Covid-19: The response of the UK Financial Conduct Authority
In December 2019, before COVID-19 unfolded into a global crisis, the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA) and Bank of England published a joint consultation paper on how to strengthen operational resilience in financial institutions. The new requirements were in response to IT failures within the financial sector. Most strikingly the proposals introduce a new paradigm of outward-facing awareness where firms must factor in their impact on their customers and the financial system as a whole. Firms should no longer consider operational resilience to be constrained within their balance sheet. In hindsight, this was a timely publication, and these proposals were a clear precursor to the UK regulators’ response to COVID-19.
The reaction from the FCA and PRA in response to this crisis has been one of high visibility. UK regulators have highlighted the need to balance operational resilience, financial stability and consumer protection. Measures have been taken to stabilise markets, limit predatory behaviours and ensure that consumer interests are being considered. The FCA notified the market that it would be delaying or postponing all activities which are not critical to protecting consumers and market integrity.
Most critically for consumers, the FCA has also issued strict guidance regarding their expectations for firms and how they conduct business in the short term.
Most critically for consumers, the FCA has also issued strict guidance regarding their expectations for firms and how they conduct business in the short term. Regulated firms must, therefore, be able to balance the need to limit their exposure to risks arising from the Covid-19 pandemic with the demands of ‘being there’ for customers and treating them fairly.
The FCA, in particular, has been vocal when it comes to its expectations for insurers. The FCA’s interim CEO, Chris Woolard, recently said “We expect all firms to be clear and not misleading whenever they communicate and to be fair and professional in how they deal with their customers.” He noted that consumer behaviour is changing and the FCA expects insurance firms to be cognizant of this and to treat their customers fairly and to recognise the position consumers may be finding themselves in. “We would not expect to see a customer’s ability to claim affected by circumstances over which they have little control”.
The majority of the FCA’s focus has been on the general insurance side and information has been provided to both consumers and firms.
The majority of the FCA’s focus has been on the general insurance side and information has been provided to both consumers and firms. This includes a variety of advice on topics from travel, motor, home and private medical insurance. The FCA outlines their expectations during the whole product cycle (purchase, claims, renewal) and addresses concerns relating to the suspension of products. To clarify their expectations, they have provided examples of best practice. For example, home and motor insurers will ask questions about use when a policy is bought and base premiums on this. Car insurance customers will be asked to indicate whether their vehicle is used socially or for work, while home insurance customers will be asked about their working practices. The FCA said insurers should consider claims even where customers had initially indicated they would not be using their car or home for work. The FCA will apply this flexible approach beyond motor insurance, and they will expect the insurance sector to take this approach going forward. This response is characteristic of a principles-based regulator and therefore, unlike some other regulators, at present no direct product level intervention has been applied.
It is for this reason why it will be interesting to monitor the FCA’s continually evolving response to the COVID-19 crisis. UK authorities are not strangers to financial crises but COVID-19, even for them, is unprecedented.