Regulators remain focussed on insurers’ culture

In Brief

• On 6 January 2020, the FCA published a Dear CEO letter to general
  insurers on non-financial misconduct in the insurance sector.

• Lack of diversity and inclusion and non-financial misconduct can lead
  to poor outcomes for consumers, market participants, employees and
  markets.

• The FCA makes clear the regulator’s expectation that firms take steps
  to create a healthy, sustainable, culture.

Cultural change in insurance

There has been a huge focus on culture and diversity in the insurance industry in recent years. Traditionally, at least for the London market, insurance has been a predominantly male industry with a heavy drinking culture. Senior industry figures and regulators have made strenuous efforts in recent years to improve conduct and culture.

Lloyd’s of London has found itself at the centre of these efforts. In 2017, Inga Beale, then CEO of Lloyd’s drew attention (and some fire) when she sent an email to Lloyd’s employees banning consumption of alcohol between 9am and 5pm. Shaken by a March 2019 Bloomberg report stating that “the old daytime drinking, sexual harassing ways are thriving at Lloyd’s”, John Neal, Ms. Beales’s successor at Lloyd’s CEO, also made clear his commitment to change.

In April 2019, Lloyd’s announced a new code of conduct. Even so, in September 2019 the results of a culture survey revealed that 8% of respondents had witnessed sexual harassment in the preceding 12 months, but that only 45% of those would feel comfortable speaking up. At the opening of the annual Lloyd’s Dive in Festival 2019 Mr Neal acknowledged the uncomfortable survey results, and announced further plans to address the issues.

Link between non-financial misconduct and regulatory compliance

Both the FCA and the PRA have made clear that a healthy firm culture is considered an indicator of good governance. Poor culture, including lack of diversity and failure to deal properly with non-financial misconduct, can lead to poor business and risk decisions and a worse outcome for policyholders.

The PRA’s Policy Statement PS1/18 required all Solvency II insurers and large non-directive firms (NDFs) to have a board diversity policy in place by Monday 9 April 2018. In a June 2019 speech, Anna Sweeney, the PRA’s Director of Insurance Supervision, reiterated the importance of diversity on boards and how groupthink impacts the quality of decision-making, and also addressed press reports concerning allegations of sexual harassment and bullying in the London Market.

In a November 2019 letter to general insurance firms the PRA called reports of sexual harassment and bullying within the London market of deep concern, indicating that both the PRA and the FCA would look at instances where inappropriate culture and behaviour within firms may impact compliance with regulatory expectations, standards and statutory objectives.

Most recently, in its 6 January 2020 letter to general insurance firms, the FCA has made clear its view that:

• poor culture in financial services can lead directly to harm to
  consumers, market participants, employees and markets;

• lack of diversity and inclusion and non-financial misconduct are
  obstacles to creating an environment in which it is safe to speak up,
  the best talent is retained, the best business choices are made, and
  the best risk decisions are taken; and

• SM&CR provides an opportunity and catalyst to transform the culture
  in financial services; a senior manager’s failure to take reasonable
  steps to address non-financial misconduct could affect an assessment
  of fitness and propriety.

The FCA will run a series of events in 2020 exploring topics that are key to driving successful culture transformation within the industry.