Speech by the Financial Secretary to the Treasury.
[Check against delivery]
Good morning, and thank you for inviting me to speak here today. It’s a pleasure to be speaking at this event, with so many CEOs and senior managers from the London Insurance sector…
The Summit provides the ideal forum to analyse and debate the future of the Insurance sector. London benefits from being the home of a diverse insurance sector meeting every day insurance needs of UK businesses and households but also being a global centre of excellence with insurers and brokers managing large complex risks at both home and abroad.
London’s continuing success comes at a time of both huge challenges but also huge opportunities.
We all know how easy it is to become absorbed by short term challenges…and we know insurers had some tough circumstances to contend with in the last year…
Such as large catastrophe and man-made losses exceeding $100bn…
And of course the uncertainty across the Eurozone remains top of everyone’s list of concerns.
The ongoing sovereign debt crisis continues to undermine confidence across all our economies, the UK included.
This loss of confidence in Europe dents the prospects for economic growth but we should remember that as economic power shifts from Europe we must shift our focus if we are to tap into new opportunities in the Far East and Latin America.
Looking beyond the BRIC’s to new markets, I know firsthand from meeting my counterparts in Mexico and Peru most recently, that insurance is high on their list of priorities.
As their economies develop and expand, and as they fully exploit their vast natural resources, there is a pressing need to insure more complex risks.
For the insurance market the shift in global economic power is not a threat to its success rather a tremendous opportunity for the UK insurance sector to build on its world leading strengths.
The UK industry is already the largest in the EU, and third largest in the world after the US and Japan
Within the UK economy the industry has a vital role as an investment intermediary, managing 26% of the UK’s total net worth and 13% of investments on the London Stock Market.
It is also a major investor overseas…with around 30% of premium income coming from overseas business, from both life and general insurance business. There is the opportunity for this to grow in absolute and relative terms.
Many UK firms already have a global footprint, and importantly have a strong presence in some of the fastest growing world economies.
That brings opportunities for UK firms to expand to new markets, to innovate and provide new products, and help lead a UK recover by exporting our insurance expertise and services.
With break neck growth in the likes of India, China and Brazil, as well as Indonesia, South Korea and Turkey, it is absolutely right that we support our firms to capitalise on opportunities in emerging economies.
We cannot afford to miss out on the opportunities that come from their rapid emergence in financial markets.
I know that many of you are already mapping out a course to exploit new global opportunities.
Lloyds’s Vision 2025 provides an example of how the London Market can rise to the challenge…the headquarters for a network of hubs in overseas markets.
The Government is also here to support your ambition… be it through UKTI support here or our embassies abroad, or through high-level access alongside ministerial delegations.
These opportunities emerge at the same time as there is increased regulatory focus on financial services through developments in Europe and at home.
We all know that one of the biggest challenges facing the industry in the coming years is regulatory reform.
Whilst the sector has withstood the recent crisis well, this is no time to be complacent.
It is vital that across the financial system, as markets, products and services evolve, regulation changes to keep pace.
Regulatory reform is essential to ensure that the financial sector does not jeopardise the stability of the rest of the economy.
And reform is equally vital to restore the trust of consumers and taxpayers that had been so severely let down by financial institutions, politicians and regulators.
As EIOPA President, Gabriel Bernardino, said in December last year, we need a “paradigm shift” to restore confidence in Europe’s financial services.
But at the same time, regulation has to be proportionate, evidenced based, and has to reflect the unique risks and characteristics of the Insurance market.
Indeed, a significant part of that agenda is being driven from Europe.
For the Insurance industry, Solvency II is the big ticket item.
The UK has been a strong supporter of Solvency II.
I firmly believe that it will help support financial stability in the sector and across the financial system through better risk-based capital requirements and its focus on strong risk management in firms.
And by providing a harmonised regime across Europe, Solvency II should increase cross border competition and create new opportunities for UK firms within the Single Market.
This will in turn deliver increased efficiencies and reduced compliance costs to the benefit of both firms and consumers across Europe.
Collectively, I believe that we have gone a long way to deliver on the key priorities that we agreed with the UK insurance industry at the outset of the Level 2 negotiations. Whilst there are still some issues to be resolved for life assurance companies, the picture for general insurers is now largely clear.
The timetable for agreeing the Directive and the subsequent Level 2 implementing measures creates a significant implementation challenge, so it is critical that we continue to work closely together as the final shape of Solvency II develops.
