We are the voice of insurance and long-term savings | Contact us

Rationalising regulation Evening Standard article

Evening Standard Financial Editor Anthony Hilton discusses the role of the regulator in his latest column (June 4, 2014), referring to comments in ABI Director General Otto Thoresen's speech at the J.P. Morgan European Insurance Conference on Tuesday 3 June, 2014.

Read the article below and on the Evening Standard website.

Anthony Hilton: Time has come to regulate the regulators

The day of the Queen’s speech is a good day to note that, with the fallout from the European elections still playing out in Brussels, the independence referendum in Scotland in September and the country facing a general election in May, the biggest risk to business comes from politics not the economy.

But that prompts the question of what can business do about it. And if what Otto Thoresen — director general of the Association of British Insurers (ABI) — said yesterday is to be believed, the answer is not a lot. Engagement with politicians is desirable, indeed essential, but even so it is important not to set expectations too high, he says.

Thoresen has had more experience than most and yesterday he pointed out that in 2013, ABI staff had more than 200 meetings with the Financial Conduct Authority and around 80 meetings with the Prudential Regulation Authority.

They met with politicians in Brussels every week. They met with MPs in Westminster every week. He personally met government ministers on average every couple of weeks.

And at the end of all this, neither he nor anyone else in the industry had a clue that George Osborne planned to abolish the requirement that pension pots buy annuities, a move which has profound implications for the business model and investment strategy of a whole swathe of his industry.

Indeed, Osborne made his move only weeks after the insurance industry thought it had reached an understanding with Government whereby it would commit itself to investing more in long-term infrastructure projects which the country needs because these investments were a good match for its annuity liabilities which are also long term.

Now the challenge is that if the public no longer buys annuities and that market shrinks, it takes away the insurance industry’s need for those long-term investments.

Thoresen has been forced to the conclusion that any industry which thinks it is in partnership with government risks fooling itself.

Politicians might have a broadly similar agenda in wanting to improve the wellbeing of the voters and the prosperity of the country, but they operate to totally different time horizons. They may have a relationship; but it is not a partnership.

It is a sign of the continued naivety of business in dealing with politicians that he has to spell this out. It shouldn’t be a surprise. A former politician — junior minister in the last government — has been heard to say on more than one occasion how little he ever listened to trade association lobbyists.

The two things that mattered in his life were keeping his constituency sweet and keeping in with the more senior members of the government who had sponsored his advancement thus far and whom he hoped might one day reward his continued unquestioning loyalty with a leg up into the Cabinet.

He therefore saw meetings with the ABI or any other financial trade association as an opportunity to sleep — perchance to dream — but absolutely not to listen to what the lobbyists were pushing for.

The justification for this is that junior ministers have no power anyway and if something is important enough the officials will pick it up — eventually.

You can say much the same of regulators — the group that poses the other big challenge to financial services industry.  Here Thoresen gives credit for the most part to regulators for wanting to do the right thing, but points out how this good intention gets undermined because there are so many of them coming at his and other industries from so many angles and all seeming to want different things. And what one wants is not necessarily compatible with what has gone before.

It seems there are two issues here — first that regulators are designing structures impossible to live up to, and second that if regulatory proposals continue to pile up at their present rate the industry will be so constrained it will find it hard to perform its traditional economic role.

He worries for example how realistic is the blueprint for supervision by the Bank of England through the Prudential Regulation Authority.

It has declared that its emphasis will be on forward-looking judgement-based supervision. But the primary objective of the Europe Solvency II standard which has just been agreed is to eliminate subjective judgements and to make the industry comparable by putting all its participants on a common footing. His view is that however good its intentions, the Bank is not going to be able to operate as it hopes.

As an example of rule piling on rule, he cites work on a separate project to introduce a capital standard for the industry. He believes that is what Solvency II does but no matter.

Those pushing the capital standard say it is needed to meet six different objectives from financial stability to the advancement of financial inclusion. Thoresen’s fear is that anything which tries to hit six targets at once will end up hundreds of millions of pounds later, hitting none of them.

There is much more but the overwhelming impression from Thoresen’s remarks is of a political and regulatory system which at times looks dangerously close to being out of control.

Responsibilities are blurred and overlapping so that there is no clear understanding of regulatory objectives nor of the best way to achieve them.

And there is even less understanding of the damage done to the industry as a result of these ill-thought-through interventions.

More than ever it seems we need someone to regulate the regulators.

Last updated 01/07/2016