Opinion divided on new UK regulatory regime—Airmic gives cautious welcome

Although the new watchdogs have been operating for less than a month, there is already some apprehension, as well as some cautious optimism, within the insurance industry regarding the potential impact of the new regime. The main concern is that reverting back to a dual supervisory model will create extra cost and complexity and negate the positive work that the FSA made in unifying a disparate regulatory regime. However for insurance buyers there is the hope that the new supervisors, especially the FCA, will provide more protection for consumers and better consider the views of both buyer and seller. Representing corporate insurance buyers, John Hurrell, Chief Executive of UK risk and insurance managers’ association Airmic, is cautiously welcoming of the new regime.hideThe FSA was very much driven by the market, he said, and insurance buyers had very little involvement. More recently the FSA was focused on prudential regulation such as Solvency II. While the PRA will shoulder much of this responsibility, the hope is that the FCA will focus more on customers, said Mr Hurrell. “I would like to see the FCA reaching out more to customers and focusing on areas where they are not being treated fairly,” he said. For example, the Law Commission has recently conducted a review of the UK commercial insurance market and identified very clear areas of anti-client activity such as disclosure requirements and the burden they place on buyers. “These are the kind of issues that the FCA should not have to wait for legislation to emerge in 2015 before it addresses them and should instead look to engage with consumers as well as insurers to reform these areas,” said Mr Hurrell. “If this is the approach that it takes, then I will see the new regulatory regime as entirely positive.” Others have suggested that the creation of two regulatory bodies will only increase the operating costs for insurers that, in turn, will be passed on to corporate insurance buyers, but Mr Hurrell does not think this is likely given the current market conditions. “The market is soft and capacity is high so it would be a very brave insurer that tried to pass any additional regulatory costs onto its customers,” he said. Martin Wheatley, Chief Executive of the FCA, has already spoken of the failings of the FSA and the need for a departure from a ‘box-ticking’ culture that was ‘too captured by the interests of firms’. Instead the FCA should seek to act in the interests of both the market and consumers, he said. “A regulator can be close to firms, close to consumers and close to markets. [Our response to scandals] won’t be biased. It will look at consumers’ interests and firms’ interests,” he argued. Mr Wheatley’s comments, made at a conference in London in mid-April, came after he had earlier alarmed markets by stating that the FCA’s philosophy would be to ‘shoot first and ask questions later’ in cases where there is evidence of harm to consumers. He later made clear that the FCA’s overarching aim was to ensure a functioning market that offered ‘profit for the good firms, exit for the bad ones and products that meet consumers’ needs’. Among UK insurers there is a cautious optimism about the new regime and its objectives. “We hope that it will have a positive impact for insurers and consumers alike,” said Malcolm Tarling, spokesman for the Association of British Insurers (ABI). “The ABI has always said that it wants to work with the regulators to identify problems at an early stage. We want to move away from a predator-prey approach to one where we work with the regulator. We want to see the twin peaks approach working that allows for protection of consumers and also allows the insurers to innovate and develop new products,” he said. The main concern for insurers though is a potential increase in costs. “At a time when commercial pressures mean insurers are having to do more with less, regulators should be thinking in the same way,” said Maggie Craig, Director of Conduct Regulation at the ABI. She added that insurers’ compliance fees have doubled in the last five years. “There should be clearer success measures to ensure that fees represent value for money,” she said. Meanwhile the British Insurance Brokers Association (BIBA) believes that the FCA has an opportunity to introduce appropriate, proportionate and cost-effective regulation for brokers rather than the ‘intrusive approach to supervision’ adopted by the FSA. BIBA’s complaint is that the FSA focused excessively on capital adequacy despite the fact that brokers do not represent a systemic risk because they do not hold insurance risk. “This inappropriate and disproportionate approach from the FSA has led to huge direct and indirect costs for insurance brokers and stifles growth,” said Steve White, Head of Compliance at the BIBA. BIBA has proposed a number of amendments to the Financial Services Bill that would ease the