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Written evidence submitted by Pension Insurance Corporation plc and

New Financial LLP
About PIC

1) PIC is a specialist insurer providing pension insurance buyouts and buy-ins to the
trustees and sponsors of UK defined benefit (“DB”) pension schemes. At half-year
2020, PIC had £47.7 billion in assets and had insured 237,000 pension scheme
members. We have a clearly articulated purpose, which is to pay the pensions of our
current and future policyholders.

2) Guaranteed pensions for our growing policyholder base are backed by a purposeful
investment strategy. This strategy prioritises the management of key risks, including
environmental, social and governance, as integral to paying the pensions of our
policyholders over the coming decades.

3) Investments with a lasting impact on current and future generations in areas including
renewable energy, social housing, and national infrastructure are socially beneficial
outcomes of our focus on our purpose. Excellence in customer service and balanced
stakeholder relationships are fundamental to our approach.

4) Key outcomes of our purpose:

a. Policyholders: Guaranteed pensions for life; excellence in customer service
b. Employees: Stimulating, fair, and rewarding workplace
c. Economy: Significant investments in urban regeneration, social housing, and
areas that balance intergenerational equity
d. Environment: Increasing investments into renewable energy, with concurrent
reduction in exposure to carbon-producing industries
e. Society: Active engagement in public policy debates around purposeful, long-
term investment in the economy, and stakeholder capitalism
f. Capital providers: Growing store of value expected to provide secure, long-
term returns

About New Financial

5) New Financial is a think tank that believes Europe needs bigger and better capital
markets to help drive growth and prosperity.

6) We think this presents a huge opportunity for the industry, its customers and
policymakers to embrace change and rethink how capital markets work. We work
with market participants and policymakers to help make a more positive and
constructive case for capital markets, and we challenge the industry to raise its game.

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7) We are a social enterprise funded by institutional membership from different sectors

of the capital markets industry. We conduct in depth original research on different
aspects of capital markets and host a managed programme of small, interactive events.

Questions

What changes should be made to the UK’s financial services regulations and regulatory
framework once the UK is independent of the European Union?

8) An opportunity for major re-think of financial services regulation: The UK’s exit
from the EU and the re-shoring of FS regulation presents a unique opportunity to
consider what purpose we want our financial services sector to fulfil and how we can
regulate effectively to deliver this purpose. As such, we welcome HM Treasury’s
Future Regulatory Framework (FRF) Review.

9) However, there is a risk that the Treasury’s FRF Review leads to a series of regulatory
and structural tweaks to the existing framework, rather than a grand, bold vision for
financial services and the regulatory framework that will serve this country well in the
long-term.

10) The FRF and this related inquiry rightly focus on the financial services sector and the
relationship between Parliament and the regulators, but the UK’s exit from the EU
framework is a rare opportunity to rethink the mechanics and structure of the
regulatory framework. The current focus of UK supervisors is on protecting financial
stability, protecting consumers, protecting and enhancing the integrity of the UK
financial system and the soundness of market participants, and promoting competition
for the benefit of consumers.

11) However, it is difficult to see how we can regulate financial services so that a wide
cross-section of stakeholders prosper without the underlying purpose of the financial
services sector, and the beneficial outcomes that would come from that, being at the
core of the regulatory framework, and then combined with transparency about the
desired outcomes and how they are achieved, with real accountability built into the
system.

12) Put ‘purpose’ at the heart financial regulation: The existing regulatory framework
does not focus enough on the underlying purpose of finance. For example, the only
time that “policyholders” are referred to in the FRF consultation review is in Section
2.35. Customers / end users / beneficiaries are not mentioned at all in the document
and it is our contention that this stakeholder group (broadly the ultimate customer
base) should be right at the heart of this review.

13) The “purpose of finance” is hard to define and difficult to measure. In our work on the
purpose of finance over the past six years1 we have identified four of the main
functions of finance:

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a. Keeping other people’s money safe: either as a bank holding customer deposits
and savings, or as an asset manager looking after investments.
b. Providing an effective payment system: to enable businesses and individuals to
transact with each other.
c. Managing and pooling risk: from providing insurance and pensions products, to
hedging market, currency and credit risk.
d. Intermediation: matching the providers and users of money, and ‘moving money
from where it is to where it is needed’.

