Regulation of Insurers


Regulation of Insurers

This chapter does not seek to provide detailed coverage of the authorisation and supervision of insurers in the UK. Instead, the aim is to look at regulation in terms of its objectives and of the broad approach taken by the regulator, the Financial Services Authority.

2.1 Objectives of Regulation

The regulation of financial institutions began in most developed economies in the nineteenth century, typically in response to particular crises in particular parts of the industry. That pattern continued in most countries until relatively recently when multi-functional financial institutions (eg insurance companies opening banks) made it increasingly difficult to sustain regulatory structures that divided along functional lines (insurance, banking, securities and so forth). This has led some countries, such as the UK, to adopt unified regulatory structures. In addition, the growth of financial institutions that conduct business in countries other than the one in which they are established and the interconnection of national financial markets has posed problems for a regulatory approach directed by national regulators. However, recently there have been efforts, both within regions (eg the European Union) and globally (eg the International Association of Insurance Supervisors) to develop common approaches. There remain the problems of why regulation of insurance is needed and what it should seek to achieve.

[201]   S L Kimball, “The Purpose of Insurance Regulation: A Preliminary Inquiry into the Theory of Insurance Law” [1961] 45 Minnesota Law Review 471

‘In the United States and Germany, and to a lesser but considerable extent in many other countries, insurance is subject to close regulation. Interference with free activity in the insurance market is especially noteworthy in a business which is highly competitive, which is generally well-run along conservative lines, and which presents no striking problems of domination of economic life or subversion of political processes. It is perhaps not easy to justify such extensive regulation, at least in comparison with the freedom enjoyed by most other businesses of similar importance. If one seeks reasons, he is told that the parties to an insurance contract are not negotiators of equal weight in the marketplace, that insurance is an exceedingly complicated business selling a product which is difficult for its votaries to understand and impossible for most of its buyers, that the contract has long duration in many instances, that the uncertain payment coming at the end of the long delay is likely to be of crucial importance in the life of the policyholder. Although all of these things are true, it must be conceded that each of them is true of some other businesses as well. However, there is probably no other business to which so many of these characteristics apply in such large measure, and perhaps in the aggregate these factors justify the deep-probing supervisory activities of the modern insurance department.

All of these factors are in reality variations of the first, the disparity in bargaining power. This suggests that regulation exists to protect the weaker contracting party. It is not surprising, therefore, that marine and transport insurance and reinsurance have generally been subjected to much less control than other lines of insurance, for here the insurance buyer is likely to be as large as the seller, as expert, and as adept in the market-place.

While protection of the weaker of two contracting parties explains the intervention of the state in the insurance transaction, it does not explain the myriad forms taken by that intervention. Beginning with the most obvious, the requirement of solidity [by which is meant, broadly, solvency] is imposed because without it the business does not work at all, does not insure. This purpose is the first to be perceived after the decision has been made for government intervention; indeed, threats to solidity were the raison-d’être of the early insurance departments. Once intervention has begun, new purposes begin to emerge, and the goals of reasonableness, equity, and fairness become explicit. Finally, as the insurance enterprise becomes more and more crucial to the social fabric and as regulation acquires more sophistication, the manifold purposes of society at large come to have more and more implications for the processes of insurance regulation.

There is nothing inevitable about the growth of insurance regulation from a simple focus on the solidity of the enterprise to a wide-ranging concern for many purposes. English regulation, for example, seems to have gone little beyond the purpose of solidity. Clearly, in the case of England this reflects neither an undeveloped state of the insurance enterprise nor an undeveloped sense of responsibility for the welfare of the people. In part it reflects a greater emphasis than we place on certain of the objectives we have described, for the objectives are not all consistent with one another. In part it may reflect also an entirely different pattern of solutions which seek and achieve roughly the same ends. Thus the ease of access of new entrepreneurs into the American insurance market presents the American insurance departments with difficult problems of control — problems that do not exist in the English market, where few new companies are formed. Moreover, there is said to be a quality of sober restraint in English economic life that may make various kinds of regulation less necessary than here. Another relevant factor is the degree of self-regulation of the business. One may justifiably suggest as a hypothesis that the English pattern of regulation seeks the same goals as the American, but that the English social and governmental structure permits it to achieve the same goals with a lesser expenditure of effort than does ours. This would not be the first time that English society had managed to do a large job with a small investment in central government machinery. In its early centuries, the royal judicial machinery in England operated quite successfully with an investment in judicial manpower that was a mere tithe of that used on the continent of Europe. Before one concludes that the English are less effective in achieving most of the goals we have described, or are uninterested in some of them, one needs to make a close comparison between the English insurance system and the American or German systems — and in considerable depth. The differences one thinks he perceives between the purposes of English insurance supervision and those of either American or German supervision may be more apparent than real. The difference may instead be a difference in the extent of the need for particular governmental controls. But this question requires much exploration before one can venture an answer.

