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Super regulator at work: United Kingdom's Financial Services Authority adjusts to its broadening role.

Key Points

* In 2005, the Financial Services Authority became responsible for nonlife insurance distribution.

* The FSA can issue public warnings and public censures, impose fines, restrict the amount of business a firm can conduct, take action against individuals and even close firma.

* The FSA regulates the Lloyd's market.

In 1997, the U.K. government created the Securities and Investments Board to regulate banking and securities. The board, which soon changed its name to the Financial Services Authority, was a natural vehicle for the newly elected Labor regime, which had dramatically swept away the Conservative Party after 18 years in office.

Since that time, the FSA has gained regulatory authority over most of the United Kingdom's financial services sectors.

Much of the FSA's impetus has been driven from Europe, particularly now as the European Union moves toward the adoption of a Reinsurance Directive and the onset, targeted for 2007, of Solvency II, which will apply a commonly recognized gauge to the strength of insurers.

The European Commission, the European Union's executive arm, guides policy in the 25 member states through directives that require national governments to bring their legislation in line with the commission's wishes. John Tiner, the FSA's chief executive, is the authority's representative on the Committee of European Insurance and Occupational Pensions Supervisors and a member of the managing board of CEIOPS. The FSA also works closely with the U.K. Treasury to make sure the views of the two entities are aligned.

"We're very active in the working groups on Solvency II," said David Strachan, director of the FSA's retail firms division. "To those discussions, we hope we bring the experience of moving to a more modern market-consistent approach to solvency that we've designed and implemented over the last five years."

Strachan said the FSA doesn't deny there are differences between the United Kingdom and other members of the European Union. He said it's important that contrasting views be aired during the consultation process to give the industry a chance to respond.

The FSA's regulatory approach involves extensive consultation and detailed cost-benefit analysis, Strachan said. Before it acts, it will normally look for evidence of a market failure. But it is happy to step back if it feels the market can resolve the problem itself. "We set ourselves fairly high hurdles before we regulate," he said.

Push for Contract Certainty

Strachan pointed to the FSA's current effort to bring contract certainty to the London market by the end of 2006. This owes much to the legal disputes that followed the terrorist attacks in 2001. Strachan noted that insurers and brokers have accepted the need for contract certainty. "In essence, we think this is something the industry can and should sort out itself," Strachan said. "If it can't, then we might find ways of helping it."

The FSA's push for contract certainty goes beyond processes and information technology. "It's about changing attitudes and behaviors," Strachan said, "the way things are done for many years. I don't think anyone underestimates the scale of the challenge."

Strachan said there is widespread recognition within the insurance sector that the regulatory process has moved to a "better place." But he noted the industry isn't shy about making its dissatisfactions known, privately or publicly. "I think that that's part of being an open regulator, that we take those concerns and criticism and respond to them," he said.

Becoming a Super Regulator

The FSA rose steadily to its "super regulator" status. In 1998, it took over banking regulation from the Bank of England. In 2000, it absorbed listing powers from the London Stock Exchange. In 2001, it got jurisdiction over such areas as personal investments, securities futures trading and building societies, which are the rough U.K. equivalent of savings and loans. In October 2004, the FSA gained the power to regulate the mortgage sector. And in January 2005, it became responsible for nonlife insurance distribution. From the beginning, the FSA had regulated nonlife solvency.

All of this represented a broad ambition on the part of the government. "The aim was to create a single regulatory body for virtually all financial services business, which focused on prudential regulation, solvency regulation and the conduct of business-sales regulation," said Strachan. This aim was achieved, Strachan said, if not all at once. "I think it's fair to say that for the last five years, we have been operating as a single unified regulator," he said.

The FSA has also worked to promote the take-up of pensions. For instance, it issued a guide to help employers make it easier for their employees to enroll in pension plans.

The FSA can issue public warnings and public censures, impose fines, restrict the amount of business a firm can conduct, take action against individuals and even close firms.

Strachan said these powers are clearly defined, with judgments subject to appeal to an independent tribunal. "It's a very transparent process throughout, with no shortages of checks and balances," he said.

The FSA, which takes its powers from the Financial Services and Markets Act of 2000, draws its operating revenue from the financial services sector. It answers to the U.K. Treasury, through Parliament.

Steve White, head of compliance and training for the British Insurance Brokers Association, recalled the climate in which the FSA came into being. "The FSA was born out of a desire by government to create what at the time was called a super regulator," White said.

Paul Clarke, an insurance specialist at consultants PricewaterhouseCoopers in London, said the FSA has brought extensive change to the U.K. insurance sector, notably on the life side, which had been marked by the arcane quality of some of its practices. He pointed to with-profits life policies, which "give rise to some very specific challenges in terms of how you go about regulating enterprises that sold those products and assessing how much capital they need to service their obligations under those policies."

