Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of British Insurers


  1.  The ABI welcomes the direction of EU policy on regulation of financial services, as set out in the Commission's 5 December White Paper. The White Paper recognises that, following the Financial Services Action Plan, the interests of both the financial services industry and consumers would be best served by a period of legislative consolidation. The Commission will therefore concentrate on implementation and enforcement of the existing legislative framework. We support the enhanced role for the consumer voice envisaged in this process.

  2.  Europe's retail insurance markets remain largely local, for deep-rooted reasons relating to consumer preference, the local nature of risk, and national tax and social security systems. None of these can readily be tackled by EU legislation. We therefore welcome the Commission's statement that any future legislation should benefit from thorough consultation and rigorous cost/benefit analysis. In the medium term, the major legislative challenge for insurers will be the Solvency II project.

  3.  Our experience of the Lamfalussy arrangements has been mixed. They are relatively new, and, on balance, we believe that they should be given further time to develop in an evolutionary manner. Re-negotiation of the EU regulatory hierarchy would be an unwelcome diversion of energy.

  4.  The White Paper confirms the Commission's commitment to the principles of "Better Regulation" in financial services. Consultation has now entered the Commission's culture, and we are beginning to see improvements as a result. Cost/benefit analysis is an equally important tool, from which EU legislation in the financial services sector has not yet benefited. We therefore need more evidence before reaching a view on the Commission's use of cost/benefit analysis. The Commission's adoption of evaluation is a welcome innovation in the White Paper, which could in time lead to real practical improvements in the legislative framework.

  5.  In general, the ABI welcomes the contribution of the European Parliament to the EU legislative process.


  6.  The White Paper was published on 5 December, and represents the end of an extended period of consultation by the Commission on follow-up to the Financial Services Action Plan.

  7.  The theme of the White Paper is "dynamic consolidation". The key points are:

    —  "Better Regulation": in future, legislative initiatives will be based on transparent consultation and impact assessment. The Commission will focus on the implementation and enforcement of the existing legislative framework, including evaluation of Directives, and an extensive simplification of the insurance and motor insurance Directives. ABI welcomes the enhanced role of consumer groups in preparing and commenting on financial services measures.

    —  Supervisory convergence: this is an important issue for insurers with pan-European operations, as the additional costs of servicing several regulators with differing traditions and practice are high. The White Paper suggests work in the following areas: clarification of the roles and responsibilities of home and host supervisors, delegation of tasks and responsibilities between supervisors; practical improvements in the efficiency of supervision, for example common reporting requirements; and the development of a European supervisory culture. This work programme would clear some of the ground for the development of a prudential system based on the "lead supervisor" concept. This is the ABI's objective, and it is disappointing that there is no explicit reference to it in the White Paper.

    —  Limited legislative activity: insurers of course face a major legislative challenge in the Solvency II project. There are also significant implications for insurers if the Commission propose a Directive on insurance guarantee schemes, and in the medium term initiatives on asset management or mortgage credit.

    —  External dimension: the Commission will expand dialogue with regulators in the US, Japan, China and India, and in international bodies, such as the International Association of Insurance Supervisors.


  8.  We have a number of concerns about the way the Lamfalussy arrangements are working in practice:

    —  One of the benefits offered by the Lamfalussy arrangements was that legislators would be able to react more quickly to developments in fast-moving markets. However in practice, if experience with the Markets in Financial Instruments Directive (MiFID) is anything to go by, the Lamfalussy process does not deliver legislation to the marketplace any quicker than the previous arrangements. Agreement that primary EU legislation should be framework legislation means that secondary legislation becomes a very substantive part of the rule-making process. The transposition deadline should therefore allow sufficient time after agreement of secondary legislation for national regulators and the industry to implement it efficiently.

    —  The Level 3 Lamfalussy Committees of national regulators (CEIOPS, CESR and CEBS) have devoted most of their energy to the task of providing advice to the Commission on legislation. We hope that in future they will be able to spend more time on issues of convergence in practice between national regulators.

    —  The status of the advice of the Level 3 Committees on EU legislation to the Commission needs to be clarified. In general, their advice has been over-cautious, as is perhaps inevitable for committees made up of 25 regulators. If unnecessary legislative cost is to be avoided, the Commission needs to adopt a robust and balanced attitude to the level 3 Committees' advice. The Commission has done this: their draft secondary legislation on both MiFID and the Transparency Directive differed markedly from the advice of CESR. There is a risk here that that the advice of the Lamafalussy Committees is devalued. The Commission should therefore explain where and why it has departed from their advice.

