Compliance crunch: insurers caught between growth and trust | Commercial Awareness Compass #52

Hello everyone and welcome back to the commercial awareness compass. Your weekly guide to thinking like a commercial lawyer. Each episode we unpack a key issue shaping legal and business world, giving you the clarity and confidence to discuss it in interviews on a vacation scheme or with future claims. This week we're exploring something that might sound a little bit technical, but has huge consequences for the UK economy, proposals to reduce regulation in the insurance sector. This isn't just about car crashes or home repairs. It underpins global trade, financial stability and corporate risk management. Regulators like the financial condo to authority and the potential regulation authority have kept it tight grips since the 2000 financial crisis, but they're now consulting and reforms to simplify the rulebook. So today's big question is, will cutting regulatory tape make UK insurance more competitive or could it lead consumers in smaller businesses exposed? So my name is Daniel Shepherd and I'm a well-conversion student and a future training solicitor. And today I'm joined by Don. Thank you so much for joining us today. Would you be able to give us a brief introduction to yourself and what you do? Thanks, Dan. I'm just going to be summed up the topic. I'm already in the zone. Perfect. Yeah, so I'm dog rare and I'm currently an associate at HW. And I sit in the funding and nothing insurance team. Within that we're splitting to claims, such as litigation on one side and non-contextual work on the other side. I'm in the latter, so I do a mix of corporate work, so M&A, the town board. Commercial work, which will be commercial contracts and other, you know, corporate, restructuring things. And then the final kind of limit of my work is regulatory work, which is what we'll tap into today mostly. And yeah, that's all focused on the insurance sector, which, as you say, is an important sector and quite an interesting sector. It's still been around for a long time when it's still ferny old school in some ways, but also adapted in the modern world. Just a brief background around that, brief background at that MII. Like you, I was a law conversion student, so I did an arts degree, didn't really work at that heart at uni. So going into law was a short-term system in some ways, but did the law conversion, LPC after that, which is obviously now falling, falling, falling, falling, falling, falling and falling, falling, falling, falling, falling, falling. So we're going to be able to do that. And then we're going to be able to do that. So we're going to be able to do that, and then we're going to be able to do that. And insurance intermediary from the UK law. I think there's often a big mix up from further kind of the laymanness. There's often, I myself, before I started working this, wasn't really sure about the difference. But I didn't know that. So when you go get your car insurance or home insurance, you might go through someone like a car market or someone who's selling the insurance. And it kind of feels like they are the insurer. But actually, what there is is there's an entity sitting behind them, which essentially takes on the risk. The insurance company is the person who underites that risk. It's the phrase, "an easy industry." And they are the entity who companies, which hold capital, i.e. cash, so that when there has to be an insurance payout, they will cover the risk or the payout or the claim. So they are the people who hold the risk. And the intermediaries are the people who essentially broker on behalf of people who hold the insurance. So it's you or I, we're going to take out some car insurance. We're being short for the policy hold that we go to a broker, like, say, the compared the market, or you can even have the high-street broker still, which is also your broker. On our behalf, we'll then go off and find insurance, which is appropriate for our needs. So then contact the insurer who will then provide the actual cover. In short, it's in simple terms as well as what happens. So number one is, sorry, the intermediary does everything about finding insurance, facilitating it, being taken out, you know, past one information, et cetera. But the person who actually says, "You're going to be the risk. I'm taking on the risk and taking on the risk of paying you out." That's the insurer. So how does this difference drive the authorizations that they need from both the FCA and or the PRA? So I'll probably, the PRA and the FCA are the two financial services regulators in the UK. And so I'll give a bit more context for this. Sorry, sorry, so back with all the financial, more ram, financial services, you have the financial services authority in the FSA, which was the sole financial services regulator in the UK. There was then a split from the FCA, so from the FSA business where it's happened. The FSA became the FCA and the PRA. So now we have the two separate regulators, which you mentioned at the start. And the whole idea of that split was to have the PRA focusing on credential regulation as its name suggests. And what I mean by that is it essentially looks after banks and insurers of a similar type of investment firms. And what the PRA's focus is on is whether banks and insurers have enough capital so that they can as he covered the needs of their customers, particularly if things go wrong or the claim comes in. And where the FCA is focused more on how firms conduct themselves, so how insurers and banks. And what's focusing on