Simon Carne asks whether current regulatory proposals by the Institute and Faculty of Actuaries and the Financial Reporting Council go too far?
I have been working with regulators for 20 years now, so it is not often that one of them says something that takes my breath away. That is exactly what happened at a regulatory dinner I attended at the end of last year.
A representative of the Legal Services Board, the oversight regulator for the legal profession, told me they were increasingly sceptical about excellence as a regulatory objective. They didn't like it when the regulatory body for solicitors argued recently that it is "essential that [legal] services are of the highest possible quality".
I wondered how much more than "excellence" a regulator could reasonably demand? But I was looking in the wrong direction. The Legal Services Board sets a lower regulatory standard: "competence". The rationale for this is that if the market can sustain higher quality or higher prices, so be it, but if the regulator pushes quality to levels of excellence, this pushes prices higher and excludes people from the market.
This got me wondering about the regulatory regime for actuaries. Actuaries do not face the same challenge that dominates the legal market, where access to justice is barely affordable for the man in the street, as we seldom sell services to individual consumers. The dominant focus of the Financial Reporting Council (FRC), the oversight regulator for the Institute and Faculty of Actuaries (IFoA), is not affordability or access: it is the 'reliability' of actuarial information. This is an aim I support, but could it be one that can also be taken too far?
Current indications from the FRC and the IFoA are that they may each be exploring the extremities of what could be the reasonable bounds of professional regulation.
Consider the IFoA's proposals for a standard that requires actuaries to consider peer review for all actuarial work. I do not doubt that peer review enhances the quality of advice, nor do I challenge the implicit premise that peer review is to be encouraged. However, is the need to consider peer review enough to justify a regulatory intervention?
Doctors give advice with life-changing, potentially life-ending, consequences if they get it wrong, but peer review is an exception rather than the rule. Barristers are sole practitioners, which severely limits the scope for peer review. Solicitors draw on peer review more frequently because their practices are structured as firms but it is not a regulatory requirement. It is also not a regulatory requirement for accountants. What is different about actuarial work that should cause a deviation from the approach taken by other professions?
The IFoA states in its regulatory strategy that it has a test to determine when the need for regulatory intervention has been triggered, but that test does not seem to have been met in this case. The five central principles for the approach to regulation are shown in Table 1. Three of these principles are that:
1Regulatory action should be focused on identified problems, so as to minimise the side effects
2Intervention should be undertaken only to the extent necessary and appropriate to the risk
3The IFoA should be ready to justify its
What is the "identified problem" that the proposed peer review standard seeks to address? What is the evidence or analysis that demonstrates that the proposal intervenes only to the "extent necessary"? Above all, why does the IFoA believe that it needs to introduce peer review regulations when other professions do not have an equivalent?
Maybe there is a credible case for the proposals. I certainly do not argue that peer review is never needed, but the proposal has been put forward without, so far as I can identify, any attempt to address the key questions.
Peer review is by no means an isolated example of regulation without an established need, nor is the IFoA the only organisation deserving of challenge.
Technical Actuarial Standards
The FRC's most recent annual report told us:
" as part of our planned review of the TASs in 2014, we will develop and seek views on proposals to restructure the TASs [to include] high-level principles which are recognised as applicable across all professional actuarial work " [My emphasis].
The proposals have yet to emerge, so it is too soon to complain that we have not been told what has been identified as the problem for which high-level principles across all areas of actuarial work are a necessary solution. However, it is not too early to point out that once again, this is a step that other leading professions have not found necessary to take.
Accountants are the closest profession to our own in terms of technical standard-setting, but their standards apply only to the preparation and auditing of accounts. No other areas of accounting work are subject to technical standards.
Lawyers do not have technical standards governing their work. They restrict themselves to ethical standards. The same is true for doctors. The National Health Service in the UK has rules governing what it will pay for, as do the private health insurers, but the medical regulators do not have technical standards directing the form or content of the advice doctors are permitted to give.
Is the FRC ahead of the game in realising that technical standards are necessary across the entire range of actuarial work? Or has it fallen into the trap of thinking that standards encourage excellence, so why limit them to only some aspects of actuarial work? The FRC's annual report certainly suggests the latter, and that worries me.
I am worried enough to test my own hypothesis. What is the harm in having more regulation? If the actuarial market is not in danger of becoming unaffordable, why not allow a body as august as the FRC to decide where to draw the line? If they draw it on the wrong side of the Principles of Good Regulation mentioned in Table 1, maybe it is the Principles that need re-thinking, not actuarial standards.
The answer is a simple one: if clients or employers have a choice between hiring an actuary restricted in their decision-making by FRC or IFoA standards and hiring someone else just as bright and just as ethical, but unrestricted in the form and content of their advice, clients and employers will choose the latter more often than not. Experience shows that, when people are free to choose, they select advisers they trust, not advisers tied down by a bunch of rules. That applies even more so when recruiting employees.
Just as setting excellence as a regulatory minimum in legal services would risk making justice more inaccessible than it already is for those of modest means, extending standards for actuaries risks driving users away from the profession for everything except the narrow base of work reserved to actuaries by law.
Throughout my career, I have watched in dismay as those who regulate professions behave as though raising the quality bar was self-evidently a good thing. It took my breath away to discover that the legal profession is now blessed with regulators who have seen the light. If only some of that thinking could be applied to our own profession.