Hugh Savill gave evidence.

Good afternoon, everyone. We will now take evidence from the first of our afternoon witnesses, who is joining us remotely. I remind hon. Members on the right-hand side of the room and in the Public Gallery to use the microphone near the window when they pose their questions. We will hear first from Hugh Savill, from the Association of British Insurers. We have until 2.45 pm for this session, so lots of time. Hugh, will you introduce yourself for the record, please?

Hugh Savill:

I am Hugh Savill, director of regulation at the Association of British Insurers.

Thank you. We will start with the Minister, John Glen.

Q158 Thank you, Dr Huq, and thank you very much, Hugh, for giving evidence to us this afternoon. Thank you very much also for the written evidence that the ABI has submitted, I think through you, and for the welcome that you give to the measures, particularly on Gibraltar, the overseas fund regime, PRIIPs and money laundering.

I would like to probe your views on the measures that we are introducing with respect to access arrangements between the UK and Gibraltar for financial services firms. How do you see the issues around maintaining the same quality of regulation between the Gibraltarian and UK regimes? Do you foresee any challenges with that? How important do you think that that level playing field will be?

Hugh Savill:

A level playing field between Gibraltar and the UK is essential. I think that about 20% of the British motor insurance market is in fact serviced by firms from Gibraltar so, clearly, whether people are working from the UK or from Gibraltar, that needs to be on the same basis. Given that you have two regulatory authorities, and that can always be quite awkward, we think this strikes a good balance. There is good dovetailing of the relationship between our regulators and the Gibraltarian regulators, and we really hope that the Gibraltar authorisation regime works and provides a smooth basis for business in the future.

Q I understand from your written evidence that, as a body, you have some reservations about the setting of conduct rules at an international level. Would you like to say a bit more about that and explain what implications it has for how we should approach this issue going forward?

Hugh Savill:

This is mainly derived from our experience of conduct regulation at the European level over the past 10 years or so. To be honest, it has not shown the European Union at its best. We have the PRIIPs regulation, which is mentioned in the Bill—well, we are having to correct it—and there have been other measures, such as the insurance distribution directive, which, frankly, have been no better. It is not entirely to do with the way that the European Union makes rules; it is because consumers expect different things in different countries. All you have to do is put together all the things that consumers want. It makes for a very heavy-handed—[Interruption.]

I’m sorry, Hugh, could you please pause for a moment? We have a noisy bell. It is gone now, so please carry on. Can you start that sentence again?

Hugh Savill:

Worse things might happen at my end.

We won’t go there.

Hugh Savill:

The fact is that consumers expect different things; they have different traditions. Introducing conduct regulation at the international level—setting what people expect from their bank, so that it fits the conditions in Japan, Brazil and the UK—is too big an ask. You will end up with a very unwieldy rule book that is not particularly suitable for British consumers. We think the retail conduct rules need to be set with British consumers in mind.

Thank you very much, Hugh. I will pass you on to Pat.

Good afternoon, Hugh. I want to follow on from the questions that the Minister asked you. I think it is fair to say that ABI has been a part of the financial services sector that has perhaps been more critical than others of the way that EU directives have applied to your sector. Given that the Bill onshores quite a lot of that regulation and gives it to the UK regulators, what differences are you hoping for in the way you will be regulated in the future compared with these directives, which you have been unhappy with in various ways?Q

Hugh Savill:

I should say that we are equally blunt when we see shortcomings in British regulation, as well as European regulation, but, yes, we have criticised some of the European rules. In effect, the Bill sets out the first step towards a UK regime for financial services, and there will be others that follow. Really, this needs to be tailored to the needs of the British market—first to the needs of British consumers and secondly to the needs of British providers of financial services. Now that we have left the European Union, we think that is the way to go forward, and that is what we are hoping our legislators and regulators will concentrate on.

Q Can I go back to the issue of Gibraltar? Gibraltar has lots of friends across the parties in Parliament, and the Bill sets out a special regime for Gibraltar. Given the generous access to the UK market envisaged in the Bill for Gibraltar-based firms, is there any risk or danger that UK-based insurance companies might have reasons to relocate to Gibraltar and do their business from there?

Hugh Savill:

I would be surprised. Ideally, what the Gibraltar authorisation regime sets out is the same basis, whether you are doing business in the UK or from Gibraltar. It is quite an enterprise to move your business to Gibraltar, and I am not certain you would be able to take all your skilled people with you. It is expensive to shift domicile like that. I see no big advantage in firms that are servicing the UK market from the UK moving to Gibraltar. Most of the Gibraltarian firms that have moved into the UK market, particularly the motor market, have done so as new entrants.

Q Is there any tax advantage to being located in Gibraltar?

Hugh Savill:

I will have to let you know on that point. I believe there is a small value added tax advantage, but I will let you know that in due course.

Q Okay. Is there a particularly good reason for creating this sort of regime for Gibraltar, but not having something similar for, say, the Channel Islands, the Isle of Man or other Crown dependencies elsewhere in the world?

Hugh Savill:

They are all slightly different circumstances. I am by no means an expert on the relationship between, say, the Channel Islands and the UK, Gibraltar and the UK, and so on. What was unusual about Gibraltar was that it was part of the single market in a way that the Channel Islands were not, so you had an existing passporting arrangement between Gibraltar and the UK, which, for the sake of the smooth continuation of the motor market, would be helpful to continue.

Thank you very much. I don’t have any further questions.

So we go to the Scottish National party spokesperson, Alison Thewliss.

