Further written evidence from Aviva
GENERAL COST
OF REGULATION
1. Regulation will have a different cost
impact on different firms, dependent on a range of factors including
their size and product offering. I would therefore direct the
Committee to look more broadly at the correlation between the
overall running costs of the Financial Services Authority (FSA),
Financial Services Compensation Scheme (FSCS) the fees gathered,
and the tax take from the sector.
2. The correlation between the regulatory
fees, tax on the financial sector, fines and costs of the FSCS
should provide an indication as to the growth in regulatory costs
relative to the size of the financial services sector. This should
allow an analysis of the effectiveness of that regulation given
that it should result in fewer failures requiring compensation
from the FSCS and fewer serious incidents of non compliance resulting
in regulatory fines.
AVIVA DIRECT
COSTS
3. The "direct" costs of regulation—the
annual fees and levies that Aviva pay to the FSA, FSCS and Financial
Ombudsman Scheme (FOS) is in excess of £6 million per annum.
4. The total cost of these fees and levies
for insurers as an industry in 2010-11 equated to £138 million.
5. These direct fees have increased substantially
in recent years, particularly for general insurers (Aviva is a
composite insurer—writing both life and non-life business).
The FSA has increased its fees considerably in excess of inflation
for the past number of years.
6. Insurers are subject to regulation by,
and pay fees to, other financial regulators—eg. The Pensions
Regulator and Financial Reporting Council (FRC)—but the
amounts involved are relatively small compared to FSA costs.
AVIVA INDIRECT
COSTS
7. Aviva is subject to considerable internal
costs to ensure compliance with regulatory requirements. Given
the time constraint along with the difficulty of the task, it
is not possible to accurately and in any substantial detail quantify
these indirect costs. One complication in making such as assessment
is that many costs (eg holding capital or operating a complaints
handling system) would also occur in the absence of regulation.
8. That said, as indicators:
(a) Aviva's UK business had 121 meetings with
the FSA in 2010—excluding those as part of the Advanced
Risk-Responsive Operating framework (ARROW) which takes place
every two years (essentially a planned schedule of ARROW visits
to the firm throughout the regulatory period).
(b) The UK Risk and Compliance teams cost in
the region of £10-15 million per annum.
(c) We have a team of four full time equivalents
(FTE) within HR to manage FSA registrations and applications along
with 3.5 FTE responsible for financial advisors vetting and applications
for regulatory approval.
9. The largest regulatory costs for an insurer
such as Aviva tends not to arise from ongoing compliance, but
rather from one-off costs associated with implementing major changes
in regulation—changes to customer documentation for example
prove highly costly. Aviva has evolved through numerous mergers
and takeovers over the course of 150 years; as a result currently
operates between 50 and 100 separate IT systems—this makes
apparently relatively minor changes complicated and costly.
HIGHLY SIGNIFICANT
UPCOMING REGULATORY
CHANGES
10. The insurance industry is currently
preparing itself for implementation of two hugely significant
regulatory changes coming in the next couple of years—namely
Solvency II and the Retail Distribution Review (RDR). Aviva is
supportive of both of these initiatives as they will deliver significant
benefits to consumers. It is important that Government and regulators
appreciate that the implementation costs for both of these will
be very high.
(a) It is estimated that the average cost for
a major firm implementing Solvency II (excluding any capital increases)
will be more than £100 million.
(b) Earlier this year, the FSA substantially
increased their estimate of the cross-industry costs over the
first five years of the RDR to the range of £1.4-£1.7
billion.
BENEFIT TO
CONSUMERS
11. Aviva supports effective regulation
which addresses an indentified market failure or consumer detriment
and aids confidence in the sector such as the RDR. However, when
considering whether to introduce new regulatory requirements,
regulators should rigorously assess whether the benefits are justified
by the additional costs.
12. There is a need to balance the need
to provide customers with products that meet their needs and to
protect the taxpayer from the fall out of failures by financial
services firms with maintaining a healthy financial services industry.
Too much regulation may discourage innovation and inhibit the
provision of products and services that customers may otherwise
benefit from.
