June 30, 2009

Flood defence spending and Thoresen review get legislative nod from Gordon Brown

The government has been very slow to put any flesh on the bones of the Prime Minister's statement on Building Britain's Future yesterday, in which he set out the draft legislative programme for the session that will start in November and finish early with the General Election, most likely in June next year.
Usually, a deluge of press notices flows forth from Whitehall with briefings on the bills announced in such speeches. So far, apart from housing, there has been virtually nothing on the dozen measures the Prime Minister promised. This shows that the announcement was brought forward and rushed out as Labour tries desperately to win back the political initiative.
So, what do we know about the programme that will affect the financial services sector? 
Most obviously, there is a Financial Services and Business Bill that will be the vehicle for delivering regulatory reform. Quite what that reform will look like is still a matter of a major debate but the short briefing from 10 Downing Street on the bill makes it clear that the government is sticking to its decision to give the Financial Services Authority greater powers "to ensure financial stability". This has already provoked an increasingly bitter confrontation with the Bank of England and is likely to be the most contentious measure in the draft legislative programme.
This bill will also create a new national money guidance service which follows on from the Thoresen Review (published in October 2007) and the pilot schemes currently being run offering generic advice.
Less contentious, but very welcome to the insurance industry, will be the Flood and Water Management Bill which promises "increased investment in flood defence and improved emergency planning and flood risk management". This sounds as if it should be everything the insurance industry wanted following the Pitt Report in the wake of the severe flooding two years ago. Of course, the devil will be in the detail but at least it is there to be argued about.
The big cloud that hangs over all of this is the uncertainty over the timing of the General Election and, of course, its outcome. The dozen bills announced yesterday could be forced through if this Parliament runs to next June but any foreshortening of the session or unforeseen political or financial crises (and there have been enough of those around in the last year) and the government will struggle to complete this programme.

June 25, 2009

Little progress on Equitable Life but pressure could build up to move the Treasury

The debate on Equitable Life in Westminster Hall yesterday ran along pretty predictable lines with MPs of all parties giving eloquent voice to the raw anger of their constituents over the length of time it is taking to get them any sort of compensation for the failure of Equitable Life. This was followed by further stone-walling on the part of the Treasury, this time in the shape of Sarah McCarthy-Fry who only found herself as a Treasury minister because Kitty Usher was forced to resign last week. I think it shows a degree of contempt for the Equitable Life policyholders on the part of the government that they send a different minister along every time this is debated, often to read out more-or-less the same speech as the previous minister.
There was some relief on the part of MPs that the high court judge appointed by the government to oversee the very limited "compensation" scheme it has announced, Sir John Chadwick, appears to have rejected means-testing policyholders in his first consultation paper. This is seen as a glimmer of hope that he will be adopting a commonsense approach, albeit within a woefully restricted remit.
Where there might be more hope for the policyholders is in the feeling that seemed to run through many of the contributions that the failure of the government to accept the recommendations of the Parliamentary Ombudsman on this is an issue that should be put to the vote in the House of Commons. There is an Early Day Motion on the topic put down by Vince Cable that has attracted the support of 275 MPs - a very high number for an EDM. In the new mood being fostered by the new Speaker who wants the government held to account by Parliament, there is a feeling that this motion should be pushed to a vote. I don't know how likely this is to happen and whether the government would be defeated if it did but it could be something for the Equitable Members Action Group to work on. If they do, they might look at how many Labour MPs they have on their side.
The debate yesterday was initiated by a Labour MP, Fabian Hamilton (NE Leeds), but only one other Labour MP spoke - Barry Gardiner (Brent North). Both spoke very well, balanced and with authority, but contrast that with seven Conservative contributions, eight Liberal Democrat speeches and even two out of the five Independent MPs. This apparent lack of interest among Labour MPs is probably encouraging the Treasury in its stubborn refusal to accept the Ombudsman's recommendations.

June 23, 2009

Tomorrow is another big day for Equitable Life as both Parliament and the High Court add to the saga

Tomorrow (Wednesday 24 June) is shaping up to be another significant day in the decade long battle by Equitable Life policyholders to get decent compensation following the insurer's failure.
MPs will launch another assault on the government, presumably in the shape of Treasury minister Ian Pearson, over its rejection of many of the findings and recommendations in the report from the Parliamentary Ombudsman. Although this debate is being led by an MP not previously vociferous on the Equitable Life issue - Fabian Hamilton (Lab, NE Leeds) - it is hard to see Mr Pearson changing his hardline stance from the previous Westminster Hall debate last month.
Perhaps the more significant cation will take place in the High Court where the Treasury has to file its defence of the application for a judicial review of its rejection of the Ombudsman's report. While this is very unlikely to offer any concessions, it should clarify the battle lines. 

