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

Further written evidence from Aviva


  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.


  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.


  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.


  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.


  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.


  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.


  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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