It is usually assumed that the purpose of insurance regulation is single and simple. In reality it is neither. There are many purposes, and they are in considerable conflict with one another. Insurance is a small world that reflects the purposes of the larger world outside it. It is not easy, therefore, to state a theory of insurance regulation in which every activity will neatly fit. Perhaps it is even impossible. It seems likely, however, that more attention directed to the purposes of insurance regulation would illuminate the field and render it more meaningful, not by making it simple but by explaining the objectives in all of their complex interaction and in all of their conflict. Only thus can a theory of insurance regulation be developed as a meaningful guide to practical, everyday activities in the insurance departments of the world.’


Kimball goes on to suggest that the objectives of insurance can be divided into those that ‘relate to the internal working of the insurance business and those that derive primarily from its relationships to the world outside.’ He emphasises solidity or solvency within the first category, but also includes what he terms ‘aequum et bonum’. This latter ‘has many facets: It is equity. It is morality. It is fairness, equality, reasonableness. It may even be efficiency, economy, parsimony.’ More particularly, he refers to issues, which have been a feature of regulation in the US, such as reasonable premium rates and policy terms for all policyholders, no discrimination against particular groups of policyholders and fairness in the treatment of individual policyholders. Among the objectives that Kimball identifies as not inherent in the insurance business, he mentions corporate governance, controls over the regulatory authorities and policies that subject foreign insurers to disadvantages in relation to domestic insurers. Objectives in this second category are drawn from the fact that, ‘Insurance does not exist in a vacuum, but in a complex modern society with a developed and dynamic economy.’ There is, for instance, pressure to broaden coverage as exemplified by the emergence of workmen’s compensation, compulsory motor insurance and so forth. He also points out that the free market principle means there is pressure to allow new insurers. Finally, there are moral considerations, such as have led to laws on gaming.

[202]   J Hellner, “The Scope of Insurance Regulation: What is Insurance for the Purposes of Regulation” (1963) 12 American Journal of Comparative Law 494

‘At the opposite extreme from using the definitions as a guide in delimiting the scope of regulation, there is the possibility of simply asking whether there is need for regulation or not…The reasons for submitting certain activity to regulation coincide mainly with the general reasons for supervising insurance. Although these reasons are not identical for all countries, as appears from fact that the rules and facts of supervision differ considerably one country to another, some main reasons can be stated. They include the need for protection against fraud, the need for technical skill and caution in conducting a sound insurance business, the need to collect and protect adequate funds (most conspicuous in long-term insurance, such as life insurance), the general desire to assure a fair and equitable treatment of the insured, the need to protect the insured against his own inability to understand the value of what he gets in exchange for the premium, and the great social importance of insurance that has as a principal object the task of providing assistance in time of need.

If we accept these reasons for supervising insurance as our primary guide for delimiting regulation, the outcome would differ considerably from that reached by starting from the definitions of insurance. Instead of examining whether there is assumption and distribution of risks, we should ask whether there is a need for a complicated technique which calls for a special skill. Instead of asking whether the promisee gives any special consideration for the promise, corresponding to a premium, we have the question whether the value of the promise is difficult to estimate. Instead of asking whether the risk attaches to a fortuitous event, we should rather ask whether there is a need to collect and maintain special funds. Furthermore, we should ask whether there is any need for protection against fraud and for ensuring fair and equal treatment of the promises, and whether the promise has less social importance.

Against using the need for regulation as a test it can, however, be argued that general policy objectives are not suitable means for deciding questions of applicability of law. If we should ask simply whether an activity is in need of regulating, we might conclude that a certain enterprise does not need to be supervised, because it is well managed without supervision. But this would be inconsistent with the policy which imposes regulation even on the best-managed insurance companies. At the other extreme we might impose regulation on any enterprise whose activity calls for accumulation of funds and where the value of the benefits is hard to estimate. It is necessary to find some more concrete and limited circumstances on which to base the decisions.