    —  There is a risk of "consultation fatigue". Some of the consultation documents could with advantage be more concise.

    —  There is further work to be done to raise the profile, accessibility and accountability of the Lamafalussy committees. This may require additional resource.

  9.  The many achievements of the Lamfalussy committees have to be weighed against these concerns. They have produced advice on major legislative initiatives to challenging timetables; CESR produced a thoughtful if over-ambitious paper on the development of the roles and responsibilities of the Committees. In addition, those involved in the process are only just beginning to work out how to operate it efficiently. We therefore conclude that our concerns are not great enough to call the Lamfalussy arrangements into question. They should be allowed to evolve within the existing structure. Re-negotiation of the EU regulatory hierarchy would be a diversion of resources.


  10.  The Commission's White Paper confirms clearly the Commission's commitment to the principles of Better Regulation in financial services.

  11.  Quite enough has now been written about the theory of Better Regulation. The challenge for the Commission is to apply these principles in practice:

    —  The commitment to consultation has entered the culture of the Commission, at least in DG Markt. Most Commission initiatives are now preceded by formal consultation, for example the recent Internet consultations on cross-border consolidation in financial services, and on a possible Floods Directive. It is also clear that the Commission take the response to consultation seriously. For example, in the context of the Markets in Financial Instruments Directive, the Commission's initial proposal was to extend the definition of investment advice to encompass generic (ie non product-specific) recommendations. This would have had the unintended consequence of undermining the FSA's financial capability initiative. The Commission revised their views following representations from the industry and consumer groups.

    —  There is not enough evidence yet to reach a view on the Commission's use of cost/benefit analysis in its impact assessments. For example, MiFID has never been subject to an impact assessment. There have also been some poor examples, for example the Commission's impact assessments on the Gender Directive and the Services Directive. However, we recognize that cost/benefit analysis is a difficult discipline. If the Commission's analyses are to improve, it is important that financial services providers supply the Commission with good quality material. If good quality analysis is available, we expect the EU institutions to base their views on it. The European Parliament and the Council have a responsibility to assess the impact of revisions to legislation that they propose.

    —  The Commission announced in November an extensive programme of legislative simplification. Almost 70 Directives on which agreement seemed unlikely were scrapped. Large areas of EU law, including the motor insurance and insurance framework Directives, will be re-worked and consolidated over a three year period. In principle, this is a helpful initiative, though the detail will require careful scrutiny.

    —  We have no experience so far of the Commission's intention to evaluate the impact of EU legislation. In principle, this is a highly welcome innovation. It would be helpful if the Commission could set out a transparent process for its implementation. The Insurance Mediation Directive is an early candidate for this treatment. Our analysis of its transposition across the EU shows that it has not yet been transposed in most of the EU's major insurance markets, a year after the transposition deadline. In addition, national transposition plans show significant variations in approach to scope, to information requirements, and to enforcement. We can only conclude that a Directive intended to provide insurance intermediaries with a passport to do business across the EU and to provide common standards of consumer protection will have no such effect. The only predictable outcome is increased cost, which affects those operating at national level as well as those with pan-European operations.


  12.  In general, ABI welcomes the contribution made by the European Parliament to the EU legislative process. External stakeholders value the transparency of the Parliament. The different working methods of the Council of Ministers and the Parliament produce different approaches to the Commission's proposals. Expert working groups in the Council of Ministers produce a negotiation centred on issues of principle. This helps to ensure the internal coherence of legislation. On the other hand, important points of detail can easily get lost in the negotiation of a compromise in the Council. By contrast, the Parliament proceeds by votes at political level on individual amendments to the text. This procedure is much better suited to picking up the details of a piece of legislation.

  13.  There is currently an inter-institutional debate about whether the Parliament should have a call-back right in the secondary legislation produced by the Lamfalussy process. For the reasons given above, we believe that a call-back right for the Parliament would be helpful. However, we have no view on the mechanics, which are a matter for debate between the EU institutions.


  14.  The Association of British Insurers (ABI) represents the collective interests of the UK's insurance industry. The Association helps to inform and participate in debates on public policy issues relevant to the insurance industry and also acts as an advocate for high standards of customer service in the insurance industry. The Association has around 400 companies in membership. Between them, they provide 94% of domestic insurance services sold in the UK. ABI member companies account for almost 20% of investments in the London stock market.

December 2005

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