David Gamble, executive director of the United Kingdom's Association of Insurance and Risk Managers, spoke approvingly of the FSA. He endorsed the authority's determination "to ensure that the U.K. is well regulated but is not constrained by regulation, that it is in fact more competitive."

Gamble represents a membership that includes those who buy insurance on behalf of their corporate employers. Gamble said that AIRMIC members spend around 4 billion [pounds sterling] (approximately $7.06 billion) a year on insurance and risk management. The organization scored a victory in 2004 when it persuaded the FSA and the Treasury not to require the regulation of risk managers who buy insurance for their employers. This give and take had a favorable effect, Gamble said. "My members had a sudden brush with the possibility that they would have to be regulated," he said. "But now I think they are seeing the FSA as a major ally, whereas before it was really difficult to know where to go if you had a concern."

Gamble also noted the recent letter, sent to the chief executives of brokers, expressing the FSA's dissatisfaction at the slowness of progress toward automatic disclosure of remuneration. "We found that very interesting," Gamble said. "It is, in fact, an area that we had asked them to consider."

Strachan is pleased with the FSA's progress, but he said some things could be done better. "Is there scope," he asked rhetorically, "to pare back unnecessarily detailed regulation and more further away from a rules-based approach to one that is based more around high-level principles?" He said the goal would be to maintain standards while giving the senior management of firms flexibility in meeting them.

Focus on Brokers

Strachan described the distribution picture on the nonlife side as "mixed." One area for possible improvement, he said, has been in brokers' management of conflicts of interest. He suggested that some brokers take an overly narrow view of potential conflicts, focusing too much, for instance, on remuneration. He said this is understandable, given the attention the issue has been receiving. But he argued the industry also should be aware of issues that can arise from an underwriter's ownership of an intermediary. Strachan maintained a broker delivering business to a parent should ensure it is acting in the best interests of its clients.

He also cited the FSA's concern about lengthy disclosure documentation, particularly on the nonlife retail side. While brokers want a lot of information in these documents, he said, the FSA is more interested in seeing that the right information is included. It is important for customers to understand the policies. "What they don't want is necessarily 10 pages of fine print, which they may not get to the end of," Strachan said.

Strachan said the FSA intends to provide the industry with some feedback on this issue. The authority's practice is to work with a cross section of firms and report its findings to the market without identifying its sources. It would repeat the process at future intervals.

White, of the British Insurance Brokers Association, said that BIBA consults regularly with the FSA on such issues as financial capability, the fair treatment of customers, conflicts of interest and supervision. He added that the regulator was willing to respond to BIBA's concerns during 2004 as it prepared for the extension of its regulatory powers to nonlife distribution."B1BA takes the view that it's in the members' best long-term collective interests for us to have a working relationship with the regulator," White said.

Clarke suggested regulators around the world regard the FSA as a benchmark leader. "In terms of international impact and recognition, they would be seen as relatively successful," he said.

Clarke praised the FSA's willingness to look at firms' individual circumstances. "It recognizes that a single formulaic capital calculation can't realistically deal with whole great diverse circumstances that you find in practice," he said. But he criticized the FSA's "labyrinthine" rule book, arguing that its complexity can make it difficult to discern the intention of the rules.

The FSA also has assumed regulation of the Lloyd's market from Lloyd's itself. Michael Jackson, chairman of the regulatory committee of the Lloyd's Market Association, said the FSA is more pragmatic and proportionate than Lloyd's had been. The LMA provides a collective voice for Lloyd's underwriters.

"They [the FSA] do regard all businesses as different," said Jackson, who is head of insurance compliance at underwriter Brit Insurance Holdings plc. "Therefore, the manner in which you achieve compliance with their rule book may be different to the chap next door. But that doesn't mean it's not the right way."

Jackson said the FSA also has accepted that its rule book is indeed complicated and has issued consultation documents soliciting advice on how to make it simpler. "I think that's a refreshing surprise," he said.

United Kingdom

Officials in Charge of Insurance Affairs

The Financial Services Authority (FSA), 25 The North Colonnade, Canary Wharf, London E14 5HS

Phone: From the United Kingdom: 020 7066 1000, from outside the United Kingdom: +44 20 7066 1000

Web site:

FSA Board

* Chairman: Sir Callum McCarthy

* Deputy Chairman: Dame Deirdre Hutton

* Chief Executive: John Tiner
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Article Details
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Title Annotation:Regulatory/Law
Author:O'Connor, Robert
Publication:Best's Review
Geographic Code:4EUUK
Date:Feb 1, 2006
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