Will the FSA stay or go?

The hung parliament delivered by last week’s general election has taken the UK into waters that, while not exactly uncharted, haven’t been traversed for more than 30 years.

As Insurance Times went to press, the Liberal Democrats looked set to either be in government or, at the very least, have a significant say over which party forms it. The last time they had this much influence was in the 1930s, when their predecessors in the Liberal party were in government.

However, although the past few days have been exciting for political trainspotters, they have been deeply unsettling for the business community.

While Britain was voting last Thursday, the world’s stock exchanges were going into meltdown as the markets panicked about the Greek debt crisis.

Uncertainty over the UK’s vulnerability to these wider economic problems has been compounded by the failure of any single party to secure a majority in the House of Commons.

And uncertainty is exactly what the business community wants to avoid, judging by the post-election comments issued by a battery of lobbying organisations on the morning after the polling stations closed.

Brokerbility chairman Ashwin Mistry reflects the wider mood in the business community. “A hung parliament is not good for the country, full stop. We need clear leadership. An outright majority would have been preferable.”

Biba chief executive Eric Galbraith agrees: “It’s a little frustrating that we don’t have a government with a clear mandate.”

Business hostility

A British Chambers of Commerce survey, published during the three-week general election campaign, showed overwhelming business hostility to the idea of a coalition government.

And, given the deep enmity between the two parties’ grassroots activists, the long-term viability of such an arrangement must be questioned, even if Tory leader David Cameron and the Lib Dems’ Nick Clegg can cut a deal. Many commentators believe that a fresh general election is inevitable within months, with or without a formal coalition (see box, overleaf).

If the Liberal Democrats can forge a coalition with the Conservatives, the two parties will have to hammer out a common platform, junking manifesto promises.

‘Everything is going to be up for negotiation,” says Forum of Insurance Lawyers (Foil) vice-president Tim Oliver, a Conservative councillor in Surrey.

The most pressing issue for the insurance industry is the future of financial services regulation. The Conservatives promised to replace the FSA with a new Consumer Protection Agency.

But this mooted reform is now “dead in the water”, according to former Department of Trade and Industry senior civil servant Richard Hobbs.

The sheer size of the act that established the regulator – reputedly the biggest single piece of legislation introduced by Labour since 1997 – makes it difficult to unpick, warns the ex-Whitehall insider who is now director of public affairs consultancy Lansons.

Scrapping the Financial Services Act 2000 would ideally require two separate bills, staggered over two years, Hobbs says. A mass of secondary legislation could then stretch on for another two years, he predicts.

”You would need four years between now and the next general election. Even if Cameron wanted to carry on with it, he would never complete it on time,” Hobbs points out.

Banking reform

Banking reform was on the agenda for the talks between the Liberal Democrats and the Conservatives last weekend. But it is hard to see the Lib Dems backing FSA abolition, judging by comments made by the party’s financial services spokesman Lord Newby at Insurance Times’s pre-election hustings. He said: “We think at a point like this, when there are major issues facing the industry and the regulatory framework, it makes no sense to be worrying about the name plates on the door.”

Foil’s Oliver says: “The Conservatives want to abolish the FSA, but the other two parties are not behind it.”

If the Tories are unable to form a formal coalition with the Lib Dems, but instead opt for the ‘confidence and supply’ arrangement, the risks of parliamentary sabotage to any legislation become even greater.

Ex-FSA insider turned independent regulation consultant Branko Bjelobaba believes that FSA reform has been pushed at the very least into the “medium grass”.

The upshot is prolonged uncertainty over the future of the regulator. Broker Network Group chairman Grant Ellis comments: “It’s not good for us. We don’t know if [the FSA] is going to stay or go.”

Other pressing matters also need to be tackled sooner rather than later.

Punitive tax

The relatively punitive tax treatment of multinational companies domiciled in Britain is a particular headache for the industry, and one that has already spurred the likes of Brit to quit the UK.

As part of a package designed to make the country a more attractive location for multinational outfits, the Conservative manifesto promised to simplify the complex controlled foreign companies rules so that only profits generated in the UK would be taxed.

PricewaterhouseCoopers insurance tax partner Colin Graham says that a growing number of UK-based multinational insurers are now debating whether to stay put.

“Companies have choice over where they locate their operations, and the UK doesn’t figure high at the moment in those discussions,” he says.

The Treasury’s moves to reform the taxation of multinational companies were too slow for the likes of the ABI – and are likely to take longer under a hung parliament, Graham believes.

“We need a new government to seize the initiative on this issue. If these reforms are delayed or watered down, it will be very costly to the UK insurance industry,” he says.

A more immediately pressing worry for brokers is the Lib Dem manifesto promise to bring the capital gains (CGT)and income tax rates more closely into line.

Graham expresses concern over the impact of any move to raise CGT on potential consolidation. “For smaller owner-managed businesses, a significant increase in CGT would impact on their ability to release value from their businesses,” he says.

IPT looks set to rise

And, deepening the potential gloom, insurance premium tax (IPT) is widely expected to rise. As a tax that consumers do not have to pay directly, it would be a politically pain-free revenue-raising measure for any incoming government, and one that Ken Clarke was keen on when he was Chancellor of the Exchequer in the last Conservative government.

“I can’t see IPT not going up. If VAT goes up, IPT goes up,” Hobbs says.

But he believes the industry should take any increase on the chin, given the depth of the crisis facing the public finances.

“Against the background of a financial crisis and the need to take out £70bn of public spending, people should recognise that it’s a contribution they need to make,” he says.

Bjelobaba agrees: “Everybody needs to take a hit, otherwise the debt will never get dealt with.”

Concerns over uncertainty extend to insurance law reform, notably the implementation of the Jackson Review of personal injury compensation. Foil’s Oliver says that, while the review itself is not politically contentious, its implementation cannot be left to civil servants.

“We hope that a new government will grasp these issues, but that’s clearly not going to happen because it’s going to be right down at the bottom of the agenda.”

He believes that Cameron would be wise to exploit any post-poll honeymoon to go back to the country for a stronger mandate.

“There’s going to a hiatus for six months and that can’t be good for the insurance industry or for law reform. We must sort it out as quickly as possible,” he says.

Mistry agrees that long-term stability of the economy will demand a fresh election. “The country needs to give the government a clear mandate.” IT

For more, click: Tory plan to scrap FSA dead