How the Senior Manager Regime Could Undermine the Consumer Duty

The Prudential Regulatory Authority has fined the former Chief Information Officer of TSB (a high street bank) £81,000 for breach of a SMCR Conduct Rule. The IT meltdown at TSB in 2018 has already resulted in a fine of £48m for the firm, as well as costs estimated at more than £350m.

This however is the first enforcement action against an individual involved in those events. Indeed, according to this leading law firm, it is the first enforcement action under SMCR per se. And it came not from the conduct regulator, but from the prudential regulator.

In terms of impact, this enforcement action feels like a very small pebble entering a very large pond. Ripples are going to be indiscernible. And in that situation, a question arises as to whether the whole SMCR push around individual accountability has really been influencing behaviours as much as intended.

A Pipeline?

Linklaters, the law firm, takes this view…

“The SMCR already has had a powerful impact on behaviour in financial services and is an important part of the regulators' supervisory toolkit. In the enforcement context, SMCR investigations constitute a rising proportion of all FCA investigations and we expect to see more concluded outcomes against senior individuals within the next 12-18 months. This is so particularly observing that 2022 featured a series of enforcement actions that were accompanied by actions against individuals, many of whom have made Upper Tribunal references. We expect (this) action to be just the first of an imminent series of SMCR enforcement actions…”

Working on the basis then that there is a pipeline of enforcement actions pending, two questions arise. Firstly, how many of them will be successful for whichever of the regulators bring them? And secondly, what does that pipeline mean for the current big-ticket initiative, the Consumer Duty?

Success Rate

You can look at the pipeline of enforcement actions delivering seven years after the SMCR was introduced in a number of ways. Firstly, the actions are being contested, which implies that their impact is of concern to those involved. Secondly, contesting takes time, or to put it another way, can be made to take time. And thirdly, the people involved feel that the actions could be overturned.

Then there’s the success rate that is eventually achieved across these pipeline cases. For the FCA, this needs to be high, in order to send a ‘we bring, we win’ type message. If that high success rate is not achieved, then an already overly long enforcement process under SMCR will stay that way. The pipeline could become congested, even blocked.

Accountability Disengagement

The danger then emerges of what I could call an ‘accountability disengagement’. Senior executives begin to feel that the risk to their careers from individual accountability is much less than they initially thought (more here). As a result, behaviours and decisions adapt to this lessened threat environment and SMCR starts to lose its grip on executive minds.

This in itself is of course of concern from an ethical perspective. Individual accountability should be guiding behaviours and decisions to take account of key issues like fairness, integrity and honesty. Working as I do on the basis that conflicts of interest are the biggest ethical risk for insurers, that concern will remain until I see a successful SMCR enforcement action for a badly managed COI. I’m not holding my breath though.

The Weak Link

As I said, a mixed picture about the impact of SMCR on executive behaviours and decisions is a concern. It is interesting then that the FCA recently announced that it was undertaking a review of SMCR (more here). Later this year, we will hear the output of that and the regulator’s response. Following that review, I would expect to see some form of tightening of processes, as part of the learning experience that such reviews produce. The pipeline may be squeezed to produce more results, more quickly, but even then, still only by around early 2025.

Remember that the SMCR had value outwith of its own requirements. I saw it forming one corner of a triangle, with supervisory technologies in another corner and whatever the big concern of the day was in the last corner. Dealing with that big concern would rely a lot on the insight coming out of data analysis in the SupTech corner and on the market’s attention coming from the individual accountability in the SMCR corner. In short, SupTech and SMCR were key foundational tools for delivering supervisory impact on the big concern of the day.

This means that if the credibility of SMCR around individual accountability is lessened (as I can’t help but think it is), then the ability of the FCA to tackle the big serious concerns is also lessened. SMCR may well have become a weak link.

