Articles
The regulatory landscape – what’s in store for the financial services sector this autumn? 06/08/2007
By Iain Anderson, director and chief corporate counsel, Cicero Consulting
While the political class spent the early part of the summer waiting for Gordo, the financial services sector is set for yet more significant regulatory change emanating from both the UK and Brussels. The industry is second only to the health sector in having an active public affairs presence and given the trend towards yet more regulatory activity the sector may be vying for the top spot quite soon.
The UK regulatory regime
We have just had the appointment of Hector Sants as chief executive of the Financial Services Authority (FSA). John Tiner is judged to have had a relatively successful period as head of the City watchdog, transforming the FSA from a rules based regulator to a principles based one. The question for firms will be whether Tiner’s successor looks to set to continue the thrust of his reforms. Brown has announced that future chairmen and CEO’s of the FSA will soon have to undergo US Congressional style approval hearings. More power to the elbow of the Treasury Select Committee it would seem. The two most important retail items in the in tray of the new FSA CEO will be the distribution review (RDR) and the Insurance Conduct of Business Review (ICOB) – both of which will have some fundamental repercussions.
The RDR has on its agenda to sweep away the current remuneration structure for financial advisers and look to adopt a new mechanism for incentives. Consumer groups and some parts of the regulatory community do have concerns around product bias driven by commission based sales. However, the industry is keen to point out that the current remuneration structure has delivered financial advice and provision to millions. If there is to be change in coming months – it will be explosive. The Treasury Select Committee has also had this issue on its agenda and no doubt will be taking a keen interest in the outcome in the autumn.
The ICOB review which is also set to report by the end of the year, focuses on the level of regulation which categories of insurance products will have to adhere to – essentially a light or heavy touch regime.
The debate remains just where products such as Private Medical Insurance need to be regulated – light or heavy. The FSA has undertaken consumer research which suggests consumer find PMI a complex product which will need a more complex regulatory approach – yet all signs appear that the regulatory structure may be light in nature.
Equally institutional financial services are undergoing rapid change with the rise of private equity as the leading alternative investment vehicle of the moment. At both UK and EU level regulators are looking to this sub sector to disclose more as well as questioning investment technique.
The industry is now active in the public policy space for the first time which is providing momentum for change.
The EU agenda
The EU agenda for the sector has been driven by the Financial Services Action Plan – or FSAP – and is now taking on a new shape under the guise of the Commission’s White Paper on Financial Services to 2010. The big change in recent years has been the arrival of Internal Market Commissioner and former Irish Finance Minister Charlie McCreevy who has lent considerable understanding of markets and financial policy to the role. Most importantly McCreevy has also looked to ensure that existing EU legislation can be both digested and work better – a move which has been met with loud cheers from all sides – consumers, regulators and providers.
The biggest game in town over the summer will be the draft directive – Solvency II – replacing the previous capital adequacy regime. For banks and insurers in particular this is a long awaited move which has the opportunity join together UK and EU regulation towards a risk-based approach.
However, from a lobbying perspective, there has been some concern that much of the impact assessment undertaken by the Commission may be skewed towards the larger pan-European players rather than either mono-line or indeed single country firms. Following a number of meetings I had with Commission officials at the start of the year, I know, this is a key issue of which Brussels is well aware.
The lending industry can look forward to a new green paper on mortgage credit set for the summer as well as an investigation into the workings of equity release as this becomes a preferred route to unlock retirement income needs.
And MiFID. That is really starting to worry the regulators now. Only the UK, Ireland and Romania have fully transposed the directive into national law. Some 24 states are dragging their heels. We wait and see if it will go live in November.
The big prize for some remains the challenge of integrating retail markets across Europe alongside the prospect of a single European financial regulator. However, I think the sector has a lot more to achieve before lofty thoughts of a single regulator are properly on the table.
