TUESDAY 27 NOVEMBER 2007

Mr Peter Skinner MEP

  Q89  Chairman: Good morning, Mr Skinner. We are on the air. You will receive a transcript of everything that has been said and you will be able to correct that. Welcome and thank you very much for coming. I can either start off and ask the committee to ask their questions or, if there is a general opening statement you would like to make, we would be very glad to have that.

  Mr Skinner: I would be happy with the questions as they come, thank you.

  Q90Chairman: I will start off with a general question about the Lamfalussy principles. The Lamfalussy arrangements set out only the principles that constitute the core of the new prudential framework. What would be your priorities as you try to steer this one through the European Parliament? What are likely to be the sticking points and who is likely to raise them? What is the timetable? How great would you suggest the unanimity across Europe is? We have picked away at this question with other witnesses.

  Mr Skinner: Thank you for inviting me to come here. I think we are in the middle of a very exciting issue in law at a European level on financial services which, through that Lamfalussy process you have just mentioned, is going to make a huge change to the way the insurance industry looks at itself. The main sticking points are, I think, already there. Group supervision, as you have probably heard already, is a key issue. Small to medium sized businesses and the proportionate effects on small to medium sized businesses. Protection of the policyholder, which this whole Directive is meant to address, is clearly of great concern. Only by making sure that we nail down this Directive without too many amendments will we effectively be able to get the kind of US Insurance regime which will protect policyholders as well as bring about an efficient industry. Do you want me to elaborate on group supervision and where it is sticky?

  Q91  Chairman: Yes, please, as this seems to be important, and the protection of policyholders.

  Mr Skinner: Yes. I think that group supervision is essential to this Directive. There are about 50 companies at European level which seem to have cross-border relationships; either they have set up branches or subsidiary companies already within Member States those are currently being supervised under solo supervision provisions, some of which of course, because of the level of competence that you could expect and the level of experience that can expect across the European Union, is mismatched against the power, if you like, of some other companies. There are problems therefore in terms of getting general standard of supervisory regulations across the EU. On the other hand companies wish to extend their services and offer innovative products into markets which, domestic companies frankly, have not been ale to develop themselves. The idea of group supervision is to be able to attend to these key objectives of harmonisation at the same time as being able to expand the business environment and make it more subject to the competitive pressures that industry should feel across the EU in the Single Market. That said, the idea and the proposal for group supervision is to have a lead supervisor. In Britain, for example, we would use the FSA as a lead supervisor to supervise companies operating in another EU country. There are companies out there at the moment that would therefore have most of its capital requirements and other qualitative requirements placed under the authority of the FSA, who would take a lead and would lend its support to other EU countries regulators. That is the idea of lead supervision in a nutshell. The problem of course is that many of the solo supervisors see it as their issue to be able to supervise the companies in the countries to which they have hosted them and do not like the idea of being crowded out by other authorities with deeper experience and competence like the FSA for fear of losing the control that they hitherto had. The challenge of course is to bring about a level of understanding between the supervisors in a way in which they can work together and trust each other to be able to operate so that lead supervisory approaches can be brought to address the greater internal market issues. On SMEs, they do not cross borders, on the whole. They do suffer from not being able to afford actuaries on a day-by-day basis to be able to work out what their capital requirements are and therefore in terms of calculating the economic side of their business, sometimes they are very used to a situation inside their own markets where they are able to work out very quickly and speedily just what their problems are with a supervisor but, under the rules that are suggested by Solvency II, there will be economic requirements which they will have to meet, which may be more of a challenge on small businesses than on larger ones. It has been remarkable how many people have responded under the impact assessment from the small business sector, and that has been very rewarding in itself. It is the highest I think ever, but, even so, many still struggle now to get their voice heard on this issue. I have been met with representatives who have come to me on a daily basis to tell me how collectively small businesses find it difficult to see how this is going to give them the same adequate, competitive level playing field of some of the bigger companies, let us put it that way.

