Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019

The Committee consisted of the following Members:

Chair: Phil Wilson

† Bowie, Andrew (West Aberdeenshire and Kincardine) (Con)

† Day, Martyn (Linlithgow and East Falkirk) (SNP)

† Dodds, Anneliese (Oxford East) (Lab/Co-op)

† Drax, Richard (South Dorset) (Con)

† Freer, Mike (Lord Commissioner of Her Majesty's Treasury)

† Glen, John (Economic Secretary to the Treasury)

† Hands, Greg (Chelsea and Fulham) (Con)

Hepburn, Mr Stephen (Jarrow) (Ind)

Hoey, Kate (Vauxhall) (Lab)

† Jones, Mr David (Clwyd West) (Con)

† Jones, Graham P. (Hyndburn) (Lab)

† Jones, Ruth (Newport West) (Lab)

Ross, Douglas (Moray) (Con)

† Rowley, Lee (North East Derbyshire) (Con)

† Smith, Jeff (Manchester, Withington) (Lab)

† Tomlinson, Michael (Mid Dorset and North Poole) (Con)

† Walker, Thelma (Colne Valley) (Lab)

Sarah Rees, Committee Clerk

† attended the Committee

Seventeenth Delegated Legislation Committee

[Phil Wilson in the Chair]

Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019

I beg to move,

That the Committee has considered the Risk Transformation and Solvency 2 (Amendment) (EU Exit) Regulations 2019 (S.I. 2019, No. 1233).

It is a pleasure to serve under your chairmanship, Mr Wilson. The Government made all the necessary legislation under the European Union (Withdrawal) Act 2018 to ensure that, in the event of a no-deal exit on 29 March 2019, there was a functioning legal and regulatory regime for financial services from exit day. During the article 50 extension period, the Treasury has continued to work with UK regulators and the financial services industry to ensure our regulatory regime remains prepared for exit on 31 October. This statutory instrument ensures that our regulatory regime for insurance and reinsurance business will continue to work effectively from exit.

First, the instrument updates UK law to ensure that EU revisions to the Solvency 2 delegated regulation made since 29 March operate without deficiencies. Secondly, the instrument makes amendments to the UK’s domestic risk transformation regulations, which govern the UK’s regime for insurance-linked securities.

I turn first to the provisions that deal with revisions to the Solvency 2 delegated regulation. In January this year, the Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 were approved by Parliament. Those regulations addressed deficiencies in Solvency 2 legislation as it will form part of UK law at exit. Since then, revisions by the EU to the delegated regulation made under the Solvency 2 directive have updated aspects of the approach to setting solvency requirements for insurance firms, including the simplification of capital calculations and greater alignment of capital requirements across insurance and banking legislation. Those revisions took effect across the EU on 8 July 2019 and will form part of UK law after exit.

The substance of those revisions will not result in deficiencies after exit, and the updated provisions will continue to operate in the UK as they do now. However, routine deficiency fixes, including removing references to the EU and EU institutions, will be needed to ensure Solvency 2 regulation continues to operate effectively in the UK. This instrument also replaces references to EU law with references to relevant UK law at exit.

It is a pleasure to serve with you in the Chair, Mr Wilson, and, as always, to sit across from the Minister in yet another Delegated Legislation Committee relating to financial services. I am grateful to him for that explanation of the statutory instrument, but it leaves a number of questions unanswered.

First, there seems to be a lack of clarity about the locus for application of the measures. The Minister referred at various points to the fact that the Government have laid before Parliament many such instruments in relation to no deal, but as the made affirmative procedure was used, the measures are already in place, regardless of the manner in which the UK will exit the EU. That is not very clear in the explanatory memorandum, which flits between no deal and circumstances where a deal has been reached.

I wonder whether that is an implicit acknowledgement that whatever deal the Government conclude, it will not explicitly cover some of the issues surrounding the co-ordination of financial services regulation. I have been looking closely at what the Prime Minister said last week and what has been released by the Government. There does not appear to be a clear indication of the regulatory regime for financial services. Perhaps the Minister could indicate whether that reflects a situation where all the previous SIs that we have looked at, including today’s, will be the legislative context even if there is a deal. Currently, it does not seem that a deal will cover financial services, at least from what I can see.

