Moving towards a sustainable model of regulation

In a recent speech[1], Huw talked about the importance of industry keeping pace with change. He outlined a number of the opportunities and challenges facing insurers.

Huw identified regulators as one of his challenges. Given the pace and extent of regulatory change over recent years, this is perhaps not surprising. Indeed, depending on your perspective, it might also not be a concern. After all, you could argue that the general public would be more worried if firms saw regulators as an opportunity.

More seriously, however, it is important that regulation is not seen as an adversarial process where the regulator and the regulated are in constant conflict.

The reality is that while our roles are different, and while a degree of challenge and creative tension between the regulator and the industry is not only healthy but also desirable, ultimately, in most of what we do, both regulators and the industry want the same things:

• We both want the market to work well – with profitable, sustainable businesses meeting the needs of customers now and in the future.
• We both want the industry to be known for the highest standards of conduct towards consumers.
• We both want a competitive landscape which rewards the best providers.
• And we both want to see the industry contribute to long-term economic growth.

In practical terms, notwithstanding all these shared objectives, we will not always achieve easy consensus. Our views on how to achieve these aims – and the level of pain that is acceptable to get there – may differ. 

But, in order to have an approach which is sustainable in the long term, we have to ask ourselves the question of how we meet these shared goals in the most effective way.

And to answer that question we have first to reflect on where we are and then to consider where we are going. 

The current position is a challenging one for the insurance sector. There is increasing competition from overseas, abundant capital, low interest rates, and pricing is soft. And there has been significant regulatory and legislative change in recent years.

Indeed, Huw is not the only one identifying regulators as a challenge. Surveys of CEOs in the UK and elsewhere constantly highlight regulatory changes as a key business risk. 

The reform agenda has been essential. But it has also been extensive. It has demanded, and continues to demand, significant amounts of time and resources from the sector.

But, I would like to think we are now at a point where we can start to think about what the future looks like. 

How can regulators, firms and consumers work together in an environment where we hope to be spending more time looking to the opportunities of the future rather than correcting the problems of the past?

It seems to me that there are three critical components to the success of the insurance industry in the longer term.

The first is that we must have competitive, innovative markets that meet the needs of consumers – both retail and wholesale.

The second is that consumers must have trust and confidence in those providing insurance services.

And the third is that we must have transparent, deep and well-regulated capital markets which can support long term growth and provide funding to the real economy. Thus giving the opportunity of a long-term return to investors.

Competitive, innovative markets

Effective markets depend, first and foremost, on providers supplying products and services that consumers want. If you cannot meet consumer needs, and adapt as those needs change, then you will have no business. 

The UK insurance industry has a long, and proud, history of innovation and creativity. And with each new step, it has expanded into new intellectual and commercial space. We all know the London market has been a master of innovation in devising products to enable the transfer of risk on everything from satellites to ships to footballers’ legs.

And this sits alongside innovations in distribution that – while they might sound more prosaic – have transformed customer interactions with insurers. Price comparison sites and mobile apps are obvious examples here.

In other words, the UK insurance market tends to find solutions to customer needs.

But the industry cannot rest on its laurels. 

The world is changing rapidly. 

Technological innovations over recent years have transformed the way we interact with each other and our expectations of those who provide us with services – financial or otherwise. The use of data presents opportunities to develop more targeted, more effective products. 

The UK insurance industry has a long, and proud, history of innovation and creativity. And with each new step, it has expanded into new intellectual and commercial space. We all know the London market has been a master of innovation in devising products to enable the transfer of risk on everything from satellites to ships to footballers’ legs.

But innovation has also led to new and different risks – barely a day goes by without a reference to cyber or data security issues – and the insurance industry has to meet the challenges that presents, both as insurer and as potential target. 

Demographic and social change is also changing the landscape. Our population is ageing. Indebtedness among the young is growing. There is an increasing expectation that people will take more responsibility for their own financial futures and a demand for the industry to develop new ways to help them do that. But financial capability remains low and the advice landscape patchy.

The challenge for the industry is to develop products and services that meet these changing needs and the new environment.