June 22, 2009

Irresponsible bankers will smile at the global regulatory reform chaos

The last week has seen a flurry of activity around the world on the regulatory front but I have a suspicion that the only people who will be really satisfied are the very people at whom the reforms are aimed - the institutions that caused the financial storms of the last year or so. As far as I see it, the United States and Europe have such fundamentally different approaches to this that it is hard to see any global regulatory consensus emerging, let alone concerted action to put in place a regulatory system that would prevent the near collapse of the western financial system again. We have to remember that we are only looking at a slightly calmer scene now because of the billions of public money poured into propping up the system and its institutions. As Sir Martin Sorrell observed on Radio 4 last Friday, the amount of public debt racked up dealing with this is equivalent to the cost of a major war and it should be inconceivable that no-one is held account for causing that war.

Let's start in the UK.

At the annual Mansion House Dinner in the City of London last week, we saw the government and the Bank of England at loggerheads over the path regulatory reform should take. One was pleading for very limited action, saying that we should just look to the boards of the banks and other financial institutions to take a longer term, more responsible view. The other argued for some tough action to ensure that we didn't create monsters that were "too big to fail", suggesting that there could be a Glass-Steagal like split of investment and retail banking. You might have thought the Governor of the Bank of England was the one arguing for just having a quiet word in the ears of the City grandees. You would be wrong. It was a Labour Chancellor of the Exchequer, talking in the wake of the worst financial and economic crisis in over 60 Years.

New Labour has always been in thrall to the City. It is one of the reasons why the credit bubble was allowed to grow so huge before bursting and why so many high risk products were allowed to corrode institutional balance sheets. Labour trusted the City, probably because it doesn't really understand it, and its whole approach to regulation has been to allow the City to get on with making money, naively it thought for the country. I have seen no clearer indication that this is a government that has run out of ideas, incapable of changing course even when its previous course took the country onto the rocks, than its failure to grasp the need for a radical overhaul of financial regulation and the failed tripartite system.

The day after this stunning public divergence between the government and the central bank in the UK, the Obama administration in the United States came out with its proposed reforms. I don't want to be too dismissive of such a complex plan but it is a mess. There seems to be a regulator for everything, a whole new tier of federal regulation to overlay the already cumbersome regulatory system that some parts of the financial sector, such as the insurance industry, have to contend with at state level. In some ways it is reminiscent of the UK's first stab at comprehensive regulation of the financial services sector with the 1988 Financial Services Act which spawned a real alphabet soup of narrow sector regulators. There is a certain sense of déjà vu in reading US commentators attacking the Obama plan on the same grounds. It will leave gaps and create opportunities for regulatory arbitragemand these will be exploited by those who don't want to be properly supervised.

In Europe, meanwhile, there seems to be a greater sense of purpose, even if couldn't look more different to the US approach if it tried.

The European Union wants to move to fewer, supranational regulators and has an ambitious plan for getting there. Despite UK doubts - opposition would probably be a more accurate description of the government's stance - this plan is edging ahead and was largely approved at the summit of EU leaders at the end of last week.

So far, despite fierce attacks on "Anglo-Saxon" attitudes to regulation and the contribution these have made to the crisis, EU leaders have been keen to keep the dissenting UK government on board and have made compromises around the chairmanship of the proposed new regulators to achieve this. To understand why they have done this you have to look at the wider political scene in Europe.

The EU needs to get the Lisbon Treaty ratified, a process that will probably take until the end of this year. The Labour government backs the treaty and has never been prepared to contemplate bowing to demands for it to be put to a referendum in the UK. The Tories oppose the treaty and have said that if it is not ratified if (or as they see it, when) they become the government, they will stop the ratification process, possibly putting the treaty to a referendum. This is a doomsday scenario as far as the rest of the EU is concerned so they are prepared to go quite a long way to making Gordon Brown's life as easy as possible to ensure he survives until the treaty is finally nailed down. While it is very hard to imagine a British government falling over a dust up in Europe on financial regulation, such is the febrile nature of British politics at the moment EU leaders are not prepared to contribute to the Prime Minister's discomfort and risk him being forced into an autumn General Election.

