Increased regulation in financial servicesOperating environment

Our influence and control

Over the past several years, we've seen an increase in the amount of financial regulation. Much of this has been to strengthen the protection of consumers following the 2008 financial crisis. Extra regulation could discourage innovation, though some regulators are now addressing this issue through special innovation hubs and regulatory sandboxes (which offer more neutral testing grounds for new business models). In our markets, we've seen the end of commissions for brokers in the UK and the Netherlands1, and the continued reform of pension systems in parts of Central & Eastern Europe. Arguably the most important change, however, has been Solvency II – the biggest overhaul of Europe's capital rules for more than forty years, which came into force at the beginning of 2016. What's more, we're also seeing regulation in new areas, like data security and non-financial reporting.

Our risks

Changes in regulation can have a profound effect on our business. New regulation may result in changes to pricing, product development, even to the way we manage risk and capital. Adapting to these changes is often expensive. We may have to train staff or invest in new processes and systems. Occasionally, it's not only we who have to bear the costs, but also our customers, especially when changes are made to tax liabilities. Regulation can reshape entire markets, drive investment, or occasionally prompt us to invest our money elsewhere.

Our opportunities

New legislation also brings opportunities; it may have the effect of increasing demand for some financial products, or help existing markets expand. In recent years, we've redefined the relationship with our brokers and financial advisors as a result of changes in rules governing commission payments. Consequently, we're now much closer to our customers. Effective regulation should also strengthen trust in the financial sector. Solvency II, for example, has taken several years to implement, but we believe it will lead to better protection for policyholders. Changes may also have a direct effect on our financial position – we expect recent cuts in US corporate tax, for example, to increase both earnings and return on equity from next year.

What we're doing about it

We make sure we're ready for any changes in regulation. We have a dedicated Global Government and Public Affairs department. Its aim is to support regulators and lawmakers, and help them understand the impact of any changes on the industry and consumer. We want them to bring forward laws and regulations that are effective and meaningful. Our research into aging helps in this respect; it tracks changes in attitudes towards aging and retirement, which we hope will influence long-term policy. Internally, we invest in training and new skills. We ensure proper compliance and embed changes in our frameworks for risk and capital management. We've also included the idea of reasonable distribution in our Pricing and Product Development Policy; the aim is to ensure that returns on our products are shared fairly between customers, intermediaries and shareholders; this helps head off the risk of unacceptably low returns to customers.

1 The US is also planning new rules to extend the concept of fiduciary duty to advisors on retirement plans. These rules would strengthen the requirement that advisors act always in the best interest of their clients, and would effectively eliminate payments of commissions. Implementation is currently scheduled for June 2019.