UK Regulatory Consultant Analyzes Financial Services Regime Change

The UK’s new Chancellor (Finance Minister) George Osborne has announced plans to fundamentally reform the way financial services, including insurance, are to be regulated [See IJ web site – https://www.insurancejournal.com/news/international/2010/06/16/110766.htm].

Essentially, Osborne’s government plans to dismantle the current tripartite regulatory system, eventually abolish the Financial Services Authority [FSA], and place all financial regulation under the control of the Bank of England.

These are major changes, and the details haven’t yet been worked out, but one expert who welcomes the changes is Branko Bjelobaba. He currently heads his own consulting firm (www.branko.org.uk), which specializes in handling regulatory requirements, including audits and compliance. His firm works with a number of professional organizations, including the British Insurance Brokers Association (BIBA) and the Association of Medical Insurance Intermediaries (AMII). He’s also a longtime member, and currently a Vice President, of the Chartered Insurance Institute.

He explained that within the next two years the government will establish a new “Prudential Regulatory Authority” (PRA), which will operate as a subsidiary of the Bank of England. It will be given the authority to carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.”

The new regime will also establish a new Consumer Protection and Markets Authority (CPMA), which will be charged with regulating the “conduct of every authorized financial firm providing services to consumers,” Branko explained in a press release. “It will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services, in order to preserve the UK’s reputation for transparency and efficiency as well as the UK’s position as one of the world’s leading global financial centers.”

In a telephone interview Bjelobaba said: “The regulation of general insurance only came under the auspices of the FSA in January 2005,” following demands from the European Union in an insurance directive. “Up until then it was voluntary industry regulation.”

“The government proposes to consult over the next six weeks,” he continued, indicating that it’s a “fairly short period” during which they will consult with the industry on the “regulatory look of the new legislation. The consultation will involve absolutely everything,” [life, pensions benefits, as well as general insurance].

The CPMA will regulate insurance agents and brokers, as well as insurance companies, which is “what we have now.” Bjelobaba also explained that despite some doubts from insurance leaders, notably Lloyd’s CEO Richard Ward and Robert Hiscox, the FSA will disappear. However, he said, “I think that most of the people at the FSA will simply be rebranded into a different organization, and so you have FSA ‘Mark II’.” This involves a “renaming of the regulator and an allocation of authority over “micro and macro supervision issues.”

The PRA would have overall authority and would handle “macro” regulation, while the CPMA would handle “micro” type procedures and enforcement.

Asked why he favors the new system, Bjelobaba explained that “as a general [P/C] insurance person, my biggest beef is the complexity of regulation and the cost of regulation.” The solution is a reasonable amount of regulation at a reasonable cost.

As an example he cited the experience of one of his clients, whose costs had risen over 600 percent. “Last year their fee was £2500 [app. $3600]; it’s now just below £20,000 [app. $28,500].”

He also explained that reporting requirements can be burdensome, especially for firms who deal in “high risk” products. Firms with over £5 million [app. $7.2 million] are required to file quarterly reports. “The FSA’s budget has [over the last 5 years] risen astronomically; it’s now just under £500 million [$720 million].”

A second aspect, which Bjelobaba hopes will be addressed, as the new government presents legislation to parliament, concerns the sheer number of regulations, which are currently the biggest body of laws on UK statute books.

He explained that if you were to buy a printed copy of the current FSA regulations, which would cost about $3000, “it would be around 1.8 meters [app. six feet] high.” Asked what purpose is served by having such a mountain of regulation, Bjelobaba replied succinctly, “Who the Hell knows.” By contrast the manual that his firm uses is only about two inches thick, “and everything’s in there, in plain English.”

In preference to the plethora of rules, he said: “I would certainly prefer more active regulation,” which means that “there is contact by the regulator with the firms that it regulates.” He explained that training requirements in the general insurance sector are “a lot less” rigorous than those for selling financial services. He suggested that people in insurance “should be qualified to a minimum level approved by the regulator.”

While organizations in the UK, principally the CII, offer training and courses to keep abreast of developments in the insurance sector, “it’s completely voluntary,” Bjelobaba said. He noted, however, that there are educational requirements, “if you are a member of the CII, which currently has around 95,000 members worldwide, but if you’re not a member of the CII, then it’s up to the employer to describe what level of training and competence is required for his staff.”

He described the London market as “very specialist,” and indicated as an example the requirement at Lloyd’s that “to be an underwriter they have to be ACII qualified.” As the changeover progresses, he sees the absolute necessity for consultations and “feedback” as imperative to develop a more coherent set of regulations, that will ultimately be less burdensome, more effective and less costly. “The new regime should be appropriate to the risks of the London market.”

The people who actually work in the UK’s insurance sector basically want greater clarity from those who regulate them. “The biggest problem we have with the current regulator is that the rules are not clear, they’re subject to debate. When you ask the FSA to give you a straight answer, they refuse to do so; therefore, you don’t know if what you’re doing is correct, and that’s no way to conduct business.”

In conclusion he said: “There must be a model out there [on regulatory authority] that really does do the job. We’ve got to deal with the exposures; we’ve got to make sure that consumers are protected; we’ve got to make sure that the regulated industry understands what it’s required to do; that sanctions are robust enough; that the requirements placed on firms do not bind them so tightly that they cannot do business…that the costs are proportionate to what is being done in the industry.”

His hope is that this time around a regulatory authority will emerge that adequately addresses the real needs for regulation, and that it will stay in place. Changing regulatory regimes every five or six years, “is good for no one,” he said. However, he also recognized that the advent of the EU’s Solvency II requirements in 2012 will have an impact on the regulatory regimes of all EU members. But he added that a return to the old way of doing things “is simply not going to happen.”