Briefing: London market regulatory reconstruction bid flies in face of FCA’s get tough plans

By Jon Guy

Regulation was high on the industry’s agenda last week, but it was a tale of two very different narratives.

On the day the FCA announced its new strategy to tighten up rules for insurers (7 April 2022), the London market was rejoicing that a powerful House of Lords committee had sided with it over its complaints around the current regulatory burden.

The FCA’s new strategy has been designed to “improve outcomes for consumers and in markets throughout the UK”. The key focus is to shut down firms which don’t meet its standards, prevent serious harm, set higher standards and promote competition.

FCA chief executive Nikhil Rathi said the strategy will allow the regulator to become more assertive.

However, as this strategy was published, the House of Lords’ Industry and Regulators Committee released the contents of a letter it had sent to economic secretary of the Treasury John Glen amid complaints from the London market that it was buckling under the weight of its regulatory burden.

The letter cited a lack of proportionality in the regulation of the London market, describing current oversight and requirements as “overly demanding and burdensome”.

It accused the FCA and Prudential Regulation Authority (PRA) of creating an overly inflexible culture that may have “inhibited the development of new forms of business within the UK commercial insurance and reinsurance industry, such as insurance-linked securities and captives”.

“The committee agrees that there are strong arguments in favour of the government’s proposal of a secondary competitiveness and growth objective for the financial regulators, enabling them to consider to a greater extent their impact on the industry in addition to their impact on the safety and soundness of firms,” it stated.

Therefore, as the FCA announced its intention to get even tougher on firms which do not meet it standards, London market lobbyists are cranking up the pressure on government to give EC3, its brokers and underwriters an easier ride.

Butting heads?

Those who have been in the market for a few decades will no doubt remember the time when Lloyd’s was the independent regulator of its syndicates and operations.

The financial implosion in the mid-1990s around asbestos liabilities, which brought Lloyd’s to its knees and necessitated its reconstruction, also saw its regulatory responsibilities transferred to the FCA.

Memories might be short, however I expect the lessons arising from Lloyd’s £2.5bn reconstruction and renewal (R&R) scheme, introduced in 1995 through run-off vehicle Equitas, may crop up in what will surely be some robust conversations between the Treasury and the regulators.

The R&R scheme was designed to take on claims arising from every risk Lloyd’s had underwritten prior to 1992, following the sizeable impact of asbestos liabilities.

Today’s hot question, however, is how will clients react when they become aware that parts of the insurance industry are looking to tone down the operational rules that are designed to protect them?