FSA plans overhaul of insurance regulation

The changes will:

• help consumers to get a fair deal through strengthening the disclosure regime;
• tighten up existing requirements on solvency and on the responsibilities of insurers senior management;
• deliver smarter insurance regulation - and not necessarily more rules; and
• subject insurance companies to more proactive and challenging regulation than in the past, using the new powers that the FSA receives from 1 December 2001.

The FSA Board has asked John Tiner, FSA managing director of consumer, investment and insurance matters, to lead a major project, known as the Tiner Project, to take forward the FSAs work to strengthen insurance regulation. The Tiner Project will integrate several existing FSA work strands on insurance regulation. Summarising the key features of the new approach, John Tiner said;

A proactive approach

We are developing a proactive, risk-based approach to insurance regulation that reflects the objectives given to us by Parliament: maintaining market confidence; appropriate protection for consumers; raising consumer awareness of financial matters; and fighting financial crime. Regulations that need to change will change. Those that are no longer required will go. We will be reviewing, for example, insurance firms public and regulatory reporting, the nature and extent to which insurance companies use reinsurance, the role of Appointed Actuaries, and more technical issues such as the use of future profits to bolster solvency.

The FSAs relationship with insurance companies

Our new approach will include a more effective relationship with the insurance industry, particularly with higher impact firms. We will place more emphasis on on-site visits, focus more on the competence and responsibilities of management and their corporate governance arrangements, and will make greater use of external experts such as accountants and IT specialists to assess insurance companies. In addition, we are developing our use of former senior industry executives, known as grey panthers, as advisers to the insurance supervisors.

Regulatory culture

Supervisors need to be proactive, apply judgement, think laterally, and use market knowledge to challenge the behaviour and assertions of firms and act quickly wherever they identify a potential issue. This focus on the application of judgement within the risk-based approach will help to avoid a tick box approach to regulation. The leadership for this cultural change, where change is needed, will come from the top of the FSA.

Fair deal for consumers

Underpinning the FSAs whole regulatory approach is our desire to secure a fair deal for consumers. In addition to our ongoing regulation of firms, specific initiatives for consumers include: helping consumers to make better-informed choices; improving the disclosure of information by life insurers before they make a sale, at the point of sale, and throughout the life of the product they have sold; reviewing the whole with-profits industry; and helping consumers to receive better treatment from firms when things go wrong.

Resources

We have implemented a strategic planning process that will enable resources to be allocated to areas of highest priority across the FSA with a rigour that was not possible before the FSA took on formal responsibility for the regulation of all financial sectors. We plan to increase the number of insurance regulators by a further 35 staff to well over 200 an overall increase of more than a third since the FSA inherited responsibility for insurance regulation while also undertaking extensive training and development of existing staff.

Next steps

A full report on progress made under the Tiner Project will be completed by September 2002. As with all regulatory reforms, the FSA will base its proposals on a thorough analysis of the risk to its statutory objectives posed by any aspects of the insurance industry. We will not just railroad changes through. We will make regulatory changes only after consulting widely and taking account of the likely impact on competition and innovation. We must also take account in our work of the impact of any European legislation and any issues raised in external reviews currently underway.

Overall impact

All this will amount to a major and radical overhaul of insurance regulation. The insurance industry is itself going through a period of change from which it should emerge stronger and fitter on the other side, and I hope that our new regulatory approach will contribute to that. Our new approach will, among other things, boost the regulators ability to identify possible issues earlier on and proactively nip problems in the bud. But it will not and should not mean that nothing ever goes wrong again with any insurance company. As we have made clear, it is the responsibility of firms management not the FSA to ensure that they comply with regulatory requirements, and not all of them will always succeed in doing this. It is not Parliaments intention that there should be no failures.

We have said it before, but it bears saying again: a system of regulation that ensured that no insurance company could ever fail would also ensure that there was no insurance industry.

Notes for editors

1. The report, The Future Regulation of Insurance, was submitted to HM Treasury on 20 November 2001. The report was requested by Ruth Kelly, Economic Secretary to the Treasury, in a letter dated 16 October 2001 following receipt of the Baird Report into the FSAs regulation of the Equitable Life Assurance Society between January 1999 and December 2000. Todays report can be found on the FSA website www.fsa.gov.uk. The Baird Report, entitled Review of the Regulation of Equitable Life, is available on HM Treasurys website www.hm-treasury.gov.uk.

2. The FSAs with-profits review was announced in February 2001 and work is being regularly published in a series of Issues Papers covering the key themes under the Review: Procedures for Handling Inherited Estates; Disclosure and Use of Plain Language; Regulatory Reporting; Unfair Contract Terms; and Governance & Discretion. A final report will be prepared in Spring 2002.

3. Until 1 December 2001, the FSA undertook insurance industry regulation under powers delegated from HM Treasury.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000; maintaining market confidence; promoting public understanding of the financial system; the appropriate protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.