Insurers should fear FSA reforms

"Scrapping the FSA for banks is right but the case is not made for insurers," according to Bruno Geiringer, a partner in the insurance group at law firm Pinsent Masons.

He said: "Regulators always say no one size fits all but here the Bank of England's (BoE) new Prudential Regulator would appear to be just that and there is a danger that this one-stop shop regulator will focus too much on banking. In many respects, these changes for insurers are cosmetic as the European Union Solvency II directive will set out the required system of prudential regulation for UK and EU insurers.

"The new UK Prudential Regulator will have to implement Solvency II just as the FSA has been doing. What might be interesting is if the CPMA starts to change the conduct of business rules again and insurers are caught up in having to budget for redesigning products and systems. For the life industry having to cope with both Solvency II and the Retail Distribution Review coming into effect at the same time as the BoE change, there is a huge burden to bear for the next few years."

He continued: "Insurers have, in the main, survived the financial crisis largely intact and without the scary threat of widespread meltdown like the banks. Insurers have anti-contagion rules and less inter-dependencies that are so prevalent in the banking industry.

From 2013, the Solvency II Directive, which was drafted to benefit from the lessons learned from previous financial crises to strengthen insurers' capital base, will mandate the capital requirements for UK insurers.

But for insurers, there has been great concern, from the general election onwards, that they have been lumped together with the banks and that the BoE will be unable, possibly through a lack of understanding about insurance or by being too fixated on the banks in future, to ensure that a system of prudential regulation will be appropriately applied to the insurers.

"Changing the regulatory structure does not automatically bring better regulation and insurers must make good use of the consultation phase before these changes are implemented to put their case forward for how they should be regulated by the BoE and the new CPMA.

"Insurance is a good product and works well for most people. Insurers pay substantial taxes to the exchequer. If the system of regulation for insurers in the UK is too aggressive, delivered at more cost than today and the tax regime is too high in the UK, the UK insurance industry will move abroad. We may then have a very fine regulatory system but very little of the insurance industry left in the UK to regulate."