ABI response to the HM Treasury consultation, ‘A new approach to financial
regulation: draft secondary legislation’
The UK insurance industry
1.
The UK insurance industry is the third largest in the world and the largest in Europe. It is a
vital part of the UK economy, managing investments amounting to 26% of the UK‟s total net
worth and contributing £10.4 billion in taxes to the Government. Employing over 290,000
people in the UK alone, the insurance industry is also one of this country‟s major exporters,
with 28% of its net premium income coming from overseas business.
2.
Insurance helps individuals and businesses protect themselves against the everyday risks
they face, enabling people to own homes, travel overseas, provide for a financially secure
future and run businesses. Insurance underpins a healthy and prosperous society, enabling
businesses and individuals to thrive, safe in the knowledge that problems can be handled
and risks carefully managed. Every day, our members pay out £147 million in benefits to
pensioners and long-term savers as well as £60 million in general insurance claims.
The ABI
3.
The Association of British Insurers (ABI) is the voice of insurance, representing the general
insurance, protection, investment and long-term savings industry. It was formed in 1985 to
represent the whole of the industry and today has over 300 members, accounting for some
90% of premiums in the UK.
4.
The ABI‟s role is to:
Be the voice of the UK insurance industry, leading debate and speaking up for insurers.
Represent the UK insurance industry to government, regulators and policy makers in the
UK, EU and internationally, driving effective public policy and regulation.
Advocate high standards of customer service within the industry and provide useful
information to the public about insurance.
Promote the benefits of insurance to the government, regulators, policy makers and the
public.
5.
The ABI welcomes the opportunity to respond to the HM Treasury consultation, „A new
approach to financial regulation: draft secondary legislation‟.
Summary
6.
We are concerned that the tight consultation and legislative timetables for the transition to
the new regulatory structure may not permit adequate consideration of the issues or allow
firms to implement any necessary changes, leading to unintended consequences. This is
especially so given that the FSA is also currently consulting, through CP 12/34, on a number
of issues that are covered in this consultation, although with a later response date.
7.
We consider that the consultation highlights the need for effective coordination between the
PRA and the FCA, particularly in the absence of handbook-based guidance for the PRA
threshold conditions. Without this, there are risks both of duplication or inconsistencies in
approach that could make compliance more uncertain and costly, and of unintended and
disproportionate consequences. We suggest in particular that the secondary legislation
should reflect a commitment to a level playing field for firms, whether regulated by both the
PRA and the FCA, or by the FCA only.
8.
We do not agree with the proposal to allow representatives of small to medium size
enterprises to be designated as „consumer bodies‟ for the purposes of submitting supercomplaints to the FCA. We do not think a good case has been made to change a wellestablishes process that applies to other sectors.
9.
Further detail is given below in our responses to the consultation questions.
Association of British Insurers
December 2012
Consultation questions
Scope of PRA regulation
Q1:
Do you have any comments on the draft order?
10. It is important the legislation recognises the need for adequate transition time. For example,
an FCA regulated firm may become dual regulated. The firm would take time to be able to
transition itself to potentially new/ different requirements. Given the threshold condition of a
firm having to be able to be “effectively supervised”, we think the legislation needs to include
a time period to allow transition. We would suggest a minimum of 12 months for a firm to
make any necessary adjustments, which was the same time allowed when the FSA came
into being in 2000.
Threshold conditions
Q2:
What are your views on the proposed division of threshold conditions between
the PRA and FCA?
11. The division of threshold conditions between the PRA and the FCA is sensible and we also
welcome the distinction between insurance and non-insurance in the PRA‟s threshold
conditions, given the different characteristics of insurers and banks. However, please note
our comments in paragraph 7.
Q3:
What are your views about the new content of the threshold conditions?
12. Overall, the threshold conditions proposed are reasonable, but we have some concerns
about how they might be applied in practice as set out below.
Q4:
Do you have any other comments?
13. Much will depend on how the PRA and FCA will apply their respective threshold conditions,
and how coordinated they are in doing so – including in relation to any threshold condition
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regulations that they may develop in the future and for which public consultation will be
essential. At this stage, it is quite difficult to assess the potential impact of the new threshold
conditions. We note that further guidance will be given on the FCA‟s threshold conditions in
its handbook, and we will comment accordingly in response to FSA CP12/34, Regulatory
Reform. However, we are concerned that, without full explanation of, and transparency for,
HM Treasury‟s expectations, there could be unnecessary uncertainty for firms and
regulators.
We would therefore welcome a detailed explanatory memorandum to
accompany the legislation which sets out clearly the purpose and intent of each threshold
condition.
14. In particular there is a need for clarity on how the new requirements for firms to have suitable
business models and to be capable of being effectively supervised will be interpreted and
applied. Our key concerns are:
The regulators could consider they have far-reaching scope to intervene in a firm‟s
business model, even to the extent of directing what a firm can and cannot do. We
agree that it is appropriate for regulators to look at firms‟ business models, but it is
important that a good balance is struck so that business growth and innovation are
not hindered;
The FCA‟s/PRA‟s internal process before intervention need to consider fully all other
more proportionate tools, as there are risks that interventions could be made without
a thorough understanding of the firm‟s business – with consequential impact on the
firm, its customers and shareholders – and even that the regulators may act in effect
as shadow-directors;
As a result we would expect this tool to be used sparingly and with great caution.
