Osborne's plans for financial reform must not stifle insurance market

Out-Law Analysis | 17 Jun 2010 | 1:17 pm | 2 min. read

OPINION: The Government's decision to take financial services regulation out of the hands of the Financial Services Authority (FSA) may make sense for banks, but the case is less clear for the insurance industry.

Insurance regulation has been shunted from pillar to post and there was nowhere left for it to go to but the Bank of England (BoE). Firstly it was regulated by the Board of Trade, then the Department of Trade, then the DTI and then HM Treasury, so now it appears that it is the BoE's turn.

Scrapping the FSA for banks is the right thing to do, but the case has not yet been made for insurers. Regulators always say no one size fits all; but the BoE's new Prudential Regulator would appear to be just that – and there is a danger that this one-stop-shop regulator will focus too much on banking.

In many respects, these changes for insurers are cosmetic as the European Union Solvency II Directive will set out the required system of prudential regulation for UK and EU insurers. The new UK Prudential Regulator will have to implement Solvency II just as the FSA has been doing.

The timing of the changes could create problems for businesses. If the CPMA changes the rules on the conduct of business again then insurers will have to budget for redesigning products and systems. For the life industry having to cope with Solvency II and the Retail Distribution Review coming into effect at the same time as the BoE change, regulation becomes a huge burden over the next few years.

Insurers have, in the main, survived the financial crisis largely intact. Insurers have anti-contagion rules and less inter-dependencies that became so prevalent in the banking industry.

From 2013, the Solvency II Directive, which was drafted to benefit from the lessons learned from previous financial crises to strengthen insurers' capital base, will mandate the capital requirements for UK insurers.

But insurers have been concerned since the recent general election that they will be lumped together with the banks and that the BoE will be unable, possibly through a lack of understanding about insurance or by being too fixated on the banks in future, to ensure that a system of prudential regulation will be appropriately applied to the insurers.

Changing the regulatory structure does not automatically bring better regulation and insurers must make good use of the consultation on these changes to strongly argue their case, clearly outlining how regulation by the BoE and the new CPMA should work.

Insurance is a good product and works well for most people. Insurers pay substantial taxes. If the insurance regulation is too aggressive, and costs more than it does today, and the tax regime is too high in the UK, the UK insurance industry will move abroad. We may then have a very fine regulatory system but very little of the insurance industry left in the UK to regulate.

By Bruno Geiringer, a partner of Pinsent Masons, the law firm behind OUT-LAW.COM. Bruno specialises in the legal issues of life insurance.