Select Committee on Treasury Written Evidence

Memorandum submitted by the Association of British Insurers (ABI)


  1.  The insurance industry aims to serve customers well and to grow the market for savings and protection insurance. Companies respond to changing customer needs within a fast-developing social and economic environment and have to reflect these in the products and services that they offer. The industry recognises that further work is needed to build public confidence and its own reputation.

  2.  To achieve this, we need a constructive relationship with our regulator, and a framework of regulation that sustains high levels of public confidence in financial services, financial strength in the industry, and a competitive and innovative marketplace.

  3.  In recent years the FSA has made significant progress and this is recorded in its most recent Annual Report. The FSA has introduced important reforms of the financial regulation of insurance companies, improved processes of supervision and enforcement, its Better Regulation Action Plan, and has a strong commitment to move towards more principles-and risk-based regulation. The ABI supports the FSA's work in these areas.

  4.  We have also welcomed the large number of FSA reviews that are now underway, including of distribution issues, the Conduct of Business rules for investment and savings products, and the regulation of the sale of general insurance, as well as the continuing work on Treating Customers Fairly.

  5.  The challenge now facing us and the FSA is to ensure that this work is fully integrated, and that each project fits comfortably within an over-arching strategy based on a set of regulatory outcomes that command the widest possible support, within the industry and outside.

  6.  This paper responds to the three issues specifically raised by the Committee.


  7.  The FSA has a responsibility to protect retail consumers of financial services. The test for its regulation is therefore the extent to which it reflects the real needs of those consumers.

  8.  One important area in which this is currently being achieved is the prudential (capital adequacy) regulation of insurance companies.

  9.  The FSA has worked closely with the industry to develop the UK's new insurance capital adequacy regime. A recent Consultation Paper (September 2006) sets out a series of progressive reforms aimed at establishing a more effective, principles-based regime. A number of these reforms were proposed by the ABI. New FSA rules will be complemented by industry guidance to achieve a more proportionate and risk-based approach to capital assessment.

  10.  The FSA has also engaged in extensive dialogue and consultation with the industry on the forthcoming EU-level framework for capital adequacy regulation—Solvency 2.  For example, the FSA's Insurance Standing Group provides a forum for debate with the industry and for reporting on discussions with the other European supervisors involved in developing advice on the draft Directive.

  11.  The FSA's work on capital adequacy regulation helps reassure customers that insurance companies are financially sound and well-managed. And, through the increasing use of risk-based regulation, it enables companies to keep prices down.

  12.  Whilst not wishing to see the FSA being overstretched, the ABI also supports the forthcoming regulation of the sale of all equity release products. Many customers are potentially vulnerable, and a coherent regulatory framework is essential to build confidence in this market. We recognise the need for high-level rules to prevent misleading advertising or the mis-selling of high-risk products.

  13.  The industry also has a key role to play in responding to the needs of consumers. It is working closely with the FSA to help deliver the FSA's Treating Customers Fairly objectives in areas such as financial promotions and complaints-handling. We also believe that industry initiatives can play an important role in complementing principles-based regulation. Such initiatives can be more flexible than statutory rules and can raise standards quickly. For instance, the ABI has worked with the FSA and consumer groups to address criticisms about Payment Protection Insurance (PPI). We are developing a Customer Guide with Citizens Advice.

  14.  Earlier this year, the ABI launched the Customer Impact scheme. This is designed to improve customers' experiences of the life, pensions and protection insurance industry. The Boards of participating member companies must submit annual reports to explain their progress against a set of customer commitments, and join in an annual benchmarking survey of the industry's customers. The ABI is also issuing guides for firms on key customer issues such as clear language and claims-handling. The launch of Customer Impact has been welcomed by consumer groups and the FSA.

  15.  It is important, however, to guard against unintended consequences of regulation that are not in the consumer interest. For instance, the regulatory costs of providing financial advice can make it unprofitable for insurers to offer core savings products to the mass market. And the rules governing generic advertising can make it difficult to persuade people of the need to save. Regulation should make it easier for people on low and middle incomes to access simple savings products.

  16.  Equally, the time taken to comply with disclosure requirements during a telephone enquiry about general insurance products can deter customers from shopping around.

  17.  Our concern is therefore that in some cases, the current approach of trying to prevent any customer buying any product other than the best possible, can result in consumers not purchasing any product at all, so missing out on the protection that they need. Consumers can therefore become the victims of a well-intended but costly approach, leading—for example—to lower than desirable savings rates and all the resulting consequences.