insurers, they're going to see. They'll focus on how insurers get about their database business. So looking at through that then, so you've got insurers on one side, which is capital, do they hold enough money in order to pay out risks or policies once when a payout occurs. On the other side, you've got the FCA looking at insurers and brokers. So are they conducting themselves properly? And what that means is in terms of the regulation required by the broker at all, and insurer it's that insurers are authorized or regulated by both the PRA and the FCA because they need the redemption side and the conduct side intermediaries such as brokers are only regulated by the FCA. And so there's the phrase dual regulated and so on, regulated or so on or authorized. So you mentioned that they came from one entity, the FSA. I think that's quite an important point that we needed to establish. So obviously if they come from one entity, coordination between the two, I imagine it's quite important. Are there situations where the FCA and PRA need to be very much aligned? So time for this critical. So you're right, when they did the split, the rationale for the split mislead would allow the separate regulators to focus or have increased focus on their respective areas. In other words, rather than having the FCA, you know how the product do at all, it allows the PRA and the FCA to focus on their bits. As you say, the flip side of doing the split is then as it say you're a broker, you will have to deal with both the FCA and the PRA. I'm sorry, if you're in a short yet to deal with the FCA and the PRA, it can be a pain sometimes. And yeah, it's very easy for that to be say duplication and more, but in terms of how they cooperate, yes, they need to do it. Otherwise, you will have pitfalls of duplication or inconsistency to see it between them. And so one key area where they need to cooperate with each other is enforcement. So obviously there is a super bit of it, as we've had them in there. But if they want to, you know, have enforcement action against someone, they need to speak to each other and make sure they're being in the system. You can't have one regulator taking a different approach to the other, which would just be that we're in market confidence and also lead potentially to leaping challenges by ensures or believers against the regulators and say. In terms of how they supervise, so we'll be talking about the fact that we're in. company insurers companies are regulated or authorized. So to actually carry out activities such as being a broker or being an insurer, you need to be authorized in the UFA. And so the companies themselves need to get authorization from the regulators. But individuals within those companies also need who are seeing here. And we're going to do too much data right now. But certainly the visuals need to also be approved by the regulators. And so because particularly of insurers where you have, you might as a company be authorized by the PRA and the SAA. And you also might have employees who are authorized or approved sorry by the SAA, PRA. That's where you really need the two to be speaking to each other. Ideally you put in a joint application. Are you really looking to be considering everything at the same time? As I was saying, moving force, but it will just lead to things getting bulked down or inconsistent to the stuff being challenged. Yeah, definitely. So you mentioned that a lot of these changes happened around the financial crisis since the financial crisis. What would you describe as the UK's approach to insurance regulation? Has it been a bit more rules heavy, more outcome of focus, or is it kind of a mix of both? Yeah, so come, I was obviously not sure when one answer crisis happened. So I'm going to be talking about it second time. But yeah, back then, the way that insurance regulation or the general financial service of regulation was done in the UK, as you say, more of a rules based approach. And what I mean by that is generally speaking, you have two approaches. On one hand, you have rules very similar, which is very prescriptive. In other words, let's say the regulator will say, I want to protect consumers. The way I'm going to go about doing that is I'm going to tell insurance and brokers that they must do XYZ. And if you comply with XYZ, then that should result in the regulators view good outcomes with consumers. On the other side, you've got the outcomes based approach, which is what the regulators in the UK shifted to after the financial crisis. So now with an outcomes approach, what we have is strictly speaking, the regulators aren't so much putting out you need to do XYZ. And that's how we achieve this. It is the regulator saying to firms, you need to achieve this. I get outcomes with consumers. How you go about doing that, we're not going to prescribe the whole load of rules specific rules. But we're going to give you some overarching principles, some specific rules. But ultimately, there's all about reaching this endgame. And that's what we've shifted to in the UK. That's different from say the EU or some EU jurisdictions, which are still more rules based, example. And the whole idea of this shift was like that. There was a phrase that probably heard of it, the Too Big To Fail, which was used about a lot of banks and the insurers, and we have the talented financial crisis. And what you essentially had is you had companies. They would be following the rules, say the descriptive rules. They would be ticking the box. But even with ticking the box of the nature of all these businesses, unless