We’re in danger of duplication and overlap

The government is in the midst of the biggest shake-up of the financial services regulatory structure in 15 years.

Its key proposals for the insurance sector are that the FSA will be disbanded and two new regulators established: the Prudential Regulation Authority (PRA) and the Consumer Protection and Markets Authority (CPMA).

A central plank of the reforms will be the separation between these two bodies of prudential regulation and conduct of business regulation, reflecting the government’s belief that one cause of the financial crisis was regulators having too much focus on minutiae, so losing sight of the big picture. Separating prudential regulation from conduct of business, it is thought, will ensure that the separate regulators stay focused on their areas of competence.

The PRA will have responsibility for ‘micro-prudential’ regulation, dealing with the authorisation and supervision of major financial institutions, such as insurers. It currently looks like the PRA will have no responsibility for insurance intermediaries.

The CPMA will have responsibility for conduct of business rules – for example, the rules concerning how products are sold.

However the CPMA will also be the prime regulator for those firms, such as insurance intermediaries, that are not regulated by the new PRA because they are not regarded as capable of creating systemic risk for the economy. This means that the CPMA will be in charge of the authorisation and supervision of insurance intermediaries.

Details published last week as to how this division of responsibilities will work in practice are not good news for insurers. The existing proposals made it clear that insurers would have different regulators for prudential and code of business issues. However, it now appears that the position could be rather more complicated.

Currently, most authorised insurance companies have FSA permission to act both as insurers and as insurance intermediaries, with the latter permission usually allowing direct sales. In addition, many insurer groups have authorised insurance intermediaries within their group structures.

The current proposals therefore will mean that insurer groups will have two different regulators for authorisation and supervision: the PRA will authorise and supervise an insurer in relation to its insurer permissions; the CPMA will authorise and supervise the same insurer in relation to its intermediary permissions, and will authorise and supervise any associated group intermediary companies.

This could create complexity and additional cost. The government is committed to ensuring effective co-ordination and information-sharing between the two regulators, but this is likely to mitigate the risk rather than eliminate it. The proposed structure will require more complex internal systems to deal with two different regulators. There might be differences between the rules of the PRA and the CPMA, and there will also be a danger of duplication and overlap between the two regulators. IT

Alexis Roberts is a partner in Pinsent Masons’ insurance team.