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23 March 2020 6 min read

Covid-19: How insurers and lenders manage the conduct risk tightrope

Daniel Golding

Daniel Golding
Partner | Finance, risk and compliance | London

In these unprecedented times, regulated firms must be able to balance the need to limit their exposure to Covid-19, the single biggest market downturn since the great depression, with the demands of ‘being there’ for customers, treating them fairly and living up to the values that most firms have inscribed on their walls, websites and coffee mugs.

The reaction from the FCA and PRA in response to this crisis has been highly visible. Measures have been taken to stabilise markets, limit predatory behaviours and ensure that customer interests are being considered. The FCA notified the market that it would be delaying or postponing all activity which is not critical to protecting consumers and market integrity. The FCA has also issued strict guidance regarding their expectations for firms and how they conduct business in the short term. 

Postponing market consultations and publications will no doubt provide firms with the opportunity to review their current compliance portfolio and consider the priority activities required to meet short-term needs. Restructuring any active or planned change also provides many firms with the ability to re-deploy resources to prop up front line operational activity. Firms must however make ruthless decisions regarding in-flight or planned activity, avoid the trap of sunk cost bias and in some cases second-guess the regulator about what to pause or proceed with.  

The FCA in particular has been extremely vocal when it comes to its expectations for insurers, mortgage providers and lenders. Never before have so many people been so reliant on the financial protection that is provided by the financial services sector; but these firms are struggling. It is impossible to miss the much-publicised impact that Covid-19 has already had on healthcare services and supermarket chains. What has not been reported is the absolute surge experienced by financial service providers offering retail and SME products.   

Under ordinary circumstances insurers and lenders (whilst adhering to their own conduct framework) would be able to risk-select as they see fit. Optimising their portfolio of exposures is fundamental to their overall success, one false move may result in significant claims or defaults. However, Covid-19 has not merely brought about a change in the rules, it has forced us to play a whole new game... and some firms are already starting to struggle.  

The FCA publication to the General Insurance Industry cited a number of examples where market convention would need change. Established working practices governing underwriting, servicing and claims-settlement may now need to be reconsidered in light of the changes in customer behaviour, which many insurance firms are ill-equipped to contend with. The uplift in operational burden for some organisations - given the additional time and effort required to transact business in this new world - will be a considerable struggle. This is all taking place at a time where complaint volumes are spiking, employee numbers are reducing, and organisations are trying to ensure their resilience plans are able to cope. 

Some of the challenge may be alleviated where firms are able to re-deploy resources to shore up BAU activity, but often it’s not just a case of pure horsepower. To mitigate any potential conduct risk before it turns into a genuine issue requires expertise and experience. Firms should be considering: 

  • Bringing their first- and second-line teams much closer together to become more nimble in this rapidly evolving landscape 

  • Establishing ‘exception’ channels to cater for atypical sales, servicing or operations cases where there is a potential conduct risk exposure 

  • Convening a senior design authority group whose purpose is to review potential customer harms from either existing ways of working or short term operational changes.  

Baringa has been working at the coal face with a range of insurance and lending service providers. Our regulatory conduct specialists have first-hand experience of supporting our clients in optimising their control estate and developing products, services and operations that are compliant by design, and resilient and responsive to future regulatory change. Reach out to us if you need support in the coming days and weeks. Our teams are fully mobilised to work remotely, and available to support you and your teams.  

Please reach out to Alex Woodhead and Dan Golding if you would like to discuss further.