London and International Insurance Brokers’ Association (LIIBA) – Written Evidence (FRS0006)
The London and International Insurance Brokers’ Association (LIIBA) is the trade association for Lloyd’s brokers. We represent our members on all matters affecting them in the London and International markets. We have the support of the vast majority of Lloyd’s brokers accounting for over 95% of business in a market that manages US$91 billion of premium annually, employing 54,000 people and overall contributing £30 billion to UK GDP. LIIBA membership ranges from large diverse multinational corporations to small niche London Market specialists.
LIIBA welcomes the opportunity to respond to this call for evidence. Our market is highly internationally mobile and export focused. Only around one third of insurance business written in London is on behalf of a UK client. Brexit therefore could have a significant effect on London’s ability to remain a competitive centre for the business written for clients established in EU countries; and for global business written on behalf of non EU clients but where the coverage, at least in part, applies to property or other assets held in EU countries.
We have responded to the Committee’s questions below.
Current regulatory regimes
1. What is your overall assessment of the EU’s financial services regime, in light of its current application to the UK? To what extent is it effective, and for whom?
LIIBA’s members are subject to regulation by Financial Conduct Authority. The relevant area of FCA’s Handbook for insurance brokers is principally made up of a transposition of the Insurance Mediation Directive (IMD - which is due to be superseded by the Insurance Distribution Directive (IDD) in February 2018). LIIBA believes that the regulatory regime prescribed in the rules in general provides a balanced approach to delivering consumer protection. LIIBA and its members recognise that UK’s reputation as having an effectively regulated financial services industry is a key criterion that clients consider when choosing to bring their international insurance business to the London market. However we, on occasion, have issue with the level of proportionality shown by FCA. LIIBA members are predominantly engaged in the placing of complex commercial insurance on behalf of sophisticated customers. We believe that this negates the need for stringent conduct regulation. We do not believe, however, that FCA’s supervision approach always reflects this
2. Are current EU proposals on banking and financial services in your view positive for financial stability? How do you expect the EU’s regulatory framework to evolve in the coming years?
As noted in the answer to (1) above, the key development in EU regulation affecting LIIBA members is the forthcoming implementation of the Insurance Distribution Directive (IDD) in February 2018. In general IDD does not represent a significant change to UK regulated firms. Its principal aim is to achieve a harmonisation of implementation across EU and to extend conduct regulation to insurance companies engaged in distribution. LIIBA welcomes both these developments as they will establish a more level playing field for UK insurance brokers.
3. What are the key differences between financial regulation as agreed at the international, EU and UK levels, and where are the gaps? How important is it to maintain a level playing field for regulation?
A level regulatory playing field is vital for UK’s international competitiveness in financial services. LIIBA’s members are active in the international specialty insurance market in London. This manages $91billion in premium each year and makes a £30 billion contribution to UK GDP. As only around 30% of the business emanates from UK, London insurance is predominantly an export market. It is thus highly internationally mobile – and indeed London’s share of global markets has declined in recent years, particularly in reinsurance (From 15% in 2010 to less than 13% in 2015).
Our main concern with the structure of international regulation is the lack of accountability for a number of very influential bodies. For instance, insurance regulation at the global level is founded on the core principles published by International Association of Insurance Supervisors (IAIS). Chapters 18 and 19 of these principles – covering conduct of business and conflicts of interest – are currently under review. IAIS is unable to cite any evidence of market failure that has driven this desire to change the rules. And yet, once the new principles are published, they will be reviewed by European Insurance and Occupational Pensions Authority (EIOPA) and will likely result in changes to EU regulation that will be adopted by FCA. Whatever the implications of these changes, it is the change itself that is costly and burdensome for our members. Given IAIS’s seeming ability to initiate these changes just as an academic exercise with no focus on resolving a perceived problem, there is no real measure by which to judge their success. And, even if there were, there is no body to which IAIS could be held accountable. LIIBA believes that this has the potential to make regulation unnecessarily burdensome and disproportionate.
4. Are there any particular legal or practical challenges related to incorporating the existing body of EU financial services legislation into the UK’s domestic law, for example the PRA rulebook?
We do not believe there to be so.
Transition, equivalence and alignment
5. What would be the key priorities for a transitional arrangement, and how much continuity would you expect to see under such an arrangement?
