The Financial CrisiS AND REGULATION

1
The Financial CrisiS AND REGULATION

• Third Annual Industry Leaders Summit Dublin, 8
  October 2009
• Alastair Evans, Head of Government Policy
  Affairs, Lloyds

2
Contents of Presentation

• The Financial Crisis
• The regulatory consequences for the industry
• The lobbying environment
• Concluding comments

3
The Global Financial Crisis

• The Conventional Wisdom 2006
• Gordon Brown
• There will be no return to boom and bust.
• IMF Global Financial Stability Report
• There is growing recognition that the
  dispersion of credit risk by banks to a broader
  and more diverse group of investors, rather than
  warehousing such risk on their balance sheets,
  has helped make the banking and overall financial
  system more resilient.
• The improved resilience may be seen in fewer
  bank failures and more consistent credit
  provision. Consequently the commercial banks may
  be less vulnerable today to credit or economic
  shocks.

4
The Global Financial Crisis

• Causes of the crisis
• Easy credit
• In some cases, irresponsible lending and
  borrowing
• The US housing market and sub-prime mortgages
• Excessive risk-taking
• Inappropriate remuneration systems
• Collapse of major financial institutions
• Credit crunch

5
The Global Financial Crisis

• Banks crisis is down to men
• Front page headline of London Evening Standard
  of 3 August 2009 reporting comments made by
  Harriet Harman, UK Minister for Women and
  Equality.
• My clear line is that if Lehman Brothers had
  been Lehman Sisters, would the crisis have
  happened like it did? No.
• EU Competition Commissioner, Neelie Kroes

6
The Global Financial Crisis

• A letter to the Queen of England
• In summary, your majesty, the failure to
  foresee the timing and severity of the crisis and
  to head it off, while it had many causes, was
  principally a failure of the collective
  imagination of many bright people, both in this
  country and internationally, to understand the
  risks to the system as a whole.
• Professors Gestey and Hennessy, London School of
  Economics, August 2009

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The Global Financial Crisis
8
The Global Financial Crisis

• Some Consequences for the Insurance Industry
• More challenging economic environment.
• Investment returns affected by volatility in
  equity markets.
• Increase in recessionary claims.
• AIG and Fortis massive losses on financial
  products.
• Severe impact on financial guarantee and mortgage
  insurance sectors.
• Direct impact on insurance sector fairly
  limited compared to other financial sectors
  (OECD 2009).

9
The Global Financial Crisis

• The Regulatory Consequences
• Flux of reports from various sources analysing
  causes and consequences of banking sectors
  problems.
• Risk of regulatory over-reaction (Geneva
  Association Survey).
• The complication of a multiplicity of
  organisations formulating rules.

10
The Lobbying Environment
Global environment
WTO
G 20
EU
IMF
SANCO
MARKT
OECD
EMPL
TAXUD
European Commission
ENV
COMP
ECON
EMPL
Economic Social Committee
IMCO
TRADE
AGRI
European Parliament
TREN
ENTR
INTA
WB
ENVI
JURI
ITRE
UNEP
ARC
Council/ EU Presidency
European Central Bank
ECJ
CEA
IASB
IAA/EAG
IFRIC
EFRAG
EFC
CESR
EIOPC
NCOIL
IAIS
FSC
Occupational pensions
Insurance mediation
Insurance groups
CEIOPS
Financial stability
FCC
Joint Forum
NAIC
Solvency II
FSB
IOPS
central bodies
representation of States
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• You have to be a genius to understand how the EU
  
• makes law.
• Madeleine Albright, US Secretary of State
• 9 February 1998

12

• You have to be a genius or French to
  understand
• how the EU makes law.
• Madeleine Albright, US Secretary of State
• 9 February 1998

13
The Global Financial Crisis

• The Consequences
• Proposals for change are emerging in various
  areas
• In the structures of financial services
  supervision (including more focus on systemic
  risk).
• Closing of regulatory loopholes.
• Intensified and more intrusive supervision and
  co-operation between supervisors.
• Heightened capital, reserving and risk management
  requirements.
• Revisiting of corporate governance rules.
• More focus on consumer protection.

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The Global Financial Crisis The Consequences

• Proposals for change in structures of financial
  supervision
• Establishment of a new Financial Stability Board
  to include all G20 countries.
• De Larosiere proposals on creation of a European
  Systemic Risk Board and strengthening of
  centralised European regulatory powers.
• US Administration proposals to create a Financial
  Services Oversight Council and Federal Office of
  National Insurance.
• Restructuring of some national financial services
  regulators.
• Proposed abolition of UK Financial Services
  Authority (the UK Conservative Party).

15
The Global Financial Crisis The Consequences

• Closing of regulatory loopholes, intensified and
  more intrusive supervision and co-option between
  supervisors
• Initiatives in EU and elsewhere to regulate
  previously unregulated financial services
  providers (e.g. hedge funds).
• Introduction of a registration system for credit
  rating agencies in EU.
• Increase in supervisors resources and level of
  oversight (likely to become more costly and
  intensive).
• G20
• commitment to greater consistency on regulatory
  issues
• increased pressure to close tax loopholes
• enhanced oversight of systemically important
  financial institutions.

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The Global Financial Crisis The Consequences

• Heightened capital, reserving and risk management
  requirements
• Solvency II regime is still being developed but
  will
• create a principles based capital and supervision
  regime based on economic value
• incentivise management control of risk
• harmonise supervision rules in the EU.
• CEIOPS is preparing draft Level 2 Solvency 2
  advice for the Commission.
• Solvency II project pre-dates the global
  financial crisis but is not immune from its
  consequences.

17
The Global Financial Crisis The Consequences

• Revisiting of Corporate Governance Rules
• Global international and national debate on
  remuneration systems, particularly in the banking
  sector.
• IAIS/OECD work on international corporate
  governance standards.
• Solvency II rules on Board responsibilities and
  risk management.
• Walker review in UK likely to lead to
  strengthening of Combined Code and FSA rules on
  corporate governance and remuneration.

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The Global Financial Crisis The Consequences

• More focus on consumer protection
• European Commission White Paper on national
  insurance policyholders protection schemes in EU
  Member States.
• Review of the IMD.
• EU work on harmonising and raising consumer
  protection standards for investment products.
• Proposals to strengthen cross-border collective
  redress systems and use of alternative dispute
  resolutions.
• OECD work on consumer education and
  intermediaries.
• US Treasury 2009 proposal to establish a new
  Consumer Financial Protection Agency to protect
  consumers across the financial sector from
  unfair, deceptive and abusive practices.

19
Extract from Letter of 2 September 2009 of
Michaela Koller, Director-General of CEA, to
Thomas Steffen, Chairman of CEIOPS on its
Solvency II Level 2 Consultation Papers

• As repeatedly stated, the global financial
  crisis did not originate from negligence in
  market practices or shortcomings of insurance
  regulation and any regulatory initiative should
  be justified on the grounds of insurance
  specialities and objective regulatory needs.

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The Global Financial Crisis

• Concluding Comments
• A torrent of regulatory proposals affecting the
  insurance industry across many different policy
  areas, being developed by a multiplicity of law
  and rule-making bodies.
• This was not an insurance industry crisis.
• Importance of distinguishing the insurance and
  banking sectors.
• Industry needs to collectively develop sound
  policy positions to ward off excessive and
  inappropriate regulation.
• Better regulation principles must not be
  abandoned because of the crisis.
• Not a time to be shrinking violets.

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