with Tom Broughton
Is the FSA fit for purpose? Once the economy moves from the intensive care unit to the hospital ward, this question is likely to form the spine of a government review.
The forensic analysis of how the FSA failed to mitigate the meltdown will continue to play out in the financial pages for some time. But if you can, put aside the pinpoint analysis of the US mortgage system or of AIG’s derivatives division and understand that the remit of the FSA must surely be overhauled. Not convinced? Well, consider the management of the capital markets after the introduction of Solvency II.
The regulator’s raison d’être will be undermined by this long-planned legislation, which will govern the financial health and risk management systems of insurers across Europe from 2012. There is a general consensus on the need for a risk-based capital framework to protect customers and govern a single market. There is a fundamental problem, however: insurers are increasingly concerned that the detail of Solvency II is unworkable against the backdrop of the international accounting standards and the current liquidity problems.
The FSA, consultants and government bureaucrats have spent thousands of hours and millions of pounds over the past 12 months understanding how these regulatory changes will drive insurers’ future strategy. But now, as the full implications of the financial crisis begin to become clearer, Solvency II will need wholesale review.
Philippe Maso, chief executive of AXA Insurance, this week told the audience at the Insurance Times forum about the lobbying efforts of European trade bodies striving to understand the complexities of the problem, which will probably first play out in the life market. Meanwhile, back home, the FSA is to write to every insurer in the UK to demand a point of contact be made responsible for its implementation and to ensure the necessary planning is in place for the roll-out of Solvency II.
So the plea to the regulator is a simple one. Before dumping more Solvency II-related red tape on the industry, please look at whether this legislation can work at all – before somebody decides to take the problem out of your hands.