The Association of British Insurers (ABI) has welcomed plans to create the UK’s own version of financial solvency rules, under plans announced by Chancellor Rishi Sunak.
In a parliamentary statement Mr Sunak spelt out the plans for the UK’s financial services regulation when the country leaves the European Union at the end of the year.
“Leaving the EU means the UK has taken back control of the rules governing our world-leading financial services sector,” he said. “The UK has always championed and remains committed to the highest international standards of financial regulation. The financial services sector plays a crucial role in supporting the wider economy, creating jobs across the UK, supporting SMEs, contributing taxes, driving regional growth and investment, tackling climate change and embracing technology and innovation.”
The Chancellor said the UK’s financial services sector has been at the forefront of the country’s response to the economic impact of COVID-19, extending more than £35 billion of credit to “provide fundamental support to businesses and offering crucial forbearance on mortgages and consumer credit products”.
The statement added the future success of the UK financial sector will be underpinned by a world-class environment for doing business.
“In turn, our future legislation will be guided by what is right for the UK, to support economic prosperity across the country, to ensure financial stability, market integrity and consumer protection, and to continue to ensure the UK remains a world leading financial centre,” it added. “An enduring future relationship with the EU would help complement the UK’s leading global role in financial services. The Government continues to believe that comprehensive mutual findings of equivalence between the UK and the EU are in the best interests of both parties and we remain open and committed to continuing dialogue with the EU about their intentions in this respect.”
However Mr Sunak added that there remained a range of important regulatory reforms in the process of being implemented at the international and European level that the UK needs to address before the end of the Transition Period on 31 December 2020.
As part of the next phase of the Financial Services Future Regulatory Framework Review, it will look at how financial services policy and regulation are made in the UK, including the role of Parliament, the Treasury and the financial services regulators, and how stakeholders are involved in the process. HM Treasury will consult on its approach to the next phase of the Review in the second half of this year.
“In general, consistent with the UK’s position as a major international financial hub, the Government intends to implement immediate reforms in line with existing expectations of the industry and the approach of the EU and other international partners where relevant,” Mr Sunak added. “Naturally there will be some defined areas where it is appropriate for the UK – as a large and complex financial services jurisdiction – to take an approach which better suits our market, while remaining consistent with international standards.”
He said the UK played a pivotal role in the design of EU financial services regulation. “However, rules designed as a compromise for 28 countries cannot be expected in every respect to be the right approach for a large and complex international financial sector such as the UK. Now that the UK has left the EU, the EU is naturally already making decisions on amending its current rules without regard for the UK’s interests. We will therefore also tailor our approach to implementation to ensure that it better suits the UK market outside the EU.”
The statement revealed the Government intends to introduce updated prudential standards “in a flexible and proportionate manner, as called for by industry and the House of Lords EU Affairs sub-committee.
“The Government intends to do this by delegating responsibility for firm requirements to the relevant regulator – the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA) – subject to an enhanced accountability framework to ensure that the regulators have regard to competitiveness and equivalence when making rules for these regimes. Both the PRA and the FCA will set out further details on the substance of the proposed regimes in due course.”
As such Mr Sunak said there were now plans to bring forward a review of certain features of Solvency II “to ensure that it is properly tailored to take account of the structural features of the UK insurance sector”.
It added: “The review will consider areas that have been the subject of long-standing discussion while the UK was a Member State, some of which may also form part of the EU’s intended review. These will include, but are not limited to, the risk margin, the matching adjustment, the operation of internal models and reporting requirements for insurers. The Government expects to publish a Call for Evidence in Autumn 2020.”
Insurers have provided a cautious welcomed to the statement.
Hugh Savill, the ABI’s Director of Regulation, said: “We welcome a revision of Solvency II that will be suited to the British market. Improvements to the Risk Margin are long overdue, and the Matching Adjustment needs to encourage much-needed investment in the British economy in the wake of COVID-19.”