Bank of England governor Mark Carney has issued a warning to the countryís insurance firms, identifying that he will punish firms in the same way he does to banks if they are found to be guilty of ìreckless misconductî
The insurance industry has been under heavy scrutiny for some time now after a series of scandals that have severely damaged the reputation and credibility of a number of firms.
Writing a column in the Times newspaper, Carney said: “Integrity, honesty and skill are not optional” whatever type of financial institution you run.
Unlike other institutions within the finance industry, insurance firms managed to escape the damaging effects and huge losses experienced by many during the recession era.
And Carney has argued that the current extended period of historically low interest rates could result in a multitude of insurance firms opting to make more risky decisions in order to acquire higher returns, citing that this behavioural trend will need to be changed as the Bank endeavours to address the ìchallenges in the post-crisis landscapeî.
Whilst Carney conceded that high risk decisions are not a problem that has materialised frequently in reality at present, he pledged to act fast if he believed that insurance companies were comprising the financial future of customers int he future.
He said: “If we think that managements’ actions today pose a risk tomorrow we won’t hesitate to step in.”
He added that he views the role of the Bank of England as “making sure that failing insurers don’t harm their policy holders, cost the taxpayer money or make insurance harder to obtain”.
BBC Economic expert Robert Peston has queried by the Bank has opted to adopt this protector role to policymakers.
He said: “If the Bank of England sets itself up as the protector of policyholders, why should they bother to shop around to give their cash only to prudently managed insurers?
“And what incentive would there be for the insurer to manage itself prudently? Surely it would be rational for an insurer to offer investment products that promise unrealistic returns, or general insurance priced too cheaply, if customers believe the Bank of England will insulate them from losses in a crisis.”
Mr Carney has argued that whilst strict regulations governing the quantity of capital should be sufficient to check the conduct of insurers, that nevertheless there is always a risk that an insurer will fail to adhere on the basis of past actions.
He said: “Alongside reforms that Parliament has asked us to make to hold senior bankers to account, we will create a similar regime for senior managers in the insurance industry,”
Mr Carney did not outline the potential punishments that offending insurers could be faced with, but new laws for guilty bankers entail that they could face a custodial sentence depending on the severity of their misconduct.
The Prudential Regulation Authority, an arm of the countryís central bank, took charge of regulating banks, building societies and insurers in 2013. Mr Carney argued that regulating these industries was a “core part of our work.”