The key priorities for a transitional arrangement are:
6. In practical terms, how and when could a transitional arrangement be agreed and put in place? How long would such a transition need to last?
LIIBA believes that the framework of a transitional agreement could be agreed relatively swiftly. It would need to last until such time as a long term agreement preserving UK insurance brokers’ rights to transact cross border trades to bring business into the London Market was in place.
7. What are the benefits and drawbacks of seeking equivalence? What conditions are likely to be attached by the EU to any equivalence decisions?
Currently there is no concept of regulatory equivalence under IDD. Clearly, for UK insurance brokers to continue to be able to transact cross border business in the remaining 27 EU countries, there will need to be some form of mutual recognition of the acceptability of UK and EU’s ongoing approach to conduct regulation. We would expect this to be agreed between FCA and EIOPA as part of the transitional and long term agreements.
8. What alternatives may exist for maintaining alignment between the UK’s and EU’s regimes? What options could be considered for resolving disputes or arbitrating on such matters? What would be the barriers to a more bespoke arrangement?
As stated above, LIIBA members see a well-regulated UK financial services industry to be a key selling point to our clients. We would not therefore envisage a situation where UK insurance regulation deviated materially from EU. Indeed, given the approach to implementation of relevant directives by FCA, it could be argued that UK insurance regulation is currently more exacting than the equivalent regimes in some EU states. LIIBA members do not have a significant issue with this. Where we do have concerns is the proportionality of the approach that FCA sometimes adopts in its supervision of the adherence to its rules, as set out above.
The future environment
9. What effect will the loss of the UK have on the development of the EU financial services framework and its capital markets?
An inability to access the specialty London insurance market would have a significant detrimental effect on all EU countries. There are a number of classes of business – particularly in the areas of Marine, Aviation and Transport – where coverage for complex commercial risks is unavailable anywhere other than London. For instance, work by the London Market Group of which LIIBA is a part has shown that no EU airline would be in apposition to have flights take off without access to the London insurance market.
10. Where is there scope for the UK to amend its regulatory regime? What precedents exist under current equivalence decisions for divergence to occur?
As mentioned above, there is currently no concept of equivalence under IDD.
11. What challenges will expected innovations in financial markets, for instance in the FinTech sector, present in respect of regulation and supervision post-Brexit? How can these challenges be overcome? Can the UK maintain a competitive advantage while adapting to a new regime? If so, how?
LIIBA believes that it is important that regulators concentrate on supervising the provision of financial services regardless of the medium used to deliver them. Whilst we see scope for technological innovation in insurance intermediation – and, indeed, many of our members are at the forefront of these developments – we believe that any attempt to have a “special” regulatory approach for technology based financial services firms would be very dangerous. At best it is likely to deliver an uneven playing field for existing regulated firms. At worst it could become anti-competitive.
12. Will leaving the EU affect the way that the UK represents itself in international fora? How can the UK continue to maintain influence when dealing with organisations such as the FSB and IOSCO in setting international standards?
As stated above, LIIBA does not believe that UK will have an interest in materially separating itself from EU in terms of its approach to financial services regulation. We would consider it advisable that, as part of any transitional exit arrangement, FCA maintains some role within the EIOPA framework. We would also expect it to remain a member of IAIS. The fact that London is, by some distance, the largest specialty insurance centre in the world should ensure UK retains significant influence over issues that are relevant. Given that no other potentially competing centre is located with the remaining 27 EU countries, we do not see that Brexit will be a significant issue in determining UK influence.
13. The Commission is currently conducting a review of the European Supervisory Agencies. What, in your view, are the key areas where reform should be pursued and what might be the impact of such reform on UK supervision?
LIIBA believes that EIOPA should be made more accountable for the impact that its work has on markets. Similar to our comments regarding IAIS above, we would like to see more rigour in only seeking change where there is demonstrable evidence of market failure. We believe that EIOPA should also be required to track and publish measurements of the success its initiatives have in addressing the problems identified.
14. How could an enhanced role for ESMA and the ECB in respect of euro-denominated clearing work? What are the options for the UK to retain euro clearing in the light of the European Commission’s recent proposals?
This is not a matter for LIIBA
15. How would supervisory cooperation (as envisaged for CCPs) work in practice? Are there any precedents? What are the potential risks?
LIIBA has no comment on this.
27 September 2017