The following column is written by Sean McGovern, CEO, UK & Lloyd’s market at AXA XL.
The Business Environment workstream of the London Market Group (LMG) aims to ensure that the London Market is well positioned for growth and able to respond to new client demands and existing and emerging risks. The policy environment set by the Government and by our regulators is a significant influence on that ability to continue to compete in a global market where capital, risk and talent are increasingly mobile.
Given that influence, we need to ensure that we work closely with the UK government so that they better understand the position of the London Market, its importance and its place in the UK economy. Five years ago, that understanding was not there. The publication of the first London Matters report gave us the facts and data to fully engage with Westminster and Whitehall so that we have a voice at table on the subjects that are vital to the international competitive position of the market.
Over the last few years, we have had many, productive discussions about issues such as the UK’s exit from the EU and future trading relationships. Now, the government is focusing on the future of the financial services industry in a post-Brexit world and we have been taking an active part in two pieces of government work; the Treasury Select Committee enquiry into the Future Regulatory Framework (FRF) and the call for evidence in the Solvency II Review. I am very grateful for the input and work of all members of the workstream in shaping the London Market’s responses to these important consultations.
In terms of the FRF, the LMG supports some elements of the consultation and has also recommended a number of further reforms that we believe would ensure that the London Market remains competitive within the global marketplace, and fully contributes to the UK’s economic prosperity in the future.
As well as welcoming an activity-specific approach to regulation which allows for public policy considerations to be part of the regulatory framework, we also think this is an opportunity to recognise the differences between financial services industries, such as the services they provide and the nature of their clients and customers. Having a more proportionate approach to individual sectors within the insurance industry and the type of client they serve will help the industry make a greater contribution to the UK’s economic recovery, boost its competitiveness and make the market more attractive to international investors.
Balancing the increased powers that the UK regulators have post-Brexit by strengthening how they are held accountable to Parliament, the public and the industry they regulate is also important. We would specifically like to see clearer, meaningful mechanisms for Parliamentary scrutiny and earlier, more formal and more meaningful consultation with industry, particularly in the policy development process of the regulators. We would also strongly urge the Government to consider how international competitiveness considerations can have a more prominent role within our regulatory framework. This will help to send a positive message that the UK is an attractive place for new investment and trading opportunities while always being underpinned by strong but proportionate regulation.
And finally, it is crucial that the UK continues to be a welcoming and open market for overseas firms seeking to trade in the UK. This is particularly vital for the London Market given that over 66% of its capital is from overseas. We therefore support the commitment within the consultation to maintaining the UK’s alignment to international regulatory standards and continuing to be a leading country in the development of those standards. Clients and investors in the London Market see adherence to these international standards as a benefit of doing business in the UK.
For the London Market, we believe that Solvency II’s fundamental principles are sound, not least because many of them were based on UK concepts that were later adopted here ahead of Solvency II through the FSA’s Individual Capital Adequacy Standards (ICAS). The industry incurred significant expenditure in preparing for and implementing the Solvency II regime. It has clearly helped to ensure robust capital within the market and has raised standards of governance and risk management to improve the industry’s resilience. It is also an internationally well-regarded system of regulation that encourages transparency. Any exercise to re-design the UK’s insurance solvency system will require UK insurers to embark on new and potentially large programmes of operational and systems change. We believe that there is little market appetite for this.
While we do not support a fundamental shift away from Solvency II, we do believe that there is much detail within the application of Solvency II which can be simplified, in particular the more onerous reporting obligations can be reduced.
In addition, this review offers scope for the UK to take a decisive step to encourage the growth of a UK captive market. Our submission has made the case to H.M Treasury that other EU jurisdictions have successfully achieved this within the Solvency II framework. This does not require legislation but rather regulators willing to create a more attractive regime. The solvency, capital and governance requirements in those jurisdictions are less onerous for captives compared to other forms of non-life insurance and reinsurance firms. The Solvency II review is therefore a great opportunity for the UK regulators to seriously consider how they too could adopt this kind of ‘differentiated supervisory approach’.
The investment of time and energy by a wide range of market professionals in building strong relationships across government has been a testament to the market’s ability to speak with one voice through the LMG on key topics. As the UK continues to look to build its international trading relationships, I am confident the market is in a great place for that voice to be heard.
