Not long after he was appointed CEO of the UK's Financial Services Authority, Hector Sants said that individuals should be very afraid of the FSA. Some laughed - but not very loudly, and not for very long. Since then, the FSA has shown its teeth, and the UK's prisons, and the FSA's coffers, are fuller than we might otherwise have expected.
On 19 June 2012, the Financial Times published an article which suggests that US insurers and reinsurers may need to be scared of the FSA as well
.Apparently in response to US criticisms about the quality of regulation in the UK, and the regulatory issues that are said to have arisen here, the Financial Times reports the Sants view: 'What is deeply unsatisfactory is that we have very little prudential oversight of a branch.' When the UK revamps its regulatory structure next year, it 'has to be clear and public about its reliance on overseas regulators or it should consider [forcing] subsidiarisation'.
At first blush, and from a regulatory perspective, forced subsidiarisation seems desirable. What's not to like? The firm subsidiarises its branch, the branch has to be fully capitalised, and the FSA can regulate all of its activities, not just some. That should mean the UK can avoid some of the problems that followed the Lehmans and Icelandic banking collapses, because they were operating in the UK via branches.
But that hardly seems appropriate or desirable if you're a US insurer or reinsurer. For starters, banks and (re)insurers don't collapse in the same way, and when they do collapse, it's rarely for the same reasons.
Subsidiarising a (re)insurer's UK branch necessarily reduces the assets available to (re)insureds in the event of a claim, and it concentrates (re)insurance risk in the London market.
Worse than that, the FSA now has to decide how it will supervise the group created or extended by subsidiarisation. And that may well mean making the new subsidiary responsible for the group solvency capital and ORSA obligations...a step that could eventually mean the FSA indirectly supervising US firms, under Solvency II rules, unless the US becomes Solvency II equivalent.
Now who needs to be scared of the FSA?