Among the key concerns voiced by industry witnesses are:
- That the regulator takes a “one-size-fits-all” approach to commercial insurance and reinsurance, requiring London Market firms with “sophisticated clients” to comply with unnecessary consumer protection requirements.
- That there is a lack of proportionality which can hinder the development of new forms of insurance in the UK.
- That there is a “very demanding regulatory regime” that involves a significant body of requirements and large numbers of information requests and meetings with the regulator.
- That the regulators “take a risk-averse approach and operate very bureaucratic systems, contrasting this with other jurisdictions that manage to operate high regulatory standards in a more pragmatic, business-friendly way”.
The inquiry saw industry members highlight the different approaches taken by regulators in other jurisdictions, notably Singapore and Bermuda, which seek to support new businesses through collaborative, open dialogue.
“This was contrasted with the approach of the UK regulators,” the letter stated, “who were said to be more likely simply to point new businesses to a website and ask them to make their own judgement on the requirements.”
This difference in approach was also highlighted in relation to stakeholder and practitioner panels that the regulators operate, with witnesses suggesting that these panels – particularly in the case of the FCA – are selected by the regulators and meet in relative secrecy, with meetings often consisting of the regulator outlining its approach rather than taking on feedback from stakeholders.
The UK industry would likely benefit if UK regulators would adopt a similar and more collaborative approach, the letter stated. However, despite these concerns, the committee recognised it is important to distinguish between dissatisfaction with the outcome and dissatisfaction with the process. In those cases in which the industry did not secure its preferred outcome, it said, this is not always necessarily a sign that the process was poorly run.
“The PRA and FCA stated that they aim to act in a proportionate manner and take into account their impact on the industry,” the letter stated. “However, it is understandable that they focus on their current statutory objectives, which prioritise safety and soundness and make no reference to competitiveness.”
Proposed solution
The industry’s proposed solution to the above issues is a “competitiveness objective” for the regulators that encourages them to be less cautious and to give thought to their impact on the industry. However, many contributors said the proposal of a “secondary competitiveness objective” may be insufficient and argued it may need to be a primary objective instead.
The PRA and FCA argued in favour of a secondary objective, the committee stated, and witnesses from the regulators suggested that they would try to take competitiveness into account when assessing the impact of new rules.
Many witnesses called for clear metrics to be established around this objective, as well as some form of annual reporting to drive cultural change within the regulators and to allow others to hold them to account.
“We heard suggestions that this could include comparing numbers of new applicants, entrants, flows of capital and services to the UK market with other regulated territories each year, reviewing UK regulators’ performance relative to other major regulators,” the committee said, “and monitoring the UK’s performance against international metrics.
“We share the PRA and FCA’s view that the primary objective should continue to be the safety and soundness of firms. Indeed, we agree with those who emphasised that a robust and rigorous regulatory framework contributes to both the competitiveness and the reputation of the London Market and would be concerned at any initiative which could unintentionally dilute this.”
Committee recommendations
The committee agreed that there were strong arguments in favour of adopting a secondary competitiveness objective but noted that this alone may be insufficient. Concerns around the inflexible and sometimes unnecessarily complex processes identified by witnesses require a broader reassessment of regulatory culture, it said, and there is a need for current rules to be applied more proportionately and effectively.
“The FCA and PRA should regularly review their rulebooks to ensure that they are maintaining high standards in the most efficient way possible to enable the competitiveness of the UK financial industry; such reviews should focus on the scope for more efficient and proportionate as well as less cumbersome and mechanistic engagement between regulators and industry,” it stated. “The PRA and FCA should consider formalising such reviews on a regular basis.”
The letter also advised the following:
- The importance of open and transparent communication with industry.
- The need for regulatory stakeholder panels to offer two-way dialogue.
- Discussions in stakeholder panels to be more transparent and public.
- The need for the PRA and FCA to regularly look at other successful financial centres to develop and sustain best practice.
- That, alongside, introducing a competitiveness objective for the PRA and FCA, it will be essential to establish clear criteria and appropriate performance measures.
Regarding the last point, the committee stated: “The evidence we heard suggested that industry practitioners have some ideas for what such measures might be and would be a useful source. Publicly disclosed performance criteria would provide an opportunity for both the Government and Parliament, through this committee and others, to monitor performance and hold the regulators to account.”
The committee welcomed Glen’s agreement on the importance of strengthening the role of parliamentary committees in holding regulators to account as they are granted greater rule-making powers. It added it will consider issues of remits, responsibilities, performance measurement and accountability more generally in forthcoming inquiries and looks forward to Glen’s response to outline the Government’s thinking in this area.
Industry reaction
Responding to the recommendations, the London Market Group (LMG) welcomed the letter and noted that, having listened to market leaders and stakeholders – including those from the LMG – the Committee agrees that it is possible to have a properly functioning competitiveness duty without compromising safety and soundness.
LMG highlighted the letter’s call for a more proportionate and efficient implementation of the current rules and the acknowledgement of industry concerns around the ‘one-size-fits-all’ approach by regulators, and the need for more openness and transparency, so that they are open to constructive challenge.
Caroline Wagstaff, CEO of the London Market Group, commented on the letter and said: “This inquiry was an opportunity for the industry to show Parliament its value to the UK economy, but also the challenges it faces. We are delighted that the committee agrees with us on the impacts that regulation can and does have on the future success of the market.”
She highlighted LMG’s five-point plan to identify the regulatory and legislative changes it believes are necessary to enhance the market’s competitive position and that the recommendations of the committee align with many of the key points this plan raised.
“Growing global competition means that the London Market’s place as a jewel in the UK financial services sector is under threat, and it is vital to take action by producing a regulatory framework that makes us fit for the future,” Wagstaff added. “These recommendations are a step towards a regulatory system which boosts our competitiveness, brings in new investment and allows our market to fully contribute to the UK’s recovery and future prosperity.”
