Conduct and Ethics: insurers need to understand the difference

Earlier this week I looked at the difference between compliance and ethics, and at why that difference matters to insurance firms. I want to follow that with a look this time at the difference between conduct and ethics, and at the implications that has for the sector. It’s a difference that is changing the regulatory landscape for insurance firms.

Conduct is a term that has become popular in insurance circles. I suspect this is largely a result of the UK regulator changing its name to the Financial Conduct Authority (FCA) in 2013. And it’s common now for events and publications looking at standards of behaviour in the insurance sector to talk about conduct risk: for example, this report in March 2014, commissioned by the Chartered Insurance Institute (CII) from consultants Oliver Wyman, entitled ‘Conduct Risk for Insurers’.

Ethics is a term still in common use, in the CII’s ’code of ethics’ for example, in discussion forums about particular issues and, interestingly enough, in a growing number of speeches by FCA executives. I suspect conduct became popular in insurance circles because some may have seen it as more ‘business friendly’: it can sound more certain, more delineated, less emotive, than say ethics.

Not the same

Yet conduct and ethics are not the same: they do overlap, but there are differences. And those differences are going to become more important to insurance firms over the next few years, as the evidence trail being left by the FCA’s thematic reviews and market studies makes clear.

The two terms can be summed up as follows: conduct is centred around standards of behaviour. After all, the root verb ‘to conduct’ means “to behave in a particular way, especially in a public or formal situation”. So this means looking at how people behave in a particular work situation: a conflict of interest for example, or a payment to an introductory agent.

Wider Focus

Ethics certainly covers the same ‘standards of behaviour’ ground as conduct, but also picks up more than that. That wider focus brings in situations at work that are less about personal behaviours and more about corporate level decision making: for example, the products that are designed, the way in which they are distributed, their pricing and the servicing associated with them. Of course, people are involved in such initiatives, but the focus is on the outputs of that work and what this says about the values of the firm and the culture influencing those decisions.

This difference matters to the FCA. It sees some types of consumer detriment originating in how those decisions on distribution, pricing et alii, are made and, most critically, in the ethical culture that frames those decisions into a particular pattern. So while standards of behaviour around issues such as conflicts of interest and inducements will always be on the FCA’s radar, we will increasingly find it looking at more structural, systemic issues such as suitability and consent.

Change in the Regulatory Landscape

This represents a noticeable change in the regulatory landscape, from an FSA whose chairman once made clear that ‘we don’t do ethics’, to an FCA prepared to put limits on the prices and terms of business of pay-day lenders. And this change in mindset by the regulator needs to be mirrored by a change in mindset across the insurance sector. The danger for insurers is that a mindset overly centred around conduct, to the detriment of ethics, could put them in a position of at best, permanent catch-up, at worst, lost in the new regulatory landscape. It’s time to learn some new map reading skills.