Solvency 2 (Group Supervision) (Amendment) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Solvency 2 (Group Supervision) (Amendment) Regulations 2021.

My Lords, I beg to move that the Committee considers the Solvency 2 (Group Supervision) (Amendment) Regulations 2021. This instrument is being made to address deficiencies in retained EU law relating to the supervision of UK insurance groups under the insurance prudential regime known as Solvency II.

The onshoring of large amounts of EU legislation into domestic law was a vast, complex and time-pressured process. I hardly need remind your Lordships that over 60 statutory instruments were passed; one of these related to Solvency II. This was not an easy feat, since Solvency II is a particularly technical and complex regime, so it is unsurprising that, among the sheer volume of complicated work, there was an oversight that means a technical fix now needs to be made. By this instrument, we are taking action now to ensure that this oversight is addressed well before any potential issues materialise from 1 April 2022.

I will explain what the instrument does and why it prevents a cliff edge on 1 April 2022. The UK Government have made equivalence decisions which assess that the insurance group supervision regime in another country, a so-called third country, is equivalent to the UK. To date, Bermuda, Switzerland and the EEA countries have been determined to be equivalent to the UK for the purpose of insurance group supervision. This instrument will ensure that the UK Government’s equivalence decisions achieve in full the objective of avoiding unnecessary duplication of supervisory work.

I will give a practical example of the type of duplication this instrument seeks to remove. Where a waiver is granted by the PRA, a UK subgroup that is supervised at ultimate parent level by an equivalent supervisor will not need to submit quarterly and annual group reporting templates to the PRA, or prepare an annual report known as the “own risk and solvency assessment”, or publish an annual group report known as the “solvency and financial condition report”.

Using a typical large insurer as an example, I will illustrate how extensive these submissions are and the time and cost savings this instrument may achieve. The solvency financial and condition report of a large insurer can be over 100 pages long. It has qualitative and quantitative materials and sets out aspects of the insurer’s business and performance, system of governance, risk profile, valuation methods used for solvency purposes, and capital management practices. The production of such a report requires analysis and co-ordination by experts in multiple disciplines such as actuarial, finance, accounting, internal audit, IT and risk management, not to mention board and senior management input and review. I stress that this is only one example of the supervisory compliance materials that we are seeking to remove.

The costs of duplication would vary from firm to firm but comprise initial one-off costs as well as ongoing costs as high as £500,000 per annum. Without this instrument, the UK subgroup must duplicate these materials at the UK subgroup level, when its parent already produces equivalent materials for submission to the third country supervisory authorities. The advantages are: reduced regulatory compliance cost for the insurance groups; reduced supervisory cost for the PRA; and reduced need for co-ordination between third country supervisory authorities and the PRA where duplicative materials are being reviewed.

My Lords, I appreciate the Minister’s introduction of this second statutory instrument. It is a somewhat simpler SI than the previous one but will nevertheless be important in the day-to-day regulation and operation of insurance groups.

As the Minister outlined, the regulations make a series of changes to ease the regulatory burden on the Prudential Regulation Authority—PRA. This is intended to save costs for both the regulator and insurance groups themselves. Under the new arrangements, the PRA would be able to defer to the decisions of the regulatory body or bodies of relevant third countries in certain circumstances. In practice, this is likely to be EU bodies, although the provisions cover non-EU third countries too. Where third countries have been deemed a regulatory equivalent to the UK and happen to host the parent company of a PRA-regulated insurance group, the PRA may choose to defer to relevant decisions made in the other jurisdiction, avoiding unnecessary duplication of work and costs.

We do not oppose these measures. As is noted in the supporting documentation, the current temporary arrangements are due to lapse in March 2022, and it makes sense to adopt a more permanent approach along the lines of this one. The changes, however, are very interesting when considered in a broader sense. First, they provide an example of how our departure from the EU simultaneously changed everything and nothing. Like many sectors, financial services were relying on cross-border trade and collaboration; that is as true for the regulatory bodies as it is for the firms themselves, whether they are commercial banks, traders, insurance brokers and so on. We may have completed the technical exercise of leaving the EU’s regulatory framework, but this SI makes it clear than an ongoing engagement with it remains a necessity.