And we often hear that regulation is one of the things that gets in the way of innovation. We are told that rules designed for a different time and different delivery mechanisms don’t always work with new technology. We are told that the requirements of regulation prevent effective communication with consumers. And we hear that the regulator spends too much time looking in the rear view mirror and not enough looking through the windscreen at what the future might hold.

Now, we may not always agree with everything we hear. But we do recognise that just as the industry needs to adapt to changing circumstances, so do we. So our challenge, as the regulator, is how we can ensure that we have a regulatory environment which gives firms the confidence to innovate.

So what does such an environment look like? What is required to deliver that confidence?

First we must have a clear, and shared, understanding between the regulator and the regulated of the dynamics of the markets in which you are operating.

And to help us achieve that, we are now complementing our individual engagement with firms with increased market-wide analysis. 

This shift in focus has driven a significant restructuring of our supervisory and authorisations divisions over the past year.

The most obvious consequence of this change for industry has been to reclassify regulated firms into fixed or flexible portfolios.

So the old C1,C2, C3 and C4 classification is out.

Those in the fixed portfolio, as many here are, will engage with us on the basis of firm or group-specific supervision. Those in the flexible portfolio will interact with the FCA on an event-driven basis.

In practical terms, this means they will be supervised through a combination of market-based thematic work and industry-wide engagement on key issues across the sector. Over time, this should lead to more targeted use of our resources, reduce the amount of time firms need to spend on dealing with routine monitoring visits, and enable us to pool and share best practice and lessons learned across the sector.

Now I am aware this may sound a bit dry and technocratic – welcome to my world – but I spell it out today because it is important.

It allows the FCA to commit a greater degree of resource toward cross-cutting market analysis and provides us with the opportunity to continually assess, and where necessary, raise standards across markets. So lifting all boats on the tide, if you like, and not just taking individual ships to dry dock for repair.

Secondly there must be a willingness to look at rules that are not working and to be prepared to make changes where necessary. 

I want to stress at the outset that this is not about deregulation for the sake of deregulation. Simply removing regulatory requirements without considering the costs to society of doing so is not a long-term or sustainable approach to regulation. 

The events of recent years have amply demonstrated that the ‘regulate, deregulate, repeat’ cycle is one which we would do well to avoid.

What it is about is being willing to evaluate the effectiveness of regulatory interventions, large or small, and to look at those afresh in the light of changing circumstances.

By way of example, our recent work on Smarter Consumer Communications has highlighted areas where we think that mandated disclosures are not effective, and we are consulting on removing those. 

We have already reviewed the operation of the retirement risk warnings in relation to smaller pension pots – and are consulting on changes to make those more effective and less burdensome for industry and consumers alike. And we continue to monitor developments in the market and will make further adjustments as required.

And finally it needs genuine, constant and open engagement between all of the players in the market – regulators, industry and consumers. 

Many of the challenges we all face have no easy answers and no quick fixes. So we need to work together to try and find solutions. 

Our work on the Financial Advice Market Review is a good example of this. Building on the work of the RDR, the review is asking some fundamental questions about how we can ensure that consumers are able to obtain the support they need to plan their financial affairs. 

This is not the first time regulators have asked this question and many apparently good ideas have failed to gain traction in the past. 

So we are looking to learn from all of that past experience, drawing on the input of all interested parties – firms, consumers, technology providers, regulators and politicians – to seek to design an outcome which will deliver the best possible – which might be different to the best – outcomes for all interested stakeholders. We have recently published our Call for Inputs and I would encourage you all to respond to that. 

Trust and confidence

And that brings me neatly on to the next of my three areas. All the reforms in the world will not change the advice landscape unless customers have the trust and confidence to engage with financial services more proactively.

Insurance, perhaps more than any other industry, is critically dependent on consumer trust and confidence. Trust that the product bought to help you when the worst happens will actually provide the cover or the income you expected.

Confidence that the provider will be around to deliver it many years into the future. Sam Woods has talked about the steps the PRA is taking in relation to the latter. I will focus on the former.

It is often said, and is true, that the financial crisis was not primarily caused by insurers. It is also true that insurers were not responsible for attempts to manipulate Libor or FX. And more recent episodes of mis-selling were not, generally, laid at the doors of insurers.

But before the insurance sector becomes too complacent it is worth remembering a couple of things.