14) Putting customers and consumers at the heart of the system will help rectify the trust
deficit that has grown in the financial services sector since/owing to the financial
crisis. Just 51% of people in the UK trust the financial services sector according to the
Edelman Trust Barometer. Trust matters: if people don’t trust the industry, they are
less likely to buy financial products and invest their savings, leading to potentially
worse outcomes for them and the industry, and a cumulative negative impact on the
economy.

15) Too often, the increased complexity in the financial services industry has been
matched by an increase in the volume and complexity of regulation. The timeframe
for conceiving, formulating, passing and implementing regulations often means that
by the time a particular regulation has been put in place to respond to a particular
challenge, the world has moved on. To reflect the change in risk, new regulations are
often layered on top of existing regulation, creating a vicious circle of complexity. An
example is pension legislation. In the late 1980s, pensions legislation that could be
studied totalled 3,000 pages. By 2017, that total had ballooned to more than 160,000
pages of, “…rules which advisers (and consumers) are required to comply with.”2

16) The beneficial outcomes we might expect from a purpose-driven financial services
sector include:

a. For the UK economy:

i. A measurable and sustainable increase in capital formation and the
flow of a wider range of funding into the UK economy, particularly
equity finance and long-term productive investment.
ii. Higher productivity and higher productivity growth to drive growth in
real GDP per capita. This in turn would generate higher tax receipts
without having to raise current tax levels.
iii. More efficient and balanced intermediation, leading to more
investment in longer-term projects / urban regeneration / regional
projects (supporting the ‘levelling up’ agenda).
iv. Better overall management of risk, macro stability and a more robust
economy (“anti-fragility”).
v. A more balanced financial ecosystem
vi. Higher levels of political support for the financial services industry

1https://www.pensioncorporation.com/the-purpose-of-finance/
2Pensions and Chocolate, the Pensions Institute
http://www.pensions-institute.org/PensionsAndChocolate2017.pdf

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b. For consumers:
i. A more equitable spread of the proceeds of wealth creation through
wider retail participation in savings and investments (direct
investments and indirect through pensions and insurance) and wider
exposure to equity markets
ii. International best-in-class outcomes for UK consumers (for example
within the current framework, a UK citizen saving towards their
pension in a defined contribution scheme will generate a significantly
smaller pension pot than under either CDC or defined benefit pension
scheme systems3, which are more commonly used in the Netherlands
or the US
iii. Clearer alignment in outcomes and incentives between financial
services firms and their customers / end users
iv. Simpler, more efficient, less complex, and lower-cost products
v. Higher levels of trust in the financial services industry

17) The starting point for these beneficial outcomes is to place the beneficiary / customer /
policyholder be at the core of the system and at the heart of every business model in
financial services – and ensure that there is transparency built into the system.

18) Do not rush changes to the framework: It is critical that these considerations are not
rushed, and that this consultation and the FRF are given the time it deserves. This
means the question of sequencing with HMT’s Solvency II review is also key, and
that in our view the questions asked by this consultation will take some time to work
through, whereas there are significant economic and social benefits to moving ahead
more quickly with the Solvency II review.

What role does Parliament have to play in influencing new financial services
regulations?

19) We strongly support a co-ordinated approach between Parliament, HM Treasury and

financial services regulators in order to secure a more holistic system-wide view of
the regulatory framework, and the potential impact of regulation in one area on the
beneficial outcomes of another part of the financial services ecosystem.

20) There is an underlying question as to whether MPs and policymakers have a clear or
strong view on the end-to-end process of savings, investments and financial services
and the interconnected nature of different sectors and activities within the industry,
and whether enough focus is place on a system-wide view when individual
regulations are being proposed and considered.

3Professional Pensions: CDC pensions could be 70% higher than DC and 40% more than DB, says WTW
https://www.professionalpensions.com/news/4021175/cdc-pensions-dc-db-wtw

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21) An alternative view might be to focus on key outcomes and then regulate for these
across the system. Regulators have the privileged position of being able to see across
the whole industry / market and should use that ability to fix inefficiencies and
deficiencies, rather than focus on, for example, micro-prudential supervision. This
might also lead to cross-sector regulation where appropriate, for example across the
banking and insurance supervisory regimes.

