Financial Services Bill

Memorandum submitted by the Association of British Insurers (ABI) (FS 05)

The ABI

The ABI is the voice of insurance, representing the general insurance, protection, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK.

Summary

The work of the Treasury Select Committee and the Joint Committee has helpfully refined the Government’s original proposals, and there is now a broad consensus on the outlines of the new framework for the regulation of financial services in the UK. There are still some significant changes that need to be made at Committee Stage. First, we believe that the Financial Conduct Authority is being established with an unnecessarily adversarial remit, that will lead to a difficult relationship between regulator and regulated, with little benefit to the consumer. The rough edges of this remit need to be smoothed. Secondly, the framework still reflects the origins of the financial crisis in banking. The insurance industry should be adequately represented. Thirdly, the arrangements have been written on the assumption that the UK is a stand-alone jurisdiction, with the EU-related points added as an afterthought. This is an inadequate reflection of the major role that the EU plays in practice in setting standards for financial services, and the British industry would be better served by a more constructive dialogue with the EU authorities.

Key Points

1. The FCA should be working towards positive consumer outcomes, not just avoiding negative outcomes. So the FCA objectives should require it to work with the industry to promote consumer access to financial services. The PRA and FCA should in setting their rules ensure that the UK remains attractive as a location for financial services in comparison to other major jurisdictions.

2. Close co-ordination between the PRA and FCA is essential, particularly for dual-regulated firms. We welcome the greater clarity about the arrangements set out in the draft MoU between PRA and FCA although we continue to have concerns about the lack of detail in the MoU. However, there remain certain areas where improvements are needed on the face of the Bill (particularly in relation to the approved persons regime). Parliament will need to ensure that the arrangements set out in the Bill and the draft MoU actually operate in practice to ensure that firms are supervised efficiently. The respective roles and responsibilities of the FCA and the Office of Fair Trading also need to be made clear, in light of the FCA's new role to promote competition in financial services.

3. Good quality regulation is essential. We need supervisors with a background in regulated firms, and policy-makers with appropriate negotiating and technical skills to represent the UK at EU level.

4. We are concerned that in relation to the EU the overriding priority of the British authorities should be to ensure that the "European rulebook does not limit their discretion. This approach is not consistent with the role of the ESAs as set out in the EU Regulations establishing them, which set out the circumstances in which the ESAs can overrule national authorities, and look forward to deeper co-operation and supervisory convergence in the EU. Further, this approach is not shared by other national authorities, and will make them reluctant to follow the UK’s lead on substantive policy issues. It can already be seen to be leading to the isolation of the UK in EU discussions. British companies operating in the Single Market would be better served in EU negotiations by a constructive dialogue.

5. We generally welcome the proposal to set up a separate prudential regulator and, in particular, the recognition of the need for a separate insurance objective – this will enable the different business model of insurers to be taken into account and for insurers to be supervised by specialist regulatory staff. We also agree with the Government’s proposal that the main responsibility for the regulation of with-profits policies should lie with PRA.

6. However, the accountability arrangements for the PRA remain weak and need to be improved. In particular we believe that there is a need for the consultation requirements on the PRA to be included in the Bill rather than left to the discretion of the PRA itself.

7. The insurance industry must be properly represented at the Bank of England and the PRA. This needs to be reflected at PRA Board level and with the membership at the Financial Policy Committee.

8. Wholesale markets must not be the ‘’poor relation’’ in the FCA. The insurance and investment industry does not just operate in the retail market (ie where products are sold to customers), it also operates in wholesale markets. The wholesale markets need quality not quantity of regulation. Regulators need to understand markets and their complexities and the nature of financial innovation.

9. The insurance industry would like to see stronger accountability of the Financial Ombudsman Service. We support a low cost adjudication service for customer complaints. The respective roles of FCA, FOS and Courts should be clear and we need external scrutiny of effectiveness and efficiency of FOS. We also need better regulation of Claims Management Companies, which are fostering a compensation culture.

10. We support the role of UK Listing Authority (UKLA) being retained by the FCA alongside its other responsibilities for markets regulation. However, we do think that the current formulation under the 2000 Act, where the relevant powers are given to the competent authority and the FSA is in turn designated as the competent authority, should be retained.  The role of the UKLA is qualitatively different from the role of the FCA as regulator of entities and individuals in financial services.  By contrast, the Listing Authority’s remit extends to all listed companies and other public issuers of securities, and this should continue to be reflected appropriately in the legislative framework.

Proposed Amendments

The ABI has separately sent members of the Committee our proposals for a number of amendments to the Bill which we believe improve the Bill and address a number of our key points.

