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The Actuary The magazine of the Institute & Faculty of Actuaries

Joanne Hindle: The future of regulation

As I write this, discussing the future of regulation seems a fairly esoteric topic — there may not be any industry left to regulate by the time this is published. There are headlines of 2000 jobs cut in the City, and no doubt further upheaval to come. However, I find myself in a privileged position in that I am currently not working for a major company, having left Unum earlier this year.

In running my own business I have the luxury of being able to stand back and contemplate the chaos around us with some detachment. What is starting to emerge is that once some dust settles, whenever that might be, the question of how the industry is regulated in future will be centre stage.

Since the Gower report of the early 1980s and the initial Financial Services Act 1986, the UK has adopted a model based on financial supervision and conduct of business rules. In effect, one could sell what one wished, provided it was sold according to the rules (for instance, being suitable for the client) and that the company had sufficient capital for the risk that product exposed it to. More recently, this has of course also been backed by a focus on ‘principles’ rather than detailed rules, with Treating Customers Fairly (TCF) the most obvious example. A simplistic description perhaps but in light of what is happening currently, going back to basics may be no bad thing.

We are in a situation where some of what was being sold at the sophisticated, complex or wholesale end of the market seems not to have been understood by many, either buying or selling. Indeed, we have seen this too in the retail sector since the mid-1990s with, first, pensions mis-selling, then endowment mortgage issues and now PPI, where the Financial Services Authority’s (FSA) warnings get ever more severe. It may be too early to say whether principles-based regulation contributed to the problems, or would have prevented them if it had been a focus earlier on, however, so far it does not seem to have led to a rapid change in approach.

The UK has always resisted the alternative model of product regulation. The essence of this is that only products that the regulator approves may be sold — the selling process itself can then be a lighter touch. The regulator would also, before any sales take place, satisfy itself as to the financial ability of the seller to back the product. Many of the arguments against this are familiar — that it stifles innovation, greatly slows the product development process and overly involves the regulator in the day-to-day business of the regulated. However, I suspect that in the climate after this chaotic period, such arguments may not hold sway. There is already talk of a need for more interventionist regulation.

Similarly, the structure of the regulator itself is likely to be questioned — particularly if we see a change of government after the next election. The current turmoil might sound a death knell for the FSA, and the model of one single regulator — itself. Europe has been considering introducing an overarching EU regulator for some years, and now may be the time. The enactment of Solvency II may take longer than expected — almost certainly introducing a tougher regime than that currently proposed.

Finally, under the current model firms themselves are supposed to ensure that they have sufficient capital for the risks to which their products expose them. I think we will see legal action, either from disgruntled investors or the regulator against the boards of those companies where it seems there was little understanding of these risks.

While no doubt it will take some years before all of these issues are worked through, the current market instability will be followed by a period of regulatory change — almost certainly towards tighter controls, more intervention and possibly even a different structure.

Joanne Hindle is a consultant to the financial services industry.
Contact: joanne.hindle@orange.net