers and SMEs learn how to protect themselves from criminal breaches through cyber insurance.
The guide also contains information and case studies on the application of cyber cover to prevent attacks as this is sometimes misunderstood. It also includes a glossary to help SMEs understand industry jargon.
“To date CFC’s monitoring has prevented over 12,000 incidents from occurring and saved millions of pounds in potential losses,” Trudgill exclaimed.
Moreover, a ‘Ransomware Calculator’ is accessible to SMEs via the CFC, whether policyholders or not, to allow evaluation of their specific risk.
However, even though the growing risk of cybercrime is dangerously amounting, many Senior Executives are failing to identify cyber risk as a primary concern.
In October last year BIBA member, Aon, conducted an executive risk survey of 800 C-suite and Senior Executives. The survey found that Executives are most worried about risks surrounding the economy, whilst cyber-threat concern ranked 4th.
According to Lindsay Nelson, budget constraints are responsible for the low subscription to cyber policies; even at a time when many UK businesses agree that cyber is a concerning exposure.
Jane Kielty, Head of Commercial Risk for Aon UK, and Deputy Chair of BIBA concluded that; “Addressing risk is no longer a choice, it’s a question of survival.”
Businesses must protect themselves and ensure adequate frameworks are in place to battle the ever-increasing threat of cyber criminals.
History is set to be made next month, with the United States employing the “world’s first robot lawyer”, as an AI-powered robot prepares to defend a US citizen in court.
The accused is on trial for a traffic violation and will make headlines when an artificial intelligent robot stands as their subsequent defence lawyer.
The “robot lawyer” in question is a downloadable mobile application, called DoNotPay, that utilises artificial intelligence to provide legal services.
Founded in 2015, DoNotPay was first and foremost a basic chatbot, which used conversation templates to assist bureaucratic and legal proceedings.
Now, the AI lawyer is programmed to analyse the entirety of the courtroom’s arguments in a bid to replicate that of a human lawyer’s critical thinking capabilities.
The DoNotPay robot works from a smartphone, listening to arguments and then advising the defendant what to say via an earpiece in real-time; with the accused only saying what the AI lawyer instructs.
If the defence is found guilty, DoNotPay have ensured they will remunerate any incurred fine at the expense of using a robot to defend the accused.
CEO and Founder of DoNotPay, Joshua Browder, stated his reasoning behind the deployment of robots to assist legal proceedings is to ultimately democratise the legal representation.
It is Browder’s main aspiration to grant free access to anyone, regardless of background, to ensure equal opportunity for defendants.
Browder declared; “What we are trying to do is automate consumer rights.”
“New technologies typically fall into the hands of big companies first, and our goal is put it in hands of the people first.”
However, the fallout from lawyers and their counterparts was on the contrary to noble reasoning behind the AI-powered legal tool.
The use and application of technology in many courtrooms is illegal; as well as some states requiring the consent from all parties to be recorded, before granting permission.
Indeed, only 2 out of the 300 considered cases were feasible for the trial of the “robot lawyer.”
Moreover, Browder informed CBS Money Watch that he had received threatening messages from lawyers suggesting his potential jail imprisonment, after he tweeted about the upcoming trial of his “robot lawyer.”
Nonetheless, DoNotPay have succeeded in raising $27.7 million from tech-focused venture capital firms, including Andreessen Horowitz and Crew Capital.
When comparing to popular artificial intelligence tool, ChatGPT, Browder critiqued the latter for its lack of sophistication, stating; “AI is a high school student, and we’re sending it to law school.”
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New data from Weightmans has revealed fraudulent claims have been unnervingly rising amidst the cost-of-living crisis.
This insight surfaces as a result of over half of industry professionals stating fraudulent insurance claims have significantly escalated during the unprecedented times as compared to the volume of claims in previous years.
Moreover, 97% of insurers predict the number of insincere claims is only set to multiply during the cost-of-living crisis.
