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
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.
FSA TO THE
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
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 regulationSolvency
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, leadingfor
exampleto lower than desirable savings rates and all the
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
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
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
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
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 costsnot
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 modelsimproving
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
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 OnMarch 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.