The question of whether 2007 will deliver better regulation for the insurance industry was considered at a recent conference held by the Association of British Insurers (ABI), at which the FSA, Treasury, Cabinet Office and European Commission were represented.

The Government's views

The Government's better regulation agenda for 2007 is:

  • To execute its plans to review and simplify the way information is used and communicated to consumers. In particular, the Government wants to see a reduction in information provided to consumers of 25%.
  • To ensure insurance products are clear, accessible and easy to understand.
  • To ensure that the FSA Handbook is more accessible to consumers.
  • To introduce a statutory code of practice on how regulators should run their businesses (through the new Legislative and Regulatory Reform Act 2006).
  • To ensure regulators are more transparent.

    The FSA's views

    The FSA has recently set out an agenda for change to deliver a simpler, more focused and more customer-friendly approach to regulation to replace its detailed rules. It is currently consulting on simplification of the rules relating to life, pensions and savings products and it is also reviewing the rules on the sale of general insurance products. Some key points to note are:

  • The FSA is continuing to move to a more principles-based regime, to shift emphasis away from firms' processes to the outcomes for consumers, firms and markets. These changes are not just a matter for the FSA. The move towards more principles-based regulation will give firms more flexibility to innovate as to how they achieve the outcomes the FSA is seeking. There may be more than one way to achieve these outcomes. The primary responsibility for achieving them remains with firms' senior management.
  • “Treating customers fairly” is one of the building blocks of the new regime. The FSA expects firms to complete the implementation phase of their gap analysis against the FSA's Principles and high-level rules by March 2007.
  • The FSA is training its supervisors and policy-makers on the new principles-based regime.
  • Enforcement will be more principles-based. The FSA is taking on board the industry's concern that this might lead to a decrease in predictability.
  • Referring to its recent discussion paper on Industry Guidance, the FSA said that it is hard at work in the area of industry guidance. It welcomes the opportunity to work with industry bodies in developing guidance.
  • A principles-based regime should not have a major impact on the Financial Ombudsman Service as its decisions are not based on detailed rules but on Principles and high-level rules.
  • As far as the review of ICOB is concerned, Dan Waters warned that firms should expect radical changes. The FSA expects to go out to consultation on this in the middle of next year.

    The ABI's views

    The ABI welcomes the FSA's overall proposals including - as it puts it - the FSA's balanced and sensitive approach to the implementation of the EU's Markets in Financial Services Directive, and the prospect of a more risk-based approach to general insurance regulation. It stresses the importance of getting right the relationship between statutory regulation and trade association industry guidance and says that the FSA and the industry need to continue to work together to build trust and ensure the full benefits of a principles-based approach are realised. Some key points to note are:

  • The shift to principles-based regulation will be a major challenge for regulated firms as much as for the FSA.
  • The ABI supports the FSA's reviews of the conduct of business rules for both life and pensions products and general insurance.
  • The FSA needs to address any unintended consequences of regulation that are not in consumers' interests. It believes that regulation that prevents a customer buying any product rather than the best possible product can result in consumers not getting the protection they need.
  • The ABI agrees that the rules of the sale of general insurance products do not take sufficient account of the important differences between products and distribution channels. It welcomes the FSA's recognition of this and is reviewing the effectiveness of the current ICOB regime. It hopes that the rules will be better tailored to different general insurance product markets.

    Views from across Europe

    To achieve better regulation across Europe the key building blocks are:

  • Openness
  • Competitiveness
  • Lighter, more flexible regulatory frameworks, which create confidence and foster innovation
  • Cross-border consolidation - creating an integrated market for financial services
  • Integration of insurance retail markets
  • Supervisory convergence.