Financial Services and Markets Bill

Written evidence submitted by Aviva (FSMB35)

Financial Services and Markets Bill

Public Bill Committee Submission

Executive Summary

1. Aviva welcomes the Financial Services and Markets Bill ("FSMB") and especially its focus on supporting Financial Services ("FS") to deliver UK growth. Aviva is the UK’s leading insurer providing life, general and health insurance and we support the Growth agenda in a number of practical ways:

· We are one of the largest private investors in UK infrastructure; We set a 3-year target of £10bn for UK infra investment in 2020, and £6bn in green investment, which we are on target to meet. Our investments help build schools and health centres, develop greener energy and lay the fibre UK communities rely upon.

· We provide high-skilled, well-paid jobs across the regions of the UK with 90% of our 15,000 UK employees based outside London in locations like Perth, Sheffield, Bristol, Norwich, Eastleigh and York.

· We are rooted in the communities we serve; this is why we set up the Aviva Community Fund and we’re proud to have helped build stronger, more resilient communities across the UK.

· We help 1 in every 4 households in the UK to protect what’s important to them, save for retirement and plan for the future. Insurance helps people and firms mitigate risk to property, legal liability, and financial loss. It also channels funds into long term investments and facilitates pensions and savings This activity supports real economic activity and growth

2. The UK’s long-term economic interests are best supported by a robust regulatory system operated by world leading independent regulators. Given this, it is right that the UK’s regulators will be responsible for technical FS rulemaking.

3. Whilst FS rules can be technical, they often have direct significant consequences for the wider UK economy and consumers. We welcome the secondary growth objective; it should prompt regulators to consider the implications for the UK’s economy in their decision-making and take positive action to promote growth. Despite the new objective it should be remembered that Regulators are legally required to prioritise their financial stability and policyholder protection objectives where there is a conflict with secondary objectives.

4. Given this, Government retains an essential role in weighing up wider Public Policy objectives and reflecting them in the legislative framework they set for the regulators technical rules.

5. Reform of Solvency II (insurance regulation) will require Government to play this role and assess a wide range of Public Policy objectives, including the security of UK policyholders, insurers’ capacity to provide long-term investment in the UK, and the need for retirement products that provide good incomes. Government will need to appropriately reflect their assessment in the secondary legislation that will set the parameters to be used by regulators to write the technical rules for Solvency II.

6. Given the FSM Bill represents a significant increase in the regulators’ policy-making powers we welcome the accountability measures that are currently included in the Bill. However, these need to be more rigorous if they are to balance the new powers regulators will receive. The overall package of accountability measures should enable Government to set clear objectives for regulators, provide appropriate direction on the purpose of rules, require the regulator to think again if rules do not meet intended outcomes or have serious unintended consequences, and support Parliamentary in its scrutiny of the regulators throughout the rule-making process.

7. Whilst the package of accountability measures in the Bill considers each of these pillars; several of them can be improved to achieve an optimal framework that balances the interests of consumers, industry and policymakers. For example – to make the new growth objective meaningful, clear metrics are required for how the regulator reports on it.

8. It seems a pre-requisite of the new scrutiny arrangements announced by the Treasury Select Committee ("TSC") that the advice of the Cost Benefit Analysis ("CBA") Panel should be made public. This would aid transparency and accountability and therefore be aligned with the other aims of the Bill.  At the very least the advice should be given to the new subcommittee of the TSC in order to aid their scrutiny of regulator policy proposals given the committee has been set up for this purpose. 

9. The Government has stated their ambition for the UK to be the world’s first Net Zero aligned financial centre. To drive this, government should strongly consider introducing a new secondary objective for regulators to facilitate the alignment of the financial services sector with net zero. Regulator’s objectives are unlikely to be re-assessed for 20 years+ and this therefore represents a unique opportunity in the context of the UK’s 2050 legally binding Net Zero target.

Submission

Secondary Growth Objective

10. Given the Regulators are legally required to prioritise their primary objective of policyholder protection, there should be a focus on what Key Performance Indicators ("KPI") and reporting is required on the new secondary growth objective (in Clause 24) to help it lead to a meaningful shift in the culture of the regulators.

11. HMT should set out the market/economic metrics that Regulators will be measured against (e.g. number of new market entrants, total Assets Under Management, reputation as a global financial centre) and Regulators could be required to set out those specific metrics aligned to their work plan (e.g. funding, resourcing, KPIs on specific projects). All metrics should be consulted on as a package.

12. When notifying the TSC of consultations the regulators should be required to comment on how they have considered the secondary statutory objective, even if they have not advanced it. The Bill should also mandate the consideration of the statutory objectives in CBAs and how this is assessed should be made public as part of the consultation response.

Rule review

13. Clause 27 enables HM Treasury to direct the regulators to carry out a rule review once implemented if in the public interest. This is a helpful additional accountability measure that recognises that there are situations where it is appropriate for HM Treasury or Government to ask the regulator to think again.

14. However Clause 27 is unduly restrictive. The 12-month time limit should be removed. We think the power should also be enabled for use pre-rule implementation based on a public interest test, or where the CBA panel has provided a negative assessment but regulators continue to pursue the proposed rules in question.

15. Finally there is a good case for the rule review mechanism to be developed to enable consumer and practitioner panels to formally request HMT to consider mandating a rule review. To ensure this was used in an appropriate way HMT should set out their thresholds for using the power. 

Cost Benefit Analysis ("CBA") Panels

16. The new CBA panel is a welcome step that could help improve decision-making and lead to more proportionate and efficient regulation. However the important details around how the panels will be composed and operate are either undecided or clearly out of alignment with the development of critical new scrutiny arrangements developed for the new sub-committee of the TSC.

17. The key point is that the advice of the new CBA panel should be public. This would aid transparency and accountability and therefore be aligned with the other aims of the Bill.  At the very least the advice should be given to the new subcommittee of the TSC in order to aid their scrutiny of regulator policy proposals. The committee has been set up for this purpose and so it would seem a pre-requisite that they should receive the full advice.

18. In addition;

· HMT should issue guidelines around the composition of the CBA panels (i.e. economists, consumer representation, industry representation). 

· The CBA panel should have the explicit power to recommend improvements to a CBA and use a traffic light system to rate CBAs.  This is an established approach used by the Regulatory Policy Committee. Where the regulators decide to proceed despite a poor report from CBA panel, this should be justified transparently in its consultation paper.

Net Zero

19. The Government has stated their ambition for the UK to be the world’s first Net Zero aligned financial centre yet how the UK’s new regulatory framework contributes to this is unclear. In a challenging economic climate, the green transition offers an enormous opportunity; the supply of goods and services for the transition could be worth £1 trillion to UK businesses by 2030 [1] .

20. A booming UK green finance sector requires a transparent and trusted market that combats greenwashing, has clear standardised metrics, and levels the playing field to reward rather than penalise early action. The proposed framework is insufficient to achieve the Governments objective to become the world’s first Net Zero aligned financial centre and would not facilitate the rapid growth of the green financial sector.

21. The government should strongly consider a new secondary statutory objective requiring the regulators to facilitate the alignment of the financial services sector with net zero to drive UK leadership in green finance - a key industry of the future – to meet its own ambitions.  Regulator’s objectives are unlikely to be re-assessed for 20 years+ and this therefore represents a unique opportunity in the context of the UK’s 2050 legally binding Net Zero target.

22. You will note that Aviva has separately written to the committee in a letter co-signed by a number of like-minded FS organisations to highlight this once in a generation opportunity the UK has to demonstrate global leadership in aligning FS regulation with the Net Zero target Government must meet by 2050.

October 2022