Further supplementary memorandum submitted
by the Association of British Insurers
1. SUMMARY
1.1 The ABI is the trade association for
Britain's insurance industry. Its nearly 400 member companies
provide over 94% of the insurance business in the UK. It represents
insurance companies to the Government, and to the regulatory and
other agencies, and is an influential voice on public policy and
financial services issues.
1.2 We have taken a close interest in the
Markets in Financial Instruments Directive (MiFID). Insurance
is explicitly excluded from the scope of MiFID. However, both
as major investors, and as providers of MiFID-scope retail investments,
MiFID will impact upon insurers. Furthermore, the FSA has said
it will consider applying MiFID conduct of business rules to sales
of some insurance products.
1.3 Insurance sales were excluded from MiFID
and are regulated at the EU level by the Insurance Mediation Directive.
The extension of MiFID rules to cover insurance should only occur
if it leads to more coherent regulation and does not increase
the existing burden of regulation. If changes are made that impact
on insurance sales, the implementation deadline should be later
than the November 2007 deadline that applies to MiFID-scope investments.
1.4 The ABI welcomes most of the changes
made during the consultation process on the MiFID implementing
regulations ("Level 2"). However, we are concerned that
Article 38(1) of the Level 2 Directive will add unnecessary costs
to non-advised "direct offer" sales of investments.
This would be contrary to the UK Government's policy of reducing
barriers to saving.
1.5 In the remainder of our submission,
we provide detailed comments on the specific topics on which the
Treasury Select Committee requested evidence.
SPECIFIC TOPICS
2. Whether the proposals adequately reflected
prior input into the legislative process and the extent to which
there were any significant "surprises" in the proposals,
or whether any new requirements were included without sufficient
prior consultation.
2.1 For the most part, the ABI considers
that the European Commission's Level 2 proposals reflected prior
input, and represented an improvement on their draft proposals.
Inevitably the text has evolved since the Committee of European
Securities Regulators (CESR) offered its advice to the Commission
last year. However, most of the changes were a sensible response
to concerns highlighted by trade associations and other stakeholders
during the consultation process. For example, changes to the detailed
provisions concerning compliance, risk management and internal
audit functions were broadly positive because the requirements
are now more proportionate than those originally proposed.
2.2 We were also pleased that changes were
made to the definition of investment advice. The Commission initially
proposed that the definition should extend beyond product-specific
personal recommendations to incorporate "generic advice"
(eg a general recommendation that a person should invest in equities).
This could have threatened efforts in the UK to improve the financial
capability of consumers, because additional regulatory costs could
constrain the provision of generic advice. So the ABI joined the
FSA and the Financial Services Consumer Panel in calling for a
narrower definition of investment advice, as is the well-established
approach in the UK. The Commission's final proposal reflected
this recommendation.
2.3 Another "surprise" decision
was the late inclusion of conduct of business provisions within
the proposed Directive, rather than the proposed Regulation (as
previously expected). However, we supported this decision, as
the conduct of business rules require some flexibility, making
it inappropriate for them to have direct effect (as applies with
a Regulation).
2.4 We welcome the extensive consultation
conducted by CESR and the Commission as the Level 2 text was developed.
The Treasury and the FSA have also made considerable efforts to
keep the UK industry informed about the EU-level negotiations.
3. The extent to which the proposals now
provide sufficient information for a full cost benefit analysis
to be undertaken at this stage and the desirability of undertaking
such analysis.
3.1 It has long been our view that regulators
should conduct a full cost-benefit analysis (CBA) before proposing
new legislation. CBAs are a key tool for improving the quality
of regulation, as they help assess whether a regulation will correct
a market failure, or only add costs for firms and customers.
3.2 The Commission's White Paper on Financial
Services policy (2005-10), confirms the Commission's commitment
to the principles of "Better Regulation" in financial
services. In future, legislative initiatives will be based on
transparent consultation and impact assessment. While welcome,
it is regrettable that the Level 1 Directive on MiFID predated
this policy, so no impact assessment was conducted on MiFID.
3.3 In future, there could be a case for
a requirement on CESR or the Commission to conduct a CBA when
they make Level 2 proposals. However, a full CBA on MiFID at the
EU level at this stage would not be desirable, as the Level 2
regulations are almost finalised, and the transposition deadline
is fast approaching.
3.4 When the FSA comes to introduce new
rules in implementing MiFID it will be required to conduct a CBA
under the Financial Services and Markets Act. A number of ABI
firms have co-operated with the FSA as it prepares its CBA on
MiFID.
3.5 In so far as the FSA is considering
extending MiFID rules to "non-scope" business, such
as life insurance, a CBA will be of critical importance. We are
concerned by the suggestion made by the FSA that retail conduct
of business rules within MiFID should apply to sales of insurance
products currently regulated by the FSA's conduct of business
rules. Insurance is explicitly excluded from the scope of MiFID,
as it is regulated by other EU Directives, including the Insurance
Mediation Directive. We are not aware of any other national regulator
proposing to apply MiFID rules to insurance and there are no obvious
benefits to customers. So MiFID should only be "gold-plated"
in this way if the FSA can establish a clear cost-benefit case
for doing so, and if it leads to more coherent regulation.
4. The identification of any elements of
the proposals which are most likely to be interpreted differently
across Europe and the problems that this may generate.
4.1 It is difficult to anticipate the way
in which national governments and regulators will transpose MiFID.
However, the development of more detailed rules at Level 2 ought
to reduce the scope for inconsistent interpretation of Level 1.
