Charlotte Clark and Karen Northey gave evidence.

We will now hear oral evidence from Charlotte Clark CBE and Karen Northey. We have until 11.25 am for this panel. Would the witnesses please introduce themselves for the record?

Charlotte Clark:

I am Charlotte Clark, director of regulation at the Association of British Insurers.

Karen Northey:

I am Karen Northey, director of corporate affairs at the Investment Association.

Q Good morning, and thank you for being with the Committee. I have been trying to ask every witness an open, framing question. The Bill is designed to bring our corpus of financial services regulation up to date, with a view to sustaining and, ideally, improving the competitiveness of a really important part of the UK economy that touches everybody’s life up and down the country. How important is that? Where are the opportunities in the Bill? I know this will come up, so I will lead a bit: what are your thoughts on what is referred to as the competitiveness objective, and on a potential intervention power? If you think that those would have utility for financial services firms operating in this space, why?

Charlotte Clark:

Like all the other witnesses, we welcome the Bill. A lot of work has obviously gone into trying to get the right structure. That is really key in terms of how this works for the next generation. I think it was you who said that it had been 23 years since our last Financial Services and Markets Bill, so the legislation needs to work for a very long time.

On the specifics that you talked about, the competitiveness objective is key. Financial services regulation has been made in Europe for the last however many decades. As we onshore it, getting the structure right and making sure that the regulators balance different objectives is really key. We have argued for a primary, rather than secondary, objective around sustainable economic growth, partly because—as today’s debate has probably shown—competitiveness is quite a difficult thing to articulate, whereas for sustainable economic growth, it feels to me a bit easier to say how you are doing, why you are doing it and whether or not you are successful.

Culture change—I cannot remember who mentioned it—is important as regulators take on greater responsibility, particularly around policymaking. That comes to your point about the call-in power. None of us has seen it—I certainly have not seen it; I do not know whether Karen has—but nobody wants to undermine the independence of the regulators. It is incredibly important that they have their independence, particularly in their roles as supervisors and regulators. Political interference in that is not something that benefits the UK economy.

Policymaking, to me, is about trade-offs. If you are trading off economic growth against stability—we have mentioned financial inclusion and net zero—it is about balance. Sometimes, the regulator is not going to be all-knowing, and sometimes it is the role of Government and Parliament to step in and say, “Actually, we have a slightly different opinion.” I don’t think that is about undermining the independence of the regulators, though.

Karen Northey:

I will focus on competitiveness and international competitiveness. The Investment Association represents investment managers in the UK who manage £10 trillion-worth of assets on behalf of clients. Of those assets, £4.6 trillion are from overseas investors. The investment management industry in the UK is truly global, and a global success story.

Our industry has two parts: the fund domicile and the activities that go behind the fund, and then the management of those assets—so the investment management side. We are a world leader in investment management, second only to the US, but the US is a very domestic market, whereas London—London and the UK; I must not forget my colleagues, particularly up in Edinburgh—is international. The international competitiveness is absolutely key to our industry.

We support the Bill. We support the secondary objective of international competitiveness; we think it is really important for our industry. Our position as an international global leader is at risk. We are the second largest and the most international, but we cannot be complacent about it. More can definitely be done to support our industry in continuing to be that world leader. That brings investment decisions closer to home. It enables greater opportunities, in terms of products and services for the wider economy, for investors, and for pension funds and so on in the UK.

Q What is the competitive set you look at? Can you give us examples of jurisdictions that we are in competition with?

Charlotte Clark:

It is the United States, Bermuda, and Singapore—Europe as well, but particularly for reinsurance.

Karen Northey:

For investment management, I mentioned before that the US is the largest investment management centre. We are seeing growth in other centres, close to home in Europe, but there is also a very significant China and Asia investment management centre. On fund domicile, which is more the back office where the funds are registered, Ireland and Luxembourg are obviously the key places where funds are often established.

Q Charlotte Clark, you mentioned net zero. Do you think the provisions relating to net zero in the Bill will have a significant impact in your sector, in terms of the green transition?

Charlotte Clark:

I do not think that there is anything in the Bill specifically around net zero. I understand the debate about whether there should be an additional objective for the regulators around it. Obviously, net zero is incredibly important for the insurance sector. We bear the cost of climate events. The incentive on us to think about and support the transition, particularly financially, is very apparent.

