Lloyd’s Market Association Questions Aspects of FSA Regulatory Reform

In a response to the proposals to restructure the UK’s financial regulations the Lloyd’s Market Association (LMA) has taken issue with some of the proposals, which, in its view are “over-engineered” and excessively “bank centric.”

“The future regulation of the Lloyd’s market will be more effective and efficient if market organizations are allowed to play an active role in shaping that regulation,” said the LMA.
It pointed out that “the market’s involvement in drawing up the Memoranda of Understanding that will exist between its three regulators – the proposed new Prudential Regulatory Authority and Financial Conduct Authority, and the Corporation of Lloyd’s itself acting in a regulatory capacity – will be valuable in making the new system of regulation workable for Lloyd’s entities. It is these Memoranda of Understanding that will effectively stipulate how the process of regulation will operate for Lloyd’s managing agencies, members’ agencies and their service companies.”

The LMA has already stated that it believes the proposals, as currently constituted, are “over-engineered and likely to be overly costly for the general insurance sector.” Under the proposals, Lloyd’s managing agencies face the prospect of “dual regulation” by the two new authorities, in addition to existing regulations required by the Corporation of Lloyd’s. As a result the LMA foresees “a significant increase in regulatory fees and levies.”

On a more positive note the LMA said it is pleased that the “Treasury has said in its consultation paper that the Government, Bank of England and FSA will continue to consider how the characteristics of insurance firms should be recognized in the new framework. Therefore, there is an opportunity to ensure that supervision of the Lloyd’s market will be proportionate to the risks it presents to the financial system.”

Kees van der Klugt, the LMA’s Head of Legal and Compliance, commented: “It’s fair to say we’re not convinced of the need for the “twin-peak” system of separate prudential and conduct of business regulators which the Treasury is proposing – it’s complex and it has the potential to increase the cost of regulation for the Lloyd’s market – but we recognize the real practical necessity of making it work as well as it can. The Memoranda of Understanding between the regulators are the key in that they will lay out the way in which this system will function on a day-to-day basis.

“When Lloyd’s and managing agents came under the authority of the Financial Services Authority in 2001, the market was consulted on the Memorandum between the FSA and the Corporation of Lloyd’s at that time and the result was a manageable system of regulation which has improved over the 10 years of interaction between the FSA, Lloyd’s and managing agencies. It would be a pity to lose that. We now need a similar degree of consultation to take place if we are to avoid creating a regulatory environment that could erode Lloyd’s competitive position globally.”

The LMA is also concerned that the proposed changes in the UK are “coming at a critical point with three major EU regulatory initiatives also underway: Solvency II, which is already taking up a considerable amount of resources within managing agents, the Insurance Mediation Directive review and the bedding down of the new EU super regulator, EIOPA.”

Van der Klugt noted: “There’s a real danger of taking our eye off the ball here. Both the Government and the Lloyd’s market are going to be heavily engaged in the transition at a time when major developments are taking place in Europe. The Government is well aware of this – and indeed we highlighted the problem in a letter to the Conservative Party when they mooted their plans in opposition in 2009 – but nevertheless, the necessary skills and resources are scarce.”

“The twin-peak regulatory structure planned for the UK is also very different to the structure now in place in Europe, where the new, sector-specific super-authorities for insurance, banks and markets will deal with prudential and conduct matters. Indeed, it would be hard to design a system of regulation more unlike the European model than the one the Government is putting forward. That may be storing up problems for the future.”

The cost estimates are not insignificant, and have risen over the past year. Last July the “Treasury estimated that the transition costs for the public authorities (Treasury, Bank of England, PRA, FCA and FSA) to the new structure would be £50 million [$83 million] spread over three years,” said the LMA. “In this 2011 consultation, they now estimate these costs to be some £140 to £240 million [$233 to $400 million] over the same period – a difference which has not been explained.”

So far the Treasury has been “unable to detail the transition costs of single or dual-regulated firms: for the latter, which will include all managing agencies, this is said to be ‘simply the costs of setting themselves up” to deal with two regulators, ignoring future consultations on the new rulebooks, staff training and new systems. The Treasury estimates the costs of 800 of the dual-regulated firms will be £60,000 [just under $100,000] on average and for the remaining 900 dual-regulated firms the costs will be £10,000 [$16,664] on average, so that transition costs for these firms would amount to £57 million [95 million]. By way of comparison, where significant regulatory change is involved, the LMA points out that the Corporation of Lloyd’s expects the costs of implementing Solvency II for the Corporation itself and the 58 managing agencies will be in excess of £250 million [$416 million].”

In respect of ongoing costs of the “twin-peaks system,” the Treasury is assuming that “these will not be significant for regulated firms. This does not entirely square with the proposals that the FCA be a much more intrusive and intensive conduct of business regulator than the FSA, with inevitable impact on the regulated.”

The LMA said it is “wary of the Treasury’s view that the costs of prudential regulation (and therefore of the PRA) will fall in the medium term, partly because of the proposed judgment-based model of supervision. Van der Klugt stated: “We ask the Treasury in our response how different the judgment-based model will be from the FSA’s principles-based model or outcomes-based model in costs terms; we also ask how realistic the Treasury’s assumptions are when in reality the PRA rulebook will have to contain EU-driven rules, for example for Solvency II.”

“There are inevitable risks in moving to the new system but it is our belief that these and the associated costs can be minimized through continuing discussion with the industry,” he continued.

The Government will consult the market in 2011 and 2012 on the amendments to the Financial Services and Markets Act with the aim of putting the new regulatory architecture in place for 2013.

Source: The Lloyd’s Market Association

Topics Legislation Agencies Excess Surplus Europe Lloyd's