So, where does that leave the much vaunted desire of world leaders (as expressed at April's G20 Summit) to make sure we never have to go through the same crisis again? Frankly, it is desperately hard to tell but I still think that the most coherent and focused case for reform has been that made by the EU. The challenge they will face is translating that into a global plan.

Meanwhile, those most in need of a firm regulatory grip being placed on their collar will look at this huge divergence of approaches with a smug satisfaction.

 

 

June 16, 2009

Sweden lines up with UK in battle over Europe-wide regulatory reform

Perhaps the UK is not quite so isolated in the debate about the reform of financial services regulation in Europe as first appeared.
Sweden, which takes over the European Union presidency next month, is apparently lukewarm about the tough line being pursued by the EU and most major European governments. According to a report in The Guardian yesterday, the City minister Paul Myners, is off to Stockholm later this week after it emerged at the meeting of G8 finance ministers in Italy over the weekend that Sweden does not support a harsh, centralised regime for hedge funds, derivatives and private equity envisaged by the supporters of the Larosiere report, which has so far been the main reference point for the reform debate in Europe. This is probably because Sweden has a successful private equity sector that government and unions feel comfortable with and they fear that heavy-handed centralised regulation could stifle it.
I was struck by a certain naivete in FSA chairman Lord Turner's comments to The Guardian: "If one was absolutely confident that European supervision was going to be completely politics-free, in a neutral, technocratic fashion, we would be more relaxed about it". Politics-free? I don't think so. Vast sums of public money have been poured into the financial system and politicians and the public expect some accountability to go with the unprecedented response to the the business and regulatory failures that threw the world's financial system into chaos. We will be paying for this with cuts in public spending and high rates of inflation for most of the next decade so politics will play a very big part in the debate about the future of financial regulation.
Back to the European debate and it is going to be an interesting six months as the country that holds the presidency usually has alot of say over the priorities and the pace at which issues progress so you can see why Lord Myners is rushing off to smooth talk the Swedes. There is, however, pressure to maintain the pace of the reform programme and even the Financial Times lined up yesterday on the side of those who want swift, effective and lasting reform.

June 15, 2009

All Party Group has a bright future even if it might look a little different

When meeting people in the industry to talk about the political, policy and regulatory scenes one of the most frequent topics at the moment is the future of the All Party Parliamentary Group on Insurance & Financial Services. There seems to be an assumption on the part of some people that just because a few familiar faces will definitely not be there after the next General Election that the group will face a difficult time. I'm not sure I accept this assumption.

The group has always been one of the most active all party groups and this level of activity is set to be sustained as the financial services sector faces up to some significant regulatory and commercial challenges over the next few years. Certainly, this will all take place against the background of major political change with a General Election within the next year and possible reform of the House of Lords, both of which could significantly change the composition of the group.

The group will have to find a new chairman as John Greenway announced two and a half years ago that he would not be re-standing following the redistribution of his current seat in North Yorkshire (So, what did happen in Thirsk & Malton?). John has chaired the group since 1992, when he succeeded the group's founder chairman Sir Robert McCrindle. Similarly, joint secretary Sir John Butterfill announced sometime ago that he was not seeking re-election. More recently, one of the other joint secretaries, Labour MP Jim Cousins, decided to retire at the next election. All three have been tremendous supporters of the group and have helped ensure that there are MPs who have an understanding of the issues that affect the sector. They will be missed.

With 41 MPs and 26 peers currently members of the group, however, they are far from the complete picture. There is significant interest in Parliament in engaging with the insurance and retail financial services markets and the fact that over half the members of the group have attended at least one event so far in the current session helps underline that point. Just a glance at the programme and the range of organisations that want to meet the group demonstrates that there is similarly plenty of interest outside Parliament in using the group as a vehicle for communicating with policymakers, the principal purpose for which it was established in 1991.

I think the other factor people need to bear in mind is that the APPG has always been run above board. It is not a cloak to disguise a lobbying group like some specialist all party groups. It exists to provide a channel of communication on issues that matter to the insurance and retail financial services sector. We frequently arrange meetings on specific topics for the group to which speakers with differing viewpoints are invited and, sometimes, these will be consumer critics of the industry.

Nobody makes any money out of it. It is not sponsored. We (by which I mean Incisive Media) do not take "membership fees" from outside organisations like some all party groups. The only members are Members of Parliament and most of its meetings are open to whoever wants to attend - even rival publications to those owned by Incisive Media have been known to attend!