Our most significant proposals for amendments relate to the FCA. In particular we believe that the objectives of the FCA should be amended to ensure that it improves access by consumers to financial products and that the regulatory principles applying to both PRA and FCA should include a ‘have regard’ to the competitiveness of the UK financial services industry. These changes will help ensure a more competitive industry able to offer appropriate products to a wider range of consumers.

We also have concerns about the proposed product intervention powers which, if they are retrained, should clearly be used only as a last resort; we believe that claims management companies should be brought within the scope of regulation; that existing powers of the Financial Services Tribunal should be retained and that the accountability of FOS should be strengthened.

In respect of PRA we have concerns about the wording of the insurance objective and about the requirements on PRA to consult with the industry (which remain deficient compared to FCA).

We are also concerned about the composition of the Bank of England’s Financial Policy Committee and would suggest amendments to increase the number of independent members and ensure that these members are drawn from a wider pool of relevant candidates (including from the insurance industry).

Draft Memoranda of Understanding

Much of the Bill’s provisions about co-operation between the UK authorities will be underpinned by Memoranda of Understanding (MoUs). Three draft MoUs have been published – one relating to co-operation between PRA and FCA, one on crisis management (between HM Treasury and the Bank of England/PRA) and one on international co-operation (between HM Treasury, the Bank of England, PRA and FCA). Consideration of the draft MoUs will, therefore, inform the Committee’s deliberations on those parts of the Bill which relate to co-operation between the UK authorities.

The Annex to this paper sets out our comments on the draft MoUs. In general we remain concerned at the lack of detail in some areas of the MoUs.

The Bill makes provision for certain other MOUs. Those relating to exercise of powers in relation to recognised investment exchanges and clearing houses involving the Bank, FCA and PRA are important in establishing confidence in regulation of infrastructure relating to the capital markets. We consider that these should be published in draft at an early stage in the Parliamentary process to allow informed deliberation on how effectively these arrangements will work and whether other safeguards need to be incorporated in legislation.

Annex - Comments on the Draft Memoranda of Understanding

Draft MoU between FCA and PRA

1. This draft MoU sets out the relationship between the FCA and PRA. It is intended that the two supervisory bodies will operate largely separately in pursuit of their individual objectives. However, it is accepted that in certain areas there will be an ongoing need to co-ordinate and co-operate. The draft MoU appears to cover all of the relevant issues but we do have a number of concerns about it.

2. In some cases the MoU explicitly sets out which officials within the PRA and FCA will be responsible for ensuring that co-operation takes place in particular instances (for example, paragraph 19 makes clear that it will be the Board Secretaries of the two organisations which ensure that co-ordination on rulemaking takes place). However, in other areas (for example, the quarterly meetings discussed in paragraph 18) it is not made clear who will be responsible for ensuring that the arrangements are set-up and operated effectively. We believe that the MoU should be much more explicit about assigning responsibility to the relevant officials within PRA and FCA.

3. In paragraph 17 it is stated that in relation to policy and rule-making that ’the regulators will seek to avoid incompatible requirements’ and in paragraph 47 it is stated that ’PRA and FCA will seek to avoid taking regulatory actions that are incompatible or even in conflict’. This is not good enough. As drafted it leaves open the possibility that PRA and FCA could reach incompatible views. It would be entirely unacceptable for firms to be put in a situation whereby it would be impossible for them to comply with regulatory requirements because of incompatibilities between PRA and FCA: the MoU must make clear that all such differences must be resolved.

4. Paragraph 10 relates to exchange of information. It makes clear that not all information will be shared but that the regulators should share data where it is requested and each regulator should proactively offer information where it thinks that it will be relevant to the other. This puts considerable onus on each of the regulators to be aware what information the other has gathered and what information might be relevant to the other This raises the possibility that where they are not so aware (which seems more than likely given that the two authorities are independent of each other) information might be gathered separately by both authorities – at additional expense to both firms and the regulators. We would recommend that wherever possible the regulators gather information jointly and that the MoU should require details of all the information collected by each regulator to be shared so that each is aware of what the other has.

5. Paragraph 28 provides that domestic supervisory colleges will be set up for dual regulated firms where appropriate. We agree with this. The draft MoU proposes that the college should meet every six months for large firms and annually for smaller ones. While this may be appropriate for formal meetings we would expect more frequent interaction between the regulators to ensure that they properly co-ordinate their work. Paragraph 37 deals with international colleges and notes that both PRA and FCA will attend where appropriate. We would recommend that this paragraph is expended to require that FCA and PRA co-ordinate their positions in regard to international colleges so as to present a unified UK view.