I think our regulators do a pretty good job when it comes to net zero. If you think about the things they are doing, such as the stress test, the establishment of the climate financial risk forum and the work they are doing on disclosure, they are pretty much ahead of most other regulatory organisations on net zero. I guess one of the questions is: what would you want to do differently? This comes back to whether they have an objective. One of the concerns about them having an objective is whether it would be their responsibility to direct investment. Again, that comes back to what the role of the regulators in this is. In some ways, put bluntly, I think it is the Government’s responsibility to deliver net zero. We all have accountability in that, but I would not necessarily say that giving an objective to the regulator should change what they are currently doing, so I would question why you would do it.

Q I was referring to provisions in the Bill relating to net zero—as you say, it is not direct—but I hear what you are saying. I have a similar question for you, Karen. How should the regulators’ new secondary objective on long-term growth take account of investment in green industries, which is what Charlotte was talking about?

Karen Northey:

Again, I would highlight that the UK is a centre for green finance and has done very well in it. It is a big part of what our members do. For risk management, investment managers have to take a long-term view, and that long-term view, by its nature, has to take into account climate change. Additionally, they play a huge role in directing finance towards transition, so there is a dual role for our industry.

In terms of a competitive and growth objective for our regulators, I agree with Charlotte that the regulators are generally doing a very good job. One of the key things in green finance is international standards and compatibility between them. There is a cross-border element to all forms of capital movement and investment, and alignment with international standards, so taking into account what is happening elsewhere is a key part of a regulator’s activity, particularly in green finance.

Q I think Charlotte partially answered my first question, which was about whether you think the objective should be a primary or secondary one. Karen, I think you said that you were happy with it as a secondary objective. First, do you think it will be enough to shift the culture of the regulator as a secondary objective? Secondly, when the FCA gave evidence it was unable to say, at this stage, what its key performance indicators or metrics would be; in the interests of helping it to form its opinions, do you have any views on that and how it could be effectively reported?

Karen Northey:

On your question of whether the secondary objective is enough to change culture, I think an objective is necessary but I do not think it is sufficient—so it is necessary but insufficient. Culture absolutely has to follow. What we do not want is for it to be a check in the box when you are making a new rule for the handbook—“Yes, it will contribute to this.”

There does have to be an overall culture change, but to do that you do need the objective. I think that a lot of the ideas put forward this morning by TheCityUK around, for example, disclosure and transparency reporting on exactly how the objective is being met in each decision, will be key to that. I think we will continue to work with our regulators on that, as we currently do, but we would definitely encourage more transparency and disclosure around how individual measures are meeting that secondary objective.

Q Let me follow up before Charlotte comes in. Where do you see Parliament—not just Government but Parliament—sitting in that process?

Karen Northey:

Parliament plays an important role. If I think of the various roles that, for example, the FCA plays as a rule-maker or a law-maker, as well as in supervision and enforcement, we are specifically talking about the rule-making function of regulators, which will be significantly increased. European directives are created through a process of Parliament, as well as through the Commission and Council, so if the regulators are taking on those responsibilities, it is important that Parliament then also plays a significant role in holding them to account. These are quite significant powers coming back from Europe and Parliament has a legitimate and important role that to play.

One important thing, from our perspective, is that that review and that holding to account of the regulators when they are being reviewed must be sufficiently well resourced and have access to sufficient expertise. Certainly our industry—I know this is true across financial services more generally—is willing and available to provide and help with that expertise, as appropriate. I understand that there are balances that need to be made, but ensuring that level of expertise is important, because there is a lot of this regulation and it is also very technical and across lots of different areas. Parliament absolutely has an important role to play and will need the resources and expertise to do that.

Charlotte Clark:

My response is pretty similar. Part of the reason for arguing for the primary objective is that a lot of our experience is coloured or shaped by the debate around Solvency II. The Government proposed three objectives for the review of Solvency II. One was around a vibrant industry, the second was around policyholder protections and the third was around investment—getting investment in infrastructure, net zero and those sorts of things.

I would say that the regulator is still very focused on policy holder protection. While no one would want to undermine that—financial stability is the absolute bedrock of everything—it is a necessary but insufficient condition for everything else that needs to happen with regard to investment and growth. That is part of the reason why we have argued for the importance of a primary objective: that culture shift is needed. Could it be done through a secondary objective? I hope so. It is about whether there is the right reporting and the right accountability and whether the challenge is there.

