Helen Liddell – 1998 Speech to the Life Insurance Association Conference
The speech made by Helen Liddell, the then Economic Secretary to the Treasury, on 21 January 1998.
Thank you for inviting me to your conference. I know that this audience represents a wide range of insurance industry interests and I welcome this chance to get together again.
I should like to speak this morning about the Government’s plans for reform of financial services regulation.
The speed with which the new Government announced our reforms in May reflected the importance we attach to the industry. An efficient and clean financial sector is of benefit to the whole UK economy. Effective regulation is central to attaining our wider economic aim of a stable, low inflation economy with sustainable growth and high employment. An economy with a world-leading financial services industry, of which your own sector is a most important and valuable part.
Single regulator
The key element of our reforms is the creation of a single, statutory regulator.
A single regulator will be better placed to provide effective and consistent regulation across the traditional financial sectors of banking, investment services and insurance. This is the logical way to go as traditional business boundaries continue to get more blurred.
The single regulator will be more effective because there will be no duplication of effort, no doubt about which body is responsible. Firms will benefit because they will no longer be supervised by several bodies with overlapping regulatory demands.
Many firms are currently subject to a range of statutory regimes, for insurance, investments and deposit taking. In many cases equivalent provisions relating to different kinds of business are subtly different – in some cases radically so. It is not in anyone’s interests for firms to have to consider in each case which regime they are operating under. Neither theirs nor their customers.
Stages of reform
Our reforms are already taking shape. Last October we launched the new regulatory body, the Financial Services Authority, under the excellent chairmanship of Howard Davies.
The transfer of banking supervision from the Bank of England to the FSA will be effected by a Bill currently before Parliament. At the same time, we are drafting a second bill which will complete the task of dismantling the old, fragmentary arrangements based on self-regulation and putting in place a new, fully statutory system. We intend to publish a draft of the bill for consultation in the Summer. As a result of the two bills, the FSA will replace nine existing regulators. The FSA’s role will also include the authorisation of those members of the professions who carry on investment business.
The FSA will be a unique one-stop service for financial regulation. There will be a single supervisor for all financial services providers. Wholesale and retail; from the smallest independent financial advisers to the biggest City firms. What it will not be is a one size fits all bureaucratic monolith.
Statutory objectives
When the Chancellor launched the FSA he announced that it would have a set of statutory objectives written into the second bill. The objectives will set down the responsibilities of the FSA, who will be required to comment annually on performance against them in their annual report to the Treasury.
The FSA will have a responsibility to sustain confidence in the UK financial system and markets. The FSA’s role as a prudential supervisor of financial institutions and its oversight of markets are both essential to the maintenance of confidence in the UK financial system.
The FSA must also protect consumers by ensuring that firms are competent and financially sound and give their customers confidence in their integrity, while recognising customers’ own responsibility for their decisions. This will set down in law the need to protect consumers.
I am sure I do not need to tell you how much importance I attach to this objective in the life insurance industry.
It is essential also that the FSA should promote the improvement of public understanding of the benefits and risks associated with financial products. I believe that the FSA has a key role in helping to educate customers, to enable them to discharge their own responsibility to themselves to make sensible choices.
The FSA must also monitor, detect and prevent financial crime.
In delivering these objectives, the FSA has an obligation to facilitate innovation in financial services and to take account of the international nature of financial services business.
The FSA will also have to be efficient and economic and to ensure that costs and restrictions on firms are proportionate to the benefits of regulation.
Cost-effective regulation
I know that this last point will be of particular importance to you, who will be responsible for meeting part of the FSA’s costs. I can assure that, as with all aspects of the objectives, we regard it as more than an aspiration.
Cost effectiveness goes hand in hand with effective consumer protection. The costs of regulation are met by firms. This means they are passed on to consumers in the form of higher charges or lower returns.
We will be taking specific steps in the Bill to achieve cost effective regulation. Not only must the FSA use its resources effectively, it will need to show the industry and the public that it is doing so. So it will be required to publish its proposed budget for consultation at the same time it publishes its proposals for fees.
Also, where the FSA introduces a new rule or change to an existing one, it will have to consult the public and practitioners by publishing the proposals. These proposals will include estimates of the costs and benefits, and other options. This requirement goes well beyond the requirement in the current legislation for the SROs to take account of the costs of compliance.
Complaints
Now let me touch briefly on two further areas I know are of interest to those here today – the issues of consumer complaints and compensation. These are fundamental to our plans to provide an effective level of protection for consumers.
We intend to establish a system of complaints handling arrangements which will ensure that consumers receive help when they need it in a manner that is simple and easily accessible.
At present the Insurance Ombudsman Bureau and the Personal Insurance Arbitration Service are just two of at least eight schemes which relate to different sectors of the financial services industry. There are also separate procedures for complaints against professional bodies. These schemes operate in different ways, with differences between the schemes in terms of eligibility criteria and limits on awards.
The result is a confusing alphabet soup of arrangements. Consumers do not always know where to turn to when they have a complaint.
Whilst I welcome the recent initiatives which have been taken by the various ombudsmen to streamline their operations within the boundaries of the current system, we intend to undertake more fundamental changes to harmonise complaints handling arrangements in line with our approach to regulation. I have recently announced our intention to establish a single, statutory Financial Services Ombudsman. Consumers will have a single point of access to the complaints handling arrangements. There will be a clear and simple means to seek redress to a scheme which will be independent of both consumers and practitioners. The scheme will be compulsory for firms.
