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The Financial CrisiS AND REGULATION

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Alastair Evans, Head of Government Policy & Affairs, Lloyd's Lloyd's ... Madeleine Albright, US Secretary of State. 9 February 1998 Lloyd's ... – PowerPoint PPT presentation

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Title: 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

7
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
11
  • 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.

14
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.

16
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.

18
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.

20
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.

21
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22
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