ABI response to the FSA s consultation on The FCA s use of temporary product intervention rules (CP12/35) The UK Insurance Industry 1. The UK insurance industry is the third largest in the world and the largest in Europe. It is a vital part of the UK economy, managing investments amounting to 26% of the UK s total net worth and contributing 10.4 billion in taxes to the Government. Employing over 290,000 people in the UK alone, the insurance industry is also one of this country s major exporters, with 28% of its net premium income coming from overseas business. 2. Insurance helps individuals and businesses protect themselves against the everyday risks they face, enabling people to own homes, travel overseas, provide for a financially secure future and run businesses. Insurance underpins a healthy and prosperous society, enabling businesses and individuals to thrive, safe in the knowledge that problems can be handled and risks carefully managed. Every day, our members pay out 147 million in benefits to pensioners and long-term savers as well as 60 million in general insurance claims. The ABI 3. The ABI is the voice of insurance, representing the general insurance, protection, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK. 4. The ABI s role is to: Be the voice of the UK insurance industry, leading debate and speaking up for insurers. Represent the UK insurance industry to government, regulators and policy makers in the UK, EU and internationally, driving effective public policy and regulation. Advocate high standards of customer service within the industry and provide useful information to the public about insurance. Promote the benefits of insurance to the government, regulators, policy makers and the public. 5. The ABI welcomes the opportunity to respond to the Financial Services Authority consultation The FCA s use of temporary product intervention rules (CP12/35). Executive summary We welcome the FCA s stated intention not to use temporary product intervention powers regularly. They represent a significant intervention in the market and should be used in exceptional circumstances only. Their use should be set in the context of the FCA s general approach to product intervention. We are disappointed that there is still no statement of policy on its approach to product intervention as a whole. Temporary product intervention rules (TPIR) are not an appropriate tool to address issues of value for money. Any interventions in a market should be grounded in clear evidence that the market is not working in the interests of consumers. The FCA s approach to product intervention in response to developments at an EU level needs to be further strengthened. The paper does not provide clarity as to how the FCA will seek alignment between EU and UK product intervention rules.
More specific information on how the rules will be used in practice is required to provide clarity and certainty for firms. For example, the paper does not discuss how the FCA will approach the actual rule making. The process must be robust enough to ensure the scope of rules is targeted and specific and does not inadvertently draw in products or areas of the market where no problem exists. The proposed approach to rule publication will not result in an appropriate level of awareness amongst firms affected by them. As a minimum, the FCA should inform relevant CEOs and trade associations 24 hours in advance of publication. TPIR will not be effective if firms are not made aware at the earliest opportunity. In the interest of transparency and accountability the FCA should always - encourage feedback on the rules; - conduct post implementation review of any TPIR; and - publish a statement where a rule made under these powers lapses and is not replaced by a permanent rule. General comments FCA s approach to product intervention Product intervention is new territory for the regulator and the industry, so the FCA should set out a clear policy framework to provide some clarity to the market and to ensure consistency in policy and supervision. Whilst we welcome the FSA s consultation on the use of TPIR, we are disappointed there is still no statement of policy on its approach to product intervention as a whole. The last communication on this was FS11/13 in June 2011. The FCA s approach to temporary product intervention rules should be placed within the context of the FCA s general approach to product intervention. TPIR are a significant intervention into the market without the scrutiny of consultation and should sit in a hierarchy of general product intervention tools. We welcome the FSA s assertion that TPIR will not be used regularly. However, setting out the FCA s general approach to product intervention would allay concerns that these powers will be used more frequently than originally intended. We recognise that the use of the power does not require formal consultation. However, the factors that the FCA will take into account when determining whether to take such action (paragraphs 9 15 in the Statement of Policy) will by necessity require discussion with, and intelligence gathering from, firms and relevant trade associations. This necessary interaction should be recognised in the approach. At minimum, the FCA should always seek informal discussions with the trade associations that represent the area of the market affected before making TPIR. The Statement of Policy (SoP) also recognises that the FCA will generally seek the views of the FSA panels and will consult with the PRA so it would be strange and unacceptable not to seek input from the relevant parts of the industry. We are not clear how much time the FCA envisages will be saved by utilising TPIR rather than using the normal rule making process. The need for temporary powers will require analysis and some discussion/investigation with product providers. The rules will then need to pass through the FCA s internal decision making process before they are finalised. By definition this will take time. The FCA needs to be clear what time is gained from this approach relative to the normal rule making process. Careful consideration should be given to whether any time saved offsets the unintended consequences that could result from poorly designed rules following inadequate consultation and cost benefit analysis. Europe