First, the conduct of insurers has not always been something to write home about. The sale of unnecessary and low-value insurance products, often in a pressurised way, has featured in a number of our enforcement, supervision and competition activities in recent years. Our recent market study on the sale of GI add-ons identified some significant issues around transparency and disclosure to consumers. We are working closely with the ABI on this subject and welcome their commitment today to greater transparency on value. 

One of the things that contributes to a general disillusionment with financial services is the sense that the industry does not reward customer loyalty. Instead it seeks to take advantage of inertia by, for instance, charging higher prices on renewal of GI products than are charged to new customers.

Secondly, while you may think there is a world of difference between you and an investment banker, consumers don’t necessarily draw such fine distinctions. So a lack of trust in financial services is a problem for the industry as a whole. It cannot be confined to particular sectors.

Indeed, with 90% of UK households holding one or more[2] general insurance products, the view that many people have of financial services will be driven by their experience with your firms. Are they treated decently when they make a claim or when they come to renew their products? A bad experience, rather than whether it meets our rules or not, will colour their views of the whole financial services sector.

And I would like to dwell on this for a moment. One of the things that contributes to a general disillusionment with financial services is the sense that the industry does not reward customer loyalty. Instead it seeks to take advantage of inertia by, for instance, charging higher prices on renewal of GI products than are charged to new customers. And I know from my discussions with industry that many of you recognise that problem and are concerned about the impact it has on perception. But you are also concerned to ensure a level playing field.

This is, then, an area where there is clear alignment between the interests of regulator, industry and consumers. We all want products to be priced fairly and transparently and for consumers to have the opportunity to shop around and make real choices based on value, not just headline rates.

And we have taken the opportunity to work with industry on this. We are grateful for the support of a number of firms who have worked with us to conduct large-scale research trials. Testing how different disclosure options could engage customers renewing their home or motor insurance.

Moving forward, I hope this can be a model for future regulatory work with insurers. Sharing expertise and resource in an open and positive manner to drive improvement in the interests of consumers.

In this regard, I should say we welcomed the opportunity to test the ABI’s proposal to include last year’s premium on renewal notices amongst other options. And I certainly welcome the industry’s work, particularly with the ABI’s announcement of two initiatives this morning, to drive better consumer outcomes.

Deep capital markets

And finally, I want to talk about the contribution of the insurance sector to growth in the wider economy. 

We have spent much of the last eight years managing crisis. But as we begin to move on from the crisis, supporting sustainable economic growth is important for all of us. And one measure of success in this area will be the depth and liquidity of Europe’s capital markets, and the opportunities they afford UK investors – including insurance firms.

It is clear that there is scope for progress here. Although EU capital markets have developed over recent decades, fragmentation persists with a strong national bias, and there is a well-documented lack of depth compared to the US.

The EU Commission’s recent launch of the action plan for capital markets union is targeted at this issue. This is welcome. But it is also important to assess our domestic market and ensure it is able to support the wider aims of capital markets union.

One area we are keen to explore, alongside industry, is the effectiveness of the UK’s primary markets.

With this in mind, and given their importance in supporting both the real economy and issuers and investors, I can announce today that we will be creating and chairing a UK Debt Market Forum.

This group will bring together the collective wisdom of a broad range of parties including industry, government and the FCA, and will look for practical measures to enhance primary debt markets in the UK.

Alongside this, we are also setting up a broader project to assess the effectiveness of our primary markets more generally. 

This will consider how successful the current structure of UK primary markets is in meeting the needs of issuers and investors in the real economy. Recognising that a key component of London’s attractiveness comes from the premium listing regime, we will consider the extent to which it is able to continue to support innovative and growing sectors of the economy, whilst maintaining high standards.

I would certainly encourage the ABI to lend their authority to that debate as it takes place over the coming months.

Conclusion

In opening, I referred to Huw’s statement that regulators were one of the challenges faced by insurers. 

I hope my comments have made clear that we are committed to ensuring that the UK has robust, respected regulation. Being tough when required but also recognising – and accepting – the challenge of ensuring that regulation is able to adapt and evolve to help deliver our common aims – for the good of the regulator, the industry and most of all the users and consumers of insurance services. Thank you.