Select Committee on Treasury Written Evidence

Further supplementary memorandum submitted by the Association of British Insurers


  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.


  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

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