Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Further written evidence submitted by Aviva


  1. Aviva is the UK's largest insurer, a leading pan-European insurance group, operating within eleven European countries with approaching 40 million customers, and an owner of a substantial global asset management business.

  2.  Given our large constituency base we have a unique insight into the impact of the regulatory regimes of the EU and a number of its Member States in relation to UK headquartered financial services companies.

  3.  Aviva's approach to the Single Market is that we believe the goal should be a fair, open, competitive market at national and EU level, with companies free to underwrite on a commercial basis on a "level playing field".

  4.  We congratulate the Commission in its' approach to better regulation and its process of carrying out extensive consultations before proposing legislative initiatives. We hope these efforts to achieve considered and balanced legislation to continue.


  5.  Eight out of the 10 largest insurance groups in the world (as well as the world's leading wholesale insurance market) are headquartered in Europe—Insurance is a uniquely European success story, led by the UK insurance industry which is the largest in Europe and the third largest in the world.

  6.  For the UK, insurance is an integral part of the UK economy: managing investments amounting to 24% of the UK's total net worth (£1.6 trillion), contributing the fourth highest corporation tax of any sector and employing around 275,000 people in the UK alone.

  7.  EU and UK regulations must not competitively disadvantage EU insurers internationally. One of the core foundations the European Commission laid down for Solvency II was to ensure the global competitiveness of EU insurance companies. We believe this goal should stretch beyond Solvency II and be considered in all EU legislation affecting EU headquartered insurance companies.


  8.  There has been a significant amount of regulatory reform stemming from the Commission in recent years, which while largely welcome, has been resource intensive for both policymakers and industry.

  9.  The implementation of Solvency II alone has been the biggest change to insurance regulation for a generation. In the coming months the Commission's work on Undertakings for Collective Investments in Transferable Securities (UCITS), Markets in Financial Instruments Directive (MiFID), Pensions, Transparency, Packaged Retail Investment Products (PRIPS) and the Insurance Mediation Directive (IMD) are all likely to generate significant costs for industry, which will ultimately impact customers.

  10.  There must be a greater focus by the Commission on enforcement of Directives after they've been adopted by Members States—it is felt that this will help iron out many idiosyncrasies within the Single Market, lead to the establishment of a common EU rule book and allow the formulation of better regulation going forward.

  11.  We reassert the vital need for the EU to maintain its approach to better regulation—ensuring that there is no knee jerk or inappropriate legislation which could result in unintended consequences. In addition the Commission must allow adequate time periods for companies to reply to consultations.


  12.  We understand and support the desire for lessons to be learned from the crisis, and agree with the need for regulations to operate at an international/EU level.

  13.  It is vital that the difference in the role and business models between banks and insurers is recognised. Insurance companies are participants in, and stabilisers of, the financial system and not drivers of it. They provide a valuable source of stability through their demand for long term assets that match the duration of their long term liabilities.

  14.  Insurance companies were not the cause of the economic crisis. As demonstrated earlier this year by the Geneva Association,[29] core insurance businesses do not pose a systemic risk.

  15.  There is a risk that measures designed for the banking sector read across to the insurance and asset management sector. For example measures around the definition of capital if read across would have a significant detrimental effect given the business model of insurance and regulatory regime proposed by Solvency II—unnecessarily removing billions of pounds of capital from the sector.


  16. The most significant area for possible unintended and disproportionate read across between sectors is from the banking to the asset management sector where many banking Directives also apply to asset management firms (eg the continuing updating of the Capital Requirements Directive).

  17.  However, the business model of banks differs fundamentally from that of asset managers' where clients' assets are kept separate from the assets of the managers. Therefore a one-size fits all approach should be avoided.

  18.  The upcoming review of MiFID must carefully balance both "buy side" and "sell side" issues. The City of London Corporation and the City UK have already begun to explore work in this area and have shown that "buy side" and "sell side" interests can be constructively incorporated.


  19.  With all financial services legislation, it must be remembered who the ultimate customer is. Measures to reform the wholesale markets have the potential to impact on the management of pension funds, trusts and investment funds, which in turn leads to a poorer return for the final retail customers and weaker capacity to provide products they need to save for their future.

  20.  Insurance is about protection—managing risks within society, protecting customers, households and businesses from unforeseen events and ensuring that citizens are able to plan adequately for their retirements. We are, therefore, very supportive of initiatives that promote consumer protection, but they must not be disproportionate and add undue burden on the end customer.

  21.  We are keen that policymakers within the EU avoid any move towards product regulation rather than market regulation which would be to the detriment of competition and innovation and ultimately once again, customers.


  22.  Aviva was and still remains highly supportive of the Level 1 Directive, and the Implementing Measures should remain faithful to its economic, risk-based approach.

  23.  It is essential that the Commission robustly defends the economic principles enshrined at Level 1 and pushes back against pressure to move away from these economic principles, particularly around the definition of capital available to meet solvency requirements..

  24.  While we accept the economic approach is appropriate to manage business. In terms of regulatory requirement it is important to manage a transition in an orderly fashion for existing business. Solvency II must not result in avoidable market dislocation.

  25.  Given European insurers unique role in the global economy, a appropriate solution must be found to ensure that EU headquartered companies can compete competitively around the globe. This is especially important in relation to the US. We recognize the progress that the Commission has made to propose a possible solution but encourage them to ensure that it will appropriately address the issue.


  26.  Many of the problems in relation to corporate governance identified by the economic crisis related to companies inadequately identifying and managing risks. Insurance as an industry is about just that; managing risks.

  27.  As a company and a sector we pride ourselves on leading best practice in these areas within the financial services industry—our Chief Risk Officer (CRO) reports directly to the CEO, we have a strong internal audit committee and our executive remuneration packages are prudent, proportionate and based on long term goals.

  28.  As a regulated financial services company and long term institutional investor we have a unique perspective. We use our influence to engage and encourage other companies to raise their governance standard. We are also leading calls for stock exchanges around the world to embed a provision for sustainability reporting into listing rules and follow Aviva's lead—we put our own Corporate Responsibility report to a separate investor vote at our 2010 AGM, the first financial services group in the world to take this step.

  29.  We have concerns, however, that the direction of travel globally, while broadly encouraging and in line with the UK's Walker review, also signals a potential danger to the "comply or explain" approach which is so vital in encouraging responsible governance.

6 December 2010

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