Memorandum submitted by the Association
of British Insurers
SUMMARY
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.
WHITE PAPER
ON THE
FUTURE OF
EU FINANCIAL SERVICES
POLICY
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.
OPERATION AND
DEVELOPMENT OF
THE LAMFALUSSY
ARRANGEMENTS
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.
IMPACT OF
"BETTER REGULATION"
PRINCIPLES
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.
ROLE OF
THE EUROPEAN
PARLIAMENT IN
THE LEGISLATIVE
PROCESS
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.
THE ASSOCIATION
OF BRITISH
INSURERS
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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