Speech by the Financial Secretary to the Treasury.
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The UK’s Approach to Financial Regulation and the important contribution insurers can make to developing the UK economy
Thank you for your warm welcome and thank you especially to Archie Kane and Kerrie Kelly for hosting this evening’s dinner.
I would like to take this opportunity to thank Archie, your departing chairman, for his contribution to joint industry - government work on competitiveness and insurance; and for his wider role in representing the industry. I look forward to working with Tim Breedon as his successor.
I believe I’m the first member of the new Government to have the pleasure of addressing the insurance industry. And I imagine it’s the first time that a Conservative minister has stepped in at the last minute for a Liberal Democrat colleague on one of your platforms. I know that Nick Clegg is sorry not to be able to join you this evening.
But we have in this room the physical embodiment of Coalition working with Steve Webb our Pensions Minister and we have a close working relationship.
We’re all getting used to a new way of working and if you’re already struggling to remember life before David Cameron and Nick Clegg entered Number 10, it’s worth reminding you that in fact our new Coalition Government is still less than a month old.
There are still moments when I hear the words “The Government has announced”, and I wonder for a split second what Gordon Brown has done this time.
Having known nothing but one party rule for 65 years, it’s understandable that some feared a coalition would lead to weakness and indecision. But even at this early stage it is clear that the new experience has taught us that you can work together, remain distinctive, find common ground and end up stronger for it.
We need a strong Government if we are to learn the lessons of the economic and financial crises that we’ve been through.
Take for example our commitment to addressing the fiscal position in the UK. Less than two weeks after taking office, we took immediate action on our budget deficit, reducing public spending for this year by over £6billion. This will be followed by a full Budget later this month and a review of public spending later this year.
And in the interests of transparency the Chancellor has taken the bold decision to pass control of government economic forecasts to an independent body - the ‘Office for Budget Responsibility’. It will be distinct from Government, tasked with producing the fiscal forecasts that underpin Budgets, and importantly, holding the Government to account over progress towards its fiscal goals.
This together with our decision to publish the fine detail of government spending will make us a more transparent and accountable government.
Tackling the deficit is one of a series of measures needed to put the economy on a firmer footing. We need a more stable model of economic growth.
The financial services sector is pivotal in this - we need to learn the lessons of the financial crisis but at the same time the sector can play a key role in supporting innovation and stabilising the wider economy.
Just as we are tackling the fiscal challenge, so we need to set a new agenda for financial services - recognising the changed international landscape - and the need for the sector to play a role in rebalancing the economy.
As one of the biggest players in the City and in the global insurance market, the British insurance industry has a vital part to play.
So tonight, with these priorities in mind, I want to touch on two themes:
- first, I’d like to draw on the approach to the reform of financial regulation at home and abroad that I set out in Brussels last week, showing how this applies to the insurance sector;
- second, I’d like to talk about the important role the Government sees for insurance rebalancing the economy by developing markets for protection and savings; and supporting the longer-term agenda for the economy.
In both cases, I want to reinforce the message of the value I see in the insurance industry working in partnership with Government.
Turning to regulation first.
I am of course acutely aware that insurance companies are not banks.
Insurers did not play the same role as banks in the financial crisis; and UK insurers came through the crisis relatively unscathed. It’s not appropriate to apply the same regulation across all financial services indiscriminately.
But there are ways in which our approach to building a more stable and sustainable financial services sector in general applies to the insurance sector as much as it does to other areas of financial services.
The first challenge we face is to strike the right balance in our regulatory response.
This Government firmly believes that businesses and consumers get the best outcomes from financial services if markets are competitive and properly regulated. However, disproportionate or overbearing regulation imposes costs on firms that are passed on to users either through higher charges and lower returns or through a reduction in choice and competition. This is a delicate balance, but one that we are committed to getting right both in the UK and internationally.
Whilst geography may tell us that Britain is an island, in terms of financial services we are inseparably joined to world and European markets. This is of course very true for your industry, which is a world leader and has centuries old traditions - dating back to the Lloyd’s coffee houses - of transacting in global markets, underpinning trade.
The deeply interconnected nature of today’s financial markets means that the UK should play a major part in shaping the global response through the EU and the G20.
This is an area where this Government is determined to lead, but our ability to influence that response will be enhanced by demonstrating that we have learnt the lessons of the crisis and acted, not defending the old way of doing things.
But in a world where people, capital and businesses are highly mobile, we cannot pretend that either the UK or the EU can tackle these problems in isolation.
Decisions that we take will determine where international businesses locate - this debate is not about London, Paris or Frankfurt but Europe, the US or Asia. This is why a coordinated G20 response is needed.
So our response to the financial crisis will be engaged and practical. It will be rooted in our understanding of the strengths and weaknesses of global markets; a recognition of the benefits of global and European co-operation but a realisation that the distinctive nature of the UK’s financial services sector presents a set of challenges which is the prime responsibility of our Government.
What does this mean for UK policy and internationally?
In the UK, as you know, the Government intends to strengthen the regulation and supervision of the financial sector by putting the Bank of England in charge of macro prudential regulation, with oversight of micro prudential supervision.
This will enable better monitoring of systemic risk across all sectors, including insurance, and ensure more effective regulatory interventions not just for individual firms but across the whole of financial services. George Osborne will set out our approach in more detail next week.
