Clifford Chance

The FCA recently published its Business Plan for 2024/25, which outlines the work it will undertake in the next year to achieve its 3-year Strategy launched in April 2022. In that Strategy, the FCA outlined its expectations for regulated firms and aimed to deliver improved outcomes by becoming a more assertive, data-driven regulator.

This year's Business Plan acknowledges the current economic challenges including high interest rates, persistent inflation, global financial risks and geopolitical uncertainties. The UK insurance industry, in particular, has been significantly affected by these challenges, leading to increased claims costs and subsequently higher premiums. Insurers have also faced intensified regulatory scrutiny in terms of their operational resilience and risk management amidst these economic headwinds.

Despite the economic environment, the FCA remains ambitious in meeting its strategic goals and firms should anticipate assertive FCA supervision, especially on consumer protection and enforcement of financial crime. This article highlights aspects of the Business Plan that are particularly relevant to the UK insurance sector.

Strategic themes and commitments

The Business Plan continues to be based on the three strategic themes of the FCA's Strategy:

1. reducing and preventing serious harm;
2. setting and testing higher standards; and
3. promoting competition and positive change.

These themes are further supported by 13 public commitments in the Business Plan, including priority commitments such as: (i) reducing and preventing financial crime; (ii) putting consumers' needs first; and (iii) strengthening the UK's position in global wholesale markets.

The Business Plan omits 'preparing financial services for the future' as a priority commitment, unlike the previous year's plan. This is because the FCA believes substantial progress has been made through the Smarter Regulatory Framework, with Solvency UK set for full implementation by year-end, fulfilling this commitment for the UK insurance sector.

The commitments particularly relevant to insurers are:

• Commitment 1: Reducing and preventing financial crime

The FCA's Business Plan highlights its strong commitment to combatting financial crime. In particular, the regulator is focused on addressing the rise of investment fraud and authorised push payment scams, which involve victims being deceived into making payments to fraudsters. To achieve this, the FCA will actively evaluate firms' anti-money laundering (AML) and sanctions systems and controls, with the aim of reducing instances of money laundering throughout regulated entities. Given this increased scrutiny, senior managers responsible for risk and operations within insurance firms should closely monitor the FCA's growing attention to AML practices and ensure robust measures are in place to prevent financial crime.

The FCA also plans to enhance its systems to leverage intelligence and data more effectively to target financial crime. This strategic shift towards data-driven approaches may require insurers to strengthen their data infrastructure in order to meet regulatory expectations and may involve making additional investments in technology and training.

• Commitment 2: Putting consumers' needs first

The FCA's Business Plan places significant emphasis on consumer protection through ongoing monitoring of firms' adherence to the Consumer Duty. The FCA has recently announced a two-stage review scheduled for this summer which will involve the FCA contacting around 400 firms to evaluate their level of support for consumers, with a particular focus on vulnerable customers. During the initial stage, the FCA aims to assess the quality of customer service across various industries, including the supervisory areas of focus outlined in the Business Plan.

Insurers should therefore be prepared for potential FCA evaluations of all customer interactions, encompassing areas such as product value, fair pricing, and claims and complaint handling processes. We anticipate there will be a specific emphasis on the timeliness and efficiency of claim responses, as well as the accuracy of claim assessments. If not already in progress, insurers should consider investing in staff training and implementing systems to effectively identify and assist vulnerable customers, recognising that this is a crucial aspect of the Consumer Duty.

• Commitment 3: Strengthening the UK’s position in global wholesale markets

Promoting effective competition is a key focus area for the FCA to benefit both UK consumers and the UK's competitiveness in international markets, aligning with the FCA's secondary objective under the Financial Services and Markets Act 2023 reforms. To encourage innovation, the FCA aims for regulatory clarity and proportionality, so the UK remains an attractive market where innovation flourishes. Existing FCA initiatives like the Regulatory Sandbox, Digital Sandbox, and Innovation Pathways are already designed to assist firms to set up innovative businesses.

The FCA's continued focus on innovation should not only help insurtechs but also enable insurers to partner with them to access technologies that meet certain FCA regulatory requirements, for example, around 'demands and needs' which may enable more personalised insurance products.

• Commitment 8: Environmental, social and governance (ESG) priorities

The FCA's Business Plan underscores its commitment to promoting ESG considerations within the financial sector, with a particular focus on achieving net-zero emissions. This may translate to an expansion of the existing FCA Sustainability Disclosure Requirements (SDRs) and Investment Labels, including the anti-greenwashing rule. While these requirements currently apply to a limited set of FCA firms and UK asset managers, insurers should be alert to the potential for a market-wide extension.

To proactively manage this evolving landscape, insurers are advised to stay informed about the potential extension of ESG regulations and anticipate the need for more comprehensive ESG reporting, compliance, and data systems. This preparation should encompass not only internal operations but also extend throughout investment portfolios.

• Commitment 9: Shaping digital markets to achieve good outcomes

The FCA will continue to take a pro-innovation and technology-agnostic approach to ensure that the significant benefits of technology are captured, and the risks are appropriately managed. Over the next 12 months, the FCA will continue to assess the impact of AI technologies and investigate digital customer journeys and 'sludge practices'. These practices make switching providers, making claims and/or raising complaints unnecessarily difficult.

Insurers should therefore ensure that their claims and complaint processes are streamlined and do not deter customers from exercising their rights. Insurers should also consider evaluating the use of AI across all business functions to identify and address any potential for bias or discrimination and ensure compliance with both FCA requirements and the Equality Act 2010.

• Commitment 12 – Minimising the impact of operational disruptions

The FCA's Business Plan highlights growing concerns about cyber threats and operational risks facing the financial sector. To ensure firms can withstand disruptions, new operational resilience requirements will take effect on March 31, 2025. These requirements aim to prevent critical business services from causing "intolerable harm" to consumers and markets during disruptions.

• Commitment 13 - Improving oversight of Appointed Representatives

The FCA is intensifying its oversight of Appointed Representatives (ARs). This focus stems from concerns that some authorised firms (principals) are not adequately supervising their ARs, potentially exposing consumers to mis-selling, misleading information, and inadequate protection. The Business Plan makes it clear that the FCA will continue to strengthen its scrutiny of principals as they appoint ARs and will continue its assertive supervision of high-risk principals.

The FCA will leverage data from updated Gateway forms, new regulatory returns, and a comprehensive AR dataset to identify potential issues. Insurers using ARs should therefore evaluate their current procedures for overseeing ARs and maintain open communication with ARs to ensure they understand and adhere to FCA rules.

Next steps

The FCA's Business Plan for 2024/25 indicates heightened regulatory expectations for the UK insurance sector, with a focus on consumer protection, market integrity, and innovation. Insurers are also likely to experience the FCA's assertive supervision and enforcement in the FCA's stated focus areas, particularly money laundering and compliance with the Consumer Duty.

Insurers, insurance intermediaries and ARs would be well-advised to ensure their systems and controls are enhanced accordingly in advance of any potential regulatory scrutiny. Engaging with regulatory updates, investing in technology, and enhancing internal systems and controls will be important for insurers to navigate the FCA's increasing oversight. Where areas of improvement are identified, firms should consider undergoing a full assessment of required remediation (including any required regulator engagement). This proactive approach demonstrates commitment to addressing issues before regulatory scrutiny and aligns with the FCA's desired outcomes.