Mark Hoban – 2011 Speech to the London 100 Group

The speech made by Mark Hoban, the then Financial Secretary to the Treasury, on 30 June 2011.

Introduction

It’s a pleasure to speak with you today about the challenges and opportunities that confront the Insurance Industry. As with the entire financial sector, the Insurance industry faces an unprecedented period of regulatory overhaul and economic uncertainty.

But we know that we are starting from a strong base.

Indeed, the UK insurance industry accounts for almost a third of all financial service jobs in the UK.

It controls over 13% of investments in the London stock market, which is more than held by pension funds, and significantly more than held by banks. It is the largest insurance centre in Europe, the third largest in the world, and accounts for 8% of total worldwide premium income.

This isn’t a position that the industry has earned overnight, nor is it a position that we are entitled to as a result of past triumphs.

Rather, it takes innovation and adaptation to stay ahead of the game…

But if London is to remain the best place to do business, then as markets, products and services evolve, regulation must evolve as well.

The financial sector and the economy are still in the midst of a delicate recovery following the recent crisis.

As we grow our economy and we reform our financial services, we are caught in what the Chancellor described in his Mansion House speech as “the British dilemma”.

One the one hand we want a strong, vibrant and successful financial sector to support economic growth and provide thousands of jobs across the country. On the other hand we cannot afford the sector to pose a risk to the stability and prosperity of the nation’s entire economy,

The last financial crisis cost the taxpayer billions of pounds.

But this is a situation that we cannot afford to repeat.

Or course, we’re all aware that the last crisis was one of investment and retail banking excess and domestic and international regulatory failure.

Though in the last crisis, the Insurance industry wasn’t directly implicated and came out relatively unscathed…it is not entirely immune.

Regulation of the financial system as a whole, needs to change.

Domestic regulation

It was the failure to foresee and prevent the crisis that has undermined trust in the sector of course, but also in the regulatory authorities. The tripartite system failed spectacularly in its responsibility to monitor and mitigate the systemic risks before the crisis. We are addressing these failures.

We are establishing a permanent Financial Policy Committee inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous inter-connections and stop excessive levels of leverage before it’s too late.

We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. It will bring judgement to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet, particularly banks and insurance companies.

But we recognise, of course, that banks and insurers engage in very different types of business. The inherent characteristics of an insurance business model are different to those within a bank’s. This is why we are proposing to provide the PRA with a specific statutory objective for its insurance responsibilities. Insurance regulation will not take a back seat to deposit-taker regulation in the PRA.

Last week the FSA published the PRA Insurance Regulation document providing more information on the future regulatory approach in that sector. In particular, and in response to concerns expressed by industry stakeholders, the PRA will have a dedicated mutuals supervisory team in order to develop specialist expertise in the sector.

The PRA will also be responsible for securing appropriate protection of policy holder expectations with respect to with-profit policies. Balancing the insurance objectives of policyholder protection and general objective of firm financial soundness.

More widely, the new Financial Conduct Authority will play a critical role in consumer protection. Its single strategic objective will be to protect and enhance confidence in the UK financial system.

In that role, the FCA will oversee the conduct of financial services firms, the operation of markets and the protection of consumers with new powers to ban the sale of toxic products.

We recently issued the White Paper and draft legislation on these reforms. It is absolutely vital that we get these reforms right. We need a financial sector that continues to propel growth but doesn’t put our stability at risk.

But we can only get there through your help. I encourage you to work with Treasury officials as we consult on the White Paper and draft legislation.

International regulation

But of course domestic regulation is not enough. Financial services are a truly international industry, and regulation needs to reflect that fact.

There is a great deal of work happening at the European level as you are already aware.

Firstly, I want to touch on the ECJ Test Achats case. A burning issue no doubt for many of you.

As the Government has said before, we are extremely disappointed by this decision, but there is no right of appeal. The judgement goes against the grain of a common sense approach to equality. Of course, nobody should be treated unfairly simple because of their gender, but financial services providers should be allowed to make financial decisions on the basis of sound analysis of risk factors, including gender.

However, we need to abide by the ECJ ruling so this morning I have announced the Government’s position on the Judgment. It is our view that the judgement only applies to new contracts for insurance and related financial services entered into on or after the 21 December 2012. That means, that any contracts with gender-sensitive pricing of premiums and benefits concluded ahead of that date, can continue unchanged after that date.

