New chief exec Nikhil Rathi has this month published his first business plan for the regulator – Insurance Times finds out what it really means for the industry

The FCA’s recently published Business Plan 2021/22 showcased a “a change of mindset” and “a change in tone” centring around assertiveness – Michael Sicsic, managing director at consultancy Sicsic Advisory, said the document should therefore be perceived as “quite a warning for the industry”.

On 15 July 2021, the FCA published its latest annual business plan, detailing the regulator’s key priorities and scheduled activities for the upcoming year.

For Sicsic, “the document confirms [the FCA is] in a transition” – even though the plan is light on exact details, Sicsic believes it still gives “some hint [as to the] direction of travel”, making it “something the market in general should think about and should take notice of”.

He continued: “My overall impression is [the business plan] is trying to shift the regulator, so by saying assertive - ‘assertive’ is not too far from ‘aggressive’. It is a change of tone definitely.

“It is an important statement. Brokers may be disappointed [because] there were no details, but it is a big statement of the direction of travel and the assertive point is, for me, the main takeaway.”

Leading from the front

Leading the regulator’s new assertive approach is chief executive Nikhil Rathi, who took up his post in October 2020. The 2021/22 plan is, therefore, Rathi’s first since taking up the helm.

Speaking following the publication of the business plan, Rathi said: “The FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive, agile.

“One that acts, acts fast and, where we can’t act, engages enthusiastically with those who can.

“Continuing to be more innovative, assertive and adaptive.”

Sicsic noted that the 2021/22 plan “is very personalised, as you would expect [for] a [chief executive] coming in”.

“My guess is that the document is for us, the market, but it also has another client - his internal team - because it’s quite a change of perspective,” Sicsic added.

“His speech needs to be read by the staff because it does show the direction of travel. What is interesting, there is nothing around his leadership team. It’s him. He is taking responsibility.”

Ian Mason, partner and head of the UK financial services regulatory team at law firm Gowling WLG, added: “This is a strong post-Covid response by the FCA. The FCA is reinventing itself under the new senior management team.

“There is an increased emphasis on technology, innovation and the use of data. Also, a stronger emphasis on protecting consumers, especially the vulnerable ones. Firms can expect the FCA to be more assertive, proactive and interventionist.

“The FCA will be a stronger gatekeeper on authorising firms and tougher and more robust in using its supervision and enforcement powers.

Diversity and inclusion [is] also higher up the FCA’s agenda and the FCA expects firms to do more on this.”

Impact on brokers

For Sicsic, there are two main themes from the 2021/22 plan that will impact on brokers. First is financial resilience and the expectation that firms will fail in the post-Covid era.

He believes this focus is linked to the FCA’s 2 July ‘Dear CEO’ letter around brokers maintaining adequate client money arrangements.

The letter in question “identified common shortcomings” in “certain general insurance intermediaries’ client money arrangements”, which the regulator felt could “indicate more widespread non-compliance throughout the sector”. These discoveries were made after the FCA approached firms it felt were at greater risk of failure based on results from its financial resilience surveys conducted over the last year.

This emphasis on financial resilience could additionally be tied to the FCA’s proposed review on certain aspects of the rules on the scope and coverage for Financial Service Compensation Scheme (FSCS) payouts around specific regulated activities.

Although he anticipates this is a more long-term project, Sicsic believes the FCA is “trying to make a link to say ‘if we are much more assertive, there will be less failure. If there is less failure, the FSCS will have to pay less and then we can reduce the fees of the FSCS’. This is the logical link they are trying to make”.

He added: “They will have to explore what does that mean in practice and how we can do that differently. It is a significant point.”

The second important factor for brokers is around operational resilience.

Sicsic explained: “This will affect insurers, but also the large brokers, so the top 50 brokers where they will have to implement [a] proper plan in case of disruption.”

In addition, brokers should be aware that the FCA plans “to review the legal framework around appointed representatives (AR) and [this] is quite used in the insurance sector”, Sicsic continued.

“We don’t know the detail, but it’s something to watch for.”

‘Not shy’ about litigation

Following the September 2020 report introducing reforms within general insurance pricing, it is therefore unsurprisingly that fair value is once again a key thread within the FCA’s business plan too.

Sicsic believes the FCA’s attention on pricing and fair value will extend beyond just insurance to be a “key policy that [it] will embed and continue to implement”.

The regulator’s business plan also looks to its legal powers – in particular around using litigation as a tool, like it did during its test case for Covid-linked business interruption (BI) claims.

Sicsic explained: “[The FCA says it] wants to be a more assertive regulator and it’s quite a strong word to use. For example, [the regulator says it] is ready to test the boundaries of [its] legal power. [It] is ready to have targeted litigation.

“For insurers, I think the BI case is quite a good illustration that shows [the FCA] can do litigation and [it is] not shy [about] doing it. [The FCA presents] the BI case as a success. I’m sure the insurance industry will have a different view.”

On this point, David Morrey, partner in the financial services group at Grant Thornton UK, added: “A regulator making faster decisions and happy to test the limits of its powers should get more done than ever before, but ultimately it draws its powers from statute and we can therefore expect some pushback from firms that feel it has overstepped itself.

“The FCA showed in the business interruption court case last year that it is prepared to take the industry to court and it will be interesting to see if some in the industry now decide that the FCA’s intention to push the limits of its powers makes court action to define those limits more palatable.”

Mason continued: “It will be interesting to see how that statement the FCA will be ‘testing the limits of our powers’ plays out in practice.”

The FCA’s stance on litigation and its drive for fair value should be viewed together, noted Sicsic.

“It’s just reinforcing there is massive change for our sector – fair value and pricing – at the same time as the regulator telling you [it] will be much more assertive and agile in terms of reacting to that. For me, these are the two things [that need to be brought together],” he said.

Furthermore, the regulator plans to accelerate its speed of decision-making and actions by “moving decisions that are currently made at a board level, made at executive level”.

Sicsic continued: “It means [the FCA wants] to get pace and speed, so to be a more agile regulator, more assertive, having more power in the hands of the exec. So, this is something to watch for.”

Sharing data

The 2021/22 business plan further revealed that the FCA intends to invest £120m into its data strategy over the next three years. Sicsic believes this particular innovation could throw up issues around data sharing, however.

He explained: “[The FCA says it has] the intent to publish more data and data that [it has] not shared before.

“It raises a question to say firms are quite comfortable to share data with the FCA because they know it is confidential and it stays with [the regulator]. Now the policy around sharing is much broader, there needs to be a debate on what is sharable and what is not sharable because it may be problematic.”