Annual Insurance Review 2022: Financial institutions

Published on 10 January 2022

In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for financial institutions.

Key developments in 2021

Whilst Covid-19 related exposures and mitigation/relief efforts for financial institutions continued in 2021, on the regulatory landscape the past year has seen some interesting further developments in relation to financial crime.

At the beginning of the year, on 1 January 2021, the US Congress introduced substantial anti-money laundering/counter terrorist financing amendments and enhancements in the form of the Anti-Money Laundering Act 2020 (the AMLA). The AMLA establishes uniform beneficial ownership reporting requirements for companies and financial institutions aimed at discouraging the formation of shell corporations used to disguise and move illicit funds.

In a similar vein, the UK government has recently closed its Consultation on Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, with further UK legislation expected in 2022. One of the proposed changes is to require cryptocurrency exchanges and digital wallet providers to record information pertaining to the originator and beneficiaries of crypto asset transfers in excess of £1,000, with the Financial Action Task Force considering that such proposals should extend to all financial institutions.

In a year which has seen high profile prosecutions, judgments and ongoing investigation in relation to the cum-ex scandal that has swept across Europe, it is not surprising that there is growing pressure on financial institutions from regulators to crack down on transactions that facilitate financial crime. Consistent with this, the uptick in the SFO's use of the Bribery Act 2010 (coinciding with its ten year anniversary of being in force) and a number of new Deferred Prosecution Agreements are success stories in an otherwise difficult year for the SFO marked by the high profile collapse of its Serco case.

What to look out for in 2022

The world is becoming increasingly concerned about environmental, social and governance (ESG) matters and we expect that financial institutions will be targeted increasingly in 2022 and beyond for ESG failings by regulators, employees, investors and shareholders alike.

Indeed, the London School of Economics has reported that litigated cases related to climate change have more than doubled globally since 2015 and are now targeting a wider range of "private sector and financial actors", whilst using more diverse arguments by incorporating themes such as "breaches of fiduciary duty" and "greenwashing" in their allegations.

Such litigation can be initiated by governments for non-compliance with specific climate related legislation (e.g. the new rules requiring Britain's largest companies to disclose climate-related risks and financial information proposed to come into force in the UK from April 2022) or by shareholders against financial institutions for their investment decisions (e.g. the recent action brought by action group "Fossil Free" against the Dutch pension fund for civil servants and teachers (ABP) which led ABP to announce in October 2021 that it was divesting £15bn worth of holdings in fossil fuel companies).

Financial institutions could also face claims in relation to their own ESG-related statements if those statements prove to be (or are even alleged to be) misleading. This could lead to shareholder claims under s.90/90A FSMA in the UK, regulatory actions and/or mis-selling claims, as faced in July 2021 by the UK's largest asset manager, LGIM, when it was accused of "greenwashing" by marketing a fund investing in state-owned securities as ESG compliant. In addition, if financial institutions provide advisory services to companies exposed to ESG risks, because there is no "one size fits all" definition of ESG, the scope for negligence actions is wide.

Financial institutions, and their insurers, should therefore be prepared for more ESG-related claims in 2022 and beyond as the ESG movement gathers momentum.