Mike Brown, Head of Fraud at Weightmans, declared the industry to be spiralling into a ‘pandemic of fraud’. Brown insisted the increase in fraudulent activity is being fuelled by the cost-of-living crisis and imminent recession. Stating the unprecedented circumstances were ”acting as a breeding ground for fraudulent claims.”
Brown believes deceitfulness is down to both members of the public as well as organised fraudsters.
Impeding fraud is especially concerning, at a time when all other types of crime; including burglary, theft and knife-crime have fallen against March 2022 levels. Data from ONS Survey unveiled fraud is the exception, having risen by 4%.
Moreover, not only have fraudulent claims began to rise, but the sophistication behind the hoaxes has become alarming.
Indeed, two thirds of insurers surveyed argue the complexity of spurious claims have inclined.
Sharing and alerting industry allies is more pertinent than ever amidst the violations. Ana Mills reiterated that the alignment of awareness between businesses and partners is crucial in the ever-evolving sophisticated world of fraud.
Mills quoted; “Such exchanges of knowledge will be essential in combating fraud during this period, enabling colleagues to identify potentially fraudulent claims more quickly and accurately.”
International postal deliveries have been suspended after the Royal Mail became a victim of a cyber breach carried out by a Russian linked ransomware gang.
It has been reported that the ransomware used in the attack is Lockbit which has affected the computer system that is used by the Royal Mail to despatch deliveries overseas.
Lockbit is a type of malicious ransomware that encrypts data and demands payment in cryptocurrency, it has been developed and used within criminal gangs that have links to Russia.
The cyber-attack reportedly left printers at the Northern Irish Distribution Centres “spurting out” copies of the ransom note, which read “Lockbit Black Ransomware. Your data are stolen and encrypted.”
The ransom notes also contained threats to publish stolen data on the dark web.
The attack is said to have cause disruption to over half a million parcels and letters.
The Royal Mail stated, “We have asked customers temporarily to stop submitting any export items into the network while we work hard to resolve the issue.”
The system that has been affected is used to prepare deliveries to go overseas and track them, however, the attack may have also caused minor delays to post coming to the UK. Domestic deliveries have not been affected.
The postal service is now working with National Cyber Security Centre, a branch of UK cyber-intelligence agency GCHQ, to understand the impact of the attack and remove the malicious software.
The attack is now also being investigated by the National Crime agency.
The persistent threat of ransomware attacks is growing, with attacks to organisations occurring on an almost daily basis.
Lockbit Malware was also used in the attack on the NHS in August last year, which was still affecting systems in October.
OpenAI’s new viral chatbot, ChatGPT, is “taking the internet by storm” with its intelligent ability to augment nearly every facet of modern-day business.
Artificial intelligence and its many forms is increasingly disrupting our digitalised economy, shaping the way we work and leading the way for a digitally automated future.
However, following the launch of ChatGPT in November 2022, although in its infancy, the new advanced chatbot system is seemingly positioned to be the biggest emerging piece of disruptive technology to the AI landscape in recent times.
Founded in 2015 by renowned Silicon Valley players; Elon Musk, CEO of Tesla and Sam Altman, CEO of OpenAI, the AI system was created in efforts to develop AI “in the way that is most likely to benefit humanity as a whole.”
In 2018, Elon Musk resigned from the board due to a conflict of interest, with the company later transforming from a non-profit to a ‘capped profit’ incorporation in 2019, following Microsoft’s $1billion investment.
In short, ChatGPT is an automated artificial intelligence chatbot system, used to generate text-based responses from prompts and questions.
The natural language processing (NLP) model is a variant of popular GPT-3 (Generative Pertained Transformer 3) model. It was devised through neural network architecture, Reinforcement Learning from Human Feedback (RLHF) and unsupervised learning to generate responses.
Sentiment analysis ensues the chatbots versatility as a NLP; making it applicable to a multitude of everyday tasks, to automate and enhance workflows and efficiencies.