A more rational use of the idea that regulation should be imposed where there is a need for it consists in deducing from the rules of insurance law those particular dangers to the public an enterprise must create in order to be a legitimate subject for regulation. The decisive factor is not whether the business is well managed in the particular instance but whether the activity is of a type which requires regulation as insurance. If an enterprise operates on the basis of such risk-taking as requires the accumulation of funds, careful rate-making, and holding safe and liquid assets, it presents those dangers that are contemplated and counteracted in the rules of insurance law. If the dangers to the public are only those of usury or of unfair competition, or of deficient performance of professional services, there is no reason for imposing regulation as insurance, even if it may be assumed that as a secondary result of such regulation these deficiencies would also be eliminated.

However, this is certainly not the whole solution of the problem. The fact that an enterprise offers dangers that are typical of insurance and counteracted by rules of insurance law does not imply that it must be regulated. To comply in all respects with the rules of regulation — whether these are stated in a statute or depend on the discretion of the supervising authorities — will often be so great a burden that useful activity might be suppressed. We must therefore take into account also those considerations that argue against regulation.

We are now back at the same result as was implied in the criticism of the approach through a formal definition; we should examine whether an activity is of such a type that it should conform to well managed insurance. We then do not look at each single feature of the activity separately but consider the whole structure of the business as an entity. This view is also justified by the fact that there is often a close connection between the relevant aspects of an activity. If an enterprise is simple, unbusinesslike, and provides services in kind rather than in money, there is generally (but not always) little need for the collection and preservation of funds. Instead of comparing the details of the activity one by one with the elements of a definition, we should therefore examine the whole of it on the basis indicated by the insurance laws.’


For other aspects of this problem of defining insurance for the purposes of regulation, see chapter 1.

2.2 Financial Services and Markets Act 2000

Those engaged in insurance business in the UK have been subject to regulation since the Life Assurance Companies Act 1870, which, as its title indicates, was confined to the life assurance industry. Regulation gradually spread to other parts of the industry so that by 1946 the whole sector was covered. However, regulation was limited in its ambition. It addressed concern about the ability of insurers to meet claims as they fell due by requiring them to place money on deposit with the court to ensure the availability of funds should problems over solvency arise. At the same time, the relationship between the insurer and the insured was left to the principles of insurance contract law developed by the courts.

[203]   Re North & South Insurance Corp Ltd [1933] 47 Ll L R 346

Maugham J:

‘An insurance company differs in its nature from almost every other trading concern. It starts, in the first instance, without liabilities. It obtains premiums sometimes to very large amounts, and, as risks mature and its debts begin to figure in its balance sheet, premiums which are received ought in general to be set aside for the purposes of paying not only the not unsubstantial costs of carrying on an insurance company business but also the claims which are inevitable. The solvency or insolvency of an insurance company has to be ascertained, as everybody knows, by, among other things, a most careful scrutiny of the funds which have been set aside out of premium income for the purpose of meeting claims. Inasmuch as the claims come in in every case after the premiums have been secured, there is always a risk that an insurance company may, by offering what look like very advantageous terms to the public, obtain a very large premium income which, as the result of the practical working of the company, proves to be an insufficient income for the purpose of meeting claims.’


The Insurance Companies Act 1982 emerged against a background of scandals in the insurance industry and progress towards the creation of the European single market in financial services. The UK sought to establish a more comprehensive system of prudential supervision under which the financial health of insurers would be monitored by the Secretary of State for Trade and Industry. In addition, from 1975 insureds were given some financial protection against the consequences of an insurer failing. The marketing of those insurance contracts that involved investment was regulated under the Financial Services Act 1986, and there was also regulation of brokers (see chapter 3).

On the eve of the election of the Labour Government in 1997 there remained much cause for anxiety about insurance regulation. Major insurers were being punished for the actions of their agents in misselling private pensions and there were also problems over the performance of endowment insurance policies that had been sold to homeowners as a means of repaying mortgages. More generally, the supervision of the financial sector was regarded as too complex. As has been mentioned, the method employed was to divide the industry according to the function of the firms being supervised: banking, insurance, investment advisors, fund managers and so forth. Each of these sub-sectors had its own supervisor. One problem was that the major financial institutions were rapidly spreading their business across these sectors: insurance companies were moving into retail banking and banks were selling insurance. This meant that a single firm could be policed by several regulators.

