The end of light touch regulation

The UK banking industry faces huge challenges and the recent Turner Review proposals amount to a revolution in the UK’s approach to the regulation and supervision of banks, investment banks and shadow banks. According to the author of that review, Lord Adair Turner, chairman of the Financial Services Authority, the body which regulate the financial sector in the UK, in a recent speech to the Association of British Insurers, there was no equivalent need for revolution in the insurance sector. That state of affairs, Lord Turner suggests, reflected two facts. The first is that major changes, amounting themselves to something of a revolution, came earlier in the insurance sector. In 2004 the FSA transformed the capital regime for insurers, changes which helped put the insurance industry in a stronger position to meet the challenges of the current economic environment so that insurers entered this recession with a better understanding of risk than before; and insurers have been better prepared to deal with market volatility. The second key fact, according to Lord Turner, is simply that insurance companies are not banks, and they differ from banks above all in the much lower importance of liquidity risks, which have played such a central role in this banking crisis. As a result, the insurance industry has not suffered a general worldwide crisis over the last two years, even while banks have suffered their worst for seventy years. Here, in an edited extract from his ABI speech, two issues addressed by Lord Turner are highlighted: the increased public focus on the overall effectiveness with which the financial services industry servers the real economy and consumers; and the fact that, in the response to the public loss of confidence in financial institutions, a more intensive supervisory approach to financial services institutions, including insurers, was unavoidable