A recent FSA consultation gave a reprieve to the mutual sector from a possibly fatal course of action. Gareth Evans explains.
Just before Christmas the FSA issued a consultation paper which showed those in Canary Wharf really had been listening.
The paper (CP 12/38) goes under the eye-catching title Mutuality and with-profits funds: a way forward, but it is those three little words ‘a way forward' which gave observers of the insurance sector an early Christmas present.
For some time now new with-profits investment has been in decline. Sure, according to the FSA, there are 25m with-profits policies, with a massive £330bn invested in them. Nonetheless most of these policies have been running for 15 years or more. Some providers have developed something of a specialism in with-profits but they are fewer in number than in the heyday of with-profits products.
All about diversity
But why does this matter and why should it be a concern for the protection market? The answer is simple; it is all about diversity.
We have heard a lot about diversity since the onset of the banking crisis in 2007-08. We should not be surprised if the Parliamentary Commission on Banking Standards - which is currently busying itself with almost daily evidence sessions - would conclude as part of its findings that a lack of diversity in business model deepened the crisis.
Certainly the Bank of England director responsible for financial stability, Andrew Haldane, has blamed a lack of corporate diversity for fragility in the banking system.
If all banks take a similar corporate form and pursue short-term profits at the expense of long-term value generation, the argument goes, any external shocks will hit them all, severely and simultaneously.
The Coalition Government recognised the need for diversity in financial services when it was putting together the coalition agreement in 2010. Right there, in the first commitment in the Coalition Programme for Government is this: "We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry." Could not be more plain, could it?
You may recall right at the start of 2013 that the Government launched a mid-term review of how they had measured up to the commitments that they made in May 2010. It is interesting to see what they said against the commitment to "foster diversity and promote mutuals".
