FST. In light of recent troubles in financial industry service, what do you think the current challenges are in achieving goals and aims within the industry?
MS. I guess the main challenge for the financial service industry, and I think that applies to banks as much as to insurance companies, is that if there is a significant loss in trust from the public and the investors in the financial markets, the trust from clients in financial service institutions is affected, maybe even lost in some cases . And trust is a core component of financial products. If you look at banking, the client has to trust you that you take care of his or her money and investments, that it’s safe with you and that you, in any case of doubt, can return it.
In the insurance business, you equally deal with trust and promises that are to some extent even stronger. You promise the client to be there in case of emergencies, accidents, or other kind of insurance circumstances. There needs to be a high degree of trust and if that trust is lost in the financial services industry, building up that trust again will be the main challenge to meet any of your ambitions.
FST. You have been in your new role for a few months now and last time we spoke to you, you were going through that transition period. Can you tell us a little bit more about how your job in insurance differs from being in banking?
MS. It’s different and it’s the same. Obviously it’s not fundamentally different because it’s still a financial service industry, but there are some significant differences between insurance and banks in the space I operate. Look at the regulations, the amount and the complexity of regulations in insurance business and banks; while both have a high level of complexity, the complexity is very different in nature. There’s a different priority in regulations and also the different activity on the regulatory side. Banking regulations mostly have been transforming their approach from rules based into risk based and on to principle based regulations and that kind of evolution is still underway in the insurance business. That is not to say that the insurance business is not regulated, it’s highly regulated, but on a different level.
Where you do see a difference, is in markets where the regulators have already merged to a single, joint regulator; that is something interesting to observe. When you look at the UK, where the FSA regulates the banks as well as the insurance companies, you can see the insurance regulator acting slightly different than in locations or jurisdictions where the supervisor is separate for banks and the insurance industry. As a result it is even more challenging for an insurance company to develop global policies and approaches within compliance at this stage.
FST. In our last issue, you were talking about the ‘rough ride’ that the banking world has been through recently and how this may reach into other sectors like insurance companies. Do you see any evidence of this so far and how do you think things about this can be overcome?
MS. Obviously, there have been regulatory cases and considerations in one industry as much as in the other. However I do observe a (light) trend that certain regulations that in the past were more focused on banks, are now going into other sectors like insurance and mortgages.
One example is a non-European situation, where government bodies are now shifting their focus more and more towards insurance companies for sanction regulations, expecting them to have a compliance program in place equal to banks. This is just one example and you can see this from more aspects and again, with the merger of regulators, the environment will become more like in banking. That said it may not follow the same path, applying lessons learned on the regulatory side right from the beginning. Insurance companies are looking to the banks to learn and copy best practice too, utilising a regular exchange of thoughts.
FST. What do you think the main current areas of focus for AML in the insurance space are?
MS. It is not new to have KYC documentation in the Life Insurance business and insurance companies have complied with this aspect for years. Currently I note a trend that some regulators are now focusing on this particular aspect more in depth, to an extent and level of detail comparable to banking.
In some jurisdictions the bank regulator has loaned people to the insurance regulator to help them to conduct AML examinations onsite. That exchange on the regulatory side should be a trigger for the insurance companies to also exchange proactively with their peers in the banking sector, like I mentioned before.
FST. Can regulations move fast enough to prove truly effective and what leads can the industry give to regulators on issues of AML?
MS. Essentially, regulations mainly come after the fact, so where there are events, or events are expected, regulations get drawn up. Those things take time. They have to go through different levels of authorities and approvals. By the time they’re out, it takes years and then they need to be implemented by the regulated industry. That’s not a criticism; it’s just a fact of the process and the need to achieve agreement and obtain sign-off through legal machinery.
One way it can work or at least it will increase the chances, is where the regulators engage in a very proactive dialogue with the industry at an early stage. Where the regulators drop the concern or problem or challenge with the industry and work the industry to find the right mitigations. This brings two advantages. The first is that the regulators benefit from the know-how of the industry and joint thinking will not only improve, but also accelerate the development. Then there is another aspect that will accelerate the effectiveness of new regulations. If the industry is involved in thinking and development process from the beginning, obviously, once the industry knows that this is coming they will proactively implement steps in processes they are currently developing or are about to develop that will meet those future measures already. This is a way to speed up the process and have quicker responses industry wide, not just company by company.
FST. Do you feel there is a danger that overzealous risk regulations could stifle innovation in finance?
MS. An incredibly tight regulation can have an impact to be successful in the market. The industry needs to be proactive. The regulators have to see that the industry understands the issues at hand, that the industry together addresses the points of concern and do not sit and wait. There needs to be an acceptance on the industry side and a clear demonstration of progress to mitigate emerging risks.
Of course, regulators have a role to play as well. They have to protect the consumer and the markets. Thus if they don’t have the feeling that the industry, the banks or the insurance companies, do that themselves, there is a need for them to act . Particular issue fixing bears a risk of over regulation at a point, hampering innovation. So being proactive and transparent, openly addressing issues at hand, can be a joint way to do the best for the clients and the markets.
FST. When we last spoke to you, the third AML directive had just been implemented. Do you think you can see any of the effects of this yet or is it still too early to see? Do you think you can comment on the long-term results of the directives as well?
MS. You can see early effects and they’re very positive ones too. Within companies it often has enforced a dialogue across jurisdictions and across business units. It has stimulated a dialogue that we haven’t seen before, so that’s clearly a benefit that should not be ignored.
Beyond that, it helps in your compliance efforts because it is getting easier and more cost efficient to implement compliance measures. The speed of deployment, the cost of deploying compliance measures and perhaps even the effectiveness of compliance measures have increased. The business benefits from one compliance solution across Europe instead of 10 differing policies. The business disruption is less, so you have a better chance of faster compliance and can be more effective.
Business can be conducted cross border and is increasingly seen as domestic within the EU. Initiatives like SEPA shall further accelerate this. There are certain things I see that make me believe there is an effect and there is something to be gained. I think these kind of steps do help to make Europe one Europe and bring down barriers that may still exist.