  18.  The insurance industry welcomes the recognition, both by the Government and the FSA, that more needs to be done to improve the public's understanding and capability on financial topics. The Financial Capability Baseline Survey gives the National Strategy for Financial Capability an evidence-base, and allows progress to be monitored.

  19.  The ABI is a longstanding supporter of the Personal Finance Education Group (pfeg) which promotes financial education in schools. The industry is delighted that the FSA is supporting the expansion of pfeg so it can help more schools to introduce financial education in the curriculum. The industry also welcomes the FSA's workplace education scheme, under which companies provide staff to help plan and deliver workplace presentations.


  20.  We welcome the FSA's contribution to the Government's broader Better Regulation agenda. The FSA has recently published two very useful updates on its work in this area and we propose that they do so annually in future.

  21.  Better regulation delivers benefits for customers and the industry alike: a reduction in compliance costs; innovation in products and distribution models; and wider access to core insurance products for consumers on low and middle incomes.

  22.  The FSA's Conduct of Business Simplification project is a core plank of its Better Regulation work and the ABI is working closely with the FSA as it develops specific proposals.

  23.  As part of this initiative, the FSA is considering applying some of the regulations in the EU Markets in Financial Instruments Directive (MiFID) to insurance. The European Commission did not conduct an impact assessment on MiFID, and we do not believe that a cost-benefit case can be made for extending its scope in some areas. However, where the approach taken under MiFID is more high-level than the current FSA rules (eg as regards complaints-handling), we agree it would make sense for the FSA to use MiFID to move further in the direction of principles-based regulation.

  24.  The level of prescription in the current FSA Rulebook has sometimes led to a compliance culture in the industry, in which it becomes more important to observe the rule than to serve the customer. The shift to principles-based regulation will be a major challenge for regulated firms, as much as for the FSA.

  25.  Some firms had initial anxieties about the perceived loss of certainty associated with a reduction in detailed rules. It must, for instance, be possible to predict with reasonable certainty when behaviour will be in breach of the relevant principles and thus subject to enforcement action. As John Tiner noted recently, there is work to be done in building trust between the regulator and the regulated. But the industry is clear that the move towards principles and away from detailed rules is the right direction of travel.

  26.  For example, the FSA's recently published study on the cost of regulation found that compliance remains a significant burden for financial services firms. The retail advice sector was found to have the most significant costs—not least because of the current sales regulation regime. Overall, the FSA's study provided clear evidence of the need to move towards a more principles-based regime. Such a shift should enable firms to tailor compliance to their individual business models—improving the outcomes of regulation and reducing the costs.

  27.  We have recommended to the FSA that we should work together to develop clear criteria that will help decide where in the market principles are likely to work, and where more detailed rules are always likely to be required. The role of the Financial Ombudsman Service will be crucial here. We also believe that FSA needs to think more about "what good looks like" in terms of the market and regulation. Better regulation is more than just reducing rules on an ad hoc basis.

  28.  The ABI sometimes issues guidance to its members to help them to improve outcomes for customers. However, our capacity to do this has on occasions been inhibited, not only by competition law but also by uncertainty about the status of such guidance in relation to FSA rules.

  29.  The ABI therefore welcomes the FSA's recent positive engagement with the industry on this subject. We hope the FSA's forthcoming discussion paper will propose a clear process enabling the FSA to respond positively to industry guidance in future.

  30.  The FSA must also continue to develop the tools it uses to assess its regulations. It is especially important that the FSA periodically revisits old regulations to put them to a cost-benefit test. This will help to keep regulations up-to-date with the market, and ensure they deliver genuine benefits to consumers.


  31.  FSA regulation of general insurance implements EU directives. HM Treasury decided that customers should be treated the same way, regardless of how they bought insurance products. There was some industry support for this. However, the result is that the Directives' requirements for intermediaries have been applied to direct sales as well, so "gold-plating" the original text. And the new rules do not sufficiently distinguish between the different needs of customers who buy insurance in different ways. Giving customers the same level of protection is not the same as applying the same set of rules.

  32.  The ABI's recent research (General Insurance One Year On—March 2006) found that for core mass-market products (motor, household) the costs of regulation for customers exceeded the benefits, but that there were benefits from better sales processes for the more complex protection products. We have therefore welcomed the FSA's recognition, in launching their review of the effectiveness of the general insurance sales regime, that different market segments should be distinguished.

September 2006

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