We follow up on our article General Election 2015: ensuring a fair game and consider the implications for the insurance industry.
Budget statement: what does it mean for the UK’s financial services?
Despite many pro-business measures, the Chancellor, George Osborne, has used taxes on the sector to meet his deficit reduction targets. The insurance and retirement income sectors continue to see reform; reflected, perhaps, by Martin Wheatley stepping down from his role as Chief Executive at the Financial Conduct Authority (FCA), which regulates most insurer issues.
Industry reaction to the prospect of ‘workplace ISAs’ has been mixed. Some forecasters suggest the measure would, if implemented, cause significant reductions in net flows into insurers’ pensions operations. Others suggest the magnitude of changes could polarise the industry and risk jeopardising its status as leaders in pensions provision.
Overall, the sense appears to be one of relief that the Chancellor is at least consulting with the industry, and it seems like this is not a decision that will be taken rashly. As with all reform, it is vital that those at the coal face have the opportunity to provide their ideas and experience to ensure effective implementation – should it proceed.
Other key Budget announcements include:
- A fundamental review of the regulation of claims management companies (CMCs) will be launched, led by Carol Brady, Chair of the Chartered Trading Standard Institute Board. It will report to HM Treasury and the Ministry of Justice (MoJ) in early 2016.
- The FCA will review what more can be done to ensure that people are encouraged to shop around when they renew their insurance.
- From 1 November 2015, the standard rate of Insurance Premium Tax will be increased from 6% to 9.5%. Separately the Government will introduce VAT provisions to level the playing field for insurers.
- The Government will increase NHS funding by £10 billion per annum, above inflation, by 2020-21. This is a real terms funding increase of £8 billion, in addition to the £2 billion of additional funding for 2015-16 announced at the 2014 Autumn Statement.
- The Government will invest £23 million in six Next Generation Digital Economy Centres over six sites, leveraging £22 million of additional funding across sectors of the digital economy including finance, healthcare and education.
The more recent announcement that new funds have been pledged towards driverless cars demonstrates the commitment to innovation. On 19 July 2015, the Government launched a £20 million competitive fund for collaborative research and development into driverless vehicles, along with a code of practice for testing.
Infrastructure and fixing the foundations: long-term investment
On 9 July, the Chancellor and Business Secretary Sajid Javid launched the Government’s 15 point plan for productivity: “Fixing the Foundations: Creating a more prosperous nation”. The promised top reforms include:
- Publishing a new long-term National Infrastructure Plan for the key economic infrastructure sectors – transport, energy, flood defences, water, waste, communications and science.
- Launching an international FinTech benchmarking exercise in the autumn.
- Appointing Jayne-Anne Gadhia, CEO of Virgin Money, to lead a review into representation of women in senior managerial roles in the financial services industry.
- Consulting on a new Strategic Steer to the Competition and Markets Authority, which includes an increased focus on productivity and a commitment to innovation and encouraging new entrants.
A new business tax road map will be supplied by April 2016 to provide certainty and stability to businesses. The Government has promised to endorse proposals from some of the country’s largest investors to support companies investing for long-term growth and challenge those that are compromising long-term competitiveness and productivity.
Specifically, the Government has committed to cut at least a further £10 billion of red tape on business guarantees and to make a £100 billion investment in a modern transport system, giving increased funding to the most productive areas of infrastructure spend.
Promise is also made of improving work ready skills to stimulate competition and innovation. Aimed at putting employers in the driving seat, it resonates with the need to be able to respond to the rapidly changing market, particularly in the technology and cyber space. The determination to keep the UK at the forefront of innovation is (once again) clear.
The EU Referendum Bill, tabled on 28 May 2015, has already passed Committee stage. The essence of the Bill is clear and straightforward: “Should the United Kingdom remain a member of the European Union?”
The impact of the Bill is less straightforward:
- What do we expect the UK will gain in its negotiation with the EU and will this be enough to convince voters?
- How important is the UK’s relationship with the EU in terms of London’s status as a driving force in financial services?
- What are the main implications for UK businesses with links to the EU if Britain pulls out of the EU?
- How can business confidence be maintained?
The questions above underpin much of the commentary since the Government’s election victory. Notwithstanding that the EU referendum campaign has yet to begin, Cameron has already had bilateral meetings with every EU leader in order to discuss the UK’s desired package of reforms – attempting to secure concessions prior to the EU Council Summit scheduled for 15/16 October 2015.
Cameron’s determination for treaty change looks to have softened over the last month, with him conceding that he is unlikely to secure it before the referendum. The suggestion remains that the UK Government will nevertheless seek a commitment for future treaty change. However, after EU leaders asked the UK to contribute to the recent Greek bailout, undermining a past political agreement made in 2010 and 2011, Eurosceptics have said only treaty change, not political agreement, will do. Cameron had previously lauded this as an example of where he can renegotiate in Britain’s interest.
