Regulatory change to dominate 2023 business landscape but it is not all bad news

The global head of insurance at a leading law firm has warned the year ahead it set to be defined by the weight of regulatory change which will impact businesses and their insurers alike.

Helen Faulkner was speaking as DAC Beachcroft, issued a range of 140 predictions across a range of risks, but added that the regulatory environment looked likely to impact businesses at a time when the cost of living crisis was creating significant challenges to their ability to operate.

“What is most striking in reviewing our full suite of 2023 predictions is the prominence of regulation, albeit in the widest sense,” she explained. “Over a third of all our predictions fall within the regulation theme, with almost all 17 lines of insurance business affected.

“With a growing expectation around ESG issues, the prominence of regulation reflects a change in emphasis from environmental to social and governance issues.  The new Protect Duty legislation is a good example.  The proposed new duty to protect the public from terrorist attacks was included in the Queen’s Speech in May 2022 and further details were provided just before Christmas, with a draft Bill now anticipated early this Spring. There are significant implications for businesses, charities and the insurance industry as a whole.”

The company said for UK insurers the Financial Conduct Authority (FCA) is set to build on the experience of the pandemic in making clear its expectations of firms who deal with customers exhibiting vulnerability as a result of the current cost of living crisis.

“It has expressly referred firms in the insurance sector to its guidance previously issued in relation to COVID-19 and customers in financial difficulty,” It added. “The FCA will expect firms proactively to support such policyholders, rather than relying on their strict legal rights. This might include offering greater flexibility for policyholders who cannot meet their monthly premium instalments, rather than simply cancelling the policy.

“Firms may be expected to suggest alternative products that might meet a customer’s changed needs, rather than simply accepting a cancellation. The FCA will also look closely at the interest rate applied to loans to fund insurance products, with the suggestion that a high rate on a loan with a low credit risk may be in breach of the FCA’s existing rules.”

However, the law firm said  UK regulatory reform will be more superficial than real in the short term

DAC explained recent political uncertainty in the UK has made it hard to be confident about the government’s intentions for the future of financial services regulation.

“The UK’s departure from the EU makes it theoretically possible to radically re-shape the UK rulebook. However, the legacy of the financial crisis of 2008 can still be seen within government and UK regulators, with demands for tougher regulation, particularly in the retail space, never far away.

“While the theory of a more proportionate and streamlined approach to regulation sounds compelling, therefore, we predict that, while we will see progress in some areas, the reality is likely to disappoint many.”

DAC said the proposed Financial Services and Markets Bill promises a more internationally competitive regulatory regime for the UK.

“The Financial Services and Markets Bill is designed to recast the UK’s financial services regulatory framework following the UK’s departure from the European Union,” it explained. “It goes well beyond purely technical changes, however, implementing proposals coming out of the Future Regulatory Framework Review and the Wholesale Markets Review, facilitating the use of stablecoins (referred to as digital settlement assets) when used as a means of payment, and amending the insolvency regime for insurance companies, among other things.

“The Bill will also introduce a new secondary objective for the Financial Conduct Authority and the Prudential Regulation Authority to support medium to long-term growth and international competitiveness. While this has been widely welcomed, the test will be to what extent in practice the UK regulators emphasise growth and competitiveness when set against the other competing objectives and indeed political demands to which they are subject. A change in culture, and a willingness to take risks, will be needed if the intended benefits of proportionate regulation that supports growth is to be achieved.”