Insider Week - FSA shows ‘good faith’ on contract certainty goal

20.03.06

UK regulator the Financial Services Authority (FSA) has recognised progress in pursuit of contract certainty by putting on hold work to develop rules it threatened to impose if the London market failed to meet the deadline set for the end of the 2006.

Speaking at the FSA Insurance Sector Conference today (20 March), the regulator’s CEO John Tiner said that work would not go ahead on a contingency plan for regulatory intervention as a show of “good faith in the market's ability to reach its goal”.

Since announcing in December 2004 that the market had two years to get its house in order on contract certainty, the FSA has made it clear that it would intervene with new rules if the favoured route of a market solution failed.

The regulator said that today’s announcement comes following data delivered by the market showing it had beaten its interim targets for achieving contract certainty as at the end of 2005.

As reported in the March issue of The Insurance Insider, the industry body charged with driving process reform in the London market – the Market Reform Group (MRG) – reported 65 percent of all contracts agreed at the end of last year were “contract certain” under the definitions agreed with the FSA.

Despite the move, Tiner warned the market against complacency, adding that the contingency plan for intervention had only been put “on the back-burner” and had not been taken “off the stove altogether”.

“The market must continue to stretch itself to guarantee that the challenge is met by the end of the year… On our part, we will continue to assess progress beginning in the next quarter, not least to see how the market has performed against the challenging 1 January renewal period.

“We will continue to work with the market in our role as over-seer and facilitator, and will not hesitate in consulting on new rules should progress falter,” said Tiner.

MRG chairman Dane Douetil welcomed the move, but echoed Tiner’s cautious tone, stating that the challenge will become harder as the deadline draws near.

“Achieving contract certainty is commercially vital to the market’s survival, and the FSA has made clear that they will still intervene if necessary. Every business must therefore continue its commitment to this issue.

“This expression of trust in the market’s actions and progress to date will also focus our minds on what further practical steps we might need to take to achieve our target. This will be an important aspect of the MRG’s work going forward,” he said.

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Insurance Day - Industry bodies support FSA’s decision on contract certainty
By Scott Vincent, 21 March 2006

LEADING industry trade associations have backed the Financial Services Authority’s (FSA) decision not to impose further regulatory measures to enforce contract certainty.

FSA chief executive John Tiner revealed to delegates at the regulator’s general insurance sector conference yesterday that it had decided not to press ahead with plans to introduce further measures to enforce contract certainty because of the market’s progress to date in meeting the December 2006 deadline. But Mr Tiner also handed insurers a clear warning that any sign of complacency could see this decision reversed.

"To demonstrate our faith in the market’s ability to reach its goal, we will not be pressing ahead with our work on the contingency plan of regulatory intervention. We are putting it on the back-burner, although we are not taking it off the stove altogether," Mr Tiner told delegates at the London conference.

"I would strongly caution against complacency in these next few crucial months. The market must continue to stretch itself to guarantee the challenge is met by the year’s end. In this context I imagine you may wish to reconsider the targets you have set for the middle and end of 2006. These appear somewhat a breeze given progress so far," he explained.

"We will not hesitate in consulting on new rules should progress falter. I am sure I am not alone in looking forward to the day when we can say with confidence that having issued the challenge, the market responded and, as a consequence, no regulatory intervention was needed. That would be the right regulatory outcome for all concerned."

The FSA’s decision has been broadly welcomed in the market. Max Taylor, chairman of the British Insurance Brokers Association, said: "It is very gratifying the FSA regards progress as being so good. The concept of contract certainty needs to become ingrained as business as usual in the market, and there has been a massive market response to this huge cultural and behavioural change."

And International Underwriting Association (IUA) chief executive Dave Matcham also supported the FSA’s stance. "Contract Certainty is a commercial imperative. London is leading the way, and we welcome regulatory intervention being placed on the back-burner," he said.

Simon Sperryn, chief executive of the Lloyd’s Market Association, said: "The FSA has always said it prefers a market solution and we have welcomed its support for our long-standing commitment to contract certainty. We have shown we can deliver, and the FSA is right to support our efforts."

But calls by the LMA and risk management association Airmic for regulatory intervention to provide mandatory disclosure of broker commissions have again been rejected by the FSA. Mr Tiner said that his preference remained for a market-led solution. "Making commission disclosure mandatory will not necessarily address the conflicts themselves that arise from commission sharing arrangements," he said.

"If over the next several months we do not find any discernible improvement in transparency, then we will consider seriously mandating disclosure. But I have to say this would be a last resort and necessary only because the market and its clients had failed to sort out its own issues, which does not bode well for addressing some of the other challenges you face in maintaining London’s leadership position in the international insurance and reinsurance market."

Changes to EU legislation may impact on insurers

UK financial services watchdog the FSA has warned that changes in EU legislation could have a significant impact on the way insurers are regulated. The FSA also branded the industry "soft" as it urged the sector to raise its voice in the debate on European regulatory developments, such as Solvency II.

In a speech at the FSA general insurance conference, John Tiner called for UK insurers to consult with the FSA on Solvency II before the end of April, and said that details of the new European regulations would be in place by the middle of 2007.

"The uncertainty that surrounds this means that there is much at stake. Failure to make the modernisers’ case successfully could even undermine the domestic regulatory advances made to date as well as unduly restrict the business models that firms may wish to adopt," he explained.

Mr Tiner said the UK industry has "all too often been softly spoken" in the debate over European regulations. "I would draw to your attention the recently published Discussion Paper on Solvency II, written jointly by the FSA and HM Treasury. We are keen to hear industry views on these issues and this paper is out for comment until the end of April."

IUA chief executive Dave Matcham pointed out: "Solvency II is the biggest thing around the corner. Some of the work being done on this now could become the benchmark for other jurisdictions in the future, such as Dublin or Bermuda."