compliance cost on UK brokers by introducing a level of regulation in accordance with the level of risk posed and based on sector specific scrutiny. BIBA also proposes that the funding plan for the Financial Services Compensation Scheme should ensure that the amount of levies imposed on a particular class reflects the amount of the claims made, or likely to be made, in respect of that class, removing unfair cross subsidy and having appropriate financial caps. There are some who will be sorry to see the passing of the FSA, such as Ned Swan, a lawyer at city law firm Elborne Mitchell who believes that replacing a single regulator with two bodies will mean more complication, more work and more cost for insurers—some of which will inevitably be passed down to insurance buyers. The PRA will have the lead responsibility in supervising insurers and overseeing authorisation and approval but it will need the consent of the Financial Conduct Authority (FCA). This will require dialogue between the two regulators. There will also be regular reviews of insurers carried out independently by both bodies rather than jointly. And the PRA will be able to overrule some of the actions taken by the FCA meaning there will be a significant number of issues considered twice. According to ratings agency Fitch, this creates the possibility of ‘conflicting guidance and confusion’, especially in areas such as claims settlements, forbearance measures and mis-selling compensation. “For example, the FCA is likely to have regulatory responsibility for the fairness of bonuses for with-profits policyholders from the customer perspective, while the PRA will have regulatory responsibility for reviewing the affordability and solvency implications from the insurer’s perspective,” said Fitch. “I think the change of regime is unfortunate,” said Mr Swan. “The UK has created the freest and most inexpensive place to conduct financial services business within a legal and regulatory system that is respected throughout the world. So it is a pity to diminish that effectiveness by complicating regulation in a way that I do not believe will offer the market any more protection than in the past. “I’ve dealt with the FSA for many years and found it to be a satisfactory regulator. I have also practiced law for many years and through many financial crises and never known a regulatory system be constructed so as to prevent those from happening. So I am not sure what the point of this new division is other than political and to be seen to be doing something,” he added. The political intention may be to create a perception of tougher regulation that gives consumers more protection. The FCA will have the power to remove misleading advertisements or ban inappropriately sold products. However, said Mr Swan, for corporate insurance buyers there are no significant new measures that did not exist under the FSA. According to Jim Bichard, London Markets Insurance Leader at PwC, the larger insurers are the ones most likely to carry the burden of dual regulation. Even if there is a realisation that following a financial crisis the pendulum of regulation is always likely to swing towards greater scrutiny and more consumer protection, there is also a relative level of regulatory fatigue in the insurance industry given that it has spent the bulk of the last two years dealing with Solvency II. As to whether this swing of the regulatory pendulum should be welcomed by corporate insurance buyers, Mr Bichard said that although there is no explicit sign that this is the regulators’ aim, it surely must be part of the strategy. “But in the short-term the focus is likely to be retail consumers because that is where the greatest exposure lies given that most corporate buyers will be more informed and employ the services of brokers,” he said.

Opinion divided on new UK regulatory regime—Airmic gives cautious welcome

Want to read this article?

Read Next

AXA P&C increases premiums by 7% as rates rise at AXA XL

Hong Kong and Shanghai to cooperate on captives and ILS

Swiss broker Kessler names head of special risks

Supply chain cyber risk concentrated in 15 top vendors with ‘below average’ cybersecurity

US insurers expected to increase casualty pricing as social inflation rises

AXA P&C increases premiums by 7% as rates rise at AXA XL

Hong Kong and Shanghai to cooperate on captives and ILS

Swiss broker Kessler names head of special risks

Supply chain cyber risk concentrated in 15 top vendors with ‘below average’ cybersecurity

US insurers expected to increase casualty pricing as social inflation rises

Want to read this article?

Read Next

AXA P&C increases premiums by 7% as rates rise at AXA XL

Hong Kong and Shanghai to cooperate on captives and ILS

Swiss broker Kessler names head of special risks

Supply chain cyber risk concentrated in 15 top vendors with ‘below average’ cybersecurity

US insurers expected to increase casualty pricing as social inflation rises

Related Articles