25/10/2013
Regulating for a level playing field
[Check Against Delivery]
Thank you for that introduction and to Craig for the invitation to be with you today.
You may not believe me when I say this but I genuinely do like coming to the MASS conference. It gives me the opportunity to hear first-hand what’s happening in the legal sector, to listen to your concerns and to reflect on where the personal injury landscape is heading. And there’s a tradition of healthy debate when insurers speak at legal conferences and vice versa.
There can be no doubt that regulation has played a key role in changing the legal market in recent years. And further regulation will come. That means more change, more uncertainty and more risk. But a changing regulatory environment provides opportunities as well as risks – whether that is creating new and innovative products to meet consumer demand or anticipating change and being one step ahead of your competitors.
Good regulation is about getting the balance right. That balance should ensure consumers are protected and that businesses, including insurers and law firms, are allowed to thrive. It took increasing car insurance premiums for the Government and consumers to realise that the regulatory balance in the legal services market had swung too far in the wrong direction. That balance is in the process of being restored. But that is the topic of an earlier panel on which I’m sure you don’t want to hear my views.
In addition to the LASPO changes, insurers have witnessed significant regulatory change in recent years as the Financial Services Authority became the Financial Conduct Authority. In that context, Craig asked me to talk briefly about what that change has meant for insurers, how we have responded, what you might learn from our experience and what we are doing ourselves to improve outcomes for our customers.
Financial Conduct Authority vs Financial Services Authority
The move from the FSA to what is now the FCA arose from the lessons learned following the financial crisis. It was a financial crisis brought about by banks’ excessive leveraging. But the policy response has been one that has seen the entire financial services industry brought under the regulatory spotlight. So part of our challenge in recent years has been to explain to policymakers how insurance and banking are different. That’s been especially important given that our regulator is responsible for all financial services firms.
I think it is fair to say that many thought that there would be little, if any meaningful change in the move from the FSA to the FCA. It would be the same people, doing the same jobs in the same building, albeit with a different logo at the top of the page. The reality has been completely different. The FCA recognises that Parliament has given it a broader perspective than its predecessor. Not least, a new focus on the benefits of competition, innovation and improving consumer access to the market. And the general insurance industry – from CEOs down - recognises that we are entering a new era of conduct regulation. We want and expect – and indeed, need - a healthy working relationship with the regulator.
And they have wasted no time in flexing their regulatory muscles. There has been, and continues to be, significant concern in the insurance industry at the scale and scope of the work the FCA is undertaking. Prioritisation is critical. So it would be useful is there was a clearly articulated programme of work so that everyone could plan accordingly. And given that the Competition Commission is currently investigating the private motor insurance market, it would be useful to see the two agencies being more coordinated.
Having said that, the recent motor legal expenses insurance review gave us a flavour of how the new regulator would work with the industry. The signs were particularly encouraging. The FCA engaged with insurers and the ABI early and made efforts to understand the market, including by undertaking consumer research. They based their findings on data and evidence and most importantly, they didn’t jump to take enforcement action but rather they set out their expectations and gave firms the time to get their own houses in order.
Reflections for the legal profession
So in the context of the current review of the regulatory framework governing the legal profession, there might be some lessons for you to learn as an industry given the experience of the financial services sector. As an outsider looking in, the profession must be asking itself a number of questions. For example:
What does a regulatory framework look like when it provides strong, clear regulation which protects consumers whilst ensuring the burdens on firms are minimised?
Is it efficient, effective or the best use of scarce resources to have thirteen Approved Regulators all overseen by the Legal Services Board?
Are the regulators appropriately resourced? Getting the framework right requires the right people with the right skills. That costs money. So, to what extent is the profession prepared to pay more by way of regulatory fees to deliver a framework that gets the balance right?
And the profession might be asking whether now is the time to sort out once and for all the difference between regulation and representation. It strikes me as odd that part of a solicitor’s practicing certificate fee goes to fund the Law Society which is little more than a trade body. It undertakes no regulation of the profession. Indeed, that’s what the SRA is for. So when firms’ budgets are tight, why is it that a solicitor has no choice about whether to become a member of the Society? The ABI – particularly because we are a trade body ourselves - is perplexed by this arrangement. Membership of a trade body should be voluntary on the basis of the value provided to members. If solicitors think the Society appropriately represents their views they will join. If not, they won’t. But the fact that membership remains compulsory seems, to me at least, to be a product of its time.
In addition to asking some fundamental questions, I am sure that you, like me, will want to see joined-up Government. In the context of the Legal Services Act, LASPO and the ban on referral fees, the continuing consolidation in the market and the further change to come, it will be more important than ever for regulators to work together with each other.