The chatbots functionality extends to, but isn’t constrained to, its ability to answer questions, write essays, create fictional stories, compose job application letters, solve maths problems, give relationship advice, compose music, decipher code, generate reports and write business plans.
Professor Michael Wooldridge, Director of Foundational AI Research at the Alan Turing Institute in London said; “These are the first systems that I can genuinely get excited about. It would take 1,000 human lifetimes to read the amount of text the system was trained on and hidden away in all of that text is an awful lot of knowledge about the world.”
Indeed, since its release, many businesses and individuals have benefited from the system to automate workflows and improve customer experiences.
C-Suite level leaders have praised the generative system in automating repetitive tasks and providing an advance cognitive perspective to their critical thinking and creativity.
Christain Langg, CEO of digital supply chain platform, TradeShift, has used the chatbot to compose emails and complete accountancy work, of which a professional services firm is currently employed to do.
OpenAI has also been acclaimed to be leading the way for artificial intelligence development and overpowering competing tech giants in the race for revolutionary change.
Morgan Stanley declared language models, like ChatGPT, could take market share “and disrupt Google’s position as the entry point for people on the Internet.”
Indeed, Google recently declared a “code red”; the BBC reporting the company “fears it might enable competitors to eat into the firm’s $149bn search business.”
Further Google employees also critiqued their company for missing an opportunity when their position on AI-lead technology is considered leading.
In turn, Microsoft are also considering further investment into OpenAI and its technology of $10bn.
However, the tool is not met without its drawbacks, with Co-Founder, Elon Musk, even citing on Twitter that “ChatGPT is scary good. We are not far from dangerously strong AI.”
Anguishes towards the chatbot have consisted of accusations ChatGPT primarily lacks humanisation and creativity; and although it can be exploited to improve efficiencies and accelerate workflows, the lack of humanistic characteristics, critical thinking and common sense limits its capabilities to fulfil complex tasks.
In support of this argument, the system itself declares in its introduction that the chatbot is limited in its understanding and only capable of generating text based on patterns. Moreover, acknowledgement that the system is limited to knowledge and world events after 2021 is also highlighted.
Forbes further reports on ChatGPT’s presumed vulnerability to cyber-attacks and the potential to spread disingenuous information.
“Malicious cybercriminals could manipulate people into divulging personal information using the chatbot, then use that information for fraudulent purposes or for targeted phishing attacks.”
Furthermore, investigations into unconscious bias within the system have revealed a predisposition to judge users based on their age when prompting the system to write job posts. Concerns have also arisen that the chatbot possess underlying racial and gender bias.
Academics and tutors threatened by the chatbots comprehensive capabilities have voiced their concerns of ChatGPT’s use among students. After a Professor at University of Pennsylvania’s Wharton School of Business realised the chatbot is capable of completing an MBA Operations Management exam expressed how the system will reduce the “value of education.”
Given the chatbot’s undetectability to plagiarism, many schools are battling with the fallout from student usage; with some schools in New York having banned the AI system altogether.
In rebuttal, many business leaders view the tool as a facilitator more than a replacement, in the race to radical digitalised change. Incorporating ChatGPT into everyday business has the potential to replace repetitive tasks, reduce costs and streamline business processes to accelerate trade.
Microsoft CEO, Satya Nadella stated; “I see these technologies acting as a co-pilot, helping people do more with less,”
“Anybody who doesn’t use this will shortly be at a severe disadvantage.”
ChatGPT is undoubtedly a powerful tool that has the potential to transform the way that insurance companies provide information to their customers. From Marketing Teams to Customer Support, it can take away the heavy lifting by allowing companies to mass produce content at scale, on a regular basis.
Asides from content creation, ChatGPT can further automate other processes such as claims processing, underwriting and contract reviews. These are typically manual and time-consuming tasks and so allows FTEs to apply themselves to far more productive endeavours.