The briefing that you provided on the Bill mentions referring any disputes to the Financial Ombudsman Service. Can you tell me a bit more about how that works at the moment and your fears about what the proposals might mean?Q

Hugh Savill:

There was a question about whether British consumers who were using Gibraltarian firms had access to the Financial Ombudsman Service in the UK. We think it is extremely important that all British consumers have access to the Financial Ombudsman Service—it looks at individuals’ difficulties in a way that other regulators cannot. I am particularly pleased that that has been clarified in the Bill. Let us hope that it works well.

Q Are there any other risks to consumers within the UK from this move?

Hugh Savill:

I never say never, but all the people who operate in the British market are subject to the conduct rules of the Financial Conduct Authority, so I think there should be the same standards for those selling from Gibraltar as in the rest of the UK.

Q Do you think that consumers are aware of where their insurance policies are coming from? Will this lead to people thinking about that a little bit more?

Hugh Savill:

Some of them will be, some of them will not. I am not a great reader of the small print in my insurance policy, any more than anybody else is, but if we have a similar regime, I hope that that would not be a major preoccupation of somebody buying an insurance policy.

I open the questioning to other members of the Committee. Does anyone else have questions? I call Miriam Cates.

You said that consumers expect different things in different markets. In your briefing note, you said that the Bill will allow the FCA to develop a methodology that is more accurate and that works for the UK market. Can you give an example of a characteristic that is specific to the UK market and how the Bill will help to meet those expectations?Q

Hugh Savill:

If you are buying insurance in the UK, you tend to buy it online for general insurance, or you will quite often use an independent financial adviser to buy life insurance and savings policies. That does not happen on the continent of Europe. There, there is a little shop in most small towns, and people go and buy their general insurance from that shop. If they want savings policies, whether that be insurance or other kinds of savings vehicles, they will go to their bank, so it is a completely different approach and entry into financial services.

Thank you very much for giving evidence today, Hugh. One quick question about the market access arrangements: do you think there will be any price implications from those for UK consumers? Could we see price inflation via premiums increase as a result?Q

Hugh Savill:

Sorry, from the market access arrangements, did you say?

Yes, just generally. We are seeing a large provider have access to our markets. That could traditionally see increased supply. Increased supply tends to mean price competition, with consumers benefiting both in quality and innovation of product and in the price they pay for it, but equally it can work the opposite way. So do you think there will be any price implications for UK consumers as a result of these measures?

Hugh Savill:

I do not think they would be because of these measures, in that the suppliers from Gibraltar already have 20% of the market, and it is not this Bill that is going to change that. There will be changes in price—there are always changes in price, and there will be other things that drive that—but I do not think that will be driven by this Bill.

You suggested there was a small VAT benefit to companies being based in Gibraltar. Obviously, this legislation would remove any other bar in terms of being based in Gibraltar but still being able to operate in the UK. Could you clarify what you mean by a small VAT benefit?Q

Hugh Savill:

That is why I offered to write. I am afraid I do not know exactly what the VAT arrangements are, and I will have to write it down. If I said any more, I would get something wrong.

So that will be followed up by letter?

Hugh Savill:

Yes, absolutely.

We await it with impatience.

Q I am happy to let other Members come in if they have questions, rather than hog the platform. There were some comments on equivalence in the briefing you put together. Can you tell us a wee bit more about your thoughts on equivalence both in the wider sense of it being used as a potential political weapon and in the narrower sense of what happens to investors if equivalence is withdrawn?

Hugh Savill:

We do not think very much of equivalence as a means of arranging market access. As set out by the EU, it is extremely easy to end equivalence and to leave both provider and client hanging and not knowing where their policy is going to go. We also think that the European system of equivalence is far too open to political interference in what ought to be a technical matter.

This said, if I look back to the Chancellor’s very welcome statement last week, in the supporting document to that, the Treasury set out a far more grown-up view of what equivalence ought to be—a rather more technical decision, where there is open consultation and a discussion between the two jurisdictions, that is actually looking for a long-term relationship between the two jurisdictions, and that cannot just be terminated at short notice. On equivalence generally, we really do not think much of the way that the EU runs its equivalence regime. We are very reassured by the vision of equivalence that the Treasury has put out.

Turning to the detailed point about those accessing the overseas fund regime, what is important is that, in the unlikely event that a trusted jurisdiction moves out of trusted jurisdiction status into untrusted jurisdiction status, there are, as the Bill suggests, mechanisms for ensuring that customers are not orphaned from their provider. That is extremely important, particularly when you have some long-term contracts such as annuities.

Q What further information do you think would be required for people who have invested, to give them further reassurance?

Hugh Savill:

I think they should have enough reassurance here. The overseas fund regime allows investors to access a much wider range of funds than would otherwise be available. As I said, choice is a good thing. It gives a wider choice and, ideally, better products and prices. I think the safeguards are there.

Q I am just curious because you said that, for the regime to fully work for customers, situations such as this need to be clarified. I thought that you were asking for further detail or reassurance.

Hugh Savill:

Not at the moment, no.

Q I had a further thought on the question of tax advantage. A quick search tells me that Gibraltar’s corporation tax level is 10%. There may be some caveats around that—it was a quick search—but if that is the case, that is quite a hefty advantage for a company, compared with the UK rate, is it not?

Hugh Savill:

I am not aware of the corporation tax differences between the UK and Gibraltar, so, again, I am sorry but I will have to cover that in my reply later.

Thank you. This letter is getting longer.

Hugh Savill:

Do not worry—I will not make it too long.

Good, good. If there are no further questions, all that remains is for me to thank you, Hugh, for your evidence as our first witness this afternoon. We finished a bit ahead of time. Thank you for that.