The announcement in this week’s Queen’s Speech that there will be a new Financial Services and Markets Bill to make the UK a more attractive place to invest by “cutting red tape” comes hard on the heels of the Treasury’s announcement at the end of last month of its proposals for post-Brexit reform of Solvency II.
Both have been broadly welcomed by the insurance industry but received a more sceptical reception from regulators, writes Contributing Editor David Worsfold.
The government has said the main aim of the proposed bill is to make the UK a more attractive place to invest and do business, while maintaining high standards.
As well as revoking some European Union rules – with Mifid II firmly in its sights – the government says the bill will update the objectives of regulators to "ensure a greater focus on growth and international competitiveness" and will reform the rules that regulate the UK's capital markets to promote investment.
This ties in with the Treasury’s latest consultation on Solvency II reform, launched by Treasury minister John Glen, and which will run until 21 July.
“Our reforms will unlock tens of billions of pounds of investment in the UK economy, spur innovation in the market while protecting policy holders - and will cement the UK’s position as a global hub for financial services”, said Glen.
The consultation sets out detail on the reforms, including:
- A substantial reduction in the risk margin for long-term life insurers, including a cut of around 60-70%, and consulting on the appropriate level for general insurers.
- A more sensitive treatment of credit risk in the matching adjustment.
- A significant increase in flexibility to allow insurers to invest in long-term assets such as infrastructure.
- A meaningful reduction in the current reporting and administrative burden on firms.
- Reforms to EU derived legislation, which will increase access to the market for new insurers.
In its initial response the Prudential Regulation Authority did not exhibit much enthusiasm for the proposed reforms:
“The PRA has explained its view on which potential combinations of reforms to the FS [fundamental spread] and the risk margin could be consistent with its statutory objectives, and which would not.
“Provided that satisfactory reforms to the FS and risk margin are achieved, the PRA considers there exist packages within the indicative ranges included in HMT’s consultation that would be consistent with its statutory objectives and that would also achieve the broader objectives of the review around competitiveness and long-term investment.”
Once the Treasury consultation has closed, the PRA will launch its own round of further consultation, so nothing is likely to change until early 2023, which should co-incide with the final stages of the passage of the new Financial Services and Markets Bill through Parliament.
The promise of enshrining a competitiveness objective for financial regulation into the new laws is something the sector has been lobbying for and the announcement that this will feature in the new bill has been welcomed.
“We welcome the introduction of the Financial Services Bill and the ambition to maintain and enhance the UK’s position as a global leader in financial services. We support the focus on growth and international competitiveness and look forward to seeing further detail in particular on the objectives for regulators to ensure there is meaningful change. Whilst we welcome post Brexit reform, it’s vital the detail in the Bill meets the stated objectives and delivers a prudential regulatory regime that is fit for purpose and unlocks greater investment in UK plc”, said Charlotte Clarke, the Association of British Insurers’ Director of Regulation.
However, her colleague Carol Hall, Head of European and International Affairs, cautioned that much depends on the approach of the regulator and its support was by no means certain:
“Competitiveness is of course supported – or otherwise – by the right legislation, but if the regulator drafting the details is not signed up to it, then with all the best will in the world the UK’s efforts to compete and be the best domestically and globally will fall at the first hurdle.
“We are already seeing this played out with the industry’s experience of the UK’s Solvency II reform, where the regulators have repeatedly put forward unnecessary and unjustified cautious proposals that do not align with the Government’s intentions for the review and policy objectives.”