Where the regulator does decide to intervene, it must ensure that it does not distort
the market by putting a firm at a disadvantage to a competitor as a result of its
actions;
We would not expect any assessment of the „effective supervision‟ requirement to be
dependent on the resource constraints of the regulator – this would not be within the
control of the firm, and it would not be reasonable for the FCA to standardise
business structures in order to make in „simpler‟ for the FCA to regulate firms; and
A relevant factor is „the way in which the business is organised‟ – but in our view a
potentially complex business structure does not in itself prevent a firm from being
effectively supervised, although we acknowledge that it might entail greater
regulatory and firm resource.
15. Meanwhile, limited guidance has so far been provided on the PRA‟s threshold conditions.
Given how much prudential regulation derives from Europe and the current uncertainties
about Solvency II and related supervisory developments, this approach might be justified for
the condition that the „business be conducted in a prudent manner‟. However, it highlights
still further the need for effective coordination between the two regulators, particularly for
dual-regulated entities. Without this, there is a risk of duplication or inconsistencies in
approach that would make compliance more uncertain and costly. Further, there may be
unintended consequences, including undermining the level-playing field that must exist
between firms even though they have different regulators.
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Q5:
What are your views on the proposed threshold conditions for FCA-authorised
firms?
16. We have no additional comments on these threshold conditions that are not already covered
in this response.
Q6
Do you have any other comments?
17. We have no further comments.
Q7:
What are your views on the threshold conditions that should apply to EEA and
Treaty firms?
18. We have no further comments on these threshold conditions.
Q8
What other comments do you have, if any, on any issues that should be
considered with regards to this proposed approach?
19. We emphasise the need for the level playing-field not to be undermined as between firms
that are UK-based and those that are not.
Mutuals order
20. We have no comments on the Mutuals Order, accordingly we have not responded to
questions 9 – 25.
Parent undertakings
Q26:
Do you have any views on the draft Order at Annex E?
21. We do not have any comments on the draft Order. However, we are concerned that
appropriate controls are put in place within the proposed rules implementing the
requirements, and we will be responding to the FSA‟s CP12/34 Regulatory Reform
consultation accordingly. As highlighted in previous consultations, detailed explanation of
the purpose and intent of this extension of regulatory scope is required.
Financial Services Compensation Scheme rule-making responsibility
Q27:
Do you have any views on the drafting of the FSCS Order at Annex F?
22. We have no comments on this drafting. Nevertheless, we note the need for effective
coordination and consistency in approach between the PRA and the FCA to ensure that their
mechanisms apply consistently and appropriately to both levies and recoveries. It is also
essential that they are holistic in considering the implications of their collective decisions.
Criteria for designating super-complainants to the FCA
Q28: Do you have any comments on the Government’s proposals for designating
consumer bodies as super-complainants to the FCA, or on the text of the draft criteria
and guidance at Annex G?
23. We believe the Government should employ the same criteria for designating consumer
bodies as set out in the Enterprise Act 2002. So we do not support the proposal to allow
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representatives of businesses to seek designation as consumer bodies for the purposes of
making super-complaints to the FCA.
24. The inclusion of representative bodies of small and medium-sized businesses within the
super-complaints process is a significant change to what is a well-established process for
the rest of the economy. This route is not available in other sectors and no strong case has
been made for departing from the usual definition of consumer bodies for the financial
services sector. It is generally recognised that individual private consumers require more
consumer protection and regulatory rights than business customers. But the regulatory and
legal regime provides a number of routes for addressing the operation of financial markets
from the perspective of business customers. For example, the definition of consumer in the
Financial Services Act is not restricted to individual consumers and the FSA has already
indicated that the FCA will be more willing to intervene in markets where the end consumer
is a non-financial business. In addition, the Financial Ombudsman Service (FOS) can take
complaints from „micro-businesses‟ (defined as businesses with an annual turnover of less
than two million euros and fewer than ten employees).
25. We think there is also a risk that the proposed system will be misused by bodies wishing to
gain a competitive edge for their business members. This risk is not adequately mitigated by
the intention to exclude organisations that primarily represent financial services providers.
There are other sectors which may seek to exploit this for example, representatives of the
claims management industry might seek designation as a consumer body for this purpose.
26. Whilst we are reassured that the definition of „consumer‟ in relation to super-complaints
excludes authorised persons (Clause 243C (4) Financial Services Bill), we are concerned
about how Criterion 6 paragraph G.35 will be interpreted:
G35 “If the membership of an organisation which represents small or medium-sized
businesses includes some authorised persons, the information supplied in support of
an application must demonstrate that the body does not primarily represent the
interest of those persons.”
27. It is not clear what is meant by „primarily represent the interests of those persons‟.
Notwithstanding our view that this power should not be extended to representatives of any
businesses, we do not think the order offers sufficient safeguards to prevent the misuse of
this power.
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