Regulator eager to sooth insurers over tough rules

The FSA's 'biggest ever' project attempts to placate firms which are threatening to quit the City

The Financial Services Authority (FSA) is throwing resources at smoothing the introduction of tough EU financial services rules that are threatening to scare large insurers out of the City.

Prudential recently confirmed that it is considering moving its headquarters from London, possibly to Hong Kong, over Solvency II. From 2014, these rules will force EU-based insurers to hold extra cash on their balance sheets, to protect them from the fall-out of another financial crisis.

This is similar to changes to the amount of capital banks have been asked to retain, but has met with anger from insurers who argue that they weathered the financial storm in relatively healthy shape. They also fear that in holding on to so much cash they will have less freedom to grow their businesses.

However, the FSA is spending more than £100m and has over 5 per cent of its staff working on ways of helping insurers with the proposals, in the biggest single operation in the history of the organisation.

This is a crunch year when FSA spending and resources on Solvency II will peak, as from the end of this month it will review the business modelling that 60 insurers are implementing to handle the directive.

Insurers are looking for FSA approvals of what are known as "internal models". Each insurer can come up with their own analysis of how much capital they need to hold to withstand a one-in-200-year crisis or accept the standard model, which is likely to be far more stringent.

An FSA spokesman said: "This is the FSA's biggest ever project – we have 220 people working on it. Solvency II is a major undertaking for UK industry, and we are working really hard with industry – it's not just about algorithms, it's a far more involved process."

When the FSA is abolished and its responsibilities carved up next year, the Solvency II staff, who include actuaries and IT experts, will move to the Prudential Regulatory Authority, to be headed by Hector Sants (inset below), currently CEO at the FSA.

The FSA and its successor body are unable to grant full approval to the insurers' internal models until Solvency II is formally introduced. However, they can be "minded to approve", which means that they can give the official OK on the day the directive comes into force.

Solvency II has been a particularly controversial issue in the UK, as it has 35 per cent of the European insurance market. The industry also fears that there could be further delay to Solvency II's introduction, which has been fought over in the European Commission and Parliament for years.

Many insurers are angry that they have spent so much effort on working up complicated internal models and business strategies to allow for Solvency II, but that politicians have stopped them from implementing those plans.