The UK insurance sector has been told in no uncertain terms that it isn’t doing enough ethical due diligence. The regulator raised this as one of the main concerns to come out of its delegated authority thematic review. So what exactly is ethical due diligence, and what will a firm get out of doing it?
Ethical due diligence involves the gathering and assessment of evidence about the extent to which ethical values have been embedded and are being upheld. And this of course begs the question: ethical due diligence of what? Due diligence of the more normal kind is often thought of in relation to an agent or business partner: in other words, a third party to your own firm. Yet it is used more widely than that and with the ethical variety of due diligence, that is certainly the case.
Ethical due diligence can be carried out within your firm as well. Typical examples could be the launch of a significant new product, an important new marketing campaign, an innovative new sales process, or the recruitment process for senior people. Both the PRA’s Senior Insurance Managers Regime (SIMR) and the FCA’s delegated authority review are signalling strong expectations around these sorts of activities.
One of the drivers for this regulatory interest is the relative complexity of the insurance sector. There’s a multiplicity of agency relationships and a pretty unique manufacturing process for its products. As part of an overall sector that is perhaps unique in having a regulator dedicated solely to overseeing conduct, the message is clear: trust can no longer be taken for granted; it has to be demonstrated.
Now I would be surprised if I had to use the fingers of more than one hand to count the number of insurance firms who have already undertaken an ethical due diligence. Given that, where should a typical insurance firm look to get started? The best place is your firm’s assessment of ethical risk. And then look at the map your firm has for tracking its network of relationships and influences. Together, these should point you pretty clearly towards where to start.
So what might a typical insurance firm get out of ethical due diligence? Well, less grief from the regulator is certainly worth quite a lot. And sustaining a reputation as a well run business draws people in rather than steers them away. Spending less time sorting out messes should earn a high five from those in charge, who can then do work more akin to leaders than firefighters.
There are two things that it’s important to get right with ethical due diligence. The first is language, which needs to be at least half full, certainly not half empty. Talk about them in terms of controls, problems and regulatory requirements and, to be honest, you might as well not bother. Instead, refer to them in terms of things like strategic objectives, project effectiveness and ‘doing the right thing’.
And secondly, start them early on in the gestation of new products, partnerships and processes. Avoid having them as a final check, for so much is primed for action by then that ethical due diligence would be seen as a disrupting imposition. Instead, provide project teams with overlays with which to check for ethical issues early on and at key milestones in the project’s timeline. The language then becomes about empowerment, responsibility and delivery.