Richard Hobbs: Beware continental drift to supremacy

The long summer break for our legislators ended this week. Aspects of the coalition agreement mean that it is not business as usual in Westminster. The agreement calls for fixed parliaments; there is likely to be a referendum (itself a rare event) on electoral reform; the annual Queen’s Speech is set to become a quinquennial event and the annual November ritual of the pre-Budget report is no more. Then, of course, there’s the small matter of next week’s comprehensive spending review. The phoney war of the short summer session of parliament is over: the real business starts now.

This is all significant but, oddly, it has little immediate impact for the insurance industry and other issues should be of much greater concern. Chief among these is the work in progress to abolish the FSA in London and to create European regulators out of the current Level 3 committees of (financial services) supervisors. The timing of these developments, linked to the global financial crisis, creates potential impacts of its own.

For some years, there has been a growing realisation, felt most acutely in the FSA itself, that Europe is the real regulator now. Although national gold plating (most obviously in UK implementation of the Insurance Mediation Directive) and application of the general good requirements allowed the regimes of member states to retain many of their own characteristics, successive treaty amendments have narrowed that scope.

Many of these practices can now be revisited and eliminated, or at least reduced, by the new legislation that Westminster must adopt whatever its own reforms. The creation of the European Insurance and Occupational Pensions Authority (Eiopa) out of the Committee of European Insurance and Occupational Pensions (Ceiops) will give Brussels the long-term capability to gain ever greater control of regulation in member states. While this will stop short of supervising individual financial institutions, it does not stop short of ‘harmonising’ some UK practices out of existence.

The proposals to abolish the FSA must be seen within this European context. It is not clear whether the Conservatives or the Lib Dems gave much weight to the risks to UK competitiveness of breaking up a unitary regulator just as Europe was creating more powerful institutions of its own. These questions always seem nebulous in the real world but, viewed from mainland Europe, there is a strong feeling that the Anglo-Saxon (code for ‘British’) regulatory model had gained ascendancy through the FSA’s strong voice in Brussels.

The continental regulatory model would see large teams of regulators permanently ensconced in insurers’ offices poring over policy wordings and opining on prices. Were Solvency II to evolve in that way, it might well suit domestic consumers in Germany and France, but it would not bode well for those competing in international markets.

In the UK, the regulators are busy forming shadow organisations. Our legislators are seeking to rush through consultation and legislation to show it can be done in two years rather than five. This would also reduce the period of uncertainty. The trouble is that acting in haste – indeed, acting at all – may cause us to repent at leisure. If the incoming administration believes that the regulatory regime needs improving, abolition of the FSA is not the only answer. It is not simply a case of the devil you know. Rather, by helicoptering over Europe rather than just London, a different view emerges, one where the FSA had fought the UK’s corner rather well.

That track record has been damaged by the events of 2008 (in banking supervision it should be emphasised, not insurance) but starting again rather than reforming the FSA looks to be a political flourish rather than good management in the national interest. We should find the time to scrutinise the proposals closely when they emerge. IT

Richard Hobbs is director, regulatory consulting, at Lansons Communications.