These are very complicated issues. This is the joy of discussing Solvency II—I apologise if I have inflicted that on any of you. These are very complicated issues and it is very difficult to get that wider challenge. Those people who embed themselves in this day to day can slightly overrule things, rather than find a balance for the way these things are implemented.

Q I have a final question. How much of a barrier to investment is the current regulatory framework? We have heard about the time that it takes to get regulated, and the insurance and financial services all-party parliamentary group has had reports on the cost—that it is up to 14 times more expensive to be regulated in the UK. How much of a barrier do your members see that as? Will the Bill help to address it?

Karen Northey:

I think that is a barrier. Previous conversations have covered authorisations of individuals and firms. If there is something unique in our sector, it is that our products also need to be authorised—the funds themselves need to be authorised. I mentioned the examples of Ireland and Luxemburg as key competitors in fund domicile: in Ireland it is possible to have approval for a fund within 24 hours. The FCA target is a month, but that does not always happen. There are definitely instances where in-depth review is important—we want to make sure that funds are meeting obligations—but sometimes they are very similar to previously authorised funds, run by managers who have a long history and so on. Definitely when it comes to fund domiciles it is something that is considered as important.

I know that the Bill focuses a lot on bringing EU legislation back, which is absolutely essential in terms of targeting certain areas so they are more fit for purpose for the UK market, but there are other areas of reform that are more homegrown that have led to challenges for our members in terms of our international competitiveness—the consumer duty was mentioned, for example, and there is the financial services compensation scheme and a number of others. It is not the only factor in making a decision, but it is definitely a factor.

Charlotte Clark:

Similarly, I cannot recall a new insurance company being set up in this country—certainly not in the last 10 or 15 years. They are being set up in Gibraltar, Bermuda and other places where there is equivalent regulation. There is something about how we attract it, do it quicker and ensure that people feel that this is a good place to do business.

I will make a broader point with regard to investment and slightly contradict something I said previously about net zero. One of the things we talk about is that it is harder to invest in a wind farm than it is in coalmines. Those sorts of regulatory barriers need to be changed so that we are investing in the right things for the UK economy, particularly when it comes to net zero.

Q Karen, I wonder whether you heard the back and forth between me and Sheldon on financial inclusion. What are your thoughts about introducing a “have regard” provision for the FCA on financial inclusion? What else could be done through the Bill to strengthen financial inclusion?

Karen Northey:

Financial inclusion is probably not relevant to our industry, in terms of access to bank accounts, but financial wellbeing is critical to our industry, in terms of how money is invested for the long term—particularly later in life—for individual investors. Three quarters of households use an investment manager through their pensions, for example, so it is about making sure they get the most out of their investments.

We have suggested that you address as quickly as possible the advice-guidance boundary. That might sound quite technical, but there are a large number of individuals who simply do not get financial advice because of the way the regulations work at the moment. We are encouraged to hear that the FCA fairly recently announced a comprehensive review of the advice-guidance boundary, but there are definitely things that can and should be done around enabling more people to get help, whether that be more bespoke guidance—there is lots of technology and innovation that will help without giving regulated advice, which absolutely should be the bedrock of complicated financial planning—or simplified advice. In terms of financial wellbeing, that is something we would like to see.

Q Would you have supported a “have regard” provision for the FCA on financial inclusion?

Karen Northey:

On financial inclusion, it is not something that we thought was necessary, in terms of the powers that the regulators have and the role that regulators have versus the wider Government on financial inclusion.

Charlotte Clark:

Our position is similar. Nobody doubts the importance of financial inclusion. Particularly at the moment when people are making very challenging decisions, things like savings and insurance can feel like a luxury. The regulator and the FCA in particular have given great importance to things like consumer duty, vulnerable customers—not a title that I particularly like because it is basically almost all of us at some point in our lives—and ensuring services are available to people in difficult and challenging circumstances. The review of advice and guidance is really important. For us, the point of retirement is key. At the moment, less than 10% of people are getting advice at that point.

Q So would you like to see measures within the Bill to strengthen that and make it mandatory that advice, guidance and financial barriers are addressed?

Charlotte Clark:

I think the Bill allows for a review of MiFID—this is horribly technical, isn’t it? There is a lot of regulatory change going on at the moment and we need to get the definitions right. Whether it is simplified advice, broader guidance or just more help for people, all those things need to be thought through. I am not sure that will be done in the time and space in which this Bill will be taken forward, but it certainly gives the FCA and the Treasury the powers to make the changes that could be helpful for people.

