Regulators and governments must not harm other industries, such as insurance, as they deal with the banking crisis, warns the Association of British Insurers in its new report, Restoring Market Confidence.
Published ahead of its biennial conference, the ABI says that any changes should tackle the problems that arose in the banking sector, not apply a one size fits all set of remedies to the rest of the financial services sector.
The ABI report also argues that regulation must not inhibit the ability of firms to offer competitive products for consumers, or add unnecessary costs to businesses. The report comes ahead of the deadline for consultations to the Turner Review on 15 June, and in the midst of an ambitious regulatory programme covering UK, EU and international initiatives.
Some areas of concerns to insurers include:
– lack of recognition for the advance, sophisticated prudential regulation of UK insurers, and the developments, under Solvency II, of modern, risk assessment modelling across the EU- suggestions that remuneration structures designed for bank dealing rooms can be applied to other parts of the financial services sector where business conditions and risk horizons are wholly different- the cross-subsidy element of the Financial Services Compensation Scheme (FSCS), which has been used to compensate for banking failures and is paid for by other financial services, such as insurers
Insurance is not banking and should not be regulated in the same way, says Stephen Haddrill, director general, ABI. We need targeted sector-specific changes, and not a lazy adoption of banking rules to other parts of the financial services sector. If this happens, UK-based insurance companies will suffer the damage to profitability, prosperity and innovation for a generation. As a global leader and major UK employer, the consequences of this would be felt throughout the British economy and beyond.
The reports other findings include:
– The case for a Macro-prudential Committee based at the Bank of EnglandThis would identify and act on systemic threats to the economy, in the same way that the Monetary Policy Committee focuses on monetary policy. Chaired by the Governor of the Bank of England, it would focus on the build up of long term risks and could help set capital requirements for the whole financial system.
– Increased transparency of market practices (short selling/hedge funds)We must avoid regulation of activities not related to the cause of the crisis. For example instead of the protectionist approach of the EU directive on Alternative Investment Funds, a better solution would be the registration of hedge fund managers and targeted prevention of conflicts of interest. This would help prevent problems without damaging enterprise.
– Establish a global, European and national basis for regulationBetter supervision of cross-border groups and more consistent standards for the Single Market could be achieved through an EU body that would act as a supervisor of supervisors. This would need to consider drawing in third country supervisors (such as those in Japan or Australia) to ensure Europes framework of regulation is outward-facing.
– Encouraging capital investment and the tax regimeA crucial part of restoring confidence in the UK. The Government should consult more openly at the early stages of policy development. It should also look at the tax treatment of debt versus equity and the administrative burden of the tax regime.
– Further measures to help boards to function effectivelyBoard evaluation would help ensure the necessary skills are in place and thought should be given on how to improve the accountability of directors.
– Executive pay reform must be targetedThe ABI supports the principles behind the FSAs proposed code of practice on remuneration, but calls for the differences in financial sectors to be recognised as the nature of the roles and risks are different.
– High quality financial reporting neededInvestors need transparent accounts, clear from the demands of regulators. This needs to be backed by accounting standard setters being allowed to pursue global standards free from carve outs by the EU or others. The G20 is right to look at the issue of fair value and appropriate risk provision, but this cannot be easily done in the six months set by the G20. The IASB should also be established in international law.
L.D.