We know the law. But how well do we know our regulators?
In an era where regulation is surpassing law on the radars of most in-house counsel and other risk managers, this question has never been more pressing. How do we best navigate our regulators in order not only to get the best results but also to preserve and continue good relations? In this article we look at a handful of key insurance regulators around the globe, and consider not just the facts, but also the softer issues that are often critical to making the right judgement.
Structure and independence
It is useful to pause briefly on the structure, remit and objectives of the regulator. There is currently an increasing trend for a combined regulator to cover all major financial services, reflecting a growing acceptance that insurance is inextricably intertwined with banking, asset managers and other sectors.
The UK's Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) follow this model, as does the Monetary Authority of Singapore (MAS). In the US the New York Department of Financial Services has recently merged to do likewise.
Canada's Office of the Superintendent of Financial Institutions (OSFI) is the collective federal regulator of banks, insurers, credit unions and loan and trust companies, while securities dealers and asset managers are currently provincially regulated. It is expected that Canada will create a national securities regulator by the end of 2015, but it will not regulate the other financial institutions that OSFI regulates.
What is the political framework? Again, international best practice encourages independence. In the UK, the PRA and FCA enjoy a degree of theoretical independence, and the government certainly likes to cultivate the appearance of this.
In Hong Kong, next year will see the launch of the Independent Insurance Authority (IIA), which will replace the current government department to become a financially and operationally independent entity.
In Canada, the Superintendent of OSFI is appointed by the executive branch of the Canadian government. In practice, OSFI operates independently from – but is sensitive to – government. In a number of instances (for example, acquisition of more than a 10% interest in an insurer), Ministerial approval is required and even then the Minister acts on the advice of OSFI. It would be a very rare instance in the insurance sector for the Minister to override OSFI's recommendation.
That said, any "independent" regulator is subject to being reined in where it is deemed to have over-stepped the mark. This is what UK Chancellor George Osborne appears to have done with the FCA in recent months in connection with a journalist briefing that rocked the stock exchange. In Singapore, by contrast, MAS is the central bank of Singapore and should be seen very much as an arm of the government.
It is also worth dwelling on what political or popular pressures drive the regulator. What emphasis does it place on, for example, conduct as opposed to prudential issues? What is more important – stability and consumer protection or economic growth? What is the relative importance of the insurance industry in the wider economy?
These general considerations produce some particular regulatory concerns and results. In the UK, there is, on the one hand, a substantial and mature insurance sector that is of great significance to the UK Exchequer. However, on the other hand we have (in some quarters) our fair share of engrained and historic malpractice together with the wide perception of the historic failures of the old regulator, the Financial Services Authority (FSA).
This imposes real pressures on the FCA and PRA. In response, the PRA has to date held its fire by keeping a very low profile, releasing only a handful of policy papers (which are refreshingly short in length), and has not yet undertaken any regulatory enforcement actions.
The FCA, by contrast, has set itself an immensely ambitious – some would say hyperactive – list of objectives and action points for reform across a wide array of participants and business lines. In Singapore, the emphasis is very much on building a strong regional insurance industry and hub, as well as to create stability, jobs and opportunities for the local Singaporean populace. In Hong Kong, the main thrust appears to be to ensure that regulations meet the standards of other international financial centres and to wind down self-regulation. It also seeks to compete with Singapore to be the key player in the regional insurance space.
OSFI is the federal prudential regulator while the Canadian provinces regulate local licensing and market conduct. In that sense, regulation of insurers' solvency is largely a separate matter from regulation of consumer protection in Canada.
Since the economic crisis of 2008 (during which Canadian financial institutions fared better than institutions in other countries and were consequently seen as well regulated), OSFI has been perceived and perceives itself as a senior regulator worldwide. As a result OSFI works closely with other regulators to "lead" new international regulatory initiatives.
What is the regulator's style? Is it consensual, with consultation on proposed rules? Or is it aggressive – the "stick" approach – involving sudden, draconian fines?
In the UK, the ethos of consultation is still strong, but the FCA/PRA will typically have a very clear idea in advance of where a policy proposal will end up. Rarely will it substantially change its approach in the finally published draft. The UK regulators take a risk-based approach to supervision and will impose fines – often large ones – accordingly.
They are also prepared to look beyond the UK's borders. Last year, for example, the FSA imposed a £30m fine on Prudential for failing to keep it informed of its attempts to acquire AIG's Asian business in 2010. This was based on breach of a regulatory principle, but one which per se caused no financial loss to any party.
