The insurance industry has become the latest bunny to be stunned by the oncoming headlights of the Financial Services Authority (FSA) and its cavalcade of regulators. Since assuming its full powers at the end of November 2001, the FSA has publicly avowed to ramp up regulation of the UK's insurance industry.
Regulatory costs are anticipated to rise 10 per cent this year, with the same again the next, as FSA resources are redirected towards the insurance market and away from its traditional focus on banks and building societies. As always with regulation, the worry is that costs and bureaucracy will spiral, causing some insurers to suffer. For law firms, however, the likely impact is considerably less damaging. Regulation equals more trips to the lawyers by more people, which essentially means more money for the law firms.
Lovells, Clifford Chance, Barlow Lyde & Gilbert, Freshfields Bruckhaus Deringer, Herbert Smith and Norton Rose all provide advice on non-contentious matters to clients in their insurance practices. For them, an increased emphasis on the FSA's role as industry watchdog will bring business through the door. But why has the insurance industry become the recipient of attention from the beady eyes of the FSA? It is already one of the most highly regulated industries around and each institution has liaised on an informal basis with an individual regulator for some time. The FSA is poised to move away from this friendly, almost gentlemanly, relationship between insurer and regulator to one in which the regulator takes a more proactive approach.
There are many professions and trades where, despite public concern, they continue to be responsible for regulating their own businesses. Lawyers and medics, for example, have remained free and unencumbered by an external, independent review process. So what is different about those in the insurance business? At least they can't chop off the wrong limb or mishandle the subsequent medical negligence claim.
Those in the business of risk management have to be seen to be able to manage their own risks. Add to this the fact that the FSA has been stung by criticisms levelled at it in the wake of high-profile disasters over which it presided as regulator. From the FSA's perspective, particularly if Class Law persists in its action against the authority over its handling of Independent Insurance prior to its collapse, bumping up regulation of insurance companies could be just what is needed.
By its very nature, regulation only really hits the headlines when it is seen to have failed. The FSA has received damaging reports from its internal auditor and similarly unpleasant publicity from the financial press for its monitoring of the problems at both Independent and Equitable Life. The FSA's chairman Sir Howard Davies has also commented on the under-capitalisation of the insurance industry, particularly in the light of the damage inflicted to capital reserves subsequent to 11 September.
The FSA has done no more than should have been expected. It has sat back, taken stock and opted for an increased regulatory profile for the insurance industry. It is just not entirely clear how this increase will manifest itself and lawyers are urging clients to take a cautious stance when talking to the FSA. It would be a shame if the FSA's plans to increase accountability within the insurance sector led to a reluctance among the industry to interact with the regulators.