After the 1997 election the Labour Government announced that supervision of most of the financial sector, which had been conducted by ten regulators, would be transferred to the Financial Services Authority (‘the FSA’). The Financial Services and Markets Act 2000 (‘FSMA’), which came into effect in the following year, provides the legal framework within which this new system operates, but that framework was deliberately made fairly loose to allow the FSA flexibility. The FSA took on responsibility for both prudential supervision, which, broadly, relates to the stability of firms and the financial system, and conduct of business, which concerns the way authorised firms deal with customers. Although the wisdom of combining these two issues was questioned, its value seemed to be confirmed by the problems with a major life insurance company, Equitable Life. Under the system that prevailed when the company got into difficulties over promises it had made to investors, prudential supervision and conduct of business were handled by different regulators and, as the Parliamentary Commissioner for Administration pointed out, the supervisors saw the same set of facts in completely different ways (see Parliamentary Commissioner for Administration, The Prudential Regulation of Equitable Life, 4th Report, HC 809 (sess 2002–03)). The Commissioner’s report also highlighted another, more intractable problem in the mismatch between the powers of the regulators and the expectations of investors. As will be seen, since FSMA the FSA has emphasised that it does not seek to ensure that no companies fail and that it has a statutory obligation to educate investors about, among other things, the risks involved in investment.

The approach taken by the Act was radical in another way. Instead of focusing on the risk exposures of individual firms, the Act laid down objectives (s 2(2)) which the FSA was required to achieve, subject to the principles of good regulation set out in section 2(3). The FSA, therefore, developed what it has called the ‘risk-to-our objectives’ approach. In essence, this focuses on the risk posed to the statutory objectives by a firm. At the same time, all firms are expected to be soundly managed and well resourced. The approach taken by the FSA is elaborated in its Handbook, which, although a vast document, at least has the merit of being clearly written.

[204]   Financial Services Authority, The Future Regulation of Insurance: A Progress Report (London, FSA, 2002)

‘1.1  In order to place the regulatory reforms into context, this chapter describes the economic, social and strategic importance of the insurance industry and the present challenges it faces. It then sets out what might be the key characteristics of the insurance market in the future and, finally, it explains the influence our reforms will have in that context.

1.2  The insurance sector is a key part of the UK financial services industry. It is important, both from an economic and a social perspective, that the UK has an insurance market that operates effectively, remains competitive in European and world markets, and in which all participants have confidence. The insurance industry allows consumers, both retail and commercial, to transfer risk, to buy protection and to save (for example, for retirement). An effective savings industry has become all the more important given both the public policy objective to shift responsibility for retirement provision away from the public purse, and trends in the occupational pensions market towards defined contribution schemes.

1.3  In addition to providing an important service to individual consumers, the insurance industry underpins almost all forms of economic activity and contributes directly and indirectly to wealth generation and social wellbeing. For example, the insurance industry:

—   enables businesses to pool risks associated with future uncertainties, and to sustain higher levels of activity than they could otherwise. This increases levels of economic activity and reduces costs, assisting UK firms in competing both in domestic and international markets;

—   allows organisations, both public and private, to ensure that their employees, those who use their products or services and other third parties who may be adversely affected by their operations are protected financially in the event that they suffer injury or loss. In some cases, such protection is required by law;

—   is a major means through which savings are channelled into investment in industry (the life industry accounts for about 20 per cent of shareholdings in UK industry). Through these investments, the industry helps drive growth across the whole economy; and

—   is a major direct contributor to UK GDP and foreign earnings and is a major source of employment.’

[205]   Howard Davies (Chair of the FSA), “Speech to the Annual Meeting of the Financial Services Authority” (London, FSA, 2003)

‘In the UK market the boundaries between financial services are becoming increasingly blurred. This is particularly evident in relation to life insurance, but in non-life insurance alternative forms of risk transfer and securitisation of risk are also developing. Add to this the formation of complex groups and conglomerates — amongst other things to exploit market opportunities for cross selling — and the interactions between insurance and other financial services are clearly growing. The establishment of the FSA was not a case of the regulators leading the market, but of the Government recognising that developments in the market required a more co-ordinated approach to supervision across financial services.’

[206]   International Monetary Fund, United Kingdom: Financial System Stability Assessment, Country Report 03/46 (Washington DC, IMF, 2003)


Institutional and macroprudential setting

157. The British insurance industry is venerable and large, contributing importantly to UK employment and overseas earnings. With net premium income in 2000 of £174 billion or approximately 10 per cent of the world market, it is the third largest after the US and Japan (although considerably smaller than either). It includes the most important cross border non-life insurance markets in Lloyds and the London Market, which together account for 65 per cent of approximately US $20 billion of annual global cross border general insurance premium flows…and is a significant source of life insurance product for people resident in other EU countries. Insurance penetration at 15.8 per cent is the highest in the world, South Africa excepted. UK insurers are also well represented in foreign markets.

