Queen’s Speech

Lord Ashton of Hyde Excerpts

Wednesday 16th May 2012 Lords Chamber

[Lord Ashton of Hyde]

My Lords, it is a privilege, but a rather daunting prospect, to address this House for the first time. I am lucky to have had the right reverend Prelate to pave the way with such an impressive speech. I thank the noble Lord, Lord Myners, for his kind words—I think they were kind. His facts were right, but the conclusions were wrong: I am not a confidant of the Prime Minister. In fact, he did actually write me a letter the other day, which was very kind of him, but he got my name wrong.

I echo the right reverend Prelate in thanking all those who have made my short time here so welcome and interesting, especially Black Rod and his staff, the clerks, the doorkeepers and particularly my mentor, my noble friend Lady Sharples. She has treated me with affectionate discipline, rather as one would treat a wayward spaniel, and I am very grateful to her.

In many ways, it would have been obvious to have spoken in the debate about constitutional affairs. My great-grandfather came to this House in 1911, at the height of the furore over what became the Parliament Act. He had for many years been a Liberal MP, from a long line of northern non-conformists. Just over 100 years later, we are still talking about many of the same issues.

Apart from my Liberal heritage, I am able to speak here today because I was elected—albeit, I must admit, not by a huge electorate. I was elected under the alternative vote system, so one could say that I should be a natural supporter of the coalition. It seems, however, that there is very little to say about constitutional affairs that has not been said in the past couple of days, so I thought I would talk about a subject near, if not dear, to my heart—regulation. In doing so, I should declare an interest as the chief executive of two insurance companies and a member of the Council of Lloyd’s.

At the beginning of the gracious Speech, Her Majesty said:

“Measures will be brought forward to further strengthen regulation of the financial services sector”.

I am certainly not advocating a return to light-touch regulation. This would be impossible, and we have seen only in the last week the sort of things that can go wrong at JPMorgan Chase. We expect regulation to be firm and consistent; no business that thinks it is any good wants to be undercut by cowboys acting irresponsibly. However, we also want it to be pragmatic, proportionate and targeted correctly. This is where the implementation of regulation as set out by Parliament is so important. It can make the difference between sensible, prudential regulation and expensive self-serving bureaucracy.

I shall give an example from my own industry, the insurance industry. It is labouring at the moment under the introduction of Solvency II, which is the most far-reaching reorganisation of the way insurance companies organise themselves and their accounts for 30 years. It is driven entirely by EU directives and has produced a tidal wave of bureaucracy and expense which seems to be largely unnoticed outside the industry. Lloyd’s alone reckons that it will spend £300 million on complying with the Solvency II requirements, not to mention the cost of ongoing compliance.

The Lloyd’s Internal Model application pack alone will be 6,000 to 7,000 pages long. It is estimated that the insurance industry is going to produce 500,000 pieces of paper to support the Solvency II application to the FSA. To put that into perspective, if you pile boxes of photocopying paper one on top of the other, 500,000 pages is almost exactly the height of Nelson’s column. Nor is this a light read: it is full of complicated mathematics and mind-numbing details—for example, verifying the complex assumptions in the very detailed and complex stochastic models.

I think that what Parliament might not realise, when it makes perfectly sensible regulations at a high level, is the cost of compliance with the detail. I do not see this improving if this House is full of 450 elected, professional politicians. Everything from minutes of meetings, policies, terms of reference and succession plans to detailed descriptions of the data in a company and all its interdependencies now has to be documented in minute detail. In the words of modern regulators, “If it isn’t written down, it hasn’t happened”. These documents have to be written, reviewed, signed off—often by the board—checked, monitored and reviewed regularly for ever more. The idea that more documentation in itself is useful regulation should, in my view, not be accepted as given.

There is a strong feeling that the FSA has lost its sense of proportion in implementing Solvency II. It is very sensitive to the charge of gold-plating regulation but many in the industry feel that, in its insistence on more and more documents, it has lost its perspective in regulating the process rather than the outcome. You cannot help wondering whether all this detail and the requirements are more to help the regulators regulate, and to attribute blame if something goes wrong, than being about proportionate, risk-based regulation. To cope with this regulatory burden, the FSA has proposed a whopping 37% increase in the annual funding requirement for 2012-13 for the insurance industry. That is on top of the huge cost of Solvency II.

I remind your Lordships that this is all for an industry which did not cost the taxpayer a penny during the financial crisis, employs 350,000 people and contributes £10 billion to the Exchequer each year. I very much hope that when my noble friend the Minister further strengthens regulation of the financial services sector, he will do his utmost to ensure that it is implemented at individual company level in a proportionate way under the new arrangements, and in a way which addresses the outcomes rather than the process itself.