The boundaries between the claims management, legal and insurance sectors continue to blur so regulation will need to keep up with a fluid and evolving market. This means asking some difficult questions of the regulators:
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Why is it, for example, that a CMC is banned for offering inducements but solicitors and insurers are still able to do so? It makes no sense at all. And it does nothing to stop unscrupulous claimants from making a fraudulent or exaggerated claim.
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Also, is it still appropriate for the Claims Management Regulator to continue to be a part of the Ministry of Justice? Or might they be better merged with the FCA to get the advantages of an agency with scale and resources?
Those may be questions for another day. But at some point we are going to have to answer the hard questions.
The ABI and insurers
And asking and answering difficult questions of ourselves is something insurers have been doing. I’ve talked at other events in recent months about how motor insurers have been taking a long, hard look in the mirror. The reflection has not been an attractive one. Some of our own practices have led consumers to doubt their trust in us, question whether we are an industry with integrity and ask whether they can be confident that we operate in a way that is fair.
That is not a great place to be.
But the powerful role that an effective trade association can play is to work with its members to address the difficult questions and work to deliver change. Change for insurers, change for the claims environment and change that will deliver positive consumer outcomes.
Our ideas were set out last year in a paper entitled The Way Ahead for Conduct Regulation (pdf 2.8MB). This called for the FCA and the financial services industry to work together to deliver good outcomes to more confident and informed consumers. We outlined the benefits of aligning conduct regulation with policy goals for the benefit of the public whose interests the Government, FCA and the industry ultimately serve.
Earlier this year took that discussion forward in a paper entitled Identifying the Challenges of a Changing World. In that document we considered how the world is likely to change between now and 2020 and what that change means for us as an industry.
We are preparing ourselves as an industry to meet these challenges by looking to:
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improve our reputation;
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provide solutions to the problems society faces;
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increase consumer-centric approaches by changing distribution models;
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maximise the impact of the digital revolution on a firm’s business model and operating capacity; and
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develop a closer, more effective relationship with regulators.
That might all seem very high-level and aspirational. And it is - deliberately so.As an industry, our challenge is now to achieve those aspirational goals through concrete deliverables and actions. And I will briefly touch on how we have been doing that with three specific examples.
Firstly, we have been working with insurers, the Office of Fair Trading and the Competition Commission to get things in the credit hire and repair markets more focused on what is in the best interests of the customer. We argued strongly that the private motor insurance market should be referred to the Competition Commission. For an industry that manages risk, that is not a natural place to be. My hope is that the Commission’s work will result in recommendations for reform of the whole market and will consider regulation of all of those actors in the supply chain that merely add unnecessary frictional cost to insurers. Costs which are, of course, inevitably passed on to consumers through increased car insurance premiums.
Secondly, we are looking to strengthen the Code of Practice on Third Party Assistance. This is a voluntary, self-imposed good practice guide for insurers who are dealing with unrepresented claimants and it supplements existing regulation. In the context of the challenges posed by the new legal environment, we recognise that as an industry we need to make sure consumers remain adequately protected. So we are undertaking a piece of work to ensure that the existing Code remains appropriate and investigating whether we can go further. We will make announcements on what that work results in later this year.
Thirdly, we have been working collaboratively with forward-thinking and pragmatic organisations, including MASS, AMRO and FOIL, to address the UK’s whiplash epidemic. We were never going to agree on what should happen to the SCT limit. But we did come together to develop a consensus on what a model for reforming the medical reporting system might look like and provided that to the Government. Close readers of the Government’s response to their whiplash consultation released on Wednesday will have noted this.
In these three pieces of work, and the other work we are taking forward, we haven’t pretended that it would be easy to ask the industry some really difficult and uncomfortable questions. We haven’t pretended that our industry is squeaky clean.
We haven’t pretended that the blame all lies elsewhere by, for example, running distasteful and completely misleading advertising campaigns or simply burying our heads in the sand in the hope that all the problems might go away.
And most importantly of all, we haven’t been afraid to put new disciplines and rules on ourselves rather than waiting for someone else to do that to us.
Conclusion
And that’s really the message that I wanted to leave you with today. Effective regulation is not just about what the rules say. It is about what firms in your industry do and how they do it. And as members of MASS you have the opportunity to deliver change that can make a difference. Make a difference not just for your clients but to how society views you and your industry. If the experience of insurance is anything to go by, that’s not going to be easy. So I suppose the question you need to answer, is whether you are up for the challenge.