158. UK based insurers are, with self-administered pension funds, the most important repositories of individual financial sector wealth. Of total FY2000 financial assets of households and related non-profits of £3 trillion, more than 50 per cent is represented by insurance policy-holder-related liabilities…Total investment assets under management at the end of 1999 amounted to slightly over £I trillion and the life and pensions sectors were easily the major providers of finance to government and private borrowers.

159. An analysis of the long term (life) insurers by capital strength shows a distinct bimodal distribution, with a large number of insurers having 100 per cent to 300 per cent of minimum required statutory solvency and a smaller, but significant group of very well capitalised insurers. From a stability and efficiency point of view the main danger is that if investment returns remain depressed, some long term players under stress will engage in risky business and investment strategies and tactics in an attempt to improve their market positions. This has already been observed in a number of other leading industrial markets, and FSA management has advised that they are aware of and monitoring this trend.

160. The general insurance industry does not face fundamental questions of the type facing the long term sector; however it does have its own challenges. These relate largely to operating in a world of low investment returns, much fatter and less tractable claims tails than were previously thought to exist and, in the near future, a more demanding recognition of liabilities and capital allocation under a risk based prudential regime.

161. Overall the assessors did not identify any immediate systemic risks arising from the insurance sector. However the linkages between insurance and banking appear to be growing and warrant close monitoring. Broader risks arising from the potential rationing of insurance classes essential to the operation of key sections of the economy also appear to be low, but the assessors were advised that if the general insurance sector suffers additional severe shocks, this could become an issue.

General preconditions for effective insurance supervision

162. The UK…has a well-developed judicial system with a reputation for probity and professionalism. The professions important to the financial sector are also well developed in the UK and are subject to full liability for breach of duty. There is no insurance accounting standard aside from the regulatory reporting requirements, which serve a different role to published accounts. Instead there is a Statement of Reporting Principles (SORP), largely worked out by the insurance sector on a modified regulatory reporting basis, but informed by general company reporting requirements, and “negatively approved” (not objected to) by the Accounting Standards Board (ASB). The assessors were advised that the imposition of IAS [International Accounting Standards] in the EU in 2005 will to a large extent supplant the ASB role.

Main findings

163. The UK is developing a very advanced, indeed leading edge, approach to financial sector supervision. The FSA’s approach for the future appears to be to build on existing strengths, but with more focus on risk level and likely macro impact, and further emphasising the responsibilities of management’s and boards of entities which come within its remit. To some extent the approach cuts across the Core Principles, which incorporate a range of supervisory styles.

Nevertheless, the FSA and its supporting regulatory infrastructure comfortably accommodate most requirements of the IAIS assessment methodology. When the importance and special features of the UK market are considered, and appropriately more demanding standards are applied, a number of opportunities for further refinement become apparent. In particular, under the UK risk-based approach, not all financial intermediaries will be inspected (unless they are selected for a thematic investigation), and even in the larger institutions, the more routine supervisory visits will generally operate at a high level, although skilled persons may be utilized when required. The assessors judged that there is scope for a more hands-on approach to inspection, using specialist skills where appropriate while still not threatening the risk-based model.

164. Insurance supervision in the UK is in a transition phase, and the assessors strongly agree that greater emphasis will need to be placed on staff training and development as the new risk-based methodology is rolled out. In addition, the disposition, quantity and quality of actuarial, non-lifelong tail claims assessment, and reinsurance skills needs to be carefully reviewed with a view to further strengthening.

165. The UK is a world leader in corporate governance; however the assessors recommend that the FSA require firms to strengthen or formally adopt the risk manager function. In addition, there is a general perception that on site inspections by the supervisor could be more testing. The modalities currently being developed should largely deal with these concerns.

166. The assessors believe that there is scope for a more explicit statement of solvency requirements. Regulatory minimum solvency levels are officially set at EU levels or somewhat higher, which tend to be less demanding than risk based capital methodologies. While the assessors acknowledge that more demanding standards apply in practice in the UK through the informal rules that have been applied, these ideally should be codified…’


By way of contrast, it may be noted that in the USA the McCarran-Ferguson Act 1945 placed regulation of insurance in the hands of the states, although the establishment of multistate and multifunctional financial institutions has provided problems for this regime. As well as being concerned with issues such as capital standards and liquidity, the powers of the regulators stretch beyond those of the FSA into regulating premium rates and policy provisions. See KS Abraham, Cases and Materials: Insurance Law and Regulation (New York, Foundation Press, 2000), ch 3; RW Klein, “Insurance Regulation in Transition” (1995) 62 Journal of Risk and Insurance 363; S Randall, “Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners” [1999] Florida State University Law Review 626.

