New government: Coalition consequences

Brokers could be forgiven for feeling that the general election was a lifetime ago rather than on 6 May. After the hiatus of the political negotiations needed to form the Liberal-Conservative government, the changes affecting brokers have come thick and fast. The first development came in the Chancellor of the Exchequer's Mansion House speech on 16 June; George Osborne's sweeping changes ended the tripartite approach to regulation set up under New Labour. As of 2012, the Bank of England will oversee three new bodies: the Prudential Regulatory Authority, a Financial Policy Committee and the Consumer Protection and Markets Authority.

The British Insurance Brokers' Association welcomed the news that its concerns about sector regulation being split among bodies had been taken on board: insurance intermediaries will come under the gaze of the CPMA. Steve White, Biba's head of compliance and training, used the analogy of a jigsaw puzzle to describe the changes, with the FPC looking at all the pieces to take an overview, the PRA focusing on larger institutional pieces such as banks and the CPMA operating at the micro-retail level.

Fees and levies
White called on the government to make sure the changes and the potential for increased scrutiny did not lead to increased costs. He said: "The authorities must ensure that, in any change to the regulatory architecture for the insurance intermediary sector, they do not lose sight of the fact that UK intermediaries currently face a level of fees and levies that are totally out of line with the rest of Europe." The recent dramatic rise in the Financial Services Compensation Fund fees is yet another example.

It is a call that Iain Anderson, a lobbyist focusing on financial services and a director at Cicero Consulting, believes the government could take on board. He argued: "After the Budget, we are in a different situation and this government is aware of costs. The Treasury will be keeping a close eye on the cost for intermediaries and the industry has the opportunity to maintain a dialogue about it."

There remains much detail to be delivered before the final rollout in 2012 and, in the interim, the new bodies will shadow the incumbent Financial Services Authority. While it is accordingly too early to say what the day-to-day impact will be, Anderson warned brokers this does not mean there will be no changes until 2012. Instead, he foresees a gradual but fundamental shift, similar to the way the incoming FSA had its impact on regulation from the announcement of its formation in 1997, the legislation to create it in 2000 and its implementing in 2001.

Anderson said: "While legislation will not come into force until 2012, we are already seeing the start of the shift. New entities being created will inevitably do things in a different way and brokers have to watch how the cultural and management approaches change."

An important conduit for the insurance industry to influence these cultural and management approaches - and the political environment in which the CPMA operates - will be the All Party Group on Insurance and Financial Services. Following the general election, there have been several changes in personnel, with former trade minister Jonathan Evans MP elected as its new chairman (see our interview).

The group now boasts Andy Love MP as joint deputy chairman and the former head of public affairs at Aviva, Tracey Crouch, as a joint honourary secretary.

During the next session, the group is organising meetings on reforming financial services regulation with the Association of British Insurers, Institute of Financial Services and the Financial Services Authority.

Emergency Budget
Less than a week after the Chancellor's Mansion House speech came the Emergency Budget on 22 June; with increases in insurance premium tax, value added tax and capital gains tax, there was much of interest to brokers.

There had been fears that IPT would be increased to 10% or even 20%. Paul Upton, chief executive officer at Evolution Underwriting, noted that the 1% increase to 6% is unlikely to change the take-up rate of insurance, though it still poses issues for brokers. He said: "With claims exceeding premiums in some areas, I cannot see insurers having the margin to absorb even 1%, so they are going to have to pass it on."

Upton added that he did not think the 1% hike would mark the end of the rises. He explained: "Watch this space. IPT is a soft target with no avoidance because it is a forced purchase - such as in motor - and the cost of collecting it falls on the insurers: you can see the temptation to raise it again. Brokers should be preparing their clients for the probability of it going up further."

For insurers, the rise also has implications in terms of reprogramming computer systems, a point taken up by Kevin Kiernan, director of personal lines at Groupama. He said: "Depending on the date parameters of a system, you cannot just change 5% for 6%. What about someone with a mid-term adjustment? You have to set up decisions."

Kiernan also highlighted that the rise in VAT would have a significant impact on the insurance industry. He said: "The largest cost will be from the claims. In motor, for example, it will mean a 2.5% increase from services to fix a car. It will have to be passed on in premiums."

Two immediate changes to CGT in particular might have an impact on brokers considering selling their businesses. On one hand, an increase in CGT for higher rate income tax payers to 28% could act as a disincentive, while on the other hand the extension of the Entrepreneurs Relief 10% tax band from £2m to £5m could result in an overall saving depending on the size of the business.

Acquisitions
Whether either change will lead to a change in acquisition levels or not is, according to Lyndon Wood, chairman and chief executive officer at Caerphilly-based The Moorhouse Group, a matter of perception. He said: "It is positive news: if the relief stays for three to five years then brokers will want to build their value until then. Yet with the government you never know and it has been reduced before; if brokers don't believe it will stick then we would see a rush to sell."

Wood added that his company, which is on the acquisition trail for the first time in its history, is unchanged in its plans following the Budget. He added: "I still believe acquisitions will become more buoyant next year, with capital coming back into the market from banks and venture capitalists. It will be at a lower rate than the peak times but still more than recently."

Michael Rea, chief executive officer at Cullum Capital Ventures, confirmed that the consolidator had already seen a rise before the Budget in the number of brokers considering selling up. He said: "What's been notable for us over the last couple of months is that there's been more interest in having a discussion about whether or not to sell a business." Like Wood, Rea thinks the impact of the Budget will depend on what brokers believe will happen next. He added: "Before the Budget, there was a view that CGT would be aligned with income tax. If brokers think it's the start then there'll be a lot more looking to sell."

One final post-election effect on brokers is the potential impact on insurance from the Emergency Budget announcement of "an average real cut of around 25% over four years" in most government departments, including the Department for Environment Food and Rural Affairs. This economic year, the Environment Agency received £607m from Defra towards its total £745m spend to reduce the risk of flood and coastal erosion in England and Wales. Given that Defra's budget is £3bn and it pays out £2bn of European Union money, flood defences take a significant portion of the total. While no funding changes will be confirmed until the government's Spending Review is published on 20 October, any reduction could have significant consequences.

According to the Environment Agency, the 2007 summer floods cost the country £3.2bn, while one in six homes in England is at risk of flooding. It also noted that spending of £1bn a year is needed on flood defences by 2035. Since the Budget, the agency's chief executive officer, Dr Paul Leinster, has told a conference that local contributions to funding flood defences will have to play a greater role. He said: "While continued government investment in managing the risk of flooding is important, we must now also look at alternative funding streams, including increased contributions from those who will benefit from future defence schemes."

Flood defences
A spokesperson for the ABI pointed out that it is too simplistic to say any cut in spending would have an automatic impact on insurance premiums, though they stressed it is an area the industry is taking seriously. The spokesperson commented: "The government has a commitment on flood defences spending under the insurance principles until July 2013. It is an area that the industry cannot tackle alone and we would not want to see spending cut, which is why we have an ongoing dialogue with it." The spokesperson added that any impact can be revisited once the October spending review is published.

The pace of change has been breathtaking for brokers since the election. With the autumn Spending Review already on the horizon, it is unlikely to slow down any time soon.

Source: Professional Broking – July/August 2010