Is there anything you want to add, Karen?

Karen Northey:

No, I think I covered it earlier.

Q May I refer to my themes of transparency, accountability and proportionality? Charlotte, in your written evidence you say that the Bill should be amended to achieve the correct balance between customer protection and proportional regulation, and that the opportunity for improved accountability is falling short. I rather detect from your evidence that you agree with what Emma Reynolds said about the regulators marking their own homework. Will you comment on that? Karen, in your written evidence you talk about an evolutionary rather than a revolutionary approach to regulation. Could you explain what you mean by that?

Charlotte Clark:

That language is really important. How do we get things like transparency and challenge into the system? I am not sure that writing it into legislation necessarily leads directly to it, but there is something about getting the right mechanisms, the right debate and the right challenge between Parliament and the regulators, without undermining their independence. This is such a big change. I do not think any of us could be completely certain that we have got it right, but it is about making sure that we have got the right balance and the right mechanisms to hold people to account.

So you are suggesting that we should make some other amendments to the Bill to make sure that those things are there. Sally-Ann asked another witness earlier about the need for culture change.Q

Charlotte Clark:

A good example is the cost-benefit analysis panel. At the moment, the regulators appoint people to that panel. That could be fine; it might not be. You might want a bit more independence in there and a bit more scrutiny. You might want to think about what those processes are. It is those sorts of areas where they could imbue cultural change. Dave Postings had the example of the consumer duty, whereby they told us what the cost was but not the benefits. We all have our favourite examples of regulatory change where we think, “You haven’t quite made the argument for this; you haven’t quite shown that this is going to be beneficial.” Making sure that changes is one of the things we would want to see.

Karen Northey:

I will pick up on the second part of your question, on evolution versus revolution. It comes back to the fact that there is a significant amount of legislation to be reviewed. This is kicking off and enabling a significant review. Our members believe there are a lot of things in European legislation that work, and we do not want everything to go.

I harp back to the figures I mentioned before: £4.6 trillion out of £10 trillion is overseas assets. That relies very heavily on a concept called delegation, which allows UK asset managers to manage European funds. From our point of view, it is fundamental that we operate in a global regulatory framework in a way that does not put at risk what is a significant success story and a significant source of revenue and growth for our country.

The reviews that the Bill enables should be done in a targeted way, focused on those measures that will make the most amount of difference in terms of allowing the UK industry to work better. But we have always said that we are not looking for regulation to be torn up and suddenly having no regulation. This is about making modifications that will make a significant difference to our industry here in the UK.

The Bill intends to do that; it is not intending to rip up regulation. It intends to make us more competitive, while ensuring the primary objective.Q

Karen Northey:

Absolutely, and I think the process that comes has to be done in a way that is sequenced in the right way to allow proper consultation and proper input.

Q Ms Clark, can I come back to your comment earlier about insurance companies having been set up in Gibraltar and elsewhere offshore but not in the UK? Do you have reasonable grounds to believe that the UK regulatory environment has been a significant factor in those decisions? Can you point to particular regulatory requirements that are preventing people from setting up insurance companies here?

Charlotte Clark:

Why would you set up in Gibraltar and sell into the UK market? There is not a big market in Gibraltar.

There could be a number of reasons why UK business owners choose to set up companies offshore, including in Gibraltar, and they are not always reasons that have the best interests of consumers at heart.

Charlotte Clark:

I think that is fair. I am certainly not casting aspersions on the Gibraltar regime, because they should have the same regime as the UK—equivalence with Gibraltar was in the last financial services Bill. The question would be: why would they do that if we haven’t got the right regulatory environment for companies to set up here and to have the oversight of our regulators?

Bermuda is probably a good example. If you speak to the regulators there about how they think about it, how they work with businesses and what they need to do, they have a slightly different culture. I do not think that is to the disadvantage of consumers. The Bermuda market is very similar to the London market in insurance. I do not think it is to the detriment of consumers; it is to the advantage of business, and I do not think that those two things are necessarily against one another.

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions and the end of this morning’s sitting. I thank our witnesses on behalf of the Committee. The Committee will meet again at 2 pm this afternoon here in the Boothroyd Room to continue to take oral evidence.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.