  Q92  Chairman: This is most useful evidence from the front. We have so far met with a great deal of optimism from very unexpected sources, like the Treasury and the FSA and indeed the industry. If you could expand further on any more sticking points—I can see that group supervision is really going to be one—which are going to de-rail the process, I would be most grateful.

  Mr Skinner: I think as politicians we all in the room recognise that we are actually in the business of being slightly sceptical and pessimistic in order to be able to test the thesis of many of the bureaucrats that attend us, with all due respect. We are offered of course this particular proposal as the perfect answer to the insurance market, as is, but without the calibration, without the economics, without the numbers. This we have been waiting for up until 20th of this month in fact. The European Committee for Insurance and Occupational Pensions (CEIOPS), which is responsible for delivering the results, did so in an appropriate time, but nevertheless this was after we had already kick-started our deliberations in the Parliament, Parliament will be looking very carefully at those results, and we will be having a hearing on 18 December to discuss just what the calibration issues are for small to medium sized businesses right the way through up to large groups and the impact that is likely to have on each and every one of them to see whether or not there are any adjustments which need to be made to this Directive. I do not have any lack of optimism about the success of this law like any other law but I think we must see the facts as they are presented by the real witnesses out there, who do not feel cajoled by the fact that they are dealing with large institutions or their own supervisors not to say to us what they perhaps about the difficulties that they still feel. I suspect most are happy actually, I really do. I think some are still slightly unaware of the real impacts that we could expect, both advantageous impacts and negative ones. I suspect also that, having spent now a year preparing for this and just a few months actually being involved in this particular Directive as its Rapporteur, many other issues will come to the fore that perhaps we have not possibly contemplated yet. I am optimistic but I am also ready for a fight, if you like. Small to medium sized businesses, particularly mutuals and co-operatives, feel that they cannot raise capital the open markets and so therefore they will be at a disadvantage. I think this is a fair point. Of course we do recognise that some mutuals do have private companies that raise capital on markets, but they do not really come forward and tell you that; you have to look behind the surface for this. At the same time, some mutuals and co-operatives are working together quite closely in the background to try to get some group support of their own. This is a new innovation in the insurance market to be welcomed cautiously in terms of what they are doing and examined in terms of its purpose. We do not want companies, mutuals or otherwise, to avoid the rigour of this legislation, but we do want it to be a suitable tool, too.

  Chairman: That is very interesting. Colleagues, does anybody want to pick up with Mr Skinner on this point or shall we go on and ask Lord Renton to ask his question?

  Q93  Lord Giddens: Perhaps I could ask the question I was going to ask ahead of time because it is linked to what you say. Do you feel the resultant Directive will be a general process of industry consolidation, which will tend to favour the large companies and leave many small companies either in trouble or being forced into particular very limited types of operations, or are the kinds of things you are describing, like smaller funds and co-operatives getting together, able to overcome what would seem to be a barrier? We have talked to quite a few people about this Directive and most of the others we have heard have been in my view a bit over-sanguine about it all really. It would be interesting to hear what you think about that, whether there would be jobs lost across Europe or whether the overall result of the Directive would be job creation, at least on a net basis, across the EU.