13. Instances where the cost of regulation
outweighs the benefit to customers include:
(a) Total Premium Disclosure—this
has cost Aviva in the region of £1 million and the sector
approximately £20 million. The FSA required that quotes for
pure protection products (eg income protection) include information
on the product's "total premium" (the amount the customer
will pay over the duration of the contract). Independent research
commissioned by the ABI has found that customers consider the
"total premium" irrelevant to monthly affordability.
(b) Disclosure under the FSA Handbook COBS
regime; specifically "key features documents". The
level of information required in key features documents is, in
Aviva's view, over prescribed and inconsistent in terms of transparency
and Treating Customers Fairly. The focus seems to have gone too
much towards compliance rules, rather than outcomes for customers.
Over prescription has resulted in the document being, in some
cases, nearly 12 pages in length. Our own research in 2009 indicated
that the majority of customers have little desire to read the
detail due to a genuine lack of interest for most and a belief
that the document will be highly technical (reinforced by the
density and quantity of text). As mentioned previously, documentation
is one of our highest costs, and in this instance has little consumer
benefit.
MARKET COSTS
14. The introduction of the RDR will lead
to a reduction in the number of Independent Financial Advisors
(IFAs). Those advisers who remain are likely to serve fewer customers
as the provision of advice is pushed further up-market. There
is a risk that large volumes of consumers may disengage with financial
services or make financial decisions (without advice) that do
not ultimately meet their needs.
15. ABI research has indicated that on average
full financial advice costs £670. As a result, a majority
of the adult population are outside the target market for full
advice and as such do not get the benefit of such advice. This
highlights that the indirect costs of regulation extend beyond
the compliance costs incurred by firms—also detrimentally
effecting consumers.
16. The FSA's solution for the majority
of people unwilling or unable to pay is Simplified Advice, which
the industry has been tasked to develop. For this service to be
viable it requires a proportionate approach to regulation from
both the FSA and FOS, which focuses on delivering the most beneficial
outcomes for consumers and removes the possibility of future retrospective
action.
17. Another recent and contentious issue
has been with regard to the regulation of Payment Protection Insurance
(PPI). We know that there is already a significant protection
gap in the UK because customers fail to seek out appropriate insurance,
a situation made much worse with the introduction of a point of
sale prohibition. With unemployment expected to continue growing,
this will leave many more people at risk and in greater financial
difficulty than would otherwise have been the case.
18. Estimates of the cost to Aviva are difficult
to make, however, Aviva accepts that whilst standards have improved,
the industry still has work to do to demonstrate that consumers
are treated fairly and for confidence in this sector to be re-built.
19. There are many other upcoming reforms
which have the potential to impact on firms, market structures
and consumption patterns; these include initiatives from the EU
including the Insurance Mediation Directive, Packaged Retail Investment
Products and Over the Counter Derivatives and within the UK, the
Mortgage Market Review and Consumer Credit Regime.
CONCLUSION
20. The insurance industry is highly regulated,
and subject to significant conduct of business and prudential
requirements, which result in significant direct and indirect
costs to firms such as Aviva.
21. Insurers will be expected to bear considerably
higher costs arising from regulatory requirements over the next
few years—some of these are certain while others remain
speculative. In addition to the direct costs these changes are
likely to give rise to considerable internal costs and opportunity
costs, which reduce the ability of firms to innovate and improve
customer propositions.
22. Aviva supports effective regulation
where it addresses an indentified market failure or consumer detriment
and the estimated benefits are justified by the estimated costs.
We would urge the Committee assess new regulatory proposals using
to these simple tests.
23. The new regulatory bodies in the UK,
the CPMA and the PRA, should be required to assess if the estimated
costs of their proposed regulations exceed the estimated benefits
delivering beneficial outcomes for consumers—and be held
to account on this basis. They should also hold post-implementation
reviews to assess whether the benefits do indeed outweigh the
costs.
24. To more quantifiably answer the crux
of your question regarding the cost of regulation, I would recommend
a broader analysis which looks at the correlation between the
overall running costs of the FSCS & FSA, the fees gathered,
and the tax take from the sector.
10 January 2011
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