In Singapore, the style is more prescriptive, but if your business plan is aligned with Singapore's economic growth plans then that goes a long way to enabling constructive and collaborative discussion. For Asian regulators the tendency is to focus on technical breaches and to impose smaller fines more frequently.
In Canada, OSFI professes to adhere to the Anglo-Canadian style of consultation, but it takes a very cautious approach and does not succumb to pressure. On the other hand, oftentimes OSFI can be supportive by helping to find creative ways to achieve insurers' legitimate goals within the regulatory framework.
OSFI consults with the industry by issuing new requirements in draft in advance and by inviting comment. Similar to the FCA/PRA in the UK, rarely does an OSFI initiative go by the wayside and only rarely will OSFI substantially diverge from the approach taken in the published draft. OSFI attempts to obtain the industry's buy-in to proposed new regulatory requirements, but regardless of any remaining controversy, OSFI "expects" compliance once the requirement has been finalized.
Personalities certainly matter. Who are the leading individuals at the regulator and to what extent are they the "face" of the regulator? In the UK, the style and approach of the PRA and FCA certainly reflect the personalities of their respective chief executives, Andrew Bailey and Martin Wheatley.
A recent phenomenon has seen leading individuals take their enhanced profiles from the regulator into the private sector, with the likes of Hector Sants, Jon Pain and Margaret Cole making high profile moves from the FSA in recent times.
In Asia, individuals tend to be less prominent, although this may well change in Hong Kong with the launch of the IIA.
In Canada, OSFI's updated website increasing highlights the personal profiles of its senior people. Especially in recent years, the Superintendent and other senior OSFI staff speak publicly both in Canada and internationally on a regular basis, although their remarks are generally limited to the regulatory (as opposed to the political) context. Former Superintendent Julie Dickson was a public figure in Canada and most all of her efforts were covered by the media or advertised on OSFI's website. Her successor, Jeremy Rudin, appears to be carrying on this modern Canadian tradition.
Challenging a regulator
What is the best way to challenge the regulator?? The options range from – at one extreme – private representations, through to the prescribed appeal process, or – at the other extreme – public challenge or even court-based proceedings.
Whilst the latter may at times be tempting, the odds of success are not favourable. In the UK, whilst the FCA and PRA are potentially subject to judicial review, their powers are so broad and their approach so cautious that this is unlikely to succeed, and to our knowledge has never been attempted.
In Singapore, the concept of a public challenge to a regulator is almost unheard of. However, could we see developments in this area? In the US, all eyes are on Hank Greenberg, former CEO of AIG, in his efforts to obtain recompense from the US Federal Reserve over its "forceable" bail out of AIG in 2008.
In Hong Kong, insurers historically have certainly been willing to challenge the extent of the regulator's powers before the court, and indeed may find they need to do so under the new regime next year.
In Canada, challenging OSFI publicly is almost unheard of. OSFI has broad powers and broad discretion and the Courts would be loath to interfere with its exercise of either. The much preferred route, and arguably the only one that is likely to succeed, is to discuss the matter with OSFI with openness and transparency in an attempt to obtain buy-in to the issue. OSFI's staff will then be disposed to work with, as opposed to against, the insurer.
The approach at the provincial level is much the same. However, in cases where it appears that government resistance is unreasonable, it has been possible to invoke the political process to achieve a client's goal.
In the UK, the new Regulator's Code, issued by HM Government, does raise the interesting prospect of a challenge. This might however be based upon the new requirement for a regulator to "understand and minimise negative economic impacts of their regulator activities" as well as "minimising the costs of compliance for those they regulate".
There is also an intriguing provision requiring a regulator to provide advice and guidance to assist those they regulate and "to ensure that the advice can be relied on". Might this lead to the prospect of "you said it was OK" actions?
In the meantime it is our experience that most can be achieved at the softer end of the scale. An organised and sensitive approach behind closed doors that plays to the regulator's strategic goals will invariably bear fruit.
This is where the right adviser brings considerable value, regardless of the jurisdiction of the regulator. Understanding how the regulator operates, the things that the regulator needs to have addressed and getting the regulator's conceptual buy-in to the transaction or matter in question will be key.
**Frank Palmay firstname.lastname@example.org and Carol Lyons email@example.com are Partners at McMillan and Co-Chairs of the firm's Insurance Group. Frank has over 30 years and Carol has over 20 years of experience representing insurers, including acting as regulatory counsel and participating on boards and board committees.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014