The FSA has said it will not hand regulatory breaks to the London market if the sole aim is to enhance competition with foreign markets.

It emerged this week that Sarah Wilson, insurance sector leader at the FSA, told delegates at a high-level Treasury summit on the competitiveness of the London market that the regulator would not enter into a regulatory “competition” with other domiciles that would result in “simply reducing without question regulatory burdens on the industry”.

The comment highlight the challenge faced by the high-level working group headed by Lloyd’s chairman Lord Levene which is looking for tax and regulatory reforms to boost the competitiveness of the London market.

Wilson said: “Regulation is far from the only matter that informs decisions about the location of capital.

“The UK enjoys a comparative advantage in a number of areas relevant to the insurance sector, including skilled personnel, support infrastructure and many years of experience.”

“Whatever the drivers, there is some evidence to show that the UK has not been the domicile of choice for reinsurance capital in recent years.”

Wilson added: “There are a lot of reasons London has strengths.

“The London market is reforming itself well.

“For example, look at the achievement of contract certainty.”

The Treasury has also ruled out corporation tax cuts for the insurance market, but it is understood that Levene’s working group is still arguing for tax cuts through technical changes to the rules.

A senior market source said: “There were some very technical proposals made to do with extremely technical pieces of legislation.

“If action were taken on these, there could be changes made to the Finance Bill next year.”

Tax experts have suggested changes could be made around the taxation of claims reserves and regulatory capital.