Compliance and the impact of increasing regulatory activity is one of the biggest drivers of insurance claims for financial institutions, and this is reflected in the fact that changes in legislation and regulation ranks as the third top risk for the sector.
The compliance burden for financial institutions has increased significantly over the past decade. Regulatory enforcement has intensified as banks and senior management are more readily held to account by lawmakers and prosecutors, as well as shareholders. At the same time, they are subject to a growing body of rules and regulations in a diverse range of areas, including sanctions, whistle-blowing and, of course, data protection and cyber security laws.
The consequences of data breaches are far-reaching with more aggressive enforcement, higher fines and regulatory costs, and growing third party liability, followed by the prospect of litigation. Regulators are increasingly focusing on business continuity, operational resilience and the management of third party risk following the number of major outages at banks and payment processing companies. Companies need to operationalize their response to regulation and privacy rights and not just look at cyber security.
Then there are a number of other environmental, social, and governance (ESG) issues and requirements to handle in addition. “Companies are challenged by the growing raft of regulation and guidance in many territories, leading to tougher disclosure and reporting rules, particularly around sustainability. The most recent of these is the EU taxonomy for sustainable activities regulation, which provides a common dictionary for sustainability criteria and thus aims to enable comparability of sustainability performance,” says Michael Bruch, Global Head of Risk Consulting Liability/ESG at AGCS.
Ultimately, these changes will influence how, and in which sectors, companies and funds invest, as they consider whether a particular asset fits within the taxonomy or ESG strategy, how they will report about it and what stakeholders and shareholders will think. “The financial services sector may be ahead of other sectors when it comes to addressing ESG topics but regulations and guidance will still be a driver of risk going forwards,” says Bruch.
At the same time, activist shareholders or stakeholders are increasingly focusing on ESG issues. Recent years have seen a surge in climate change-related litigation cases in particular. The cumulative number has more than doubled since 2015, according to a recent Oxford University/Climate Neutrality Forum report presented at the COP26 summit. Just over 800  cases were filed between 1986 and 2014, while over 1,000 cases have been brought in the last six years and there are a growing number of cases involving financial institutions.
Such cases ultimately seek to influence emissions trends by increasing the cost of capital for high-emissions activities. Early examples of this type of litigation focused primarily on the disclosure of climate change-related risks and their relevance to investment decisions, often drawing on guidance produced by the Task Force for Climate-related Financial Disclosures (TCFD). However, recent cases appear to mark a move beyond being focused just on disclosure to focusing on due diligence. In November 2020, a case was settled involving a $57bn superannuation fund in Australia, Rest . The claimant alleged Rest’s failure to disclose and address climate risk breached legislation. The fund committed to a raft of new disclosure and climate change-related initiatives in response.
Besides climate change, broader social responsibilities are coming under scrutiny, with board remuneration and diversity being hot topics and regulatory issues. “AGCS regularly engages in open dialogues with the banking, insurance and asset management segments to discuss risk trends and challenges,” concludes Schiavone. “We are investing heavily in our network and expertise, in underwriting, claims and operations, so we can best respond to customers’ needs and contribute to a better management of risks in a complex environment that constantly evolves.”