22) Furthermore, for Parliament to play a greater role, it must develop a deeper level of
institutional knowledge than what currently exists. The further a constituency is from
London, the more remote, complex and abstract the financial services industry can
seem. For many MPs, the financial services industry only becomes a priority when a
firm opens a new office in their constituency or closes a bank branch. That does not
reflect the breadth or depth of the sector at large.

23) Enhancing transparency and an ability to measure success/failure: It is

imperative that MPs and parliamentarians have a clear understanding of what they are
regulating (the purpose of finance), why, how and to what end it the industry being
regulated (the purpose of regulators and of regulation), and how these jointly produce
the beneficial outcomes that lead to the proceeds of wealth creation being shared more
evenly across society, and between generations.

24) This scrutiny will need a deeper level of technical expertise (e.g. supported by a larger
expert staff for the Treasury Select Committee); a clearer outline of what specific
regulations are trying to achieve so that they (and regulators) can be measured more
effectively; and a clearer set of metrics that can be used to measure progress and
impact across the system (e.g. a transparent and consistent dashboard). For example,
is “no firm failed this year” in a particular sector a good outcome for stakeholders?
Parliament should be transparent about these metrics so considered scrutiny and
debate can take place.

25) Confirmation hearings for regulatory heads: We believe there is scope for an
enhanced role for Select Committees in approving senior regulatory appointments.
We cite the US as a main comparator, where the view that ‘personnel is policy’ holds
more strongly, with direct appointments to regulatory commissions made by the
President and with Congressional confirmation of top appointments.

26) It is a very different model to the UK where there is an expectation that ‘politics’
takes place only in Treasury and Parliament and not in the regulators, with senior
regulators effectively acting as civil servants. More attention could be paid to the
appointment process of regulators by Parliament. We do not have 'confirmation'
hearings, though the Treasury Committee has tried to push in this direction by holding
pre-appointment hearings. There is arguably a need for formal pre-appointment
scrutiny by Parliament.

How should new UK financial regulations be scrutinised?

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27) Michael Gove’s July 2020 Ditchley Lecture is highly relevant as a model for future
regulatory policy making: “At the heart of our programme must be a focus on what
works – what actually helps our fellow citizens to flourish. And that means… rigorous
evaluation of Government programmes. What value do they add? What incentives do
they provide for better performance and better service to others? The Treasury in the
UK has been, historically, very good at questioning the cost of projects, but not their
broader social value. Asking that question is not an evasion of Government
responsibility but an embrace of it. And politicians like me must take responsibility for
the effect of their actions and the consequences of their announcements.”

28) Cost-benefit analysis to determine an outcomes-based approach: It is our strong

view that regulators should have to produce a cost-benefit analysis of each new major
regulatory initiative, looking across the financial services industry to understand how
the wider ecosystem would be impacted and what the expected outcomes would be
for all stakeholders. This would not simply be economic but would set out the
expected impacts and risks of any policy. Significant proposals should be ‘red
teamed’ by independent experts to test them rigorously before publication. There
should also be a requirement for that analysis itself to be challenged if it is considered
deficient or misleading.

29) Retrospective regulatory reviews: Thought is needed to be given to a process by

which significant regulatory changes are independently reviewed ex-post. Each
initiative should have clearly stated goals/expected outcomes which can then be
reviewed after a certain amount of time. For example, the FCA’s review on unsecured
credit (published in Feb 2021) targets very clear societal impacts, so it would be
reasonable to expect a review after implementation to ask: did this do what we
expected? While these reviews do happen at the moment, they are typically carried
out by the regulator which has been responsible for implementation.

30) We suggest that the National Audit Office, or similar independent body, be
responsible for conducting these reviews and are answerable to Parliament for their
conclusions. The aim here would not be to criticise policymakers who have to make
complex decisions with imperfect information, but to ask at a fundamental level: did
this policy do what we hoped it would? If not, why not? If the intervention was
successful, what do we replicate in the future?

31) The ‘working/expert group’ approach: There is scope for improving the
policymaking process, with a particular emphasis on expanding the ‘working group’
or ‘expert group’ approach. In many aspects of policy-making the UK has a strong
track record of wide consultation and policy formulation involving different
stakeholders, particularly in terms of co-ordinating the different perspectives and
expertise of HM Treasury, The Bank of England, the FCA, trade bodies and market
participants. The current working group on Productive Finance is a good example of
this approach.

