 By Michael Wainwright, Partner at Eversheds LLP
As part of its ‘Regulation in the City’ report international law firm Eversheds canvassed the opinions of 200 senior City executives, including those working in the insurance sector, on the ongoing reform of the City’s regulatory framework. While the City is broadly in favour of compulsory regulation, the general view is that the current uncertain international regulatory landscape creates a problematic working environment. Michael Wainwright, partner at Eversheds LLP, highlights the key findings.
The financial services sector around the globe is facing a changing regulatory landscape, with the consequences of proposed UK, EU or US reforms currently on the minds of many City businesses that operate across borders.
The main concern is the perceived lack of ‘joined-up’ thinking between UK, EU and US regulatory regimes as they set about reviewing existing legislation. This is placing increasing pressures and costs on businesses as they try to satisfy the demands of three regulatory authorities, each with separate remits, with the resulting confusion making it more complex for actuaries to ascertain levels of risk.
The City’s insurance sector acknowledges the requirement for tight control, with 94% in favour of a compulsory rules-based system compared to the 80% average throughout the City as a whole. However, the research pointed to a significant degree of frustration about the UK regulatory regime, with a feeling that some areas of regulation are onerous and purposeless. Worryingly, almost three quarters (71%) of those in the insurance sector stated that the uncertainty around legislation had led to their organisation delaying business activity. Additionally, 35% believe that because there are so many different pieces of legislation impacting on regulated businesses, the act of complying with one can often mean contravening another.
To get a detailed insight into the regulatory framework affecting the City, views were canvassed concerning specific pieces of legislation. It is clear from the results that the growing number of separate pieces of legislation offers a challenge to the UK financial services industry, presenting an uncertain and problematic regulatory landscape, particularly for those in the insurance sector.
UK Regulation
The research asked for views on the Bribery Act, the Remuneration Code, the FSA Retail Distribution Review and the Vickers Report. Opinion in the insurance sector on the Bribery Act was split, with half saying the legislation required no changes, but a further 47% wishing it could be simplified. Many in the insurance sector felt the Bribery Act was too complex, lacked transparency and a clear definition. Tellingly, only 3% thought it will be effective in reducing systemic risk.
The Remuneration Code was generally welcomed, as 59% of the City thought the legislation did not require change and 15% thought it would be effective in reducing systemic risk in the UK financial services sector.
However, the FSA Retail Distribution Review raised a number of concerns. Close to half of those questioned (44%) believe the review will place an unnecessary administrative burden on the sector with concerns around potential qualification confusion and the broad brush nature of the regulation.
Finally, the highly publicised Vickers Report does not have whole-hearted support. The majority (62%) believe it has not struck the right balance between managing risk and the need to grow the economy.
EU Regulation
The research touched upon a number of key pieces of EU legislation. The majority of those in the City’s insurance sector think Solvency II requires simplification (65%), and the Alternative Investment Fund Managers Directive received broad support, with 56% saying it requires no further changes. The EU savings directive was also supported, with nearly half of those in the insurance industry (44%) saying that it is effective in helping to reduce systemic risk. Finally, Basel III split opinion, with a third (35%) thinking it did not require any further changes but two fifths (38%) saying it places an unnecessary administrative burden on the UK financial services industry.
US Regulation
Across the Atlantic a number of pieces of regulatory control are under scrutiny as well as undergoing change. How the Dodd-Frank Wall Street Reform will impact on the City split opinion, with half (47%) asking for it to be simplified and 41% saying the legislation required no further changes.
The Foreign Accounts Tax Compliance Act (FATCA), was largely supported, with many of those in the insurance sector (53%) saying it requires no further changes. Finally, the Foreign Corrupt Practices Act also received support from the sector, with a third (29%) saying the legislation is effective in helping to reduce systemic risk in the UK financial services sector, with the same amount happy with the legislation as it stands.
The Future
With many City-based businesses working across borders, the challenges of adhering to the various UK, EU and US regulatory controls either currently in place, under review or actively being changed is clearly at the forefront of their minds.
Confusion leads to delays in activity and increased workload for those in actuarial roles, so it is imperative that clarity around the future international regulatory landscape is established speedily. The views of the City also need to be taken into account when decisions that could affect the success of the UK financial services sector are being made. This research demonstrates that the City is not afraid of regulatory control, but wants any new structure to ensure that the City of London remains competitive on a global stage.
To request a copy of the ‘Eversheds Regulation in the City Report’, go to: https://www.eversheds.com/uk/home/publications/report/index.page
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