6. Paragraph 49 requires FCA and PRA to meet regularly to discuss enforcement actions. We agree with this. However, the requirements are lacking in details – we think that the MoU should make clear the frequency of meetings and the officials responsible for ensuring co-operation.

7. Likewise in paragraph 60 we believe that the MoU should be more specific and provide details of the officials who will co-ordinate work with the ESAs and other international bodies.

8. Paragraph 65 requires the PRA and FCA to review the effectiveness and efficiency of co-operation. We believe that this should be amended to require the PRA and FCA to actively consider ways that they can co-operate better so as to deliver supervision in the most efficient and cost-effective way.

9. Paragraph 67 states that feedback from firms will be taken into account in assessments of how effective co-ordination has been. We welcome this. However, it is unclear how such feedback will be obtained. We propose that the MoU should set our formal requirements for the regulators to consult annually with firms (and other stakeholders).

10. Paragraphs 4 to 6 of Annex 1 to the MoU set out the proposed arrangements for approved persons. This proposes that responsibility for approving significant influence functions will be split between PRA and FCA dependent on the function. It is suggested that roles such as Chairman and CEO will be approved by PRA on the grounds that these are materially connected to the prudential soundness of the firm. We do not believe that this is an appropriate structure. Senior management roles will have significant conduct aspects as well as prudential. Therefore, we believe that these should be approved jointly by PRA and FCA as otherwise there is a material risk that conduct aspects of these roles will be downgraded.

Draft MoU on Crisis Management

11. This draft MoU sets out the arrangements, largely between the Treasury and Bank of England/PRA, for dealing with a financial crisis.

12. Our main concern is that as drafted the MoU assumes that the Treasury and Bank of England can act autonomously without significant reference to EU or other international obligations.

13. The only references to international obligations are in paragraphs 35 and 36 of the draft MoU. This section concentrates on state aid issues (and even in this respect does not make clear that decisions on state aid lie with the EU institutions).

14. We think that the draft MoU should be expanded in order to cover relations with international organisations in greater detail (including making clear those circumstances in which these obligations may constrain the autonomy of the UK authorities). In addition to the EU authorities in respect of state aid this should include the role of the ESRB and the role of international colleges (these are likely to be particularly significant for those firms designated as G-SIFIs).

Draft MoU on International Organisations

15. This draft MoU sets out the arrangements for co-operation between HM Treasury, the Bank of England, PRA and FCA to ensure that a coherent and consistent UK position is expressed in international organisations. This is particularly necessary as the proposed UK regulatory system will operate on a twin peaks system where the distinction is between prudential and conduct regulators whereas most international bodies operate on a sectoral basis.

16. The intention is to establish an International Co-ordination Committee. The draft MoU goes on to set out principles for the authorities to adhere to in co-ordinating their work. We agree with the setting up of the proposed committee and as drafted the principles appear sensible. We are concerned, however, by the lack of detail about how the arrangements will work in practice. For example, although principle d requires an authority to facilitate representation by other relevant authorities at meetings of an international body it does not explain how the UK authorities will determine when it is appropriate for an organisation other than the official UK representative to attend meetings.

17. The draft MoU focuses on the interaction between the UK authorities but we believe that it should also cover consultation with the industry. Given the importance of international rules it is vital that the industry is involved as early as possible in discussions in respect of new requirements that will impact directly on it. We have found in the past, for example in the Solvency II negotiations, that the best results are obtained where the UK authorities and the industry are able to agree a common UK line.

18. We are disappointed by the draft MoU’s limited recognition of the need for constructive engagement and dialogue with the European Supervisory Authorities (ESAs). In particular, we are concerned that the MoU suggests that the overriding priority of the British authorities should be to ensure that the "European rulebook does not limit the necessary discretion." This approach is not consistent with the role of the ESAs as set out in the EU Regulations establishing them, which set out the circumstances in which the ESAs can overrule national authorities, and look forward to deeper co-operation and supervisory convergence in the EU. Further, this approach is not shared by other national authorities, and will make them reluctant to follow the UK’s lead on substantive policy issues. It can already be seen to be leading to the isolation of the UK in EU discussions. British companies operating in the Single Market would be better served in EU negotiations by a constructive dialogue, whereby the PRA and FCA would negotiate on the basis of the practical implementation and impact of EU legislation on those who will be regulated by it. It would be a mistake for the MoU to focus on the power-play between the UK authorities and the ESAs rather than on the important regulatory outcomes.

February 2012