The FCA s approach to product intervention in response to developments at the EU level needs to be further strengthened. The paper does not explain in sufficient detail whether firms can expect alignment between EU and UK product intervention rules. It notes that the FCA will seek to ensure that issues uncovered at the UK level are raised at European level, but is silent on its approach in a scenario where the initiative for product intervention comes from Europe. The Markets in Financial Instruments Regulation (MiFIR) requirements on product intervention are already quite well advanced and differ from those of the FCA. EIOPA have also recently published their procedures for issuing warnings and temporary prohibitions and restrictions. The approach to MiFIR investments will constrain the approach the FCA can take for such products so, the FCA should justify why a different approach is being adopted for non-mifir products. In general, the FCA should make it easier for firms to understand how the FCA Handbook links to the developing rulebook emerging from each of the European Supervisory Authorities. Transparency and accountability We set out our specific comments on raising awareness of any TPIR in response to Question 3 and 4. However, there are a few key issues relating to transparency and accountability that should be taken into account. As a minimum, the FCA should inform relevant CEOs and trade associations 24 hours in advance of publication. TPIR will not be effective if firms are not made aware of the rules at the earliest opportunity. We are concerned that following publication of TPIR, the FCA will not always invite feedback on the rules (paragraph 43 in the SoP). Given the potential impact of TPIR (developed and implemented without the scrutiny of consultation) it is essential that the views of stakeholders are sought post implementation. Stakeholder input is vital, so the FCA can assess the effectiveness of the rules and whether they are operating appropriately. For example, engagement with stakeholders could uncover unintended consequences. Such discussion and further evidence gathering will be essential to the FCA s decision making process on whether permanent rules are required. To ensure proper accountability the FCA should always be required to conduct a post implementation review of any use of TPIR, rather than being able to choose whether to conduct a review or not. By their nature TPIR are only valid for 12 months. During that time period the FCA will need to make a judgement about whether permanent rules are required or if the rule should be withdrawn. Such a review should be a formal process informed by the stakeholder engagement outlined above. Stakeholders should always be informed where TPIR lapse after 12 months and are not replaced by permanent rules. We do not believe there is any justification for not following the same process as for rules which are withdrawn, disapplied or have been replaced by other rules. Accordingly the FCA should always publish a statement in these circumstances. Alongside confirmation that the rule is no longer in effect we would expect the statement to outline the reasons for the change. Furthermore, given TPIR are a significant intervention in the market, we would expect the FCA to report on the use of the powers (including an assessment of the outcomes) in its annual report. This will ensure the powers are being used effectively and increase the transparency of the process.
Specific questions Q1: Do you agree with our analysis of some of the circumstances in which product intervention rules might be necessary? The consultation paper and draft SoP discuss only in general terms how the product intervention rules would be applied in practice. It would be helpful if more specific information were available. The paper does not discuss how the FCA will approach the actual rule making. This process must take into account the risks to the market and competition if the rules are not appropriately drawn. The FCA needs to ensure the rule making process is robust enough to focus on the issue requiring correction and for the scope of rules to be targeted and specific. For example, they should be explicit in the limitation of the application to a specific product or product feature unless there is evidence that there is a more widespread application. They should not expect other firms to read between the lines or infer that a particular intervention should result in other firms withdrawing products where in fact there may be limited similarity. Lack of consultation with stakeholders increases the risk that rules could impact more widely than intended. Rules must be targeted and specific. Inappropriately drawn rules will not only impact on firms and the market but also affect the credibility of the regulator if rules have to be withdrawn due to problems with their scope. As it is difficult to predict future issues, further clarity could be provided by including examples from the past where it may have been appropriate to use TPIR rather than the powers the FSA had at the time. We agree the competition considerations set out in the SoP are important when making decisions abouttpir set out in the SoP. However, it is not clear what evidentiary threshold will be required when assessing these considerations against consumer protection concerns. As there will be no external consultation, there is concern that this threshold will be set too low, risking the imposition of rules that will have disproportionate impact on firms. We seek clarity on how the FCA will ensure that these issues are given appropriate weight during this process, not least given that the promotion of competition is a primary objective of the FCA. Given the potential impact of TPIR, it is essential for there to be robust governance procedures in place for their use. We welcome the assertion that the process will be modelled on the approach for high impact policy. This is a helpful start but should be supplemented with assurances regarding the independence and seniority of committee members and the level of expertise expected of them. We recognise that it is difficult to predict all the situations in which such rules will be made. However, more detailed examples or further explanation will help firms understand how the rules could affect the market. For example, it is not clear what is meant by a product that may be designed to frame consumer choice in a potentially misleading way. As a general point, we are very concerned by references to TPIR being used to address concerns regarding value for money. TPIR are not an appropriate tool for this purpose. Investigations into issues such as value for money require robust economic analysis. This requires time, expertise and stakeholder engagement. We set out our concerns in more detail in response to Question 6. We also do not agree with TPIR being used to respond to concerns about tying and bundling. It is generally recognised that mixed bundling (i.e.