Early indications are that this is an interpretation shared across Europe. That said, we fully understand the need for legal certainty. The European Commission has already said it will issue guidance on the interpretation of the judgement, and we welcome this step. However, we are continuing to press the Commission to make an amendment to the Gender Directive to give legislative effect to the judgement

Elsewhere in Europe, we have the important role of the new European Insurance and Occupational Pensions Authority.

We are keen to work with EIOPA as it develops, and ensure that it delivers higher and consistent standards of supervision across the EU, and most importantly of all, helps create a level playing field across Europe.

By doing so, EIOPA can take a major step in completing a single market in insurance, creating new international opportunities for the UK sector.

Of course, however, the big ticket item is Solvency 2.

Solvency 2 is vital to creating a deeper, single EU insurance market and helping to drive a more competitive and sustainable industry. Through Solvency 2 we must ensure that we deliver proportionate and risk based regulation, and do not arbitrarily raise requirements in a knee-jerk response to the last crisis.

We have worked with the industry to identify the top priority issues for the UK, and to broker a sensible deal with the European Commission and other member states on these issues.

We have made great progress. Not least by securing recognition across Europe that helping the industry to maintain its role as a stable long-term investor is critical to long-term economic growth. The Commission’s proposal for a Matching Premium for UK annuities will be key to this.

But the debate is not over, and we need to sustain our efforts over the next few months. I encourage you to stay engage in this debate.

It is only through your engagement that we can build the solid evidence to base future regulation. It is only through such evidence that we can ensure that we implement regulation that is credible, effective and proportionate.

And we’ve already seen how constructive engagement can be through our parallel reforms to the tax system. In particular, I know many in the Insurance sector have keenly followed our reforms to introduce an opt-in exemption from corporate tax for the profits of foreign branches of UK companies. This will make the UK a more attractive location for the headquarters of pan-European insurers. This change is a vital part of a shift to a more territorial system of taxation, reflecting the fact that UK business has become more internationally diverse.

Ultimately if we fail to get regulation, and taxation, right for the Insurance secor, it won’t simply be to the detriment of the industry, it will be to the detriment of the wider economy.

It will impact on bank funding, on infrastructure investment, and it will impact directly on people across the country through their savings and their pensions.

Savings and investment

All of you present know how intertwined the Insurance industry is with the country’s savings habits. And as a Government we are committed to tackling the chronic lack of savings that preceded the financial crisis.

Before the financial crisis, one in four households had no liquid savings

UK household debt was almost 100% of GDP compared to 61% in Germany and 50% in France

And even today, almost 60% of people do not have a pension.

Instead, we want to build an economy more strongly built on the back of savings and investment. We are creating the right conditions to support higher savings across the board.

By introducing a duty of automatic-enrolment on employers, more employees will qualify for a minimum quality pension scheme from 2012. That means another 4 to 8 million people can start saving, or can save more into a workplace pension scheme. And I know that this is something that the ABI have broadly welcomed.

We have also removed the outdated requirement to annuitise by the age of 75, thereby giving people more choice and flexibility over how to use their savings.

We are committed to ensuring that a greater and broader spectrum of society have the opportunities, capacity and trust in the system to take personal responsibility for saving.

We have launched the Money Advice Service to ensure consumers have the skills and understanding to engage with the system. And I have to take this opportunity to thank Otto for all his work on this agenda and all the support he has provided to the Treasury.

And, we are consulting on the development of simple financial products to ensure consumers have choice and confidence in their investments.

Our goal is a savings landscape that creates the incentives for people to address their security and protection needs. Our challenge to you is how will you meet these needs?

Conclusion

I’m sure you’ll agree that we’ve come a long way in just a year. A long way to rebalancing our economy away from debt-fuelled consumption, to more prudent saving.

And a long way to reaching a much needed settlement to the “British dilemma” and the role of the financial sector in our wider economy.

We still have a long way to go and we are continuing to work tirelessly on domestic and international reform.

It is in everyone’s interest that we get these reforms right. And tt is vital that we continue to work with the industry, including those of you present today, to do so. I look forward to working with you in the years to come.