Memorandum by Union

About Norwich Union

1 Norwich Union is the UK’s largest general insurer with a market share of around 14%, with a focus on for individuals and small businesses.

2 Norwich Union is also a leading provider of life, pensions and investment products and one of the largest financial adviser (FA) providers. FAs provide over 70% of the company's long- term savings business in the UK.

3 Globally, Norwich Union is part of plc, the world’s fifth largest insurer. Other members of the Aviva group include Dutch financial services conglomerate Delta Lloyd and Poland’s . Aviva is one of the top providers of life and pension products in Europe and has substantial businesses around the world. Its main activities are long-term savings, fund management and general insurance.

Executive Summary

4 Norwich Union supports statutory regulation and believes that it is important to recognise the work being completed by the Government and the FSA on the Better Regulation agenda both are committed to follow.

5 As a company we have long advocated a risk based regime where regulation is proportionate to the inherent risk posed to the market. We believe that regulation should reflect the fact that not all products pose the same level of risk and should be treated accordingly.

6 Norwich Union supports the FSA’s review of the regime’s effectiveness and is encouraged by their move towards a more principles based regime.

7 We believe principle based regulation needs to be based on customer outcomes. Such a regime will only work if it is embedded both within firms and the regulator, with the FSA accepting there are different ways of achieving the same outcome.

8 Norwich Union feels the FSA has not been as effective in representing the UK industry in the EU as it could be. There are examples in both the General Insurance and Life markets where the FSA has not acted in the best nature of the UK market.

Regulator’s working methods and their effectiveness

9 Norwich Union takes its regulatory responsibilities very seriously and believes it is important to maintain a good working relationship with the regulator. The group has a diverse structure selling a wide range of products that have varying degrees of complexity and it is key that the regulator has a clear understanding of our corporate culture.

10 Norwich Union attends regular close and continuous meetings with the FSA, which foster a productive two-way open dialogue relating to both group specific matters and wider industry issues, such as the development of the industry solution to contract certainty.

11 As mentioned, the FSA is currently reviewing its regime with the aim of reducing the number of prescriptive rules, whilst at the same time maintaining consumer protection. For the benefit of the Lord’s Select Committee’s inquiry, we have reflected upon the FSA’s regime prior to their review.

12 Since its inception, the FSA has actually been a principles based regulator, with eleven principles underpinning its regime. However, in addition to these principles there are also approximately 8,500 pages of more detailed rules.

13 Whilst the FSA’s emphasis is more towards the principles, as can be seen in its enforcement notices, firms tend to be drawn to adhering strictly with the rules. This approach is not beneficial to either the industry or consumers for the following reasons:

a. The detailed rules are prescriptive and set out specific actions and timescales that must be met. This leads firms to be transactional instead of outcomes focussed, which may be detrimental to the fair treatment of consumers. b. Prescriptive rules also lead firms to be less innovative and make little effort to differentiate themselves from other firms within the industry. This will result in less choice for the consumer, as the only differential between firms will be price.

14 Historically, detailed rules have undermined the objectives of industry initiatives and restricted customer benefits. For example, regulation on the Basic Advice process for stakeholder products was more detailed and costly than envisaged at their development. This restricted customer access to the products and ultimately caused their failure to stimulate demand and access to simple savings products.

15 It is important for the success of new initiatives to stimulate financial engagement, including NPSS and generic advice, that the regulator avoids the restrictive approach taken to Basic Advice. Regulation should become an enabler that widens the boundaries of financial services to those on lower incomes and make it more economically viable for providers to serve this market.

16 A further measure of the FSA’s effectiveness in the UK financial services market is their approach to implementing EU legislation. This can be demonstrated through the introduction of regulation to the general insurance industry.

17 Prior to January 2005, the general insurance industry was self-regulating, with a good track record. When introducing the Insurance Mediation Directive (IMD) and Distance marketing Directive (DMD), the European Commission’s primary intention was to provide a single market in general insurance allowing firms more flexibility to trade across international borders.

18 However, the implementation of the underlying EU legislation has been excessive and littered with ‘gold plating’. The largest example was the inclusion of direct insurers in rules emanating from the IMD, which was intended for the intermediary market.

19 At this stage it is important to recognise the positive aspects the regime has delivered, in particular, consumers and businesses are benefiting from improved protection through the Financial Ombudsman Service and the Financial Services Compensation Scheme.

20 Overall though, there was a ‘broad brush’, rather than risk based, approach to the implementation of the Insurance Conduct of Business rules. This has led to all products within the regime attracting the same level of detailed rules, which has not been beneficial for the consumer.

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21 In summary, Norwich Union believes that the regulatory authorities, i.e the Treasury and FSA, have exceeded the European Commission’s intentions and implemented a regulatory regime that recent Association of British Insurers (ABI) research shows is not justified on cost-benefit grounds.

Economic regulators and the public interest:

22 A positive example of a regulator working in the public interest is the FSA’s Financial Capability programme, launched in 2003. The FSA brought together representatives from Government, firms, employers, trade associations, not-for-profit organisations and consumer bodies to develop and pilot ways to deliver financial capability through various channels and target groups. Several of the work streams under this initiative proved successful and are being rolled out nationally throughout 2007.

23 There are considerable benefits to society and individuals if people become more able to manage their finances through all their life stages. For example people will be less reliant on the state pension and benefits, and more able to cope with unexpected financial setbacks such as illness, unemployment or disability. Whilst the programme is a long term one and has yet to yield tangible measurable results in behaviour change, the FSA has played a big part in leading national financial capability activity co-coordinating across the industry and getting it so high on the Government agenda.

Competition within domestic industries and the UK economy’s international competitiveness:

24 Whilst the industry still maintains its competitive nature, despite the current regime, there is a danger that prescriptive rules will lead firms to be less innovative and make little effort to differentiate themselves from other firms within the industry.

25 With regard to the international markets, Norwich Union believes that the current regime could have a negative impact on UK firms’ competitiveness abroad as they are hamstrung by excessive regulation in comparison to our potential overseas competitors.

26 Whilst we are aware that the FSA has a presence in the EU through forums such as the Committee of European Insurance and Occupational Supervisors (CEIOPS) and the Committee of European Securities Regulators (CESR), we recommend that their work in Europe is made more transparent to the sectors they represent. There are examples in both the General Insurance and Life markets where the FSA has not acted in the best nature of the UK market.

a. General Insurance: When implementing its general insurance regime, the FSA does not appear to have compared its own approach to that of regulators within other EC member states. Whilst widely regarded internationally as a role model, the FSA’s implementation of the IMD and the DMD is out of step with the rest of the European community, being far more stringent and wide reaching. We urge the FSA to review the regulatory framework of the other European member states and make use of the best practices identified. b. Life: Throughout the implementation phase of the Markets in Financial Instruments Directive (MiFID) the FSA has stated that they disagree with several sections, but must complete implementation as it is EU policy. It is not clear to the industry how involved

3 the FSA was during the consultation period and what lobbying was carried out on these issues.

27 Whilst considering the diverse nature in which the EU member states implement new regulation, it is important to highlight the European Commission’s own responsibilities to ensure that their directives are adopted in the spirit intended.

28 As previously mentioned, the European Commission’s intention, when introducing the IMD and DMD, was to create a single market for general insurance. Two years after the Directives were adopted it is clear that this has not materialised and instead of cross border trading, firms are setting up companies in other member states and working to the rules of that member state.

29 Norwich Union recommends that the European Commission completes a review of the market to identify: whether its desired outcomes have been met; how the legislation has been adopted; ensure that there is no ‘gold plating’ of the original text, and overall whether the legislation itself is justified.

February 2007

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