Should UK regulators take more regard for competitiveness?
The increasing intensity of global competition facing the London insurance market post Brexit has led to calls in the industry for a statutory objective on the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to consider the competitive position of the UK’s financial markets in their decision-making.
Parliamentary support for such an objective appears to be strong. The recent Treasury Select Committee's inquiry on Solvency II criticised the PRA for being heavy-handed in adopting Solvency II legislation, saying the regulator should make changes to benefit the competitive standing of the UK's insurance sector after Brexit.
This was followed by the House of Lords Financial Affairs sub-committee report "Brexit: the future of financial regulation and supervision" which noted that global competition and international standards-setting, such as initiatives pursued by the International Association of Insurance Supervisors (IAIS), will become yet more crucial after the UK leaves the EU. The report concluded with a clear recommendation for a regulatory competitiveness duty to ensure the UK is outward-facing and better equipped to access new global markets.
Other global insurance hubs already incorporate a statutory international competitiveness requirement. This includes Bermuda, Switzerland (both of which have full Solvency II equivalence and offer an EU harmonised regulatory regime), as well as Asian hubs such as Hong Kong and Singapore. Their respective competition objectives arguably better equip these jurisdictions to consolidate their status as credible insurance hubs and challenge the London market.
To give an example, the Swiss regulator is required to take account of the "effect that regulation has on competition, innovative ability and the international competitiveness of the [Swiss] Financial Centre".
An international competition duty is not a new concept within the UK - the now defunct Financial Services Authority (FSA) had such an objective, although this was criticised as having contributed to the FSA's "light touch" regulation and their approach in the run up to the 2007-09 financial crisis.
Consequently, this remit was not included in objectives of the FSA's successor bodies. As it stands, the FCA's key focus is consumer protection whilst the PRA's primary objectives are the safety and soundness of firms, with a further insurance objective of securing policyholder protection.
It may be argued that these objectives lead to a conservative capital approach and stifle innovation and are not materially mitigated by the PRA's the secondary objective of facilitating effective competition when making policies to advance its primary objectives.
A resilient UK insurance sector underpinned by effective competition arguably brings advantages to both policyholders and the industry, for example, by encouraging innovation (this is particularly important given the increasing need for risk coverage of man-made risks such as terrorism and cyber) and reducing regulatory costs that would attract inwards investment into the UK.
The argument against a competitiveness objective is that it potentially creates systemic risk. The question then is how to balance, on the one hand, the UK's need to compete globally and, on the other, the PRA and FCA's current statutory objectives. Whether or not the government decides to amend the UK regulators’ objectives, Brexit reinforces the need to find the right trade-off between regulatory toughness and competitiveness.
This article first appeared in Insurance Day