Association of British Insurers – Written evidence (EGC0028)

The UK insurance and long-term savings market and the ABI

The ABI is the voice of the UK’s world-leading insurance and long-term savings industry, which is the largest sector in Europe and the third largest in the world. We represent more than 300 firms within our membership, including most household names and specialist providers, providing peace of mind to customers across the UK.

We are a purpose-led organisation: Together, driving change to protect and build a thriving society. On behalf of our members, we work closely with the UK’s governments, HM Treasury, regulators, consumer organisations and NGOs, to help ensure that our industry is trusted by customers, is invested in people and planet, and can drive growth and innovation through an effective market.

A productive and inclusive sector, our industry supports towns and cities across Britain in building a balanced and innovative economy, employing over 300,000 individuals in high-skilled, lifelong careers, two-thirds of whom are outside of London. Our members manage investments of £1.4 trillion, contribute £18.5 billion in taxes to the Government and support communities and businesses across the UK.

1. The Association of British Insurers (ABI) welcome the opportunity to make a submission to the House of Lords Financial Services Regulation Committee inquiry into the Financial Conduct Authority’s (FCA) enforcement proposals.
2. We appreciate the FCA’s endeavour to become a more transparent and accountable regulator, to allow for cleaner and fairer markets. We support these aims, along with other goals such as shorter investigations. The regulator’s approach to enforcement should punish wrongdoing as swiftly as is commensurate with justice and deter future poor behaviour. In this way, consumers will be protected, and the UK’s financial services market will continue to be trusted and respected by the public and investors alike.  We are keen to work with the FCA on the best ways to achieve this. We are therefore appreciative of the FCA’s engagement with us since their proposals were originally published and welcome the opportunity for further discussions over the coming months.
3. However, as we have previously stated, we have significant concerns with some of the proposals as set out in the consultation paper. Specifically, we oppose the proposal to publicise enforcement investigations at the start of an investigation, as we believe it has the potential to have detrimental impacts on consumers, firms, international competitiveness, shareholder prices and the reputation of the UK’s regulatory system. There is a significant risk that publicising the opening of an investigation will have unintended consequences, if the proposals were to be implemented as they were set out in the FCA’s paper.
4. The FCA already has the means to achieve its objectives – transparency and deterrence – within its current supervisory and enforcement powers (e.g. via public statements and warnings.) It can also already name firms in ‘exceptional circumstances’. Moreover, the FCA has stated in its industry letter “that there would be no presumption in favour of announcing. We would review on a case-by-case basis, taking all facts and circumstances into account in reaching a decision on whether or not to announce”. We are therefore unclear how these proposals will further its objectives in the context of what the regulator can already do.
5. Our key concerns around the proposals continue to be:

• Unfair reputational and market impact:

• Currently, if these proposals were to be implemented, a firm’s reputation is likely to be unfairly affected if an announcement of an investigation is made. Currently around 65% of FCA investigations eventually result in no action taken. We understand that the FCA is looking to reduce this percentage significantly and we would argue that, if it does choose to proceed with its proposals, reducing this figure very significantly should be a prerequisite before they could be implemented: given the serious adverse consequences for a firm identified as under investigation, this should not happen unless action is as good as certain. However, we continue to believe that the best way to avoid this potential harm would be by omitting the names of firms under investigation, only publicising the type of misdemeanour and the industry the firm resides in, as a learning and deterrent opportunity for other firms.
• The FCA cannot control consumer action or media (and social media) fall-out from such an announcement. Whilst we understand that the FCA’s intention may not be to create unwarranted consumer concern (and panicked or hasty decisions by consumers to switch products when it may not be in their best interests) or impact share prices, it does not have control over these once the announcement has been made. An example is the FCA’s 2014 Life Insurer Review. Once reported on by the media, the share prices for the firms involved decreased dramatically, leading to an estimated $4.2bn in losses[1]. Later it was concluded that no wrongdoing had taken place[2]. This is not only damaging to the firms themselves, but also the state of the overall economy and the UK’s international financial position.
• This reputational consequences to firms could lead to investors, suppliers and customers pulling out of products and investments before the firm has been found guilty of any misconduct. While this could lead to significant detriment to all firms, it could be existential particularly for smaller or newer firms, who have fewer reserves of capital and brand recognition/trust.

• International desirability and attracting/retaining talent:

• From conversations with a number of our international counterparts, we are concerned that these proposals could damage the UK’s regulatory standing and add to an emerging narrative of overly interventionist regulation within the UK. This acts directly against both the government’s Growth Mission and the FCA’s secondary international competitiveness and growth objective.
• We are also concerned that although the FCA states in its consultation that cases against individuals will not be publicised, it would not be hard to speculate against Senior Managers within firms, if the firm itself is under investigation. This could deter individuals from wanting to take senior positions within firms and possibly even lead to reconsideration of whether they would like to continue working within the UK. Again, this could also negatively impact the FCA’s DEI strategy, as well as firms’ ability to feed into the growth and competitiveness of the UK.

• Design of the proposals within the consultation paper:

• It is currently unclear how the Public Interest Test that the FCA has put forward to determine whether an investigation should be publicised would work in practice and what guardrails the FCA would propose to ensure consistency over time and fairness of decision making. We understand that it is looking explore the detail in this area with stakeholders before bringing forward further proposals.
• We also have concerns regarding the 24-hour notice period the FCA has set for alerting firms in its consultation paper. This would not allow firms the proper time to carry out its consumer facing, internal and international obligations, such as preparing communications and alerting regulators in other jurisdictions. We understand from the regulator that in ‘most’ cases, they would expect considerable engagement between the firm and FCA via supervisory activity before enforcement was considered, and that therefore usually firms would in practice know that enforcement activity was imminent. Nonetheless we would appreciate further clarity around the FCA’s intentions here.

6. Conclusion: The ABI and our members share the FCA’s goals for the overall outcomes of its enforcement regime. High quality, appropriate and timely enforcement is good for consumers, good for well-run firms and good for the UK’s growth and competitiveness. While we are keen to work with the FCA to achieve this goal, we nonetheless remain concerned that publicising investigations is not the best way to achieve it and could in fact be counterproductive. We look forward to continuing to play a constructive part in this debate.

11 October 2024