British insurers have warned that a proposed overhaul of the rules governing the sector after Brexit would increase capital requirements for some providers and could destroy the government’s hopes of an “investment big bang” from the reform.
Ministers hope overhaul of the so-called Solvency II regime, inherited from the EU, would allow insurers to invest tens of billions of pounds in UK infrastructure. But the Bank of England’s Prudential Regulation Authority, which oversees the sector, said earlier this month that the overhaul could not be a “free lunch” for the industry and that rules should be tightened in other areas.
In its response to the consultation, which closes on Thursday, the Association of British Insurers welcomed plans to reduce the risk margin, an additional capital buffer. However, it added that for life insurers, the PRA’s proposed changes to the way their liabilities are calculated would more than offset this benefit.
Contrary to government claims that the reforms will reduce the amount of capital life insurers must hold, the ABI warned that the overall effect would force them to hold more and could hit customers or mean less investment in productive assets.
“The current proposals . . . it would risk penalizing pensioners as a result of the increased costs associated with the proposed reform,” said Hannah Gurga, ABI’s managing director.
The Treasury said it was “determined” to ensure the rules work “in the best interests of the UK”, adding that it was working closely with regulators and industry to redesign them. The PRA declined to comment.
The long-awaited financial services billwhich was introduced on Wednesday in what Chancellor Nadhim Zahawi described as a “significant day”, paving the way for reform of the Solvency II regime.
The 335-page bill, which has been the subject of more than 30 separate consultations, is the UK’s biggest legislative step yet to free the financial sector from what the government sees as overburdening EU regulations and deliver on its pre-Brexit promises to cut red tape.
“We are scrapping hundreds of burdensome EU regulations and taking advantage of Brexit to ensure the financial sector works in the interests of British people and businesses,” Zahawi added.
Most of the bill’s measures have been well watched, including one that gives regulators the power to oversee the most secure type of cryptocurrency, known as stablecoins — something that BoE asked more than a year ago. The government is planning a consultation on the wider regulation of cryptocurrencies later this year.
It also gives the Financial Conduct Authority and the PRA new secondary mandates to promote competitiveness and growth, a move backed by a “significant majority” of respondents to the public consultation.
The draft law was widely welcomed by industry bodies and lawyers. Adam Farkas, head of the London-based Financial Markets Association in Europe, said the laws would “bring significant change” and “ensure high regulatory standards are maintained”.
But the bill left out a controversial “call provision”, which would have given the government powers to intervene in financial regulation in the public interest, after the measure sparked alarm among regulators.
Zahawi said earlier this week that the subpoena provision would not be in the law, but that it was still “under consideration.” Amendments to the bill can be made at committee stage in parliament in the autumn or when it goes to the House of Lords.
The bill opens the door for some additional guidance from regulators, through more limited “rule review powers” that will allow the Treasury to order regulators to take another look at new rules. The rule review process will be public.
Respondents to the Treasury consultation “generally welcomed” the rule review measures, but some said they needed more clarity on how it would work and wanted further measures to improve the regulator’s accountability.
The Bill confirmed for the first time that HMT will speed up the implementation of new rules to make UK capital markets more efficient. It is expected that the law will be signed in the first half of next year.