Select Committee on European Union Minutes of Evidence


Examination of Witnesses (Questions 60 - 64)

TUESDAY 20 NOVEMBER 2007

Mr Peter Vipond and Mr Philip Long

  Q60  Lord Woolmer of Leeds: Can I turn then to the effect of this on London's standing as a financial centre? What do you think the impact of this over a period of years will be on London as a financial centre?

  Mr Vipond: London is doing extremely well for insurance; it is the global leader for insurance. Even as we sit here today we find firms coming in from places like Bermuda to sign up to do international business in London. We are in a position of some strength and it is undoubtedly the case—I was speaking to regulators from the other side of the Atlantic recently about this—that they are interested in Solvency II and interested in having a modern risk management system because they believe that underpins quality business. I think it is the same for banking. At the moment there are domestic problems and issues and we British often tend to criticise ourselves in those circumstances. However, having a robust, top quality system of regulation which is proportionate to retail and wholesale markets is something that has served London and the UK extraordinarily well for finance in general. I believe that Solvency II can only reinforce that.

  Q61  Lord Woolmer of Leeds: If this group supervision does come about—you said there is resistance to this in some Member States—could that result in some companies moving their headquarters and group activities to London so they come under the FSA?

  Mr Vipond: It could do that. They may choose to base their businesses in London to get the benefits of FSA group supervision, as of course a number of firms—including Philip's—already do benefit from that. More realistically I think what we are looking for in the future is, for example, for the French to work very closely with the British in the supervision of AXA, for the Italians to work very closely with the British and the Germans in the supervision of Generali so that you get a college of supervisors working under a lead supervisor in the appropriate member state.

  Mr Long: I think that is the case and I agree. Having companies relocate to London is something that is very hard to think about because I think there are many other considerations of course, not just the regulation side. I think London has a good system; it has a lot to be commended for. It is a manifestation early on of Solvency II. It is the right thing to do; it is what the FSA has introduced. British companies "suffered" a little leading up to today but it has turned out very well. We have "suffered" (let me put it in quotation marks); we have had to up our game but increasing your knowledge, your expertise and your understanding of the risks that you are writing must be a good thing for industry. I think it is testimony really to a lot of what the FSA has introduced over the last few years.

  Chairman: Lord Renton, I believe you wanted to ask something further.

  Q62  Lord Renton of Mount Harry: I just wanted to pick up something that Mr Vipond just mentioned. You have mentioned two major companies in France and Germany, but are there any EU countries that are seriously opposed to this that you know of and, if so, why? Or are there none?

  Mr Vipond: Opposing the directive, no; I genuinely believe there are no countries that are fundamentally opposed to the directive. Concerned about it to a point where they want chunks of it watered down, yes, particularly around the groups area. One or two undoubtedly, and more with reservations because it is such a radical move and it is such a big issue for European public policy. We are moving to a point where you can have retail products sold maybe in the UK and the headquarters supervisor is in Italy or Germany. Let us not pretend that that is just an arbitrary or marginal change; it is a very significant development of the European single market; it requires a degree of cooperation and trust between supervisors if it is to work, and it also requires answers to some very awkward questions about what happens if it goes wrong.

  Q63  Lord Kerr of Kinlochard: I do find this an extremely encouraging presentation; I am very grateful. Going back to the days when we used to legislate in areas like this very prescriptively and with the numbers being decided in a sort of political horse-trade at midnight in the Council, this sounds a much better process. I think the product will be something that approximates more closely to a single market in insurance in Europe. I think that small companies will therefore suffer from improved competition, and that consumers will gain on the whole. My question is about the wider world outside. If political horse-trading still goes on—although it will not be about specific numbers any more—will it not be skewed a bit, because in the EU there are not many Prus, there are not many AXAs and Prudentials, the genuine global insurers who are out there in China, big in China, big in Vietnam? Will it not be slightly skewed in favour of the many smaller insurance companies whose horizons are national or European at maximum, and is there any risk in that for the great international companies like the Prudential?

  Mr Long: I think there are competitive issues if the Prudential operates in a market where the capital requirements for the local players are much less. Especially as currently there are issues about whether geographical diversification benefits are actually something that Europe will allow when we consider non-EU countries. There is a lack of clarity there; that is one of the technical details for implementing measures that we need to sort out.

  Q64  Lord Kerr of Kinlochard: Quite important.

  Mr Long: Very important. So we have issues about competitiveness against local operations and also the non-EU groups who are also big in the emerging markets. I guess it is going back to the directive and trying to make sure that if they want the Directive to be an economic, rational, risk based system they cannot put arbitrary limits whenever they feel like it. So the battle is over here. I think there is a realisation around the world, there are certain countries—in Asia, for example—where they have guarantees that the local players cannot afford and so there is a drip feeding of losses in those local companies. I think there is a realisation that the old system of opaque conservatism, which hopefully you think you are conservative enough in order to make sure that things will work out well, is too hit and miss and people are moving very much into an objective, rational system that is based on market prices, for example. A lot of the big players like AXA, Prudential—Prudential is in Vietnam, for example, one of the countries you talked about; we are in China with licences in a number of cities—are in those countries and we can have influence over how the market develops. We help our local players talk to the regulators. For example the Singapore regulator is a very progressive regulator and monitors the workings of the FSA and Solvency II in great detail, and to the extent that we can help them understand, we do so through our local operations. I think we are in enough places around the world to try to influence things for the better, otherwise we can price rationally, but if other people are not pricing rationally we just lose market share.

  Chairman: There is no better place to end the session than with that sentiment. Thank you both very much indeed for coming; it has been enormously illuminating. Have I suppressed a colleague who had something they wanted to ask urgently? No. I would like to say thank you both very much for coming and to end the session.







 
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