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32) In the EU, this approach has the additional dimension of more actively involving civil
society and consumers / end user representatives to ensure that stakeholders in the
widest sense (individuals, wider society) are actively involved in the debate. Indeed,
the European Commission goes to far as to directly fund the work of organisations
like Finance Watch and Better Finance to ensure that policymakers and MPs have an
informed and independent perspective that may not always be the same as that of
regulators, trade bodies or market participants.

Should the UK seek to replicate the EU’s model for drafting and scrutinising financial
services regulation?

33) Replicating the scale and expertise of ECON in a ‘specialised committee’: The
UK has left the EU but has plenty to learn in terms of financial services scrutiny.
Within the EU, financial services regulators and legislation are scrutinised by the
ECON Committee of MEPs in the European Parliament, with 60 members and an
active secretariat. The work consists of pre-legislative scrutiny and consultation, the
legislation itself, and then scrutinising what happens afterwards through oversight of
the regulator.

34) Each area of legislation has a designated rapporteur, which led to a deep level of
technical expertise across the committee and an active role in shaping legislation. By
comparison, the Treasury Select Committee is slimmer in terms of membership and
resources in comparison, with 11 members, a small supportive staff, and too broad a
remit (‘the economy’) to be able to provide in-depth oversight of our regulators or
legislation. As a result, in its current form, the TSC lacks the resources and thus
ability to provide sustained democratic oversight of UK regulators as they consolidate
regulatory authority following Brexit.

35) In a recent evidence session for the TSC’s inquiry into the Future of Financial
Services, former Chair of the European Parliament’s ECON Committee Baroness
Bowles stated a belief in the need for a “specialised committee”, either in both Houses
or two separate ones, with more people involved. Citing the need for more
consultation and scrutiny of regulators and legislation, Bowles said that there should
be a role for more consultation from the regulator to the TSC like that in the European
Parliament. Given the UK’s existing structure, a financial services committee should
take a more interventionist stance in interrogating the regulators thinking and be given
more capacity to scrutinise, and possibly to influence, what they are doing.

How should consumer interests be taken into account when considering potential
regulatory changes?

36) We believe taking a purpose-based approach to financial services (see above) would
ensure consumer interests would always be taken into account as regulators would
have to consider how changes would support the fundamental purpose of any given
financial product or market.

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Should the mandate and statutory objectives of the financial services regulators change
to include wider public policy issues?

37) Changing the existing statutory objectives for regulators following the SEC’s
example: The current statutory objectives of the PRA and FCA are a good starting
point. However, there is scope to expand the current mandates to actively encourage
outcomes that would be more beneficial to society than an overly protective approach.
For example, the SEC in the US has three statutory objectives: protect investors;
facilitate capital formation; and maintain fair, orderly and efficient markets.

38) The specific inclusion of ‘facilitating capital formation’ and ‘efficient markets’
encourages the SEC to take a wider system-based view of regulation and is one of the
many reasons why the US has the deepest and most liquid capital markets in the
world. We think there is scope to consider adding ‘facilitating capital formation’ and
‘enabling wider participation in savings and investments’ to the existing statutory
objectives.

How can the balance between lighter touch regulation and prudential safeguards be
best secured?

39) Again, the principle of regulating for purpose helps instruct this debate. Prudential
safeguards are there to ensure risk is controlled at both at firm and systemic level and
is a critical part of the regulatory system. However, the construction of prudential
standards should pay more attention to the impact they have on the way the financial
industry delivers its core mission and thereby serves the real economy – are standards
designed to prevent almost all failure? Or do they tolerate a certain level failure as a
price of allowing slightly greater risk taking?

40) It can be argued that the current approach holds back investment in the UK economy
and certainly that it prevents a more equitable distribution of the proceeds of wealth
creation across society and between generations. A purpose-based approach would
permit a more rounded discussion about where the correct balance lies.

41) A purpose-based approach to regulation would also act as a check on complex

financial engineering and excessive intermediation which are often paths to rent
extraction and dangerous levels of systemic risk. Firms, regulators and policy makers
could ask simply: ‘Is this product or practice helping deliver purpose?’ If the answer
is difficult to discern it is probably questionable.

February 2021