British Insurance Brokers' Association – Written evidence (EGC0041)

About BIBA

The British Insurance Brokers’ Association is the UK’s leading general insurance intermediary organisation representing the interests of insurance brokers, intermediaries and their customers.BIBA membership includes more than 1,800 regulated firms, employing more than 100,000 staff. General insurance brokers contribute 1% of GDP to the UK economy; they arrange 77% of all general insurance with a premium totalling £105.5bn and 94% of all commercial insurance business.

Insurance brokers put their customers’ interests first, providing advice, access to suitable insurance protection and risk management.

BIBA is the voice of the insurance broking sector and advises members, the regulators, consumer bodies and other stakeholders on key insurance issues.

The following represents the response of the association following broad consultation with our members.

Introduction

BIBA have been engaging with the enforcement consultation since news of its publication earlier this year. We responded to the FCA directly back in April with a broad account of our views and have been given further opportunity to comment.

Our central argument is that whilst we recognise the FCA’s desire for greater transparency, we do not agree with their proposals as we are concerned there will be negative unintended consequences for firms being investigated, but that end up seeing no regulatory action taken against them.

The FCA’s own statistics suggest 67% of current FCA investigations conclude that there is no case to answer. Publicly announcing an investigation without adequate evidence of wrongdoing will undoubtedly cause, at the very least, reputational damage to both firms and individuals. This is exceptionally damaging in financial services and broking specifically, which is extremely reliant on trust-based relationships and reputation.

We believe this action could have huge implications for: the value of shares; reduce or remove consumer confidence in a firm or the sector more broadly; damage business relationships and partnerships, including suppliers; and small members were particularly concerned this could drive their customers to competitors and may never regain them again even if/when proven innocent, as the damage would have already been done.

In this sense we believe the risk outweighs any supposed reward regarding transparency.

Disproportionate impact

We followed Lord Forsyth’s correspondence with the FCA on this matter carefully and agree with the concerns raised, particularly around the disproportionate impact of the proposed measures.

Whilst the FCA’s consultation tried to suggest the opening of an investigation should not be taken to imply there has been a breach or other misconduct, it is human nature to assume there is ‘no smoke without fire’.  Yet, as already stated, the FCA’s own data suggests the vast majority of investigations conclude with no case to answer.

One possible eventuality is that a firm’s customers may lose faith in the firm that has been publicly announced as being under investigation which may lead to them switching to a competitor, resulting in loss of revenue for the firm under investigation. Once gone, even a firm that is proven innocent is unlikely to get those customers back. One might say that this loss of income is akin to an innocent firm receiving a fine every year for several years. This doesn’t seem to be a proportional or positive outcome, something the regulator urges firms to aspire to.

We also think this could threaten the integrity of the market and lead to unfair treatment of specific individuals.

Integrity of the market

We are concerned that access to services may reduce as an unintended consequence of the impact on firms who have been identified at the start of the investigation and this information has been published.  

Opening an investigation will naturally suggest there is an indication that a firm has done or there are firm grounds to believe that the firm must be doing something wrong.  Even the slightest indication will set rumours in motion which in turn will start a chain of events potentially resulting in consumers and the wider market questioning the credibility and integrity of the firm and the sector.  Where this seed of doubt has been planted, the firm’s reputation and character will be called into question because unfortunately “mud sticks”.

The announcement could drive speculation and cause severe reputational damage for firms; affect the value of shares and reduce, or even remove, consumers’ confidence in that firm and the financial sector more widely.  In addition, business relationships could be harmed as well as partnerships and marketing standings.  Suppliers may not wish to continue to engage with firms under investigation and could potentially remove facilities or apply severe restrictions on the agreements already in place with those firms.  This is likely to be especially true if there is significant media attention around the investigation. By way of example, insurance brokers are reliant on obtaining and retaining agencies with insurance companies so that they may place customers with them. An insurance broker under investigation is likely to see insurers refuse to open an agency with the broker or cancel an existing agency, to avoid being associated with that broker.

This could potentially have a negative effect on the government’s objective of medium to long-term economic growth in the interests of consumers and businesses as potentially, the reputation and confidence in a firm that has been investigated and cleared will have been damaged resulting in consumers going elsewhere for their financial needs. Announcement of an investigation into one firm in a particular market sector can have a negative impact on consumer confidence in all firms in that sector.

As the proposals stand, one might read into them as inference of a lack of confidence by the enforcement division in the work of their FCA supervisory colleagues, to police their respective market sectors and so deter wrongdoing. 

In April 2016, the FCA published a guide on the information they can and cannot share.  In that document the FCA quoted under what they can’t share:

“There are also other UK laws that only permit disclosure of information under certain conditions, such as the Data Protection Act 2018. For us, this means respecting the non-public information we hold about the firms and individuals we regulate. You may have passed information to the FCA and enquire about action taken, however we don’t usually make public the fact that we’re investigating (or have investigated) a firm or individual. This is partly to protect the effectiveness of our investigation, and partly because announcing an FCA investigation can damage reputations.”

Whilst we agree consumers require protection and confidence in the market,  we believe the regulator in 2016 was correct and do not believe anything has changed to mitigate the risks the regulator set out back then.

We believe simply by having enforcement procedures and powers in place that are being used to identify breaches or other misconduct, is the appropriate degree of reassurance that the FCA is protecting consumers.

Unfair treatment of individuals

Whilst a large focus of the sector’s concern has been around the impact on businesses and the market, there are also some potential ramifications for individuals too.

We are particularly concerned in relation to the small and medium sized firms.  Announcing the name of a firm may automatically enable individuals to be identified using the FCA register or simply the firm’s website. The names of individuals who are accountable under the Senior Manager and Certification Regime are recorded on that publicly available register and so will be identified quickly and risk negative media attention quickly. This could not only unfairly damage their position at the time, but also limit their future career prospects.

We do not believe the FCA set out any meaningful proposals to combat or mitigate this risk.

Conclusion:

To conclude, our central position is that we do not agree with the FCA’s proposals. We believe the disproportionate impacts on individuals, businesses and the market, are too great and they are not adequately offset by concrete, tangible benefits in kind. Indeed, the FCA’s own position in 2016 noted the harm these sorts of announcements could do, and we do not believe the proposals adequately demonstrate a great change in the realities of their previous position.

We have responded to the FCA’s consultation on this matter and await their response following significant push back from industry, former Treasury ministers (including the then Chancellor) and this Committee. However, we do recognise the FCA may choose to push on with some or all their proposals. We thought it best to offer some recommendations to the Committee to continue its scrutiny of these and any future proposals.

Our recommendations to the Committee include:

• The Committee noted separately that the cost-benefit analysis offered by the FCA was inadequate, we believe a fuller analysis should be conducted taking account for the serious direct and indirect costs of this decision, especially the unintended consequences set out above which could cost considerably large amounts for firms;
• As stated above we are concerned about individuals who could be “outed” by use of the FCA register or the firm’s website and how they could be unfairly targeted. We would welcome the FCA setting out specific details of what steps would be put in place to ensure this does not happen;
• Whilst we still believe the FCA should not go forward with its proposals, if they do, the FCA should provide an exhaustive list of what lies within the ‘public interest’ framework, so there is a definitive boundary they cannot overstretch; and
• In the eventuality these proposals are taken forward, it should only be done on a provisional basis and the FCA should commit to report back to the Committee on its implementation.

We will continue to engage with the FCA and will offer any support we can to the vital scrutiny of this Committee.

11 October 2024