New financial regime will take into account lower risks of large insurers compared to banks

The UK’s new financial regulatory system will recognise that large insurers do not pose the same risks to the financial system as large banks, according to FSA chief executive Hector Sants.

Speaking at an event hosted by data and news firm Thomson Reuters, Sants said: “We still do need to have an intensive and intrusive approach to large insurers for prudential purposes, but it should be somewhat different from that which we have for the banks.

“It is our intention that our high-impact approach to insurers will be different to that of banks.”

Sants was responding to a question from RSA group head of regulatory risk and compliance Jenny Margetts on how the new regime would assess the impact ratings of firms in the future.

She said that, as a large general insurer, RSA was considered a high-impact business, but that large insurers did not create systemic risks in the same way as banks, in part because insurers run off their liabilities over a number of years.

The UK’s coalition government announced in June this year that it was planning to replace the FSA with three new bodies under the control of the Bank of England. These would be the Prudential Regulatory Authority (PRA), the Financial Policy Committee and the Consumer Protection and Markets Authority.

The change to the regulatory structure is expected to be completed by January 2013. Although much of the focus of the new regime will be on banks, Sants clarified that the new entities would not ignore insurance.

He said: “The PRA will be very focused on making sure that during the coming years the insurance agenda is concentrated on as well as the banking agenda.”

The biggest project facing the PRA would be the European Commission’s Solvency II capital adequacy regulation for insurers.

Sants’ speech at the Thomson Reuters event was aimed at outlining the thinking on the new regulatory approach for the UK financial services industry.

He said the new approach would have a greater focus than the existing FSA regime on ensuring failing firms did not unduly disrupt the financial system, rather than on preventing failures.

“Orderly failure, with minimal cost to the economy, should not be seen as regulatory failure,” he said. “The PRA should be judged by the avoidance of failures that incur a cost to the economy, particularly individual taxpayers and customers.”

He added: “The PRA will not be attempting to pursue a zero-failure regime.”