We provide the secretariat and administrative support, website and newsletter free of charge. Why? Partially because we identified this as a way we could put something back into the markets we serve and partially because it helps keep us close to events that our markets are interested in. For almost identical reasons PricewaterhouseCoopers provides the technical support on the same basis, writing briefing papers and minutes of the public sessions.

However transparent any new regime is and however restrictive it is in allowing people to make money out of being connected to Parliament, we are confident that this group will come through those tests. So, for as long as Parliamentarians want to hear from the industry and the industry wants to engage with them, the group should have a future.

It is already planning a busy autumn session which will be kicked off by Post Magazine's annual Parliamentary reception, which started in 1989 and is now hosted in conjunction with its Business Leaders' Forum. 

June 11, 2009

Equality Bill is starting to look tricky for insurers

The Equality Bill is starting to look rather less straightforward than the insurance industry initially hoped.
The Committee stage is now underway. Last week and this week they have been taking evidence from a wide range of organisations, including the Association of British Insurers, and next week will get onto the serious business of a clause-by-clause examination of the bill. The evidence sessions will have done little to soothe the nerves of the insurance industry. The insurance industry knows it is vulnerable to criticism on the way age limits are applied in certain classes of business such as travel insurance but it will not have expected to end the week attacked for disability discrimination against victims of pleural plaques and facing a possible ban on using genetics and family history in underwriting decisions.
Not surprisingly, Help the Aged and Age Concern took the opportunity of appearing before the committee to stress their opposition to the insurance industry being given any blanket exemption from the age discrimination provisions in the bill. The thrust of their complaint, which seemed to be listened to sympathetically by the committee, was that the insurance industry uses age as a proxy for other factors such as health and does so relatively crudely with broad age bands, such as over 65 or 65-75.
Where these organisations seemed to be in agreement with the insurance industry was over the need for all exemptions to be dealt with in the bill and not left to ministerial order. It seems that they are as worried as the insurance industry that exemptions could be granted or taken away almost on a ministerial whim.
Poor Nick Startling from the ABI went in well briefed to deal with the age discrimination issues but had hardly got into his stride when Labour MP Jim Sheridan launched into an attack about the insurance industry's stance on compensation for people with pleural plaques and those who go on to develop mesothelioma. Mr Sheridan seemed to want to hold Mr Startling personally responsible for the lack of compensation paid to people with pleural plaques and steer him into admitting that this constituted disability discrimination.
Next up was the Liberal Democrat MP Dr Evan Harris who wanted to get genetic testing on the agenda and pressed for a guarantee that the current moratorium on using genetic tests in underwriting would be extended beyond 2014. Of course, Mr Starling couldn't give this and it looks as if Dr Harris will press for an amendment to the bill to make the moratorium permanent and may even include some aspects of family medical history in this proposed ban too.
The week's evidence was rounded off by Vera Baird, the Solicitor General and the minister on the committee. She was supportive of the complaints from older people's charities that the insurance industry's use of age in underwriting was "gratuitously discriminatory" and was not always actuarially justifiable. She said the Government Equalities Office was working on a policy document specifically on this area and was consulting with both the industry and the age lobbies. Apparently, a draft version is doing the rounds at the moment. I think its publication will be awaited by the insurance industry with a little more anxiety after the last week. 

June 8, 2009

Euro elections leave the UK totally isolated on financial services regulatory reform

Amid the chaotic domestic fallout from the European Parliament elections in the UK it would be very easy to lose sight of some of the wider issues that last night's results will influence. Top of my list this morning is the debate on the reform of financial services regulation.
I have written before on how the UK appears to be on the back foot in this debate with the European Commission setting the agenda through the Larosiere report and its proposals for the setting up of pan-European regulatory bodies that potentially downgrade the role of the Financial Services Authority and other national regulators. The UK has been very lukewarm, even quietly hostile, to this policy.
Yesterday's elections seem to me to make it even more likely that the European view - driven by an intense belief that the Anglo-Saxon approach to financial services regulation was one of the causes of last autumn's financial meltdown - will triumph. In France, where President Sarkosy has led the way in challenging the US-UK view of regulation, the President's centre-right party swept the board. Similarly in Germany and, to a lesser extent, in Italy. Reading and listening to reports from those countries last night and this morning it is clear that their endorsement of the governing parties is in part a vote of confidence in their reaction to the economic and financial crisis. This huge strengthening of the European People's Party in the European Parliament is a major boost to the backers of the Larosiere approach. 
In tandem with this significant electoral endorsement of the pan-European regulatory solution we have the British Conservatives walking out on the European People's Party, now by far the largest group in the Parliament: with them goes the one hope of any real UK influence as the proposals make their way through the Parliament. Inside the EPP, the Conservatives might have had some say as they appear to share the broad stance of the UK government that strong national regulators backed by true global action as proposed by G20 is the right way forward, not regional regulation. Outside the EPP, they will have no say as they line up with various fringe right-wing parties from eastern Europe. This debate on the Tories' place in Europe may have a few twists and turns yet, however.
With a weak and totally distracted British government and no voice in the major group in the European Parliament it is hard to see how the UK can stop it being full steam ahead for the Larosiere approach.

