The new ‘twin peaks’ regulatory structure can be made to work, says Maggie Craig, but the two authorities must collaborate at all levels

Let me be clear – the industry is not against new regulation. We understand the drivers for regulatory change and will strive to make reforms work.

As to the principles, there are four. First, that we want improved financial stability. Second, we want consumers’ needs to be put first. Third, we want coherent and well communicated requirements, not conflicting and confused ones. And fourth, we want regulation that reflects the fact that different parts of financial services run different business models and have different risks. One size does not fit all. What we do not want is a regulatory system that stands in the way of continued, positive innovation in the financial system.

The biggest change (being proposed by the government) is, of course, the move to a new regulatory structure – the “twin peaks” model with separate prudential and conduct regulators.Can this work? Yes – but that isn’t an unequivocal endorsement. It can be made to work, but there are still some shortcomings that we believe will require careful design and thought.

First, the regulators must take competitiveness into account. I’m not just referring to the Prudential Regulation Authority (PRA). The Consumer Protection and Markets Authority (CPMA) must do so too. We understand that this role will be different for the CPMA, but it must also understand the benefits that competition can deliver to consumers, and where possible facilitate this. Other key consumer regulators in the UK – such as Ofgem – have objectives that do this. Clearly we want to maintain our position as a world-leading insurance market, but competition also ensures that consumers receive choice and good value.

My second point is that insurance is not banking, but needs to be equal to banking. In other words, insurance should be at the top of the table, not on the same menu. Regulatory resourcing must not be skewed towards banks, particularly within the PRA.

Third, we run the risk of regulatory fragmentation and incoherence with two regulators. We need neither underlaps nor overlaps. To overcome this, the regulators need to work well together. One of the main charges always levelled at the tripartite system of regulation was the lack of co-ordination. As we move to a new system with multiple regulators this must not be the case. This will involve working together at all levels – not just at senior management – and having objectives that regard the work of the other. The CPMA must have both authority and the power to regulate financial markets properly. And we need proper recognition of the significance of wholesale market regulation to the UK economy.

Bringing together regulation of the wholesale markets with retail regulation also poses some significant risks. Wholesale markets are complex and involve several professional parties. The protection of particular parties is not the primary concern here – market efficiency is.

However, the change in the regulatory structure does present us with another opportunity. And that is to ensure that the role of the Financial Ombudsman Service (FOS) sits appropriately with the new regulatory regime. Again, let me be clear: we abolutely support the core function of the FOS. However, since its inception, its complaint profile has changed markedly. Over one half of all complaints referred to the FOS relate to just six topics. This means that FOS decisions can have much wider implications for the industry, due to their impact upon large volumes of similar cases. FOS is not a regulator and was never intended to be a regulator. It must be able to focus on its original function – adjudicating on individual consumer cases on the basis of what is fair and reasonable.

While I’m talking about consumers, let me mention the Law Commission’s review of insurance contract law. We agree that the law is out of date, but are keen to stress that consumers are not being unfairly treated. Customers are not protected by consumer law; they are protected through good practice, FSA regulation and the FOS. Taken together, these are about ensuring customers understand their rights and obligations and have genuine claims paid quickly.

Ultimately, we all want to reach the same destination and the insurance industry will be doing its part to drive this forward. IT

Maggie Craig is acting director-general of the ABI. This is an extract from a speech she made at the Insurance Times Global Leaders Forum last month. For more coverage, see