FCA sounds conflicts of interest warning to insurance sector

The Financial Conduct Authority has published new guidelines for insurance firms on how to manage potential conflicts of interest which may emerge from having vertically integrated business models.

Alexis Roberts, an insurance regulation expert with Pinsent Masons, said companies needed to pay close attention to any potential conflicts in the wake of the regulator’s new warnings.

"The FCA's message is not that vertically integrated insurance business models are inherently problematic, but that firms must be able to demonstrate that any conflicts of interest arising from those arrangements are identified, actively managed and subject to effective governance,” he explained.

"The publication also highlights the FCA's increasing focus on whether complex ownership, investment and financing arrangements may create barriers to effective supervision.

“Insurers should therefore review their conflicts management frameworks against the FCA's expectations."

The new guidance spells out expectations to the industry from the FCA, noting that while a conflict of interest does not make business models necessarily unacceptable, insurers will be required to show they can identify and manage conflicts appropriate, and that these controls support customers.

It also calls for accountability and governance from senior managers, with a need for more than just disclosing to customers about connections between integrated parties and clear, transparent information about commercial relationships.

Firms in the sector are warned they will need to be able to prove to the FCA how accountability, control mechanisms and decision-making works to prevent or manage conflicts, with sanctions should these not be successful.

It comes as the FCA’s recently appointed director of insurance, Chris Knight, explained in a new blog for the watchdog why it was turning its attention to the risk of conflicts of interest customers could face when buying insurance.

“This isn't just a theoretical concern,” he said.

“We've taken enforcement action before against firms where conflicts of interest weren't properly managed, and where ownership or remuneration arrangements influenced customer outcomes.

“Where we see firms acting in ways that could harm consumers, obscure accountability or undermine trust, we will act, starting with supervisory engagement, and with enforcement if needed.

“Getting this right will help give customers that extra peace of mind that insurance products are working for them.”