Lessons for Jersey as FCA stumbles over wholesale insurance review
The rather clumsy announcement of further regulatory investigations into the insurance world involving around 30 million insurance and pension policies has resulted in plunging share values, following the earlier announcement of the withdrawal of compulsory annuities. The move was described by Andrew Tyrie the Chair of the Treasury Select Committee as an ‘extraordinary blunder’. ‘It is crucial that we have a full and transparent explanation about how such an apparently serious mistake came to be made by our financial services watchdog - the body appointed by parliament to enforce high standards of conduct’, Tyrie said.31 March 2014
The FCA is right to be looking at the insurance industry model and value for money but its communication and timing of a wholesale review was pretty dreadful.
Sound and progressive regulation is a vital part of any healthy functioning financial system.
Timely and fair enforcement of financial regulation is an essential component of investor protection, contributing to market confidence and financial stability. It can be a powerful differentiator in attracting investment. The ideal regulatory framework should be based on widely accepted global standards and norms. A non-prescriptive approach striking a balance between investor protection, financial stability, and the ability to foster financial innovation that brings greater value to consumers, must surely be the regulatory equilibrium that all stakeholders have an interest in delivering.
Fundamentally product level regulation is extremely difficult to deliver with the regulatory approach necessarily trailing product innovation with a constant battle to keep up. This can lead to attempts to get ahead of the product curve resulting in the stifling of product innovation, the ultimate driver of customer benefit, via cost reductions or enhanced product features, delivering greater value for money.
Entity level regulation that focuses on the operating principles of a company ensuring alignment with sound regulatory principles is likelier to deliver changed behaviours and better compliance than retrospective reassessment of product level value for money based on current knowledge and the parameters of a product set that was designed and approved 25 years ago.
We wouldn't by way of example expect a ten year old car to perform to current standards in terms of performance, fuel efficiency or emissions, nor castigate a manufacturer for failing to recall a fleet to have modifications retro fitted to meet modern standards, without a serious risk of the manufacturer going out of business. The result would be less competition and a disincentive to innovate, which clearly isn't in the consumer's best interest.
As the FCAs bid for increased resources in its plan published today evidences, regulation has its cost. Regulation is necessary and valuable, but when the cost of regulation and the interventions it funds begin to undermine both the viability of suppliers, the willingness to innovate, and the choice of consumers, we should press the pause button and consider whether an appropriate balance of interests has been struck.
After all, a car with a man walking in front of it with a red flag will be very safe, but will anyone buy it.