where products are sold as a package in addition to being sold individually) can offer additional choice and competition to consumers, particularly in markets where there is no single dominant provider. As with issues of value for money, any proposals on tying and bundling require full economic analysis. We are also concerned about the references to most consumers or majority of consumers in paragraphs 2.09 and 2.10. These concepts should be used cautiously and not applied too broadly. The definition of majority should be tailored to the customer base a particular product is designed for and / or distributed to. A niche product may not be suitable for the majority of mass market consumers, but as long as it is targeted at the consumers it has been designed for and is suitable for them this should not be at risk of TPIR. This distinction should be made clearer. On a related point, the SoP states that (amongst other contextual considerations) the FCA will generally consider: the social context - issues that may lead to detriment for particular groups of customers (such as, in particular, vulnerable customer groups) are more likely to require product intervention. Again this needs to be handled carefully and be applied only in circumstances where the product is targeted at those particular groups. There also appears to be an element of confusion between products and distribution in the scenarios where TPIR may be used. For example: products where there is a significant incentive for inappropriate or indiscriminate targeting of consumers. products which may bring about significant detriment as a result of being inappropriately targeted. These scenarios are focussed more on distribution than the products themselves. Q2: In what other circumstances might it be necessary to make temporary product intervention rules? We have no comments on this question. Q3: Will our proposed approach create an appropriate level of awareness amongst firms affected by temporary product intervention rules? & Q4: How should the FCA balance the need for clarity and awareness in the market against the likely need for urgent action when making temporary product intervention rules? We do not believe the approach proposed will create an appropriate level of awareness amongst firms affected by TPIR. The SoP states that the main factor when determining whether TPIR are required will be assessing if prompt action is necessary to reduce or prevent consumer detriment. We question how effective TPIR will be if firms are not made aware of them so that they can take the necessary action - it is in the interests of the FCA (and ultimately the consumer on behalf of whom the action is being taken) for the widest number of firms to be made aware of the rules. The absence of consultation on the rules itself means that greater efforts should be
taken to make sure the rules are understood by the firms affected. Clarity and awareness in the market should not be seen as an obstacle to urgent action, but as an integral part of achieving effective and expedient changes in the interests of consumers. We see no reason why, as a minimum, the FCA could not inform relevant CEOs and trade associations, for example by email. This could be sent 24 hours before the rules are published as at this stage the analysis would be complete and the rules drafted and approved by the FCA Board. From the investigative work involved the FCA will have identified which firms are providing the relevant product as it is likely that this type of information will be required when articulating the impact of the TPIR to the FCA Board, the PRA and others. Therefore contacting the CEOs would seem appropriate and would not contribute to a delay in publishing the rules. When publishing the rules the FCA will also need to be clear about how they expect providers to deal with pipeline business that may be affected by the new rules. Q5: How can the FCA best protect consumers who hold products which might be affected by temporary product intervention rules? The FCA is right to consider the impact on consumers through the use of TPIR. We agree that the use of these powers could have an adverse impact on consumers in the market. This is one of the reasons why these powers should be used sparingly. What is in the consumer interest is not always clear cut and can require detailed analysis. Q6: Do you agree with our analysis of how temporary product intervention might impact upon innovation and market entry? The FCA must be alert to the impact temporary product intervention could have on innovation and market entry. These are big issues and it is not clear from the analysis in the consultation paper that the FCA will give sufficient weight to the risks in these areas. The FCA should conduct more in-depth analysis of the risks as the proposals in this paper develop. As mentioned in response to Question 1, we are concerned about the suggestion that TPIR may be used to challenge firms about the value for money offered by their products. Any interventions in a market should be grounded in clear evidence that the market is not working in the interests of consumers. The FCA s new competition responsibility will require it to ensure it has the right skills and resources in house to conduct robust economic analysis. Such analysis requires time, expertise and stakeholder engagement. TPIR with no consultation are not an appropriate tool to use to address such issues. The use of TPIR in these circumstances could significantly impact on competition, innovation and market entry. Q7: What issues should we consider in relation to how this Statement of Policy affects equality and diversity? We have no comments on this question.