Red tape 'strangling small insurers'

SMALLER life insurers could face extinction due to an 'avalanche' of new regulation, consultancy Deloitte & Touche warns today.

Deloitte said the avalanche of regulatory initiatives will bury many smaller insurers, saying they will struggle to come up with the capital to meet the costs of regulation.

In a report based on interviews with senior managers and regulatory and risk directors and released today, the firm says that larger firms have an inherent advantage over their smaller rivals as the financial services sector faces new regulatory demands, including the implementation of European accounting rules this year.

They are also facing challenges at home, with uncertainty in the equity markets being compounded by the Financial Services Authority's introduction of tough new capital rules for life insurers.

Deloitte also pinpoints the relaxation of the rules regarding the distribution of financial products in January and the planned introduction by the Treasury of savings products as other challenges.

New capital adequacy provisions have pushed up the cost of selling some products and has already led to some firms stopping the writing of new business and could narrow the range of products available, Deloitte says. That could have the unintentional consequence of reducing savings. 'Policymakers may not have foreseen these consequences,' Chris Gentle, head of financial research warns.

While details of the FSA's Treating Customers Fairly project are unknown, the report predicts it will mean significant changes in how companies do business and smaller firms in particular have made few plans for how they will cope in a changed environment.

Gentle said financial firms needed to improve preparations for new rules or risk annihilation.

'There are plenty of predators waiting on the sidelines to pick off companies affected by poor execution,' he says.

The report says that all new regulation will create a need for capital easily met by the bigger firms. The report, 2005: UK Financial Services at a Watershed, concludes that the UK financial services industry is facing a shake-up of a kind that has not been seen since the introduction of statutory regulation in 1988.

Industry reaction is mixed. While global banking giant HSBC admitted last month that its regulation costs in 2004 rose 25% to $500m (£259.9m), other have rejected Deloitte's finding.

Alasdair Buchanan, a spokesman for insurer Royal London, told Dow Jones he did not expect to see firms going under. 'It seems an extreme thing to say,' he said.