‘The FCA couldn’t have timed it better, could they?
No sooner had the new day dawned after Twelfth Night, marking the official ending of the season of goodwill, than CEOs in the insurance sector were woken by the sound of “incoming!”.
Whether you were alerted by the ‘ping’ of an email arriving or the thump of an envelope on your doormat, once opened the message was the same.
Non-financial misconduct in wholesale general insurance firms
Wake up and smell the coffee.
P.S. Happy New Year!”
Okay, obviously it wasn’t quite this blunt, but words to that effect.
It shouldn’t have come as a shock given the FCA’s pronouncements on the subject over the last 18 months, or so, but I fear it probably will have done to quite a few within the world of insurance broking. Especially given the results from a number of surveys conducted last autumn, which looked at firms’ SMCR preparedness.
So, here we are – less than one month after SMCR’s extension to the solo-regulated sector and the regulator is rattling its sabre like there is no tomorrow. For anyone who thought SMCR was done and dusted on 9 December 2019 (yes, there were a few out there), this was the cold water dousing they deserved. In short, it’s a timely reminder that the hard work has only just begun.
And it’s worth pointing out at this juncture that although the letter is addressed to CEOs within the world of insurance, senior managers in all sectors of Financial Services should pay close attention and consider its implications for them, both personally (remember, individual accountability) and for their firms. Just because the world of wholesale insurance has been singled out doesn’t mean to say that everyone else is off the hook. There but for the grace…
The FCA’s message is loud and clear: “Non-financial misconduct and an unhealthy culture is a key root cause of harm”.
‘Harm’ can be caused to clients, customers, employees and the market generally.
So, what might constitute ‘non-financial misconduct?’
Well, for a start there’s discrimination on the grounds of race, religion, gender & sexual orientation. Then there’s victimisation, bullying and harassment. Add a lack of diversity and inclusion into the mix and one has all the ingredients that contribute towards creating unhealthy organisational culture.
And why is this such an issue?
Because, inherent within unhealthy culture are the attitudes, behaviours and practices that stifle the creation of an environment in which it is safe to speak up, where talent is encouraged, nurtured and retained, where the best business choices are made and the most appropriate risk-based decisions taken.
The FCA expects firms – more specifically their senior managers – to ‘embed healthy cultures by identifying and modifying the key drivers of their culture’. Easier said than done, perhaps, but the regulator helpfully provides a pretty clear steer by reminding us of its 4 key drivers of culture, namely:
- Leadership – walking the walk, not just talking the talk
- Purpose – providing clarity of direction and generating a collective strategic focus
- Rewarding and managing people – engaging employees and promoting and recognising good conduct through the use of appropriate non-financial , as well as financial, incentives
- Governance, systems & controls – doing the right things right and gaining the reassurance that that’s actually happening
Of note within the letter are the references to ‘reasonable steps’ and individual senior managers’ competence, capability, honesty, integrity and reputation (i.e. fitness and propriety). A further, very clear indication that 9 December 2019 merely marked the beginning, rather than the end of a journey.
I’ve been around the block a few times, so I’m not naïve enough to assume that there won’t be those who react defensively to the latest missive. All I will say is this. The FCA is working hard to understand and support cultural transformation and if one approaches this subject with an open mind and in a spirit of true objectivity, there is a rather disarming quality to the regulator’s statement, ‘We cannot do this alone’.
Furthermore, there is ungrudging recognition of the work already being done within the industry by the Society of Lloyds and several leading firms, coupled with the open invitation to firms to engage in debate. With that in mind, look out for the CultureSprint specifically for insurance firms, focusing on ‘psychological safety’, that is due to be held in the spring / early summer this year.
Having previously attended a CultureSprint (on non-financial incentives) and having no particular axe to grind, I can thoroughly recommend firms making the time to get involved and participate actively in this initiative.
It will also be interesting to see a) the industry’s take-up for and b) the output from the conference in March at which the regulator will share its insights from the work it’s conducted to date, as well as exploring the way forward from here.
So, we are where we are. If you’ve really got SMCR sussed you’ll be well positioned for the next stage of the journey. If you haven’t, there’s still time but you can’t afford to dawdle.
And if you are worried by all of this, remember that FSTP can provide a range of support to help you – from training design and delivery through to facilitation of cultural transformation.
I leave you with some wise words from Socrates (Greek philosopher, not Brazilian midfielder!),
“The secret of change is to focus all your energy not on fighting the old, but on building the new”