Beating the Budget

One week before Chancellor Alistair Darling delivers his make-or-break Budget there is a palpable sense of excitement in Westminster.

The Tories are enjoying their biggest lead in the polls since Black Wednesday in 1992 and shadow financial secretary to the Treasury, Mark Hoban is in cheerful mood as he meets Insurance Times in the airy lobby of Portcullis House, opposite the Houses of Parliament.

At the time of going to press, Darling’s Budget was expected to be unremarkable for the insurance industry. Humiliated by the Northern Rock debacle and hamstrung by his public dithering on capital gains tax and charges for non-doms, little was expected from the Chancellor.

In the run-up to the Budget, Darling came under heavy pressure from business leaders to slash corporation tax by 10% to 18%. Last week, the ABI wrote to Darling, making it clear that the government should do more for business. It warned that financial and legislative changes were putting London’s pre-eminence as a financial centre at risk. Can the Conservatives do any better?

Hoban, a chartered accountant who served his time at PricewaterhouseCoopers (PwC) before working his way through the ranks of the Conservative party, is keen to point out that he comes armed with prior knowledge of the insurance market, which falls within his financial services remit on George Osborne’s shadow Treasury team.

Sympathetic to brokers

When at PwC, he was an auditor for broker Bain Hogg, now subsumed into Aon, and says he is familiar with, and sympathetic to, the tribulations of insurance brokers.

Dapper in a neatly tailored suit, he sips a latte, smiles sweetly and speaks in clipped tones that belie his education at a Durham comprehensive.

“We recognise that the financial services sector is one of the great strengths of the UK economy and so we want to see it expand and grow and continue to be a driver of economic growth in the future,” he says. “We are keen to work with the sector to understand the challenges that face us and what government can do to help.”

So far, so good, but Hoban, like his boss David Cameron, with whom he used to work directly in the shadow education ministry, can be a little tricky to pin down on the details.

Would a Conservative government lower the rate of capital gains tax, and/or bring back taper relief? This is a slightly unreasonable question, it seems, because Hoban sighs resignedly, shifts in his seat and patiently explains: “What we will need to do is look at the existing structure we inherit and decide what changes we would need to make.”

We go through this a few times before abandoning the question and move on to corporation tax, which elicits a clearer response.

“We made it very clear at the time of last year’s Budget that we would reform some of the complex allowances and reliefs and use money from that to reduce the headline rate of corporation tax,” says Hoban. In fact, his own alma mater PwC is working with Grant Thornton on these simplifications at the moment.

“Ten years ago we had the fourth lowest rate in the EU. Now, despite the cuts announced by the government last year, we have the 19th lowest rate and clearly this has an impact on the attractiveness of Britain as a place in which to do business.” You won’t find many arguments with that in UK boardrooms.

On regulation too the Tories are singing a familiar tune. “What we must have are competitive financial services that give consumers the confidence to buy products, and that requires a degree of regulation. But equally we know that it is also in the interests of consumers to have choice, so the cost of the regulation needs to be in proportion to the risk.

“We have got to get that balance right.”

Which leaves Hoban firmly on the fence. (It’s worth mentioning here that John Redwood’s economic policy group recommended last year that the shadow Cabinet commit to reduce the burden of regulation by £14m a year, which Cameron has yet to do).

Acting responsibly

But Hoban is vocal in his enthusiasm for principles-based regulation, now being trialled by the FSA, which he sees as an opportunity for the market to prove itself. Rather like a wayward teenager that needs to win the trust of its parents by observing a curfew, the market should seize its chance to prove it is capable of acting responsibly.

“There’s a social responsibility here,” he says. “Government action in itself should be the last resort – there is an onus on people operating in markets to demonstrate that they can regulate themselves in a way that doesn’t require government intervention.

“People like AXA, which are buying these brokers have got be very careful that they do not cannibalise what they have bought.

“If, for example, we are going to see a move away from the detailed rules that have characterised the FSA in the past to more principles-based approach, what the industry needs to do is demonstrate that the principles-based approach can work and that we don’t have to move back to more detailed regulation.” So, behave yourself and you’ll be allowed to stay out late.

The acid test of this approach, says Hoban, is the current consolidation in the market, particularly with insurers buying brokers – a potential conflict of interest currently coming under the FSA microscope.

Despite the natural Tory distaste for regulation, Hoban has a warning for insurers: “People like AXA, which are buying these brokers have got be very careful that they don’t cannibalise what they have bought, because the strength of the broker is giving consumers confidence that they are shopping around on their behalf.

“If a broker is seen to have that independence compromised by the fact it has been bought by an insurer, then I think it won’t be that long before customers walk away because they feel they are not getting the best product for them.”

And should the regulator step in at this point? “If brokers and insurers don’t take this issue seriously and don’t respond to the pressure of concern, then that’s where regulators become involved.”

Hoban believes these areas of encroaching regulation are where the Conservatives can make a difference.

The Insurance Mediation Directive which governs the FSA’s regulation of brokers is now enshrined in European law, and a government of whatever colour is hardly likely to waste time and energy trying to change that. But the former accountant fears that fans of regulation will use the public collapse of Northern Rock as an excuse to tighten the screws. Something the Conservatives would fight.

But on one point, Hoban believes the fight is over. Asked about the possibility of mandatory commission disclosure, he laughs wryly. His support has been canvassed by its opposers – Brokerbility has been in to see him – but he thinks it is too late, though he is diplomatic in saying so.

“My concern is that in other financial services, there is a much greater emphasis on the disclosure of commission that is earned on the sale of products,” he says, pointing to IFAs in particular.

“The industry needs to put together a very strong case as to why that is not needed in this sector if it is to avoid tighter rules on disclosure.”

Mandatory disclosure

He reiterates several times that this would be a big challenge before caving in with the confession “between you and I”, that he thinks mandatory commission disclosure “is going to happen”.

“It will require people to rethink their business model, as to how they charge for insurance and the services they provide,” he continues.

“If you are offering claims handling services and other support in return for the commission, it’s about more than just broking the risk. There’s a whole range of services you provide and if there is commission disclosure, you might have to go down the same route as others and just unbundle the services you provide and discuss the costs of it.

“I appreciate that for a lot of brokers this will lead to a significant challenge for their business model if it goes ahead, and they will need to respond to that challenge.”

Radical changes

He believes that Lloyd’s too must change. The Tories support the radical changes to the Lloyd’s Act currently out to consultation (he’s had Lloyd’s chairman Lord Levene on the phone a few times, and is a big fan).

He adds that the party’s commitment to reduce corporation tax would be of particular benefit to Lloyd’s as it battles it out with low tax havens, such as Bermuda.

If the insurance market is looking for a knight in shining armour, the Conservative party ain’t it. Hoban is clearly well versed in the issues and thoughtful in his responses, but when it comes to making hasty promises on regulation and tax, he is – well, conservative.

The difference for the insurance market between a Tory and a Labour government would be one of nuances. The importance of those nuances will be up to the voters to decide, when the time comes.