Richard Hobbs: New year, new approach to regulation

This is likely to be a pivotal year in the reshaping of our regulators. The government proposes to publish its draft legislation creating separate prudential and conduct-of-business regulators. But it is not at all clear it can stick to its own timetable. Moreover, with the creation of regulators in Europe and a reinvigorated Treasury select committee in Westminster, it may not be able to stick to its agenda either.

The government’s consultation document, published last July, proposed breaking up the FSA. The creation of a ‘twin peaks’ model is feasible – other countries have made it work – but the proposal must be seen in the context of what is happening in Brussels. It must also be thought about specifically in an insurance context, since both Brussels and the government are reacting to a banking crisis not an insurance crisis.

The Brussels solution is to create a Europe-wide regulator. From 1 January, a high-level committee began overseeing all systemic risk in European financial services, much as the UK government proposes at the national level.

But there the similarity ends because Brussels has decided to pursue a sectoral approach. Thus insurance and pensions will have a dedicated regulator, as will the banking and securities industries. Initially, these regulators will operate mostly through “colleges of supervisors”, which will look at Europe-wide businesses and issues. But there is a presumption that as these bodies build their capacity and critical events occur, power will concentrate in them.

The UK government does not envisage such a sectoral approach and it is not clear how the envisaged UK model can remain effective as the European model finds its feet. New UK regulators will find it tough to promote UK interests when their regime simply doesn’t fit.

Early challenges to the UK approach can be expected in amendments to the Insurance Mediation Directive (IMD) and the Markets in Financial Instruments Directive. There is the strong risk that IMD requirements will be ramped up in the name of harmonisation, yet neither the UK’s new Prudential Regulatory Authority nor the Consumer Protection and Markets Authority will be focusing on what this means for UK insurers.

The government consultation document raised some surprising issues. It questioned, for instance, whether the new regulators should continue to have regard for international competitiveness and innovation – an issue that appears to have arisen from banking sector concerns.

However, banking cannot be the sole concern of the new legislation. The UK’s ability to innovate and achieve significant international competitiveness in insurance is a big contributor to the success of London as an international financial centre. Both the lord mayor of London and the chairman of Lloyd’s have spoken out about the wrong turn the government appears to be taking in its preoccupation with banking while overlooking insurance.

Fortunately, a revitalised Treasury select committee, under the astute leadership of Andrew Tyrie MP, has several new members with backgrounds in financial services. The committee has already proven itself more dynamic in this parliament.

There’s good reason to hope that it will be able to scrutinise the draft legislation and help head off the risk that a new IMD, weakened UK influence in Europe and the government’s focus on banking will severely blunt London’s position in international insurance markets.

None of this will be easy since the force is clearly with those seeking to increase regulatory intervention. But my new year’s wish is that some critical faculties be brought to bear in 2011 on the proposals for more regulation, so that we ensure banking regulation preoccupations do not spill over into insurance. IT