This will put firms in no doubt about the obligation to deal with complaints fairly and quickly. Complainants will have access to a highly visible ombudsman scheme.
The scheme will of course need to be set up in a way which draws on the best features of the existing schemes. I am confident that the FSA will enjoy the assistance and full cooperation of the various ombudsmen and of the industry.
Compensation
We will also establish a simpler and where appropriate more harmonised set of arrangements for dealing with compensation when firms are unable to meet their obligations. Currently, there are multiple schemes – the Policyholder Protection Scheme, the Deposit Protection Scheme, the Investors Compensation scheme, the Building Society Investor Protection Scheme and even the Friendly Society Protection Scheme. Each has its own set of rules and eligibility criteria.
We will replace this patchwork with a single scheme with a single board with harmonised administrative arrangements. The creation of a single scheme, like the establishment of the Financial Services Ombudsman, will benefit both consumers and the financial services industry.
There will be easier access for consumers, greater clarity about who is eligible and in what circumstances. There will be clearer governance arrangements which will be underpinned by statute.
I believe that effective arrangements to deal with complaints and compensation will build confidence in the industry. The Financial Services Authority is currently consulting on these issues. I welcome their desire to work with the industry and consumers in order to get the details right.
Lloyd’s
There is one further very important area I would like to talk about, which is again relevant to our determination to apply statutory regulation consistently across the board. This is Lloyd’s.
For a vast majority of its time Lloyd’s has been a successful part of UK financial services industry, making an important contribution to the economy and balance of payments.
As you will be aware though, it suffered huge losses – 8 billion Pounds – in the period 1988-92. There were a number of reasons for this which were out of Lloyds’ hands – such as natural and man-made disasters. But the losses were exacerbated by bad underwriting decisions and practices.
Since then action has been taken. I should like to pay credit to Lloyd’s for resolving its financial difficulties through the successful implementation of Reconstruction and Renewal’ in 1996 and for all it has done to improve regulatory arrangements.
But more needs to be done. Lloyd’s itself has recognised the need for a greater independent element in its regulation. It rightly believes that businesses which are well regulated – and are perceived to be so -will be in a better position to compete in global markets.
Lloyd’s is a complex organisation – many of us tend to think of it as a big insurance business. But far from being one business it is – even now – many separate businesses operating under a common umbrella. This means that it needs to be looked at from a number of different angles.
Prudential supervision
The first is prudential supervision. As with all insurance regulation, the first priority is protection of policyholders. We intend to give FSA much more extensive prudential supervision powers in relation to Lloyd’s. These will be more like the powers it will have for insurance companies, such as fitness and properness checks and comparable powers of intervention. They will also include a requirement for FSA authorisation of managing agents. These are the people who are responsible in practice for running underwriting syndicates.
We intend that the FSA should have reserve powers to authorise and supervise Lloyd’s members direct, if that proves appropriate in future. But we do not intend that the FSA should supervise individual Names, so long as Lloyd’s own supervision is adequate.
Protection of capital providers
Protection of capital providers is another important area. Individual members of Lloyd’s are advised by members’ agents, who act like financial advisers. We propose to extend the authority of the FSA in this area to the authorisation and regulation of members’ agents. This will give increased protection to members of Lloyd’s, some of whom have suffered from bad advice in the past.
We recognise that the main risk to capital providers is the risk to which they are exposed through the contracts of insurance which they underwrite. The enhanced insurance supervision arrangements I mentioned should also provide a substantial benefit to members in reducing those risks.
Capacity auctions
Next, I would like to say something about capacity auctions. Recently, participation on a syndicate has moved from being a privilege to a right. As a result, a market has developed in trading capacity for different syndicates. This market, which currently operates through a series of auctions run by the Corporation of Lloyd’s, is analogous to an investment market. This market will be overseen by FSA under a regime similar to that currently in place for recognised investment exchanges.
Role of the Council
Finally, these arrangements will continue to allow scope for a major role for the Council of Lloyd’s in ensuring Lloyd’s continues to be a well-regulated, successful and important part of the UK financial services industry. This reflects the special role of the Council of Lloyd’s in controlling the affairs of the Society.
Taken together, I believe that these changes to the regulatory regime for Lloyd’s will however provide, for the first time in many areas, a major element of external regulatory accountability.
Conclusion
The Government is committed to reform and to achieving the best financial regulatory system we can. The UK financial services industry has achieved a great deal, but a lot of people remain, sometimes rightly, suspicious of its capacity to act in their best interests. This lack of confidence tarnishes the whole industry. The FSA and the industry it regulates need to work together to ensure that confidence is maintained in those areas where standards are highest and improved where standards have fallen short.
In short, the regulatory system must be more effective, providing an adequate level of protection for consumers. It must be transparent and inspire public confidence in the regulatory structure. It must be efficient, imposing only such burdens and restrictions which are necessary to achieve sound regulation.
I fully recognise the importance of working with the insurance industry and its customers in designing the new framework of regulation.
There will be further opportunities for discussion – not least when our draft bill is published for consultation next summer. But I do not want to wait until then to hear the views of the life insurance industry. Various representative bodies in the life insurance industry are already in touch with me and my officials to make sure we are aware of your ideas and concerns. I urge you to continue this dialogue in the coming months.