Whilst it is clear ChatGPT could be a gamechanger in the market; businesses still need to build relationships through human touch - it is, after-all, artificial intelligence and won’t make those connections for you. The content that is created is largely insignificant, it is how it is distributed to ensure it is in the hands of the people who want and need to consume it.
Ultimately, ChatGPT and its AI counterparts shouldn’t be a replacement for everything you are doing. Relationships have always been and will always continue to be critical and demands personalisation and creativity, no matter what the industry. Insurance relationships are fundamentally built on trust and whilst tools such as ChatGPT are exciting, can they be trusted? When considering utilising it for connecting with customers, ChatGPT is trained on text data and so has a limited ability to understand emotion or sentiment.
In summary, technology like this should help insurance businesses but must be used in the right way. It won’t make you stand out or build relationships for you and so must not be relied upon as it lacks empathy and emotional intelligence. Human touch will always be necessary, we cannot and must not ever solely rely on a machine!
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The Prudential Regulation Authority (PRA) has cautioned MPs that abandoning Solvency II could lead to an increase in risk that taxpayers will be forced to pay out if insurers go bankrupt.
Solvency II was introduced back in 2016 by the EU to harmonise insurance regulation amongst its 28 member states, which required insurance companies to hold a certain amount of capital in order to withstand unexpected financial shocks.
In November, Chancellor, Jeremy Hunt, announced reforms to Solvency II and revealed the package would “unlock tens of billions of pounds of investment for our growth-enhancing industries.”
The proposed package included a reduction to the Risk Margin by 65% and 35% for life insurers and non-life insurers respectively.
Support for Solvency II reform has come from the Association of British Insurers and insurance companies. However regulatory bodies, such as the PRA and the Bank of England, have cautioned how it may impact the economy.
Reports suggested that there had been disagreement between HM Treasury and the PRA about Solvency II as the changes to the rules were revealed.
At the Treasury select committee meeting on the 17th of January, Sam Wood, Chief Executive of the PRA, explained the “different views” on how post-Brexit red tape will affect the economy between the PRA and the Government to the Treasury select committee.
Woods stated, “I think the Government itself would acknowledge that the reform package, as a whole, increases risk and the Government is doing that because the Government believes that [scrapping Solvency II] will aid growth.”
“I do not think this particular set of reforms is a major financial stability issue. I think it is much more a policyholder protection issue,” he continued.
It was also announced that the Government would be granting regulatory bodies additional powers to help them manage risk, including the ability to publish individual firms’ stress test results, which the PRA showed support for.
Andrew Bailey, the Governor of the Bank of England also spoke at the select committee meeting and discussed the end of Solvency II and further powers that would be granted to the regulators.
These additional powers would allow the regulators, for the first time, to publish individual insurers’ stress tests, which it was previously able to do with banks but with insurers “it has never had the power to do so before.”
Bailey also discussed how the Bank may now be required to report whether Insurers’ “risk tolerance” has been met, however the procedure for this is “yet to be decided.”
Reducing solvency ratios would certainly allow insurance companies to have more flexibility in their business operations and make it easier for them to compete with other companies in the global market. This could lead to lower insurance premiums for policyholders, at a most welcome time.
Clearly though, companies that operate with lower ratios could be less resilient to financial stress, which could increase the risk of insolvency and lead to policyholder harm. Whilst in the UK policyholders are protected by the Financial Services Compensation Scheme (FSCS), cover is limited to 90% of a claim and capped at £85,000 per policy.
Regardless of any change, brokers will still be exposed to claims if they recommend insurance carriers that subsequently fail. Therefore, solvency ratios (at any level) should form part of a robust insurer due diligence process, including checking credit ratings, loss ratios, reinsurance arrangements, management team and regulatory filings.
Ultimately, the decision to reduce the solvency ratio requirement for UK insurers is a balance between the potential benefits and risks; but all regulated businesses should remind themselves of their responsibilities to carry out appropriate market assessments before recommending a product.
