A heavier touch

The era of light-touch regulation is over. Lord Turner, the FSA’s new chairman, last month signalled the arrival of a tougher regulatory regime in response to the financial crisis. “There will be more people asking more questions and getting more information than we were getting before. There is no doubt the touch will be heavier,” he said in a recent newspaper interview.

The FSA, he said, had been “over-deferential” to criticisms of too much bureaucracy. Over-regulation and red tape had been used as a “polemical bludgeon”. Regulation, meanwhile, had been done “on the cheap”.

Things are going to change. How the FSA under Lord Turner will work has been painted only in the broadest of terms, however. Areas such as capital adequacy, liquidity and mark-to-market accounting will all come under review.

Although Lord Turner’s comments were aimed at the banking sector, the insurance industry is unlikely to escape the glare of this tougher regime. “If you change the guiding principles for banks, then it should apply to other financial institutions,” warns Bryan Joseph, global actuarial and insurance management solutions leader at PricewaterhouseCoopers.

The regulator’s main focus will be on the high-impact firms, such as banks and insurers, that present a systemic risk to the market. These firms could have their capital requirements raised and be subjected to much more stringent stress and scenario testing of the models they use.

The FSA has already stepped up its scrutiny of insurers amid concerns that the crumbling investment markets are putting their solvency levels under pressure. It is likely that insurance companies will receive more FSA Arrow visits and will be required to disclose more information.

Even low-risk firms, such as insurance brokers, could be subjected to a higher level of scrutiny, although the amount remains to be seen. The insurance industry will also be expected to pay for this additional level of supervision, so fees will rise.

This toughening of the regulatory regime will have consequences. In recent years, London’s status as a global financial centre has been questioned as rival jurisdictions, such as Bermuda and Ireland, have increased in popularity.

The UK’s tax and regulatory regimes have been central to the debate on London’s competitiveness, with the insurance industry lobbying hard for lower corporate taxes in particular. A number of insurance businesses have already re-domiciled, including Hiscox and Kiln. Others, such as RSA and Brit, are looking closely at it.

The FSA’s policy of light-touch regulation, under Lord Turner’s predecessor, had won widespread praise for allowing the City of London to prosper. The danger is that a tougher and more costly regulatory regime will only speed up the exodus of businesses from the UK, which could damage the standing of the London insurance market in the longer term.

There could well be a high price for better regulation.

michael.faulkner@instimes.co.uk

Key Points

• Tougher regulation of the banks will affect the insurance industry. Insurers are likely to face more scrutiny from the FSA.

• There will be a greater focus on solvency.

• Tougher regulator regime could affect the UK’s competitiveness. Insurers may re-domicile to jurisdictions with lighter regulation.