The Wider Picture

Let’s turn now to the current big initiative, the Consumer Duty, and the big concern of the day, discriminatory pricing. We know that Citizens Advice is prepared to wait for a while and see if the Consumer Duty has the impact that the regulator has said it will have (more here). At the same time, they have also drawn a line in the sand, by saying that if discriminatory pricing continues, then they will deem the Consumer Duty to be a failure (more here).

The $64k question therefore is: ‘how long are consumer groups prepared to wait?’  There are two time-lines involved. The first is for the middle of the market – those insurers who want to make their Consumer Duty programme work, but find it complex, challenging and taking up more time than they originally thought. In my opinion, two years out from now, those insurers may well be starting to deliver (remember it’s annually renewed business) the impacts that consumer groups want. Not the whole impact, but a recognisable early chunk of impact.

The second timeline involves the outliers in the market – those insurers who will go along with the Consumer Duty (they have no choice), but pay more attention to tactical opportunities to increase GWP and lower COR. They will be the last to produce the impact that consumer groups want, and then perhaps only if they feel up against a wall to do so. In my opinion, four years is about when I would expect these firms to be delivering anywhere near the expected impact.

Balancing Cost and Integrity

On several occasions, I’ve known insurance executives push back against making the changes to deliver more ethical outcomes, because they know that others in the market will delay doing so in order to gain some form of competitive advantage. ‘This would cost me millions in the market’ is how it’s usually expressed. In short, they want to do it, but can’t afford to.

The same will happen with discriminatory pricing and the Consumer Duty. The ‘only until the last minute’ insurers will delay not only their own Consumer Duty programmes, but other insurers’ programmes too. Progress across the market will appear cautious from the inside, ‘snail like’ from the outside.

The net result is that the Consumer Duty could fail to deliver the market outcomes soon enough to satisfy consumer groups that it is actually working. And in such a situation, the FCA is not at the moment able to turn to the SMCR and say ‘be patient, have confidence, our initiatives do deliver’.  There’s not the evidence for that happening – in fact, seven years points to rather the opposite.

Outliers and Signals

What would have been much better for the regulator and that middle part of the market was for the regulator to have used the SMCR to push back quickly on outlying practices. This would have sent a signal to the ‘only until the last minute’ insurers that they needed to implement the changes sooner rather then later. This would then have lessened the competitive disadvantage of middle of the market insurers who were supportive of the changes, if still worried about the revenue impact.

To put it another way, in competitive markets, big ticket initiatives will deliver on expectations by addressing the outlying firms first, not those in the middle of the market. In simple words, things move forward by first removing the hurdle and then applying forward pressure. Doing it the other way round means that your forward pressure yields little other than frustration and the need to work out why you’re not going anywhere. An apt analogy would be to take off the brake before pushing the car.

The problem for the FCA is that a principles type approach to regulation doesn’t easily accommodate that ‘early pressure on outlying firms'. That’s because the regulator expects firms to take the initiative, and not wait until the regulator forces them too. Sometimes it needs to be the other way round.

To evidence this, I need simply point to pricing walking and discriminatory pricing. These issues would not have emerged if SMCR had made executives in outlying firms really stop and think about their responsibilities. As many firms I spoke to knew that ‘pricing walking was flawed but there is no alternative in this market’, this would then have released market pressure to reform.

Remember the Customer

Going back to my triangle, with discriminatory pricing in one corner, and SupTech in another corner, it looks like SMCR, in the last corner, has not delivered the support that it should have, earlier enough to help drive home the changes needed for the Consumer Duty into that ‘only until the last minute’ part of the market.

Why can't Citizens Advice just wait for the Consumer Duty to work? That won’t happen. As I said here last month, time is not on insurers’ side. Citizens Advice published their first ethnicity report in March 2022, based upon research carried out in 2021. This means that when two years on from their second ethnicity report is reached in 2025, that will be four years out from the start of their campaign. A long time in campaigning circles. A very long and expensive time for those people who have been paying significantly more for their motor insurance just because of their ethnicity.