you could put as many rules out as you want. But it's never quite a good job. Because some work is basically saying, oh, yeah, I've done this. That I'm done. I don't need to worry about what actually happens. And so you had a special, like Too Big To Fail, the idea is, you have to say big thanks. So nothing's going to go along with it. We're so big that, you know, as long as we take the boxes, it doesn't ring that. No one's going to fail, or like, the market will defying. And on the idea of me, this is basically about how come to base the very short is to mitigate that. So as we round out the beginning section, we'll kind of talk about the current reform push. So in a basic sense, what are the SCA and PRA actually trying to change? And what are they thinking of scrapping, what are they thinking of adding, and what's the broad timetable bit that give themselves? Yeah, so at a high level, yeah. I think one of the other reason for the instructions of the outcomes of PRA is inferior to the firm or companies more flexibility. If you say, go and achieve that, but I'll let you get on with it. How are you, you know, a bit of a bit bit of it, but generally, you get on with it as long as you need the end game with this. The idea was that would give further flexibility as well. Fast forward to about two years ago, where, you know, postconvied economies stagnating in the UK. So you kind of-- this is where governments start getting involved. And the PRA and FCA, since their inception, have a primary objective of essentially putting in names terms. It's making sure that the market is safe and sound-- I sound like a politician here at Staten. In fact, it's in Staten Bosworth. But essentially, it was to make sure that the security companies would affect what so that they could still pay out customers. And it was all about making sure that-- and it is all about making sure that customers are protected in particular consumers, in other words, non-commercial customers and not businesses, people by year and day, everyday people. That was how it was for a few years. And then in August 2023, the government introduced a secondary objective for the regulators. And that was called the Competition Road Projective, which in short, this actually told them, you've got to look up at people. But also, can you help-- you need to facilitate growth in the financial services sector in the UK? And that is where the point we've reached now, where-- and you would have seen the chance of a major race being putting out a lot of sound violence about what time not growth in financial services in the city. So you've got the STM PRA in this weird position, where their primary objective is to protect consumers. But their secondary objective is to promote growth. And the very nature of those two things is that they'll bump heads. Because generally speaking, more vaccination means all-givening less growth in my spacer. And then you have the government then applying pressure, which is technically not made to you. But in an ablution, we will have to make a difference. So the regulators are in a tricky position. But what we're seeing, which is what we'll go into, is they're looking to reform and by reform, what they're acknowledging and high level trying to do is satisfy that secondary objective of promoting growth. And the way that they, generally the way that they seek to achieve that, is freeing up money or capital for the shores. So you can now know you need to invest elsewhere, rather than I was talking about capital requirements. I mean, the shore is not being locked in, but locked in that capital, it's-- they can't do anything on that. The public can pay out policy orders. But also just trying to deregulate, not the right word, but they're trying to simplify some of the applicable and recommendations of rules so that essentially, the shore is an embroidered bandwidth that's freed up from an operational perspective. They have more bandwidth, less compliance burden costs at being telling that's all free, else focused on other things. But also allowing terms to be a bit more kind of nimble, I should say, attempts that, even though a bit more flexibility about the products that they get out, allowing them to maybe take ownership of more things, rather than they regulate a bit involved as much as it has to be. So you're definitely-- last time, of what's the stage with each step at one moment? I think that really nicely moved into the intermediate section. So kind of the follow up thing, when we're-- especially when we're looking at it in more of a practical sense, how are my simpler requirements from the authorities? Actually, ease operational pressures for both insurers and intermediate units. Yeah, so I think one of the biggest things that our clients complain about when they talk about regulation in its current state is overly burdensome. That's the classic phrase. It's too burdensome. Regulatory burden. You always hear that phrase, you'll mark it. And that has a couple of strands to it, which I mentioned a few moments ago. But one way in which the regulatory reforms can help the operational side is-- as I was saying, kind of time. I can't pal that kind of things. What I mean by that is-- I mean insurers and-- intermediaries spend a lot of time on, they have quite sophisticated compliance things, especially the larger ones. It might be a bit unfair to say that it's more one-stay, but sometimes they don't. But I can't remember the statistic, but there was a lot of kind of industry players who put out figures saying X and X of time, and Manny has spent each year on