Therefore, when Mr Sunak said in July that his failure to secure an equivalence decision from the EU meant that the UK was free to take advantage of its new-found freedoms, that was true only on a certain slightly superficial level. We may be free in some senses, but the international policy framework and sectoral norms mean that we cannot and should not become some kind of regulatory pariah. There may be other areas in which the UK can exercise greater flexibility, but even they must fall within certain boundaries.

Secondly, as observed by the Secondary Legislation Scrutiny Committee, this measure resembles something of a one-way street. Through choice, we are affording a certain status to non-UK regulators that our own bodies do not enjoy among their peers. That is not in and of itself a problem, but it is representative of an approach that has left our financial services sector at a disadvantage vis-à-vis what it once took for granted. The lack of content on services in the UK-EU trade deal, coupled with the Government’s failure to secure relevant equivalence decisions earlier in the year, means that our current arrangements fall far short of what we had and what businesses were promised throughout the negotiations.

As I said in my previous speech, we are now nearly a full calendar year into our new relationship with the EU. After a few initial shocks, and with some notable exceptions, businesses are generally adjusting and trying to make the best of the new arrangements. While firms can live with the current rules, many would much prefer the UK to build on existing trade agreements through sensible sector side deals. With that in mind, can the Minister confirm whether the UK has sought a reciprocal agreement in this area? If so, what was the outcome; if not, why was it not deemed appropriate? Although it may fall outside the narrow scope of this SI, can the Minister comment on what came out of our applications for equivalence decisions across the broad spectrum that is financial services? Are they still alive and could the European Commission still choose to respond favourably, or have the Government formally withdrawn from the process?

Like the sector itself, we remain of the opinion that striking additional agreements with the EU on a case-by-case mutually beneficial basis is both possible and desirable. The key ingredient, as ever, is political will. I reiterate that we do not oppose this SI, but I hope that the Minister can provide some hope of an improved deal for the sector going forwards. These measures may make sense on a practical level, but they do little to instil confidence that the Government have a firm grip on what needs to be done to support different strands of our financial service sector, which is after all a cornerstone of the British economy.

My Lords, rather like buses, this is the second debate in a row with only one other contributor. I say again that I am pleased that it is the noble Lord, Lord Tunnicliffe. I thank him for his general support for these measures and for his contributions.

Before I attempt to answer the noble Lord’s questions, I would like to spend a little time reminding noble Lords that the UK’s financial services sector is one of the most open, innovative and dynamic in the world. The insurance sector is the fourth largest in the world: it is a world leader in the provision of complex and bespoke forms of insurance and reinsurance. UK insurance firms held around £1.9 trillion in invested assets at quarter one 2020.

In July this year, the Chancellor of the Exchequer set out his vision for a globally competitive financial services sector, in which nimble policy-making and agile regulation benefit businesses, consumers and the economy, while ensuring appropriate protections and promoting financial stability. In this spirit, we should cut disproportionate duplication in supervisory work, so that we have every chance to compete globally and attract foreign insurers to the UK.

The noble Lord, Lord Tunnicliffe, started by asking for confirmation of whether the UK has sought a reciprocal agreement from the EU in this specific area. If so, what was the outcome? If not, why was it not deemed appropriate? A reciprocal agreement would involve the EU granting equivalence to the UK in respect of insurance group supervision. To reassure the noble Lord, the UK has sought an equivalence determination from the EU for Solvency II, including for insurance group supervision, but the EU has not granted an equivalence determination for the UK. However, it should be noted that a reciprocal agreement will benefit EU insurance subgroups with parent companies in the UK, rather than UK subgroups.

Motion agreed.

We will pause for a minute to change Ministers.