Insurers are concerned that the FSA will struggle to engage consistently, according to KPMG

Speaking at the Association of British Insurers' conference today, Fiona Fry, financial services partner at KPMG, commented on the Financial Services Authority's (FSA) initiative on more principles-based regulation (MPBR) and the effect this will have on the insurance industry:

“A clear case for MPBR has now been made. If successful, firms will be allowed the freedom to operate flexibly, drive forward innovation and ease the overall burden of regulation. However, the price of these benefits will inevitably be a greater degree of subjectivity - and therefore risk - in the relationship between the regulator and the regulated.

“Insurers are concerned that the FSA will struggle to engage consistently and constructively in its day-to-day supervision of firms. From the regulator's perspective, firms are being challenged to take much more responsibility for their own regulatory agenda at Board and senior management level. It's clear that both sides need to work together to establish a high level of trust and to be prepared to embark with an open mind upon the journey that cultural change, such as this, will inevitably require.”

Key findings to date include:

  • The majority of respondents (59%) said that they did not yet have a project in place to implement MPBR. However, 72% regard the principles as implicitly or largely embedded in their firm's philosophy, culture, strategy and business practice.
  • Over half the respondents (53%) said they felt MPBR was the responsibility of senior management, excluding the CEO. Only 12% thought it was the responsibility of the CEO.
  • Firms were asked the extent to which MPBR would give rise to a greater risk of enforcement by the FSA. Nearly half the respondents (44%) are concerned or very concerned that MPBR will lead to a great risk of FSA-enforcement.
  • On a more positive note, firms do believe that MPBR will reduce their regulatory burden (67%) and result in operational and cost efficiencies (56 per cent). However, to counteract this, only 22% believe it will improve access to insurance by a wider cross section of consumers, while 56% believe MPBR will not deliver consumer benefits, such as enhanced service.
  • Finally, 64% said they did not have management information in place which addresses all the eleven principles and are reconciled to the FSA-prescribed outcomes. Fiona Fry concludes: “The big challenge for insurers will be to integrate MPBR into ‘business as usual', so they consider improving not only their governance, but also decision-making, strategic assurance and capital management.
  • “The battle for industry minds has been won with wide-spread acceptance of the intellectual case for MPBR but a struggle remains for insurers' hearts in terms of their belief that it can be implemented in practice. The key to making this work will be effective and constructive communication between insurers and the regulator.”