Ciara Russell contributed to the writing of this blog post
From the 1st April 2013 the regulation of financial services in the UK has changed. The Financial Services Authority (FSA) is a familiar body to most in our industry but as of this week it has been replaced by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). We take a look at how regulation has changed, the objectives of the new regulators and the impact on insurers.
The FSA was in operation from 1997 when the Chancellor of the Exchequer called for the merging of banking supervision and investment services. The regulatory reform developed in various stages, including:
- the transfer of responsibility for banking supervision from the Bank of England to the FSA (1998)
- the transfer of the role of UK Listing Authority from the London Stock Exchange (2000)
- Financial Services and Markets Act granting the FSA responsibility for several other organisations including the Friendly Societies
- Commission and Personal Investment Authority (2001)
- Mortgage regulation (2004)
- General Insurance regulation (2005)
Regulation going forward
In 2010, in the midst of the financial crisis, the current Chancellor called for further regulatory reform. This time the regulation splits prudential and conduct operations, between the PRA and FCA respectively.
The organisational structure of the regulatory system from 1st April 2013 is as follows:
Implications for insurers
The FSA has been positive about the changes in its publications to firms, giving the message that the transition from the FSA to the PRA and FCA will be smooth. The FSA handbook will be split into PRA and FCA handbooks. The Financial Services Bill is under the review of Parliament. Until its approval, a draft Memorandum of Understanding between the PRA and FCA (and a separate Memorandum of Understanding for with-profits business) is available on the FSA’s website. These should help insurers, who are dual regulated, to understand how both regulators are working together in respect of their firm.
The industry will need to wait and see what the implications of having two regulators rather than one are. It is hoped that firms will not be in a position where they have to supply the same or similar information to both regulators. Equally it has yet to be seen how the regulators will deal with the apparent loss of economies of scale: if the combined resources of the two bodies are unchanged then it would not seem possible that firms can have two dedicated supervisors when they have only had one previously.
Early indications are that the FCA is addressing this by having a more flexible approach. There will be fewer supervisors allocated to specific firms and the level of supervision may depend on the firm’s past conduct history and/or its significance to the market. This may represent a welcome lowering of the regulatory burdens for well-run firms. However customers of such firms may need reassurance that lighter supervision equates to the same level of protection of their interests.
Turning to the PRA, there are understandable concerns from some in the industry that the change has been motivated almost entirely by the banking crisis. That insurance companies will now be regulated by a subsidiary of the Bank of England is a consequence of this. It remains to be seen how much influence the Bank of England will have on the PRA in relation to insurance company regulation. However there is nervousness that those who are ultimately in charge of regulation are not experts in insurance. It is important that that the Bank of England recognises that banks and insurance companies are exposed to different risks; the most obvious example being that liquidity is a significant risk for banks but that is rarely the case for an insurance company.
There have been a number of scandals for the insurance industry during the FSA’s lifetime including the collapse of Equitable Life and pensions mis-selling. The emergence of any new scandals and how these are dealt by the regulator will be of interest to the industry. Insurers stood up well to market changes, specifically the 2008 Credit Crunch. We sincerely hope that this can continue under the new regulatory regime.