Financial institutions

In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Financial institutions.

Key developments in 2023 

As we predicted last year, the global economic downturn precipitated by the COVID-19 pandemic has continued to distress western economies throughout 2023.  Whilst the UK has managed to avoid a recession this year, the Bank of England has increased the base rate of interest to a fifteen year high of 5.25% to tackle surging inflation.  Similarly, interest rates in the United States are at their highest level since 2001 with consequences for many financial institutions and society more generally.

Earlier this year, three smaller US banks (Silicon Valley Bank, Signature Bank and Silvergate Bank) all failed within the space of several days, triggering various claims against the institutions and their directors as a result.  Whilst Signature and Silvergate failed through overexposure to the volatile cryptocurrency market, the failure of SVB demonstrated how rising interest rates represent a risk for financial institutions with large portfolios of interest rate-linked government bonds (including UK pension funds).  A short time later (although arguably unrelated), Swiss bank UBS was forced to step in to save ailing competitor Credit Suisse after clients rapidly withdrew deposits, with UBS now facing consequent claims from shareholders in relation to the controversial takeover.

These developments have left confidence in the banking system shaken, and whilst the situation appears to have stabilised following the crises earlier in the year, there is still a significant risk of a slow-burning and more widescale banking crisis developing into 2024 and beyond.

What to look out for in 2024

Concerns around a global banking crisis aside, we anticipate that ESG will continue to be a source of risk for financial institutions, with allegations of 'greenwashing' constituting a particular risk for investment managers given the increased prominence of 'environmental sustainability' as an investment criterion.  Fund managers are coming under increased pressure to promote sustainable investment options, and regulators are expanding disclosure obligations for 'sustainable funds', all of which will increase the risk of greenwashing-related claims against financial institutions offering these services.

Fraud trends are continuing to rise globally, particularly those relying on social engineering, and we envisage that financial institutions such as retail banks may be at increased risk of claims brought by customers who have been victims of fraud.  In the UK, certain provisions of the Financial Services and Markets Act 2023 are set to come into force in January 2024, including a mandatory reimbursement scheme for victims of Authorised Push Payment (APP) fraud where a victim is tricked into authorising a payment to a fraudster.   Whilst there are qualifying criteria to trigger reimbursement, it is anticipated that approximately 90% of all APP Fraud (which totalled around £500 million in 2022) will fall within the ambit of the scheme.  Those costs will be borne by payor and payee banks, and we anticipate that FIPI and crime policies may be called upon to indemnify the loss. 

Lastly, we consider that Artificial Intelligence (AI) could constitute a serious risk to certain financial institutions in 2024 and beyond.  Risk management teams are increasingly using AI to help with credit risk assessment, anti-money laundering checks, fraud detection and regulatory compliance.  Failure of the AI to help manage these risks could result in regulatory consequences and concurrent claims.  Further, cyber criminals will undoubtedly look to make use of advanced AI software in order to bypass security measures and defraud financial institutions and their customers.  This in turn increases the risk of financial institutions relying on their insurance policies to cover costs related to regulatory investigations, third-party claims brought by potential fraud victims or cyber-attacks.

Written by David Healey.