Chainalysis, a cryptocurrency expert, have revealed an estimated 40% drop in the amount ransomware groups have extorted, from $788m in 2021 to $457m in 2022.
Although this is likely to be higher, experts have agreed more victims are refusing to pay, despite an increase in attacks.
Many companies and other institutions around the world, including governments schools and hospitals, have become victims of ransomware attacks.
Hackers encrypt their victim’s data and demand payment, usually in the form of cryptocurrency, in exchange for their data. The criminal groups also often threaten companies that they will publish or sell data.
Russia is thought to be the home of many cyber criminal groups, including Lockbit, however Russian officials deny this.
Chainalysis are analysing known bitcoin wallet belonging to ransomware crews, and tracking the money in and out, however not all wallets are known so the figure of proceeds is likely to be higher than what the analysts are able to see.
Despite not being able to track all criminal bitcoin wallet, analyst can confirm that ransomware payments have significantly decreased.
Coveware, a specialist firm in negotiating with ransomware hackers, also reported victims are less likely to pay ransom, with many of their client becoming more reluctant to give millions of dollars to criminal gangs.
Bill Seigel of Coveware, reported a drop from 70% in 2020 to 41% in 2022, of clients claiming to pay ransom.
Seigel and other cyber experts believe that companies are less likely to pay ransom, as sanctions against groups with links to Russia’s Federal Security Service make it more legally risky to pay ransom.
Experts have also suggested that improved cyber security within businesses due to the increasing number of attacks may also have led to this drop in earnings for hackers.
The number of cyber-attacks increased significantly across 2022, with over 10,000 unique types of malicious software being identified as active by cyber-security firm, Fortinet, in the first half of 2022.
In the recent weeks hundreds of tech companies, have revealed that they would be cutting jobs, including the industry’s biggest firms.
Amazon announced in early January that in order to save costs it would be cutting 18,000 jobs, following initial job cuts back in November.
The tech giant, which globally employs 1.5 million people, suggested the “uncertain economy” was the reason for the cuts.
After an employee externally leaked the news of the cuts, Boss, Andy Jassy, made the announcement, stating; “We don’t take these decisions lightly or underestimate how much they might affect the lives of those who are impacted.”
“Companies that last a long time go through different phases. They’re not in heavy people expansion mode every year,” he continued.
More recently Microsoft have also announced their plan to layoff around 10,000 employees.
This will cost the tech firm around $1.2 bn in severance and reorganisation costs and will affect around 5% of their workforce.
Chief Executive, Satya Nadella, mentioned the difference in spending between now and during the pandemic in the memo note to employees.
It also discussed the implication of the current recession in parts of the world and also stated “at the same time, the next major wave of computing is being born, with advances in AI”.
This follows reports that Microsoft is looking at a 10-billion-dollar investment in artificial intelligence company OpenAI, which created Chat CPT.
Another tech giant that announced workforce cuts in January was Alphabet, the parent company of Google, which has announced 12,000 staff redundancies, affecting around 6% of the work force.
The CEO of Alphabet and Google, Sundar Pichai, wrote in an internal memo that he took “full responsibility” for the layoffs.
He added that employees’ “contributions have been invaluable” and he thanked them for “working so hard”.
Pichai stated; “While this transition won’t be easy, we’re going to support employees as they look for their next opportunity.”
The last round of job cuts comes from Spotify, which has announced it will be cutting around 6% of its workforce, affecting 600 jobs and £30m in severance costs.
With many other tech giants revealing staff cuts, including Meta, Twitter and Sales Force, the tech website layoffs estimate around 194,000 jobs losses in just the US since the beginning of 2022, not including the Alphabet or Spotify cuts.
Analytic company, Globaldata, has warned that the growing number of weather-related claims and rapidly increasing costs of rebuilding will negatively impact the profitability of UK property insurers in 2023.