June 3, 2009

Equality Bill debates will hear exemption plea from insurers

The Equality Bill started its committee stage yesterday: this is where is gets debated clause-by-clause. Nowadays, these committee stages often start with a week of presentations from interested parties and the Equality Bill committee is taking full advantage of that opportunity with 25 organisations due to meet them over the next week. The Association of British Insurers is on that list and will be there next Tuesday (9 June) at 10.30am.
The ABI will be pushing hard for a full exemption from the provisions of the bill for all underwriting decisions that can be fully justified by supporting actuarial data. This is largely the position with current anti-discrimination legislation, especially that on gender discrimination, but with the Equality Bill extending its reach into age discrimination the insurance industry is nervous. It is right be.
The complaint against the industry is that it unfairly discriminates against older people, especially in the field of travel insurance. Despite the ABI's best efforts it is having difficulty shaking off this charge. The 170 page research paper published alongside the bill returns to this issue - for those interested go to pages 40-43. Unless the industry can nail this one, it is likely to find itself at the mercy of ministerial whim, which is the other reason for its nervousness. Without an exemption built into the bill, the decisions about how far the insurance industry will be exempt from the new anti-discrimination laws will be left to ministerial orders made under powers that go back to 1539 and are still called the "Henry VIII powers" to this day, a slightly chilling description. These are notoriously difficult to challenge and get debated, although with the drive for greater transparency and reform that is sweeping through the political system this could change. The insurance industry wants the clarity of clauses in the primary legislation so it can be unequivocally clear on where it stands.
The ABI's oral evidence next week will therefore be crucial. It has hinted that it is willing to set-up a clearing house to find cover for people whose travel insurers reject them on grounds of age, much as it did (successfully) in the late 80s and early 90s for commercial insurance for small business in riot and crime stricken inner city areas. This maybe enough to buy-off the critics.

June 2, 2009

Financial services regulation: House of Lords backs the global option put forward at G20

As the political chaos unleashed by the MPs' expenses scandal continues to dominate the headlines and totally absorb political leaders of all parties, there are some sharp reminders that life - real life - goes on in the world of politics. It was interesting to see in yesterday's Financial Times that business leaders have started to air concerns about just how far politicians have become distracted from the important agenda flowing from the financial and economic crises of the last year. This morning we had another reminder of just how important a debate is brewing up around financial services regulation when the House of Lords Economic Affairs Committee published its report on banking supervision and regulation.
This is a big report with alot to say about regulation and banking supervision, much of it very obvious criticism of the failures of the tripartite regulatory regime and the lack of clarity in the roles of the Financial Services Authority, the Bank of England and the Treasury. I want to look at the contribution the report makes to the wider international debate about the reform of banking supervision. This is buried in paragraphs 128 to 143 of the report under the heading International Supervision.
The House of Lords argues strongly that any extension of supranational banking supervision should be on a global, not a regional basis. It does sympathise with the critique that the European Union's Larosiere Report offers of the failures of the existing mechanisms but rejects its conclusions that the answer is a series of new and strengthened European institutions, arguing instead that the solutions need to be global, not regional. In coming to this conclusion, The House of Lords is lining up firmly on the UK government's side and gives strong backing to the proposal developed by Gordon Brown at the London G20 Summit that a new Financial Stability Board should be established in partnership with an enhanced role for the International Monetary Fund.
In normal times, this would have been seized on by the Treasury as it needs to do find some allies to help it stand up to what looks, at the moment, to be an unstoppable tide in favour of a European solution in the EU. These are not normal times. We have a government paralysed by an unprecedented political crisis with a Chancellor looking increasing doomed. Picking up and reading a lengthy House of Lords' report is not likely to be one of Mr Darling's priorities this week. The pile of reading will only get bigger in the next week as the House of Commons Treasury Select Committee report covering many of the same issues is expected to be published. It is hard to see just how and when these important issues are going to get addressed in the current fevered political atmosphere.

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