2.3 The Roles and Powers of the FSA

The FSA has wide-ranging powers and functions:

(i)   as a legislator it makes rules, statements of principle, codes of practice, gives directions and issues general guidance (eg see sections 64, 69, 119, 124, 138(1), 141–42, 158(5), 210, 316, 318, 328);

(ii)   as an investigator it has powers to gather and demand the information required to undertake its work (see, for example, sections 165–77, 284, 340, schedule 15);

(ii)   as a judicial and enforcement authority it rules on breaches and imposes penalties in the form of fines and the refusal, variation, suspension or withdrawal of authorisation (see, for example, sections 205–11 and below, and Part XXVI);

(iii)   as a prosecutor with respect to an offence under the Act or subordinate legislation (eg sections 401–02);

(v)   as a compensatory mechanism it has established a scheme, funded by the industry, to compensate those who have suffered loss in the event of an authorised person being unable to meet claims (sections 212–24). The FSA set up Financial Compensation Scheme, which replaces the Policyholders Protection Fund.

One theme running through the structure of the Act and the FSA’s own procedures is the need for regulatory transparency and accountability. The mechanisms include an independent Complaints Commissioner (FSMA, Sch 1, para 7), the Financial Services Ombudsman Service (FSMA, section 225 and Sch 17, Parts I and II), Practitioner and Consumer Panels, with whom the FSA must consult (FSMA, sections 8–11). There also elaborate provisions for public consultation, which the FSA must undertake before issuing rules, statements or codes (see sections 65, 155). These have led to criticism about delays and paperwork. Moreover, while a person or firm that has been disciplined by the FSA may seek a fresh hearing before the independent Financial Services and Markets Tribunal, the publicity that may be generated is not likely to be welcomed by the industry. The paucity of hearings before the Tribunal seem to confirm the view expressed by Lord Hodgson during the progress of the bill through the House of Lords:

‘Regulated firms, knowing that there will be publicity whatever the outcome, will inevitably be reluctant to avail themselves of their full legal rights…Even if the defendant is found not guilty, the aura of being so referred will take a long time to dispel…Such recollections would make a significant dent on any firm’s operations for a long time.’ (quoted in A Hayes, “Open Justice at the Tribunal?” [2002] Butterworths Journal of Banking and Financial Law 427)

See R Merkin, ed, Colinvaux & Merkin’s Insurance Contract Law (London, Sweet & Maxwell, 2002).

[207]   Financial Services and Markets Act 2000

19 (1)  No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is—

(a) an authorised person; or

(b) an exempt person


The penalties for breach of this provision (the ‘general prohibition’) are set out in sections 23–24; see also sections 26–28 on the consequences for the enforcement of agreements made with unauthorised persons. Under section 31(1) an authorised person is one who has ‘a Part IV permission to carry on one or more regulated activities’. Part IV (sections 40–54) provides the broad framework for granting, suspending, varying or withdrawing authorisation, and sets out the rights of those applicants or authorised persons aggrieved by a decision on these matters (section 55). Prudential supervision involves both licensing persons to enter the market and monitoring those who have been authorised. The supervision of Lloyd’s is left in the hands of the Council subject to oversight by the FSA (see sections 314–24 and below, part V).

[208]   Financial Services and Markets Act 2000

 2 (2)  The regulatory objectives are—

(a)   market confidence;

(b)   public awareness;

(c)   the protection of consumers; and

(d)   the reduction of financial crime.

    (3)   In discharging its general functions the Authority must have regard to—

(a)   the need to use its resources in the most efficient and economic way;

(b)   the responsibilities of those who manage the affairs of authorised persons;

(c)   the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction;

(d)   the desirability of facilitating innovation in connection with regulated activities;

(e)   the international character of financial services and markets and the desirability of maintaining the competitive position of the United Kingdom;

(f)   the need to minimise the adverse effects on competition that may arise from anything done in the discharge of those functions;

(g)   the desirability of facilitating competition between those who are subject to any form of regulation by the Authority.

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