The most significant element of the Solvency 2 directive is the removal of the distinction between European economic area and non-EEA insurers and reinsurers. That is done through regulation 4, which amends the Solvency 2 exit SI, which we have talked about, through, as the Minister mentioned, the insertion of a new definition of “special purpose vehicle” in the Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019, and regulation 5, which amends the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 so that the relevant Solvency 2 requirements in retained EU law apply to all UK special purpose vehicles, regardless of whether the insurer or reinsurer transferring the risk is regulated in the UK or elsewhere.

It is a pleasure to serve under your chairmanship, Mr Wilson. I will be very brief; most of what I was going to say has been said already. The SI appears to be simply an attempt to patch up the damage to our financial services industry caused by a Brexit that my country did not vote for, and I am very disappointed with it. We already know that financial firms are voting with their wallets and have moved assets worth over $1 trillion from the UK to the rest of Europe since the 2016 EU referendum, according to figures that Ernst & Young produced. I do not believe that the SI will stop the tide of financial services, jobs and assets leaving the country.

I am happy to address the points raised by the hon. Member for Oxford East, and the point made by the hon. Member for Linlithgow and East Falkirk. The SI follows the same process as all SIs. With respect to Solvency 2, the simple reality is that the legislation was amended between the previous presumed exit date and this one. We have simply brought that up to date, and the ILS-related mechanism derived from, and made reference to, the Solvency 2 provision. As a consequence of that relationship, which was something that we authored in the UK, it made sense to update both at this time, given that they are within the same category.

The hon. Member for Oxford East asked what would happen to this SIs if we got a deal. If a deal is secured, any withdrawal agreement Bill will make provision to defer any Brexit SIs that are not needed in a deal scenario until the end of the implementation period. We expect that the Bill will achieve this through a blanket deferral of Brexit SIs that come into force on exit day until the end of the implementation period. We expect that the Bill will also ensure that Ministers can revoke or amend any EU exit SIs as appropriate, so that they deal effectively with any deficiencies arising from the end of the implementation period. In the circumstances that we are talking about, following a hopefully successful conclusion of the deal-making process, we would have a 14-month implementation period, as per the plans at the moment, in which to make provision for the enduring solution. We will ensure that onshoring regulation is not commenced if there is a deal and a transitional period is agreed with the EU.

The hon. Lady asked about the difference between EEA and non-EEA firms. The UK special purpose vehicles are already subject to the same Solvency 2-derived requirements, regardless of whether they are accepting risks from EEA or non-EEA firms. The distinction in the Risk Transformation Regulations 2017 simply reflects the fact that EU law applies only to deals that involve EEA firms. This notional distinction will no longer make sense after exit, so it is being removed, but it will not affect any deals already in place. There is no distinction for these regimes in practice—all deals must comply with UK standards, so equivalence is not necessary.

I am grateful to the Minister for making that commitment, because his answer contradicts what his Secretary of State said in an answer to me: that the updates would be ready only at the end of this year. I welcome that, and hope the Minister can try to reach towards the date he gave, because otherwise I really worry about people trying to comply with the legislation without having it in front of them.

I do not try to contradict my colleagues in Government, but that is the information I have received. I will provide clarification as soon as I can.

Turning to the points made by the hon. Member for Linlithgow and East Falkirk, I recognise the distinction between the Government’s perspective on these matters and his party’s. All I can say is that the financial services industry, which is significant in Edinburgh and Glasgow, is made secure by this process. He may—and indeed does—disagree with the Government about what should happen, but I assure him that in a no-deal scenario, the interests of the financial services industry in Scotland will be looked after as best they possibly can.

I thank the Committee for its consideration of this SI, and the points made by hon. Members on the Opposition Benches. In conclusion, the deficiency fixes in this SI will ensure that the UK’s prudential regime for insurance and insurance risk transfer remains prepared for withdrawal from the EU in any scenario. I hope the Committee has found this evening’s sitting informative, and will now be able to join me in supporting these regulations.