  Mr Skinner: I think this Directive attempts to promote an industry which is robust enough in a global competitive environment rather than perhaps be laggardly in the face of global change, but at the same time I recognise that not every regulation is like this and so comprehensive to one industry. It is maximum harmonisation and I think as such it has a positive effect in bringing industry together, rather than a negative effect. I think that consolidation is seen as being negative. I hesitate to say that consolidation itself is positive but I do think that companies will start either to decide to give up parts of their business or look to partnerships, strategic or otherwise, to form a basis for new groups. I think that it would be wise as well for some companies to do that. If you take the French health insurance sector, which is quite spread but localised across France, for example, and whose very benefits everyone really depends upon, it is wise of us to make sure that they are robust enough to be able to meet those events, they are meant for medication and hospital care for example. On the one hand, this gives a chance to the industry to look inside itself and decide for itself whether or not it is going to have to make the changes. There are some potential radical changes in certain areas which may lead to consolidation. Otherwise groups on the whole, the large groups really will depend upon having a competitive regulation in place, which means that they can go out to markets outside of the European Union, global market in South-East Asia, and fight for business where we are in an extremely tight race with Americans, Japanese and others who are using lesser regimes. We need to make sure that what we do can be potentially replicated round the rest of the world and sets a global standard for the rest of the world. However not too much consolidation, I hope, because I will feel a very tight collar as people come in to see me and wag their finger about the effects of regulation forcing their companies together, but on the whole I feel that it consolidation is going to happen.

  Q94  Lord Renton of Mount Harry: The first thing we should do is congratulate you, Mr Skinner, as being willing as our brief says to steer these proposals through the European Parliament. You are going to have some very interesting years ahead of you, three or four of them I guess, not just one or two. Amidst the general optimism that we have heard from our witnesses over the last two weeks about this proposal, the Association of British Insurers did precisely use the words that draft tests on risk management are at the moment far too prescriptive, and clearly they are one of the organisations that would like to see this changed as the detail is worked out. Do you think that is possible or is it really necessary that it will be very prescriptive regulation in order to take into account the very varying quality of risk mitigation and decision-making qualities that exist at the moment within Europe and about which you have just been telling us?

  Mr Skinner: I deal mainly with the `principle' side of things (Level I) as you know. It is more of a higher level approach, partly because the Lamfalussy process knows and recognises the complex nature of this. Like you, I can share misgivings about the supervisory requirements that may come about from this. It looks on paper as if the balance is about right. I tend to say that but at the same time these things will be interpreted somewhat down the line at the implementation stages: the requirement for management, for business, the governance, these will be interpreted by the supervisors. There is a possibility therefore always in these circumstances for somebody to add things on which you would not want to see. As to whether or not you could spot within this Directive thing which are too onerous and too prescriptive, I would disagree with that. I do not see those things from this particular proposal, from the way this paper has been put forward, as being too onerous, but I am not a practitioner in the insurance industry. As a politician, I think we would like to see the issues that are raised brought to the fore with good communications for example to make sure that reports are given appropriately so that within a division of the particular tasks of any management board we do not have a repetition as in the past of issues and problems that have occurred because somebody has occupied a position on one issue in the board and also held the information on other issues. I do not want to go any further into that but you could imagine that there would be conflicts of interests. This is not just about the UK. Although, as I heard partly when the FSA witnesses were speaking, that this is rolling out some issues which we have within the UK, there are many countries which still probably would benefit from a change to their management board in a way that we currently operate within the UK. That means being prescriptive because of the way the law is set up in those other countries.

  Q95  Lord Moser: Mr Skinner was talking about consolidation and the new groupings which seemed to make a lot of sense and then different kinds of consolidation. I think you ended up by saying that on the whole maybe that is not only inevitable but a good thing. My question is: purely from the consumers' point of view—never mind the industry, never mind the regulators, never mind Europe—whether it is a corporate consumer or the little man, insurance is at the centre of everybody's life. Is consolidation on the whole a good trend?

  Mr Skinner: I do not know whether consolidation is a good trend, but I think in this first instance, after the passage of this legislation, companies may feel that they have to adjust their business model; they may have to find strategic partnerships because of the nature of cross-border activity. You may wish, for example, to find a strategic partner in another country in order to be able to get the synergies right for your insurance business, and access to markets, although you would not necessarily have to but just because of local knowledge, experience, clientele. I suspect that there will be a good effect of some of that consolidation. It does not mean that there will be fewer branches or fewer people necessarily employed. It could be quite the reverse because a trend of consolidation does not mean that it shrinks necessarily; it could grow. I am suspecting that the insurance market inside the European Union has not reached its maximum potential yet. There are still many states that are finding their economic feet, so to speak, although they are all very successful, as I understand. There are good reasons why businesses need more insurance, why individuals need more insurance, and so there is every good reason if we do consolidate it will be to expand rather than to shrink.

