January is traditionally a time for resolutions and predictions. Given that the former tend to be more honoured in the breach, certainly round my way, I am going to stick with the latter. And I foresee 2019 as a year in which there will be one topic to which we continually return: the competitive nature of our market and the impact regulation has on it.
One key event that will bring this to the fore will be the publication of the Financial Conduct Authority’s (FCA) interim report from its Wholesale Insurance Broker Market Study around the end of this month. LIIBA has worked closely with the FCA to ensure it was provided with the high-quality information needed to support its study. So, its conclusions will not be for the want of data. But they will be interesting – especially how far the FCA is prepared to consider its own role in this question.
To an economist, which I once was, a perfectly competitive market has a number of features. Key to all of them is the assumption of no barriers to entry. Only when suppliers can freely enter and exit a market will the level of competition be optimal. Now, clearly, no market in the real world can perfectly meet this academic test. But the ability of a market to regenerate with new entrants clearly delivers positive benefits for customers.
The larger of LIIBA’s members benefit from their scale as it allows them to provide a comprehensive package of services to their clients. But the overall offering of our market is improved as much by smaller members who use their flexibility and nimbleness – and frequently very specialist knowledge of complex industries – to deliver the different kind of service needed by a different kind of client. Sometimes these businesses grow to become more like their larger brethren and new entrants come to replace them.
Significant start-up costs – barriers to entry – could erode this ability. And, in the UK, one of the most significant costs facing a new financial services business is the development of a satisfactory compliance function.
I was reminded of this when reading the recent publication by the European Insurance and Occupational Pensions Authority (EIOPA) – the EU’s supervisor of supervisors. Its Insurance Distribution Directive (IDD) Evaluation of the Structure of Insurance Intermediaries Markets in Europe report includes an interview with Dr Matthias Beenken, who lectures in insurance business administration at Dortmund University of Applied Sciences. In it, he makes a series of interesting observations around the impact IDD has had on EU markets.
“IDD substantially increased compliance costs, which lead to a decline in the number of very small…agents,” he wrote. “I believe customers are becoming/should be accustomed to the fact that they are less likely to find a local intermediary who can give them personal advice.”
And he concludes: “If not adequately monitored, in my opinion, this trend could lead to an advice gap for more vulnerable consumers.”
Clearly Dr Beenken is focussed on personal lines markets than the more complex commercial business that is placed in London. But the implications are clear. Compliance costs can create a barrier to entry into a market and force out smaller players. The net result is not a positive one for consumers. So, the potential is there for regulators to do harm to the very people they are supposed to protect.
Research conducted by London Economics for our sister trade association BIBA placed the cost of regulation in the UK as second only to Denmark – and significantly higher than in France or Germany. It also showed that these costs in the UK had risen by 70% in the last three years. And then think of what 2019 will bring in this regard: the full costs of IDD implementation have yet to be realised; we have ongoing challenges like the Criminal Finance Act and, in December, we get the Senior Managers and Certification Regime (SMCR) – which will necessitate a comprehensive overhaul of how HR departments collect and report information on staff. It does not feel like these costs are coming down any time soon.
No-one is disputing that adequate, proportional regulation of financial markets is a necessity. But the best regulator, the best method of delivering positive consumer outcomes, is competition in markets. The knowledge that customers can easily access an alternative provider is the best incentive firms have to deliver world class service.
Regulators need to ensure that they are a catalyst for competition not a barrier to it. Given the pattern we see emerging in regulatory thinking, it is a question that I am sure EIOPA and the FCA, as well as LIIBA, will be returning to with some frequency throughout this new year.