Expert warns of "unintended consequences" of bank-like accountability standards for UK insurance senior executives

Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, was commenting in response to a piece in The Times newspaper by Bank of England governor Mark Carney (registration required). Carney said that the Prudential Regulation Authority (PRA), the new financial regulator with responsibility for the insurance sector based within the Bank of England, would propose a tighter regulatory regime for insurance senior executives "similar" to the one already operating within the banking sector.  Carney is concerned that insurers are entering into new classes of business and investing in less traditional assets and emerging markets in the pursuit of profit but with potentially higher risk.  

However, Geiringer said that some of the proposals included in Carney's article would not be appropriate for the insurance industry, which "does not have the same inter-connectivity and inter-dependencies" as the banking sector.  Insurance executives are already subject to prior approval from the regulator before they can take up their position.  Often the approval is preceded by an interview and if these are made mandatory for insurance executives, this step could have unintended consequences.  For example, applying similar levels of accountability to insurance executives as apply to bankers could discourage highly qualified individuals from taking senior roles in the insurance industry, he said. 

"When the stricter 'approved person' regime was considered an appropriate measure for bankers in light of several collapses and near-collapses, the insurance sector did not suffer the same impact from the financial crisis so it is hard to see why this measure is needed," he said. "Indeed, if the potential problem is insurers taking on too much risk, this is surely largely going to be regulated by the Solvency II capital resources requirements to be introduced from 2016."

"Insurers don't trade with each other like banks, and so the potential for systemic failure caused by one bank failure having a 'domino effect' on the rest of the industry is less likely for the insurance industry. It is possible that a heightened level of scrutiny will dissuade certain well-qualified individuals from becoming senior executives in the insurance industry and mean they will go elsewhere," he said.

The PRA, along with conduct and compliance regulator the Financial Conduct Authority (FCA), took over the regulatory functions of the previous Financial Services Authority (FSA) on 1 April 2013. The PRA is responsible for most of the day-to-day regulation and supervision of 1,700 banks, building societies and insurers.

The Solvency II regime sets out broader risk management requirements for insurers throughout the EU, and dictates how much capital firms must hold in relation to their liabilities. The Omnibus II Directive, which completes and finalises the new framework, is expected to be transposed into national laws by 31 March 2015 to come into force on 1 January 2016.

In his comment piece in The Times, Carney said that "integrity, honesty and skill" were just as important for senior managers in the insurance industry as for those working in investment banks or building societies. Although the effects of the global financial crisis were not felt as strongly by insurers, the sector also experienced credit risks and despite the introduction of rules governing the amount of capital that they should hold from 2016 there was always the danger that insurers would fail, he said.

"Alongside reforms that parliament has asked us to make to hold senior bankers to account, we will create a similar regime for senior managers in the insurance industry," he said.

The article did not specify the potential sanctions that senior managers could face. However the Banking Reform Act will introduce a new criminal offence of reckless misconduct that leads to bank failure for senior bankers and a two-tier authorisation process for bank staff, following the recommendation of the Parliamentary Commission on Banking Standards (PCBS).

Commenting on why these processes could be disproportionate for senior insurance executives, Geiringer said that forcing them to set out their role in 'statements of responsibilities' lodged with the PRA could "lead to unbearable tensions in the boardroom if there are shared responsibilities". A regulatory regime for insurers similar to that in place for banks also has the potential to reduce risk-taking and turn off inward investment into the UK industry from overseas investors looking to penetrate the UK market, he said.

The PRA is intending to consult on the proposed regime later this year. "These, and many more, are the sorts of questions that should be considered in a proper consultation exercise," he said.