“Conduct risk” is a relative newcomer to the regulatory lexicon. What exactly does the FCA mean by this term, and how does it apply to insurers?
You won’t find “conduct risk” defined in the FCA Handbook Glossary, but the term has been in use by the UK regulators for some time. Looking back a few years, the FSA’s 2011 Retail Conduct Risk Outlook viewed “conduct risk” as being “the risk that firm behaviour will result in poor outcomes for customers”. At that time, the FSA viewed its retail conduct risk analysis work as a key aspect of its retail consumer protection strategy. For example, research that it commissioned into behavioural economics led to a concern that firms may be taking unfair advantage of consumers’ behavioural biases, such as their tendency to favour the status quo. This in turn led to supervisors questioning the use, for example, of initial free periods to sell insurance products to retail consumers.
However, since the division of the FSA’s regulatory responsibilities between the PRA and the FCA in 2013, the FCA’s remit with respect to “conduct risk” has quietly, but dramatically, widened. When the FCA speaks of “conduct risk” now, it does so in the context of its statutory objective to “secure an appropriate degree of protection for consumers”, with “consumers” now defined under FSMA 2000 to include any person who uses (or may use) regulated financial services, from consumers through to large corporate bodies; and its further objective of promoting market integrity. While retail customers remain important, the FCA is increasingly interested in the operation of the wholesale markets and the outcomes that commercial customers receive.
What then, under the new regime, is “conduct risk” in the insurance context? Read the full article >