Debate about the kind of concessions the EU should be willing to make to the UK in order to keep the UK as a member vary with regard to the size of concession and which member country is asked. The campaign will continue to heat up – both inside and outside of Parliament – and trade unions could well be influential in the debate.
Discussions around the timing of the referendum remain speculative. Only one amendment has been passed to the Bill which ensures the referendum will not be held on the same date as local elections in May 2016. Going forward, the progress of the UK’s renegotiation of its relationship with the EU will be the most important factor in deciding the timing of the vote.
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What does an EU exit mean to insurers?
A vote to leave the EU could, as we already know, push banks away from London. What would a shift in the gravity in financial markets mean for insurers? Much will depend on the extent of change in any free trade agreements (FTAs) agreed as part of the EU and whether the Government could negotiate suitable FTAs both within and outside the EU. Some commentators suggest that for those parts of the industry which are more reliant on trade with non-EU countries (including the US), an EU exit would not be “game-changing”. In particular, if the UK was able to establish a more favourable regulatory framework for overseas investors – might that off-set any disadvantage of an exit? Alternatively, if the UK wishes to continue to trade within the EU but is no longer at the negotiating table, might future regulation seem even tougher?
The prospect of losing ‘passporting rights’ - rights that allow firms to conduct business across the European Economic Area (EEA) and establish branch offices, while reporting only to their home state regulator – is something that firms are no doubt alive to as a significant consequence of an exit. The potential increased operational costs of underwriting business in Europe and associated impact on competiveness cannot be good for business or the growth prospects of the sector – especially when compounded by the uncertainty with regard to what the change, if any, to the regulation regime might look like.
Insurers should not ignore the lack of clarity and instead be proactively considering the implications to their business as the referendum negotiations unfold.
Parliamentary Select Committees
After several weeks of internal Parliamentary elections, the new look House of Commons Select Committees are now in place. Charged with scrutinising government department and specific policy areas, Select Committees will remain a vital part of the parliamentary landscape.
The standing of Select Committees was significantly enhanced by reforms in the last Parliament. Those measures provided them with a greater degree of accountability and autonomy than had been seen previously within the Parliamentary system. As such, independently-minded chairs are again likely to emerge and make an impact. Indeed many members have been seen to cut their teeth on Select Committees before enjoying an ascent to the Cabinet or Shadow Cabinet.
Select Committees to keep a watchful eye on include the Treasury Select Committee (TSC) under the stewardship of Andrew Tyrie. The TSC will again be at the heart of the debate around financial regulation, banking reform and economic policy and is likely to have a particular interest in how any change in the UK’s relationship with the EU may impact upon the financial services industry.
Civil Justice: efficiency and delivery
Michael Gove has wasted little time in appearing in front of the new Justice Committee - the first Secretary of State to do so this Parliament. Having created a number of enemies in his role as Education Secretary, Gove appeared charming, suggesting he will tread more gently this Parliament.
Gove outlined three priorities for the MoJ:
- Courts reform - so that they work in an efficient and effective way.
- How we deal with offenders - ensuring they are sentenced appropriately and receive rehabilitation.
- Addressing human rights - so that rights are protected under a system that works in a better way.
Focusing on courts reform, the MoJ quickly followed suit and published a proposal on the provision of court and tribunal estate in England and Wales. In a drive for efficiency, the consultation covers the proposed closure a total of 92 courts. Integration plans cover 31 buildings including 11 country courts.
The Courts Service estate is said to cost the taxpayer approximately £500 million per year. The MoJ says the disposal value of all the freehold buildings listed for closure is estimated at £35 million.
Increased use of technology is a key proponent of the review in order to assist in reducing surplus capacity, as is the vision that only complex cases will require face to face time. The Consultation ends 8 October 2015.
The desire to improve IT in the courts is welcomed (and long overdue). However, as always, a balance needs to be struck. Imagination and innovation will be required to ensure access to justice is achieved together with the desired delivery of value for money.
Gove said he would revisit LASPO if there is evidence of ‘rough justice’, providing reassurance that he will give the cuts time to take effect before revisiting and addressing specific issues. On legal services regulators, he acknowledged the danger of blurred lines of responsibility, with regulators tripping over each other.
It is evident that Gove clearly means business. Ensuring access to justice is maintained remains the order of the day. Having said that, he is unequivocal that cuts need to be made and there is a strong sense that Gove will not take kindly to wasting taxpayer money on drawing out the process of reform. Might we, therefore, see the more radical and uncompromising colours of Gove return in due course? We expect so.
The Justice Committee is unlikely to be short of subject matter for inquiries. Indeed submissions have already been sought on the effects of the recent (and controversial) increase in court fees.
Overall, a challenging environment continues to exist for the insurance sector. Change will need careful consideration, especially that which is driven by political motivation. In particular, it will be fascinating to see how the influence of the Select Committees plays out as the Parliament develops. The noises so far are though encouraging. The Government seems prepared to, and realises the value of, listening to the industry. Long that may last.