regulatory compliance. And that's because they've had to put in all of the assistance controls in Termina. So not of reporting, for example, or regulatory reporting. Having all that in place and making sure you're not frowning any requirements, it takes time and money. So one way, one simple way that you would help is that it would free up time, free up money to be used elsewhere in the businesses. And then there's the other things I mentioned where if you have a recommendation which is more line of touch, then that gives firms more ability to, because we have to help come to best approach. If it's even more line of touch, it would kind of, what are you doing, phase, then it allows, insurers, that example where you can take an insurance product to wealth, and then being, you know, kind of a straight jacket by some current requirements, you can actually go out and offer arguably more competitive products to customers, because you're not able to tailor products more to their needs. So in some ways, the line of touch regulation can actually work the other way, and it can help, excuse me. And I'm sure there's something in mentioned in a few minutes about how this example really helped out with that, with made an algorithm into the SCA. Yeah, definitely. Well, I guess kind of when you've mentioned what the government's wanting to do, and kind of the unlocking areas of financial sectors, I guess one of those is kind of the speed in which things are done. So you may be able to explain this a lot better than I, but from what I understand, the PRA wants the speed of SPV authorisation, I think, to around 10 working days. So if approvals are move as fast as they want to, you see, what change on deals that use collateralized rain insurance or the structured risk transfers? Yeah, what are the change on most deals? So I think maybe just a very quickly contextualized SPVs, again, very jargon-heavy technical. What it is basically is, and ensure it can go to the special purpose we're going to call an SPV, and ensure it can go to an SPV and say, "Hey, I thought these were can you take them off my hands?" And they do a deal. That's what the SPV will do is it will then use debt instrumental equity to essentially bring in the money from the investors so that the SPV itself can cover the risk that's taken on. So yeah, the way I kind of view it, the way I think for the list, the way that I, in my head, think of it as it's a bit like it's not a convection corporate transaction. You're basically selling an asset or like a list of the space onto someone else, it will take on and then you finances, they're taking home of that transaction through debt or other interviews. So in some ways, the short and evil window, a lot of the impact of that, is similar to any impact that you would have in the conventional transaction, like an M&A deal, basically really tightening the time mark. If you had, you know, you wanted to buy a company generically and someone turned around and said, "Yeah, you could do it, but you've only got 10 days to do that." The things that you would have to think about there are you'd have to front-mode a lot more from deals, so a lot of deals are doing SPV transactions over time. When you had a longer period of time, you know, get things done and more and a lot of people would do because it takes up a lot of time and a lot of people would, you know, you would get the bare bones or get the bits that you need to do in order to get it, the ball moving, but you would always have a line that you can do the rest so that I'm lying. But with this change to 10 days, an all-more-nance needs to be done at the start, which means a lot more, kind of, you know, proactive engagement from internal steady-coldness at the start. And also just means more time-pressure than ourselves. You have to get things going. And I think looking the other way, another example of a name hack would be that if you've got a short window, that means actually less time for dialogue with regulators. So if you've got a complex proposal and a transaction, arguably, it puts more pressure on the regulators, puts more pressure on you, and it doesn't get as much time to probably hash out more complicated things, which arguably could need to things being rejected because it's not on the standing of it or or just being bogged down. So I think it's a good move because it allows the market to rats more, kind of, quickly to market conditions for a downfall. But it does put a lot of pressure on everyone and some, especially the complex deals, that's not necessarily a good thing. Yeah, definitely, obviously, it'd been interesting to see how that would actually play out in practice because I also think 10 working days seems quite a quick turnaround for what they're they wanted to do. So I know on other episodes, especially when we're talking about areas of governance, when people say, "Oh, we want to speed things up a lot more," especially when those services are maybe underfunded and it creates a backlog, it could even be worse than the initial offerings that were there before. And we've talked about this in a multitude of different areas. So when it's actually a putting place, I guess that's when we'll see the benefits or consequences. But if we move on to the advanced section and kind of look at what the firm does in these incentives. So if firms want to shape these proposals, what should they be doing now and where will feedback have the most important impact? So generally, the way that the regulators go about making preparers changes to rules is that they have a consultation