  Q96  Lord Moser: Will there be lower premiums on the whole?

  Mr Skinner: The state of innovation within the industry is probably not going to change very much, but the costs to the industry will come down because of the ability to be able to raise capital and use capital more efficiently. Therefore, these could be passed on to the consumer. I would like to see them passed on to the consumer. As you probably know, I also hold the brief for steering the Reinsurance Directive; this is covering reinsurance. The cost of reinsurance by using old collateral mechanisms was quite high and substantial obviously with just piles of money kept in a bank, which was a very inefficient use of money. If the insurance industry is similarly asked to do this in other respects and we can get the advantage of this Directive to change all of that, then I think that this should reduce costs.

  Q97  Lord Moser: That is very helpful. You are talking about life as well as non-life all the time?

  Mr Skinner: Yes.

  Q98  Lord Woolmer of Leeds: I think in some measure you have answered this question but there may be something you want to add. Clearly and possibly at Level 2 and even beyond the quality of risk mitigation and decision making at the level of the individual firm will be very important. You know far more about the industry across Europe than I do. How do politicians in other countries see this? Do they think that they would prefer the apparent certainties of firm rules, firm ratios, clear standards that everyone has to abide by, and do the politicians think that is in the best interests of the consumer or do they think that the quality of management in risk mitigation and decision making can respond to the challenge of flexibility and best use of resources without this posing a threat to the consumer interest?

  Mr Skinner: I am being hopeful in all respects because obviously I will attend to the legislation and the implementation will come afterwards. I think that risk mitigation, the issues of modern management in insurance companies, is something which we are seeing rolled out across the European Union even as we speak, in advance of this legislation. When this legislation comes into play in 2012, I am hoping that the techniques, attitudes and processes within companies and decision making will be in tune with everything that we would expect to see from a modern insurance industry. You are absolutely right that it is across 27 Member States covering 500 million people, many of whom will depend upon this to deliver their health care and benefits. It offers a template for other things. I am not saying there is bad behaviour out there but that this is our chance to predict what may go wrong if a market expands beyond the capacity to be able to police it effectively. In that respect, what we have now is a very effective proposal for doing that. The test of this will be the attitude of the supervisors, which is Level 2 and Level 3.

  Q99  Lord Woolmer of Leeds: Do you think that the success of the implementation of the Financial Services Action Plan now that MIFID is starting to roll out in the way that it is actually operated has mitigated political fears in the European Parliament where people did have concerns about a more modern approach to financial services? Do you think this legislation is viewed in a more relaxed way because it is following other areas of legislation in financial services? When the Financial Services Action Plan started off, and it will probably be discussed by another sub-committee, there were across Europe very mixed views about this, but now my sense is that this is seen as overwhelmingly a beneficial way forward.

  Mr Skinner: That is spot on. This is more positively viewed. The mistakes that could have been learnt in such a short space of time have been learnt as much as they could have been. The issue of MIFID, and by that I mean the negative impact that many people think that MIFID is going to have and is having, an attitude that is really drawn from the City of London in terms of the flavour of financial legislation from Europe, is one that needs to be addressed through legislation like this to demonstrate that good laws can come from Europe that do not affected by the horse trading of national financial arenas. This is one that I hope we will be able to look at objectively as far as possible as politicians and see the sense of this and that what we will draw from this is not one thousand amendments to be put inside the European Parliament like the Capital Requirements Directive, which basically sank it in my view, but one that will sharpen it, bring it more closely into focus and attend to the Single Market issues rather than individual issues of every nation inside the EU.

  Lord Woolmer of Leeds: That is absolutely fascinating.