Furthermore, Recital 10 in the Level 2 Directive permits the Commission
and CESR to issue guidance to ensure consistent application. The
ABI welcomes this.
4.2 More generally, we consider that CESR
has an ongoing role in monitoring transposition and addressing
any problems of inconsistent implementation. CESR (and indeed
the other Lamfalussy Committees) has so far devoted most of its
energy to the task of providing advice to the Commission on legislation
such as MiFID. But in future, it should spend time fostering convergent
implementation of regulations.
5. The identification of any elements of
the proposals which conflict with existing UK regulation and an
indication of the costs and benefits of changing these elements
to reflect the rules under MiFID.
5.1 A series of FSA consultations on MiFID
implementation will be issued later this year. Significant changes
to current UK regulation are likely. For example, the UK regime
for unbundling/soft commissions is more complex than that proposed
by MiFID, so this is one area where changes may be required.
5.2 One area requiring clarification, and
of particular concern to the ABI, is the potential imposition
of additional regulatory costs on sales that do not involve investment
advice. This potentially includes both "direct offer"
sales (eg sales of investments triggered by mass-mailed letters
to customers) and the enrolment of employees into group personal
pensions or stakeholder pension arrangements. Depending on the
FSA's approach to implementation of key concepts in the Level
1 Directive, and its decision on extension of MiFID rules to non-scope
business, sales of these types may be subject to a new "appropriateness"
test.
5.3 Sales regulation should be proportionate
and tailored to the nature of the service and the risks of the
product. However, Article 38(1) in the Level 2 Directive, which
relates to the appropriateness test, includes burdensome information
collection requirements. It includes obligations to collect information
on the client's educational qualifications, employment history
and previous transactions in financial products and services.
This information is unlikely to be a reliable guide to the appropriateness
of the product. Its collection is intrusive and it may trigger
a hostile reaction from customers. By adding costs to a well-established
business model, and erecting inappropriate barriers, this could
prevent some consumers from investing for the first time.
5.4 We believe that these prescriptive requirements
should be removed from Article 38(1). They do not stand up to
a cost-benefit test and they run contrary to the UK Government's
objective of increasing saving. But if they remain, we will oppose
any extension by the FSA of the requirements to non-advised sales
of insurance products. Such an extension could inhibit the enrolment
of employees into pensions arranged through the workplace without
the involvement of a financial adviser. This would run contrary
to Government policy to increase participation in pension schemes.
6. The identification of areas in which
the UK could benefit from rules additional to those included in
the Commission's draft proposals and areas in which such "super-equivalence"
should be avoided.
6.1 Super-equivalence can add costs to domestic
markets, reduce competitiveness, and undermine the scope for cross-border
trade. Nevertheless, there may be circumstances under which additional
rules are needed to address specific national risks. We therefore
support the inclusion within the Level 2 Directive of Article
4, which constrains the ability of national regulators to retain
or impose additional regulations, but prescribes the limited circumstances
under which they may do so. We also support a notification procedure
to ensure that any imposition of additional requirements is transparent
and subject to scrutiny.
6.2 In our experience, the absence of such
constraints can lead to considerable "gold-plating"
of EU Directives in the UK. For example, recent ABI research found
the UK had taken a more prescriptive approach to the implementation
of the Insurance Mediation Directive than other Member States.
6.3 There will be circumstances where the
industry would value guidance on how MiFID rules should be interpreted.
Recital 10 of the Level 2 Directive states that regulators are
expected to issue interpretative guidance on MiFID provisions,
to clarify practical applications to particular kinds of firms
and circumstances. This is welcome, and we urge the FSA to issue
guidance in relation to the impact of MiFID on "direct offer"
business, for example.
6.4 Industry guidance will also play a role
in reducing uncertainty regarding implementation. The ABI is a
member of MiFID Connect. MiFID Connect brings together a number
of trade associations, to assist them with implementation of MiFID,
and it may issue guidance in due course.
7. Whether the UK financial services sector
is prepared for the domestic implementation of MiFID and the extent
to which the proposed MiFID implementation timetable is realistic
for UK firms.
7.1 Given the scope of MiFID, its impact
on investment firms will be significant and wide-ranging. Asset
management arms of insurance groups will be subject to many one-off
changes to business processes and systems. There will also be
an increased ongoing burden in terms of documenting and reporting
costs. A number of firms have set up MiFID project teams and allocated
budgets. But given the uncertainties regarding the FSA's approach
to conduct of business rules in particular, it is difficult to
assess with certainty the degree of preparedness of ABI members.
7.2 The ABI welcomes the FSA's recent decision
to delay publication of a consultation paper on new rules for
investment product disclosure, because we agree that it would
be inappropriate to consult on rule changes while the final outcome
of MiFID remains uncertain. But we urge the FSA to discuss possible
options for changes to conduct of business rules for insurers
well in advance of the scheduled publication of formal consultation
papers in the autumn. The absence of clarity about rule changes
to non-scope business makes it difficult for firms to make decisions
about system changes and for us to assess preparedness.
7.3 We supported the extension of the implementation
deadline for MiFID to November 2007. The original timetable was
unrealistic, given the need to consult on CESR's advice and the
Commission's draft proposal. The FSA's consultation timetable
is still very tight, so any further delays at either the EU or
the UK level would be a major concern to firms.
7.4 The FSA has indicated that it may not
apply the November 2007 deadline for MiFID related changes to
non-MiFID firms. We endorse such an approach, since insurers need
time to implement any unexpected regulatory changes. Firms should,
however, have the flexibility to implement all MiFID related changes
by November 2007 if they are so able.
March 2006
|