Changes underway in the London market are creating ideal conditions for ethical risks to multiply. No wonder internal auditors at London market firms recently cited conduct as their top emerging risk for the future. So does this point to another ‘Spitzer type‘ conflagration ahead? It could well do so.
In a recent post on his ‘Lookout‘ blog, Roger Bickmore highlighted the growing dominance of the global brokers in the London market and the concentration of relationships that are being sought. Such changes will multiply the occasions when conflicts of interest have to be dealt with. As they multiply, so do the knock on effects on other ethical issues such as bribery and whistleblowing.
On paper, many firms will appear to have a structured and thought through response, yet the reality will invariably be quite different. Policies and procedures may try to frame behaviours, but they won’t drive them. That comes from the myriad of signals, nudges and influences that together form the firm’s ethical culture. So for a London market firm, governance alone should not reassure the board that ethical risk has been adequately mitigated.
The FCA’s recent thematic review into how commercial insurance brokers were managing bribery and corruption risk should be taken as a warning that some brokers may be struggling to understand the scope and depth of their ethical responsibilities. That review was pretty damning, especially when you take into account that the sector was given a clear warning to improve by the FSA back in 2010. Note that nine of the ten firms covered by the thematic review were Lloyd’s brokers.
So what should non executive directors and audit heads look for? Here are three things to start with.
What type of conflicts of interest have you been looking for? All of them, or just those you looked at last time? And are those addressing the three principle levels at which conflict of interest can exist?
Does the scope of your conflicts risk assessment match the scope and complexity of your business? And when did you last map the relationships and influences that point you towards the areas of greatest risk?
Does your management information tell you which are the greatest risks, what controls attach to those risks and how the reasons most likely to cause those controls to fail are being addressed? Or is it mainly just a reassurance that the firm has conflicts in hand?
Conflicts of interest and bribery are two, big, obvious ethical risks for insurance brokers, be they small or large. And there are signs that the sector has been taking a lack lustre approach to their management. As brokers, and how they earn income, increase in complexity, then those tasked with oversight of those businesses must look to the drivers of unethical behaviour and understand how their firm is addressing the causes rather than just managing the symptoms.