I know that there are concerns about the cost of Solvency II, but the sophistication of the London market does mean that a number of firms have opted for the internal model to ensure the most efficient use of capital. This of course implies additional costs on firms as they develop or formalise their model and require the FSA to approve these models. In the longer term the creation of a single solvency regime across Europe will help and not hinder London maintain and strengthen its reputation as one of the World’s leading insurance centres.
These regulatory changes of course pose substantial challenges for the Industry, but also for European regulatory institutions.
In particular for EIOPA as it grows into its role and builds its reputation.
We are keen to work with EIOPA in that ambition, and critical to its success is ensuring that it delivers high and consistent standards of supervision across the EU.
That means implementing Solvency 2 consistently across Europe to ensure a level playing field across Europe.
By doing so, EIOPA can take a major step in completing a single market in insurance, but also help create new international opportunities for the UK sector.
Of course, these are reforms that coincide with reforms that we are implementing domestically.
Vital reforms to demonstrate that we have learnt from the financial crisis.
After all, sound prudential regulation is key to London’s reputation. We are establishing a permanent Financial Policy Committee inside the Bank of England to monitor overall risks in the financial system, spot dangerous inter-connections and stop excessive levels of leverage before it’s too late.
Whilst the FPC’s focus will predominantly be on banking and wholesale financial markets, it has responsibility for identifying threats to stability in all financial markets and will need to think about interconnections between insurers and the financial markets given insurers’ investment activities.
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 let me be very clear, what applies to banks shouldn’t automatically apply to insurers. The risks and business models of banks and insurers are very different and they should be regulated differently too.
Furthermore a new Financial Conduct Authority will oversee the conduct of financial services firms, including general insurers and brokers (for who it will act as the prudential regulator), the operation of markets and the protection of consumers.
It will have new powers, including the power to ban or restrict the sale of toxic products, and the ability to make public the fact that disciplinary action is being taken against a firm.
It will need to differentiate between the protection afforded to different groups of consumers recognising that the needs of someone insuring an oil rig is very different to someone insuring their car.
The FCA will also have a strong mandate to act on competition, a first for a UK financial services regulator.
The PRA and FCA are required to act proportionately. The costs and benefits of regulatory interventions should be closely aligned. It is not in the interests of either the industry or consumers for them to face disproportionate costs. To help reassure firms in the costs of both the FCA and PRA, we have decided to extend the remit of Parliament’s value for money auditor, the National Audit Office, to these new bodies to give you reassurance that your fees are being spent wisely.
We are eager to support the industry to pursue those opportunities, and help support growth right across the economy.
That’s why in this year’s Budget we took even greater steps to support business.
Cutting the main rate of corporation tax by a further one percent…reducing it to 22 per cent by 2014. That’s the lowest rate in the G7, the fourth lowest in the G20.
Reducing the uncompetitive and ineffective top rate of income tax from 50p to 45p.
We are also modernising the Controlled Foreign Companies regime to update rules that have been unchanged since 1984.
Ensuring that they reflect the realities facing firms in the global market, and ensuring that global firms continue to choose the UK as their headquarters.
Looking at the Insurance sector in particular….together with branch exemption introduced in the Finance Act 2011, and our work to rewrite the life tax regime, we are ensuring that we continue to attract the most innovative, successful and ambitious insurers to the UK.
In December we announced details of major changes in our approach to the taxation of foreign profits which reduce those burdens, and provide flexibility to UK headquartered groups making Solvency II related cross-border restructuring easier.
Solvency II and a globally competitive tax system, added to London’s strengths on time zone, legal system and depth of skills make the UK an increasingly attractive place to do business.
Earlier this year AON became the first ever S&P 500 company to shift its headquarters to London. And we know that there large number of smaller companies wanting to do the same.
We want to see London’s insurance market prosper as more firms locate here to access our expertise and as we sell that expertise in emerging markets.
We stand full-square behind the Insurance industry in the UK, and we are eager to support your continued success and growth.
Of course, in the near term managing the risks from global economic uncertainty, and responding to regulatory reform will pre-occupy and consume much of all our time.
But we must also keep an eye on the long term vision.
It means ensuring that UK firms have the opportunity and build the ambition to engage and expand in the UK market, but also develop growth opportunities abroad.
And it means catalysing the kind of innovation, service delivery and product development that enable you to capitalise on new opportunities.
Industry engagement will be critical to delivering that vision.
It is only by working together that we can improve the standards that underpin firms across the industry.
And I look forward to working with you all in that ambition in the years to come.