through. So they'll put out some proposals and open the floor out to the industry for feedback. Then hopefully they'll take that feedback into account and then it will be rolled out as far and in rules and finally policy. So kind of at a high level, what our clients are all supposed to do is to get engaged, internally as possible in that consultation process. So one of their jobs is to keep an eye out and we help them with this. It's keeping an eye out for when consultations are coming out. You don't have to kind of digest what's in the consultation and from an internal perspective or what's in the consultation process. They're legal teams. I think where they earn their money in these circumstances is they need to basically look at the consultation, take out, extract what is the impact of this on our company? What are the threats to our business but also one of the potential opportunities out of this? They then need to go off to stakeholders, explain that to them and then get the stakeholder number. So for example, under-eyed to plain, use to act to error or functions, all of those guys need to basically produce hard data or examples so that the legal team can then take that and then go back to the SIO PIR and say, well actually you've proposed this but we don't like it because it would cause this detriment to businesses or whatever and here's why and that's where all of that input from stakeholders, such as data or examples or worked models. You know it's like giving any audience if you can evidence it supports it. So that's what firms should do and I'll give you a quick example where we've held out with that where we, one of our partners sits on the city of London Law Society ensuring it's law subcommittee. You also want to put that on a by-truth, yeah? Yeah, no, you wouldn't. I was a browser manager, get it out, yeah. There was some recent FCA competitors on you mentioned earlier, changing the scope of all constitutes a commercial contract or commercial customer. We've been back on the firm on the stuff stuff like that and also some other proposals about simplifying rules but also the FCA saying, actually we want to tweak it for you things. And what we said is, no, if you do that then actually a by-product of changing these rules is it'll actually result in consumer home and because it will, because if you introduce this requirement insurance will turn it out and say, well actually, we don't, we're hamstrings us from being able to offer certain products. Therefore there will be less products on offer to consumers and they might not be able to get public or insurance cover for certain things. So the FCA turned around with, actually, you know what fair enough. So that's, you've got to think about what the SCA, what are the SCA trying to do? They're trying to protect consumers and they're trying to, as I said, support growth. If you can get them on the consumer bit, by saying, actually, you get home and consumers, then they can't really argue about it. And then the secondary objective is, because it's secondary, they don't put this much stock in it, but at the moment, because of the political pressure, you can kind of save them. It's going to cost, it's going to stop people from then foreign investors from mentoring you, and that's an example, and they will have to think about that, because that's obviously quite a hot thing at the moment if it's exaggerating. Yeah, I think that really knows at least my final question. So looking beyond this package, what further reform would help balance consumer protection with UK competitiveness? So kind of looking forward to see where the markets go and what changes could be made in order to me be subjectives. Yeah, so one thing, I'm going to start with it just because everyone asked me about the AI. And this is more of a kind of an FYI, FYI, and I've been really necessarily saying something to other, but interestingly, one thing that I've been able to do is they've not gone out and said, we're going to put out a load of AI rules and frameworks. The EU has called its AI app, and that is fairly descriptive about how you can use AI, et cetera. Well, the SCA is set for its own rules. We're not going to do that. We are going to be comfortable relying on our existing outcomes based approach over the option principles. In night of that, we want firms to roll out AI, but take into account those principles. So what it means is you don't have a duplication or a separate regulatory framework, which you need to comply with, and you have a separate compliance framework to read the idea of as you build it into account. So they're doing that quite well, I think. Talks good. Let's see. But in terms of where I think reform could help is arguably elevating the competitive and kept it to the primary objective. But that has been touted. And I'm sure it's something that's a reason for that. But regulators have been quite robust in saying, no, that would require a legislative change anyway. But I think that would help, because I'm going to move in the regulation that kind of hiding the harm that factors are secondarily effective. So I think that would help. There's a concept of fair value requirements, which in other words, when an insurance product going down, it's completely to make sure that it's often fair value to the health skills. But it has to be done almost all the time, or every product. And that needs a lot of duplication. But also it means that you can't really cross subsidize your product. So if firms were giving a bit more flexibility in terms of when they have to do a fair value assessment, then