In the G20, we will remain at the forefront, arguing the case for coordinated reforms that maintain open markets, and avoiding action that could lead to protectionism, regulatory arbitrage and a detrimental effect on competition.
In Europe, we are strong believers in the European single market.
So we support the creation of a new supervisory architecture. These important central bodies will complement a stronger network of national supervisors. National supervisors remain best placed to regulate the markets they know: but the new agencies will be best placed to deliver the common rulebook, underpinning the Single Market.
And we will continue to work hard on the sectoral directives that are reshaping the regulatory framework.
We are therefore committed to the creation of EIOPA (the European supervisory agency for insurance) in 2011. Likewise we are committed to ensuring it has appropriate rule-making capacity.
Most importantly, however, for all of you, we are wholly committed to seeing through the Solvency II project, to ensure it provides the robust and modern prudential regulation we need for insurers and reinsurers. This will raise prudential standards, enhance policyholder protection and deepen the single market in insurance.
Together we have made progress, for example on the recognition of the liquidity premium in the European Commission’s draft Level 2 proposals, in order to value accurately annuity liabilities.
We have also successfully pushed for appropriate transitional periods that will allow firms to adapt whilst avoiding market disruption.
The industry, I know, has put a great deal of effort into preparing for Solvency II; and I echo the ABI’s encouragement to UK firms to complete the latest impact assessment exercise to inform decisions on calibration. And I would ask you to encourage your European counterparts to engage in the same way.
The Commission has proposed postponing the implementation of Solvency II by two months to 1st Jan 2013, in order to better tally with firms’ reporting deadlines across the EU. While this is welcome, I, like the ABI, believe it’s important that we press on with preparing for implementation without any further delays.
In the Level 2 process, the devil is very much in the detail and there is still a way to go. I am grateful to the very significant contribution of the ABI, who have worked closely with the Treasury and FSA and we look forward to keeping up the coordinated and constructive UK approach.
We want to strengthen the single market in insurance - benefiting both insurers and consumers. Common minimum standards for national insurance guarantee and investor compensations schemes are also fundamental to a genuine single market in cross-border insurance. So we will urge the Commission to be ambitious when setting out their proposals next month to raise standards in Europe to those which UK consumers currently enjoy.
And of course strong compensation schemes are a fundamental part of the crisis management and resolution toolkit.
We are consulting on improvements to the administration regime for insurers in the UK. And our thinking will feed into the Commission’s communication on an EU crisis management framework in October.
Whether in the UK, the G20 or the EU, we want to be at the heart of the debates that will shape financial services for decades to come. I would welcome your thoughts on how we can set a positive agenda for the insurance sector in the EU. Our goal is a strong, stable and successful sector that underpins the growth of the UK economy over the medium to long term.
This whole-economy view takes me to my second theme, which concerns the important role of the insurance industry rebalancing the economy by responding to consumer needs and the wider needs of the UK economy.
Just as insurance has a vital place in the reform of financial services, so it has a key contribution to make towards structural changes in the wider economy.
First, insurers are key to helping rebalance the economy through supporting investment in new projects and to the non-financial sector.
I therefore welcome insurers’ involvement in work to look at ways of developing deeper and more resilient Sterling debt markets for UK companies. It is pleasing to see that M&G has recently made a private placement to a mid-sized haulage company with a 10-year maturity.
Second, as one of the most important groups of institutional investors in the UK, insurers also play a critical role in the oversight of the companies in which they are investors.
I therefore welcome the recent establishment of the Institutional Investor Council to help establish a stronger voice for institutional investors. A strong voice will be critical with the Financial Reporting Council creating the Stewardship Code for Institutional Investors to sit alongside the updated UK Corporate Governance Code.
I also look forward to the investigation that the Council is carrying out on fees paid in respect of rights issues, due to report by the end of the year. And I hope it will play an active role in responding to the recent Commission consultation on corporate governance in financial institutions.
Third, insurers have a role in rising to the challenge of our aging population - where we all know that there is a great deal of thinking to be done to work out how we can support society’s growing needs, in terms of pension income, or protection for long-term care - areas where Steve and I will be working closely.
In all these areas - but most particularly in relation to these longer-term structural challenges, the industry needs to be an active player. And indeed, I know that many of these areas were themes in the Insurance Industry Working Group report, which was developed by industry under the previous Administration, and which provided a vision for the industry for 2020.
I am revisiting the detailed conclusions of this report, but the recommendation in the report for a “partnership” approach in working with Government is one I welcome and endorse. In fact, it would seem essential for tackling the many challenges we face.
As we put measures in place to support an economic recovery driven by sound investment and enterprise, we rely on you, the insurance industry, to take the wider view and continue to support the economy with all of the levers available to you.
When I went to Brussels last week and at yesterday’s ECOFIN meeting, I made clear that the Coalition Government is going to play a full and active part in the debates in Europe, because we see our vitally important financial services sector as part of a wider European and global sector.
This message is for you too - as I recognise completely the importance of getting the regulation right for insurance.
At the same time, I am very conscious of the wide agenda and the wide range of interests that your industry has; so equally I want to encourage you to continue to engage with and work with Government to shape the future of the economy, build consumer trust, and respond to the many economic and social challenges we face.