The letter, which is targeted at Lloyd’s and the London Market intermediaries and MGAs, provides an overview of the areas of focus within the regulator’s supervision strategy
The FCA has published a ‘Dear CEO’ letter addressed to Lloyd’s and London Market intermediaries and MGAs outlining what it believes are the key risks of harm across this marketplace for customers.
Forming part of the FCA’s supervision strategy, the letter – published on 3 November – further informs firms how they should be mitigating the specified key risks and clarifies what the regulator expects of them.
It also references appropriate published guidance and regulations that companies should be adhering to.
The key drivers of harm identified by the FCA, which it plans to combat within its supervisory work, are as follows:
- Financial resilience and orderly wind down.
- Ineffective governance and oversight of business.
- Culture and non-financial misconduct.
- Business models which provide poor oversight of distribution chains.
Financial resilience has become a more dominant focus for the FCA following the economic fallout caused by the coronavirus pandemic and how this has affected businesses. In terms of poor governance, the FCA hopes to have an impact here with its Senior Managers and Certification Regime (SMCR), effective from 31 March 2021.
Alongside these primary areas, the FCA also highlighted an additional three secondary risks – these will also be included within the regulator’s supervision strategy and the FCA expects firms to address any gaps they may have around these fields.
These additional risks are:
- Cyber risk and operational resilience.
- Hardening market.
- European Union withdrawal.
Around the hardening market, the FCA said: “In certain lines of business, we are aware of evidence of a hardening market.
”Where this is the case, the intermediated market will need to (re)acquire the skills to explain and educate clients about why their premium is rising, while cover may reduce.
“We understand some intermediaries have been active in addressing this issue, but we remind firms that inadequate insurance coverage is a potential outcome of a hardening market and poses harm for customers; firms will need to ensure they are meeting their obligations under our rules (when providing cover).
“This includes requirements on assessing customer demands and needs, product oversight and governance, acting honestly, fairly and professionally in the customer’s best interest and providing appropriate product information to address the risk of customer harm that may arise from a hardening market.”
The letter was written by Charlotte Cross, the FCA’s head of wholesale general insurance.
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