On 1 April 2013, the Bank of England published "The Prudential Regulation Authority's approach to insurance supervision"
. When the Bank published the consultation version of this paper in October 2012, I wrote half a blog about it and called it "...the article I could hardly bring myself to write". In retrospect, the title probably gave too much away. Anyway. That was then, and this is now. Is the second version any better than the first? Well. It's just as difficult to read; just as repetitive and it's managed to suck just as much life out of the subject matter for it to be just as hard to keep reading it. Which is a shame. I suspect that most of the people who manage to get to the end will forget the messages - although the PRA will use it as a reference point, and an excuse to delete most of the guidance from its Handbook.
If you were already worried that the Bank didn't want to supervise insurers, doesn't understand them, and still regards them as the banking sector's poor relations, you'll find plenty of grist for your mill in the both papers. Although they're expressly dedicated to insurance supervision, the PRA's thinking is consistently explained by reference to banks and banking. You'll also notice that the PRA has dedicated less than 25% of its supervisory and risk resource to insurance, whilst almost 40% goes to the banks (and 35% must go to investment firms). OK. This makes it all sound pretty bad. And it may not be quite as bad as it seems: as the PRA notes - repeatedly - banking can be systemic, traditional (re)insurance probably isn't. It therefore makes sense to concentrate more resource on banking, especially as the PRA's statutory objectives include "promoting the safety and soundness of the firms [it] regulate[s], focussing on the adverse effects ... they can have on the stability of the UK financial system". (That isn't, of course, a complete answer to the poor relations question, because the PRA also has "an objective specific to insurance firms, to contribute to ensuring that policyholders are appropriately protected", which hardly gets a look in by comparison. But, hey - as I know to my cost - it's much easier to point out the flaws in these things than it is to try to resolve them.)
At least as presented, it looks as if the PRA's culture and supervisory approach will be very different to the FSA's, and that might also be a good thing. The PRA will, for example, concentrate on the most material issues and pay little or no attention to small beer; it will respond proportionately to issues and expect firms to do the same; it will also take a judgment based approach that's tailored to each particular firm and its circumstances. Finally, if experience shows that the PRA has put too much emphasis on an issue, it will admit its error and change its approach. This will be really tough - but just as valuable if it can be done. We all find it hard to admit that we got in wrong, before visibly changing our approach. That can be especially difficult if you're a regulator working in today's over-heated and risk-averse regulatory environment. The change of mind-set required will also be marked and shocking on a personal level if commentators are right when they say that supervisors are often inexperienced, worried about missing things and getting things wrong, and cannot therefore let anything go for fear that someone, sometime, will criticise them for doing so.
For me, two other rather worrying assertions stood out just as loudly as before, and I've added a third to my list. The PRA says that it will:
- "ensure that it takes account of all relevant information in reaching its judgments" - which sounds sensible enough, but the FSA was often criticised for being unable to make a decision until it had "all relevant information" because, all too often, that meant "every last bit of information, however insignificant it might seem". These criticisms were often well founded and, when they were, the financial and opportunity cost of providing the information was high. Will the PRA really be any better?
- "Insurers should not...approach their relationship with the PRA as a negotiation" - which would be reasonable enough, if you thought the regulator would consistently make the right decisions. In the real world, that isn't usually possible unless the regulator's thinking has been robustly challenged and subjected to a reasonable negotiation process. A confident and competent regulator would encourage the process. How should we view a regulator that isn't prepared to countenance it?
- "The PRA is reviewing the [FSA's] Handbook, and will replace it with a rulebook...The PRA intends to limit strictly the use of guidance material in the rulebook...The PRA does not plan to issue significant amounts of detailed guidance to clarify its policy, whether in the form of general guidance [or guidance] to individual insurers. Where the PRA judges that general guidance material is required, this [will be] issued in a consistent format as...Supervisory Statements. Such material [will be] focussed on the PRA's expectations, aimed at facilitating insurers' judgment in determining whether they meet these expectations, and will not be over detailed..." Hmmm. So: (i) A shorter rulebook. Good. The FSA's handbook was 14 stories high and changing all the time. (ii) A shift back towards more principles based regulation - a divisive issue in the market, but let's go with it for now. (iii) Less guidance to help firms work out what the rules mean, and what they can or must do to comply - again, a divisive issue in the market, and unlikely to be welcomed by many. (iv) The publication of Supervisory Statements. That, I suspect, will go down badly - Not just because these statements will be brief and high level, but because they'll help to make it harder to find out what the PRA's views are on a particular issue. Now, the PRA's expectations will be spread across the rulebook, consultation documents, policy statements, speeches, discussions papers and...Supervisory Statements. And that's before you consider that the FCA will be producing a similar range of documents, and the regulators will not reproduce (and perhaps not even signpost) the European Regulations firms must comply with as well.
Still, on the positive side, the PRA has dropped the Latin from the final version of its paper. That's progress - unless it's still there and I've become immune to it.