As a former chief economist, the Lib Dem’s shadow chancellor warned for years against Britain’s bulging personal credit card debts, and was right about Northern Rock. So what does he predict for the insurance industry?
Over the past 12 months, amid the gloom of the MP expenses scandal, recession, Brown bashing, Tory posturing and general gloom, Vince Cable has emerged as the economic voice of reason.
As MP for Twickenham and Liberal Democrat shadow chancellor of the Exchequer, he became the acceptable face of the party and of politics, outshining his leader Nick Clegg and his rival George Osborne, and guiding the general public through the complexity of the financial crisis with almost nightly television appearances.
Although there was a backlash from colleagues at his own party conference last month, over controversial economic reforms and the much criticised proposal to impose a tax on homes worth more than £1m, Cable has been the only politician to hold the government to account on the state of the financial landscape, as well as the decisions leading up to the crisis.
Meeting Insurance Times at Portcullis House, however, Vince Cable looks exhausted and a bit grumpy, but he is happy to discuss his take on how the current government has served the insurance industry and what measures any new government can take to improve the situation.
What changes need to be made over the next 12 months to the way insurers are structured and regulated?
I don’t want to see a major restructuring. The Financial Services Authority came into existence a decade ago and we've had ten years of change. The FSA has been trying to get a proper balance between the interests of consumers and the interests of industry. I think the worst possible thing now would be to create an upheaval in the way the regulatory system is structured.
Is the Tory proposal to scrap the FSA sensible?
I totally disagree with the Conservatives. I think it was a sound bite that got out of control, was rather foolish, and not thought through, and it is going to cause a great deal of damage.
The problem is that the FSA did not do a good job of supervising the banks; we all know that, they know that, and now they are recruiting better people and getting more focused. It is also the case that the Bank of England has to have undivided authority when it comes to overall systemic risk, and that can be done by making clear that the government chairs the relevant committee.
Breaking up the FSA, splitting it down the middle, as the Conservatives propose, would mean, for example, that the teams who are looking after insurance companies would be split in two, with some going into the Bank of England looking at systemic risk (where that applies to insurance) and the other would go into a consumer protection arm. It would mean a duplication of efforts, a breakdown in communication and there would be massive uncertainty about which jobs are at stake. The industry doesn't need that at this point.
Should insurers be supervised separately from the banks?
There is a difficulty here, because some banks have insurance arms. But insurance is a different industry and business, and clearly does need to be looked at in a different way. The concern I have with Conservative proposals is not that insurance will be regulated by the Bank of England but that insurance will be split in two and we will have a complete lack of joined-up approach to it.
One year on, if you were Alistair Darling, what would you have done differently?
I think at the beginning the government handled the situation very well. The emergency response was right: the recapitalisation and part nationalisation of the banks was absolutely necessary. And the policy response was correct: the drastic cut in interest rates, then monetary easing, the fiscal deficit. All these things were necessary and have stabilised the position.
But the British economy is still very weak. My criticism of the government is that they didn’t see these problems coming, having warned about it myself for at least five years in terms of the build-up of personal debt and the housing bubbles, and the problems it was going to cause.
And my criticism since is that, although they took the right steps last October, they haven’t followed it up properly. There should have been much clearer direction to the banks in terms of maintaining lending to perfectly solvent, good British companies. That was the priority and it hasn’t happened. One gets the sense that the government was more a passive spectator rather than the owner of the banks, which it is in several cases.
As a result of the crisis, international regulation is set to be more co-ordinated. Is the UK well placed to interact with changes abroad?
International regulation supervision has become very complex. It is now an international business. You’ve got to have effective co-operation between regulators. That doesn’t mean uniformity; you can have some degree of competition. But there has to be a basic understanding of the rules.
One of the encouraging things that came out of this crisis is that the framework of co-operation that was built up around the financial sector has held together. It would have been quite easy to revert back to what happened in the 1930s: for countries to start fighting each other, financial protectionism, conflicts. Actually, the structure of co-operation has been maintained, and that is absolutely essential when you have global industries.
A lot of insurers have chosen to domicile abroad. How can the UK become a more competitive business centre?
What we mustn’t do is get into a race to the bottom. There are people in several industries who want the British government to cut tax to the bottom – like Ireland – and that’s not sensible. It costs a lot of revenue; and it is very questionable whether it would actually stabilise the position. And the British government revenue position is not such that they can make large tax giveaways.
I think what business wants, whether it is insurance or any other, is reasonable, moderate levels of basic taxation, and we are roughly in the middle of the OECD league table.
One of the biggest problems of British tax law and the way we do things in parliament is that it is far too complicated. It is the complexity of the tax system, and the fact it is constantly changing, that makes it difficult for businesses to make sensible long-term planning decisions.
What are the greatest challenges for insurers going forward?
We haven’t yet seen the full impact of the recession on the insurance industry. It has clearly hit the banks first, but it would be amazing if the fall in equity and properly values did not have a big knock-on effect on insurance. It’s important that the changes are properly thought through. One of the issues is the new EU solvency rules. The technical decisions will have an enormous impact on British industry. IT