How should a board develop an appropriate culture and values?
Culture and Values
This aspect of leadership will be reflected in several ways. Perhaps the first indicator will be the amount of time allocated to Board discussion on customer focused issues such as products, compliance, complaints, claims, conflicts of interest and remuneration.
All Directors, in their capacity as Approved Persons, will not only be expected to follow this mantra but be seen to influence the Board and the business so that the required stance is maintained. The Executive Board members should be challenged by NEDs in all associated areas of discussion.
Grant Thornton's published guidance on Culture and Conduct is appended by way of an electronic link.
The CII published a paper in Q1 2016, entitled “Ethical culture: Developing a culture of responsibility in a regulated environment which is also appended by way of an electronic link. This updated CII guidance is specifically aimed at insurance professionals in the area of ethics. It reflects the impact of the new SIMR and focuses on the “beyond compliance aspects of the individual responsibility requirement and the culture of firms.
Also, in early 2016, Deloitte published their paper on “Global Human Capital Trends in which they argue that “Organisational design emerges as the top UK trend but culture and leadership remain a concern.
FCA Principle for Business 1 states that a firm must conduct its business with integrity, encompassing the following:
Business model and future strategy
Whilst reflecting viable commercial activity, business models should also reflect customers' interests and as part of the on-going monitoring of implementation and fulfilment, the Board should also satisfy itself that customers' interests are maintained.
Treating Customers Fairly (TCF)
TCF is a main plank of customer focus and this concept should feature regularly within Board debate. There should also be management information supplied either separately or within a compliance report to gauge the firm's on-going behaviour towards customers.
The six required TCF outcomes are:
Where the firm does not have direct dealings with the ultimate customer, the regulator will expect the firm to be mindful of the intermediary chain. Additionally, prudent action should be taken to support the principle of TCF by passing on appropriate information such as product detail and explanations; particularly where it is perceived that the quality of the chain may be lacking in some respect. The firm will be expected to have an interest in customer facing issues such as contract certainty, complaints and conflicts of interest.
The FCA will seek to ensure that wholesale markets are efficient, orderly and fair and that retail customers do not suffer undue detriment from wholesale activities.
In December 2016, Grant Thornton published a useful insight into this topic entitled “Fair treatment of long-standing customers in insurance.
As an example of the FCA's increasing focus on conduct supervision in the insurance sector, proposals on conduct risk were introduced at the beginning of 2015. The FCA expects regulated entities to:
Boards of Directors will be held liable by the FCA to ensure that their organisations comply with the following types of conduct risk issues:
Conflicts of Interest
The FCA requires that a firm manages conflicts fairly, both between itself and customers and between a customer and another client.
Examples of conflicts that may have an impact upon customers are the firm's remuneration policy whereby some staff may be incentivised on quantity and not quality. Additionally, intermediary commission earnings may determine the product offered or carrier used rather than identifying the customer's genuine product needs.
Remuneration structures should not encourage poor customer behaviours. The amount of commission earned should not override specific customer needs. Firms should not pursue premium turnover at the expense of customer satisfaction and service.
A firm's Remuneration Committee (frequently composed exclusively of NEDs) should be mindful of such potential conflicts and again put customer considerations at the heart of their thinking.
Remuneration Committees are increasingly involved in the sometimes “sensitive task of working with major shareholders or institutional investors when it comes to agreeing levels of Executive pay and allied packages.
They may be required to “sell packages to investors and in the publically quoted sector, in particular, may have to face criticism or adverse comment from the press for the decisions they support.
Complaints should be dealt with promptly and fairly. Lessons should be learned from the experience and other potential complaints that have yet to be discovered should be identified, considered and addressed.
Delegated Underwriting or Cover schemes
Customer fairness must be considered at all times regardless of issues such as loss ratios, profitability, contingent earnings and whether an intermediary becomes an agent of the insurer when exercising such delegated authority.
Client Money (as an Intermediary)
There are very prescriptive rules for the protection of client money within the FCA Handbook under the CASS5 section. Each firm must have a robust system of client money controls with a designated Approved Person ultimately responsible for the process.