UK seeks ‘investment big bang’ with Solvency II reform

Ministers are closing in on a deal with City watchdogs to unleash what Boris Johnson has called an “investment big bang”, as the prime minister seeks to prove that post-Brexit regulatory changes can boost the economy.

Johnson and Rishi Sunak, chancellor, want to reform so-called Solvency II rules, adopted while Britain was in the EU, to allow insurance companies to invest billions of pounds more in infrastructure, including green energy projects.

“We have been working with regulators and they have moved significantly,” said one government source close to the talks. “We are confident it will end up in the right place.” Another official said: “Ministers are engaged and keen to make progress.”

The Bank of England, which is due to announce details of Solvency II reform later this year, declined to comment but its officials have publicly decried some aspects of the six-year-old EU legislation.

Governor Andrew Bailey hinted at the overhaul in a speech to The City UK on Thursday evening, telling financiers “the case for reform is clear” and pointing to ways to “enable more support from insurers for productive finance and infrastructure investment” while not compromising policyholders ‘money.

Johnson is desperate to prove that Brexit is delivering benefits to the economy and to people’s day-to-day lives, countering the narrative that it damaged the country’s growth potential.

Dame Meg Hillier, chair of the Commons public accounts committee, claimed on Tuesday the only detectable impact of Brexit was “increased costs, paperwork and border delays”.

Johnson this week made Jacob Rees-Mogg, a leading Leaver, his new “Brexit opportunities” minister, ordering him to come up with 1,000 EU rules to scrap. Rees-Mogg, who has previously championed Solvency II reform, has asked members of the public to think of ideas.

Solvency II, a 1,000-page piece of EU legislation, has long been seen as too burdensome by UK insurance companies; an industry report claimed that they would have an extra £ 95bn to invest if the rules were relaxed.

Companies argue it forces them to hold more capital than necessary when interest rates are low and prevents them from taking on long-term illiquid assets, including infrastructure projects.

Last November Phoenix, Britain’s largest long-term savings provider, urged ministers to reform the rules to unleash up to £ 50bn in investments to revive the economy, boost infrastructure and meet climate change pledges.

John Glen, City Minister, told the FT: “Now we’ve left the EU we are determined to ensure the rules around the insurance sector work in the best interests of the UK.

“We want to support our vibrant insurance sector to invest in this country, while continuing to ensure protection of policyholders.”

City regulators have been cautious about reform, arguing that policyholders need to be protected against the risk of their insurer going bust.

The BoE first sought industry views on the topic in July 2021. Wrangling between the Treasury and regulators on the issue has dragged on for months.

Although Treasury insiders say no announcement is “imminent” they say they are “confident” of a successful outcome, with attention focused on two particular areas of the EU directive.

The first would see a change to capital requirements, while maintaining protection of policyholders. The second would see reforms to the so-called “matching adjustment” regime to allow more money to be deployed to long-term projects, like offshore wind.

Tony Danker, head of the CBI employers federation, said: “Overhauling Solvency II is a prime example of where we can do better.”

He argued that the regime should be tailored “more closely to the UK economy”, adding that an overhaul of the rules “could unlock up to £ 95bn”. Treasury officials and regulators are skeptical about that figure.

Life insurers use liability matching to make sure they do not run out of money to pay pensioners and policyholders. But under the EU Solvency II rules, they are penalized if they use certain illiquid assets in so-called matching adjustment portfolios because they are considered too risky.

In a joint letter last August Johnson and Sunak called for an “investment big bang” to unlock hundreds of billions of pounds sitting with UK institutional investors; companies hit back that rule changes were needed to facilitate that.

Last September Brussels reformed its Solvency II legislation to achieve the same objective, allowing EU insurers – which collectively have more than € 10tn of assets – to beef up their long-term investments.

Some industry figures think that the Prudential Regulation Authority, part of the BoE, could loosen restrictions on insurers investing in infrastructure, but only if the projects had suitable risk ratings; many do not.

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