In the third quarter of 2022, Globaldata reported that there had been an increase in retail property claims by 33%, reaching £702 million.
Additionally, commercial property claims reported by the ABI had increased by 8% between Q2 and Q3 2022, reaching £542 million.
Subsidence was reported by Globaldata as one of the major areas of claims in retail property.
Shabbir Ansari, Senior Insurance Analyst at Globaldata stated; “Claims related to this category grew by 394.5% in Q3 2022 against the same period in 2021. Claims related to subsidence stood at £115m in Q3 2022, which is the highest it’s been since Q3 2006. This was followed by water escape, which increased by 24.3% for the same period.”
Between June and July last year, LV reported that subsidence cases had increased by 209% and cautioned that they would continue to rise.
Furthermore, by December 2022, the house rebuilding cost index published by the ABI had grown by 19.4%.
Ansari commented; “This, along with the increased frequency of weather-related incidents, will lead to an increase in property insurance premium rates and negatively impact the profitability of UK property insurers in 2023.”
More recently, Direct Line announced that their profits had decreased the value of their share price by 25%.
This was reportedly due to freezing temperatures in January 2022 and subsidence related claim. Despite expectations of weather claims being around £73 million, Direct Line reported around £140m worth of claims for 2022.
Ansari estimated that claims due to extreme weather would cost UK insurers around £1.5bn in 2022, and cautioned about current flood warnings, as they could further have “a negative impact on the profitability of insurers.”
Reformations to the Senior Managers and Certification Regime (SM&CR) are scheduled to be made in the first quarter of this year by the government.
The review was announced in December 2022, as part of the package of 30 regulatory reforms aimed at “unlocking investment and turbocharging UK growth in towns and cities.”
Revisions to the regime have been fuelled by Chancellor, Jeremy Hunt’s vision to create a more dynamic and competitive financial services after the “freedom” given from BREXIT.
SM&CR was introduced in March 2016, as in part a response to the 2008 Financial Crisis and replaced the Approved Persons Regime.
It was first introduced to the banking sector and PRA-designated investment firms, followed by insurers in December 2018. In December 2019, the scope was extended to FCA-solo-regulated firms.
As quoted by the FCA, “The SM&CR aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence.”
However, this comes at a time when brokers are already facing an amounting burden of regulation and corresponding regulatory costs.
BIBA’s 2023 Manifesto highlighted the increasing financial strain regulation is having on the sector, with brokers suffering a 40% rise in regulatory costs in just three years.
Aim Sammon, Partner at Pinsent Masons, cautioned that significant changes to the regime would require firms to revisit SMCR; which would in turn incur heightened financial and operational strain on an already swamped sector.
Sammon commented; “Proper implementation of SMCR required firms to consider their governance and management structures in detail and then make some remediations as was needed to ensure compliance with the regime.”
“Within some firms, this resulted in new processes and procedures being put in place. Any significant changes to the regime are likely to require firms to revisit the work they did to implement SMCR in order to reflect those changes.”
The cautioned enforcement complexity and expense of the government’s revisions to SMCR is troubling the sector, given the consultation is overseen by the Financial Conduct Authority and Prudential Regulation Authority.
Even though the revisions to SMCR are unconfirmed, Pinsent Masons Partner, Tom Aries, foreshadowed the increased strain on the industry.
Stating; “The mere fact that reform has been suggested so soon after SMCR, from a costs perspective at least, may not be warmly welcomed; especially if reform is pursued at the end of the review and ‘SMCR II’ results in firms needing to spend more time and money getting ready for a new regime having only just implemented and grappled with the last.”
Further apprehension of reformations leading to ‘regulatory creep’ were voiced by Compliance Consultant, Branko Bjelobaba.
Bjelobaba stating; “You do need a sensible approach to the low-risk sectors, otherwise you tighten up so much with regulatory creep it serves no purpose whatsoever.”
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