arguably they could maybe charge cheaper agreements for some products. And it just gives a bit more flexibility. And that means more products out there, more competitiveness, and hopefully better premium prices for our people, our household, will commercial policy models. Yeah. Yeah. Or a few other things, by the way. Yeah, there were quite a few other things, by the way. I guess it is one of those things, for obviously, it's such a technical-- obviously, topic to discuss. And there's so many different factors involved that we could probably do a two-hour podcast just on what reforms could be made. The impact that they would have-- well, I know for a lot of our listeners, as soon as you mentioned, AI, that's kind of bread and butter, especially when you're using assessment centers and interviews and stuff, especially with the way that law firms are working to engage with AI. If you're able to bring a topic like this in a talk about regulators and then bringing AI, I think it just adds to that next level of understanding of how not only the markets are changing the UK, but also how they're different internationally. As you mentioned, the EU has got completed for rules around AI when you consider insurance whereas in the UK, he's taking a bit more of a step back approach to see what happens. Yeah, it's kind of in a weird way. Even the AI is the whole topic. At least in the UK, financial services is whole. It turns into how it's rolling out. But the regulators don't want to hold my whole data. The way I would view it. So in some ways, actually, it's not from a regulatory perspective. It's not that important. But from a regulatory point of view, that's completely wrong. But it's not that it's not important. But you get what I mean. It's not like there's a huge, you frame up that you need to get the head around as a true family. But you still need to be so careful and mindful that you are using AI in your right way. So actually, I guess the way I'd summarize that is if I speak into an insurance, it combines to, I'd say, yeah, you don't need to learn on your AI, and you'll frame what I call frame set. But that doesn't mean you can just check it off. You've got to think about all the other requirements that you currently subject to. And then apply it out to you all along the way out of AI. Yeah, definitely. And I think what's been really strong about this episode as well is, especially those at listening, the kind of the fact that we've started with the financial crisis and how the rules were before, how the rules have changed since, how these changes have kind of shaped policy and decision making throughout and how the government is currently trying to kind of re-implement things that were pre-financial crisis. I think if you're able to use that in an interview and have a strong understanding over the last 17 years, obviously a very basic understanding of what, if you understand the fundamentals of what's gone on in financial services over the last 17 years and how the government is kind of reverting changes back to pre-ident, and you're able to make that distinct in an interview, I think, is real strong. And I know you mentioned that you were also a non-mores student, so maybe that's where the history part is. [LAUGHTER] Yeah, actually, yeah, I think. Yeah, it's a good body you make. And I think the way-- the takeaway that, obviously, this much, how is that? There is-- you can argue that we're going for a circle. But it's not a circle, yeah, it's kind of a semi-circle, in the way. It starts into inch back towards maybe lighter touch regulation. But the caveat to that, I was saying, it's not something we'd be working about today. But while we were focusing on the fact, and rightly so, the fact that there's been a box of regulatory reform on the Paris reform, the rate of places is still putting out new requirements, or building up on existing requirements. So they are kind of-- if you were a cynic, you could say that they're putting out all of these reforms to make it look like they're promoting growth. But actually, what they're doing is focusing on their primary objective still, which is our thing ultimately, what they're doing. And again, that is kind of a political effort to question should that be the case. And yet, we're in a really interesting point in time. And even your government will come in in the next election. And it knows what happens. Yeah, it's quite tricky for-- I think companies, businesses out there to kind of work out which way the wind is blowing. But yeah, I think that's just-- I wouldn't want to be the head of the essay of the RRR now. That's what you're talking about. It must be like tricky things to try and do a call. Yeah, I can imagine. Well, we'll leave up to the viewers to decide which way they are going to guess at things go. So thank you to everyone for listening to this week's commercial analyst, Compass. And here's thank you to you, Donald, for breaking down such a technical area and quite a nicely packaged way. Obviously, as we mentioned before, the episode is so many acronyms. And I think we managed to get through and explain them. So I think we've done well there. And what also remember, the commercial awareness isn't only about the headlines. It's about understanding the rules at shape entire industries and how changes to those rules can rip off business models clients and consumers. So as always, ask yourself, how does the suspect clients on what color often do to help? Join us next week to keep building your commercial awareness. And until then, prepare without panic. Thank you.