Draft Solvency 2 (Group Supervision) (Amendment) Regulations 2021

John Glen Excerpts

Tuesday 7th December 2021 General Committees

[The Chair]

Before we begin, I remind Members that they are expected to wear face coverings and to maintain distancing as far as possible, in line with current Government guidelines and those of the House of Commons Commission. Please also give one another and members of staff space when seated and when entering and leaving the room. Members should send their speaking notes by email to [e-mail]. Similarly, any officials in the Gallery should communicate electronically with the Minister.

[The Economic Secretary to the Treasury (John Glen)]

I beg to move,

That the Committee has considered the draft Solvency 2 (Group Supervision) (Amendment) Regulations 2021.

It is a pleasure to serve under your chairship, Ms Rees. 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 2. The UK Government have made equivalence decisions that assess that the insurance group supervision regime in another country—a third country—is equivalent to the UK. To date, Bermuda, Switzerland and the European economic area countries have been determined to be equivalent to the UK for the purpose of insurance group supervision. The instrument will ensure that the UK Government’s equivalence decisions achieve in full the objective of avoiding unnecessary duplication of supervisory work.

The instrument affects UK insurance groups whose parent companies are domiciled in equivalent third countries. Such insurance groups are supervised at two levels: first, the UK insurance group level is supervised by the Prudential Regulation Authority and secondly, the ultimate parent group level, the so-called worldwide group, is supervised by the supervisory authority in the relevant third countries.

The instrument enables the PRA, when certain conditions are met, to defer to third-country supervisory authorities if the UK has determined that the third countries are equivalent for the purpose of insurance group supervision. The conditions apply where compliance by firms would be overly burdensome and where waiving the requirements would not adversely impact the PRA’s advancements of its objectives.

In that circumstance, the PRA may disapply or modify regulatory requirements, which amounts to issuing waivers to UK insurance groups. In effect, the waivers exempt those UK insurance groups from demonstrating to the PRA compliance with solvency 2 group supervision requirements at the UK sub-group level. That is in recognition of the fact that compliance at the UK sub-group level has already been supervised by virtue of being a subset of the ultimate group that is supervised by the equivalent third countries.

Pre-EU exit, the European Insurance and Occupational Pensions Authority issued guidelines to allow EEA supervisors to issue such waivers. Under such guidelines, the PRA could issue waivers to affected UK insurance groups pre-EU exit. However, those guidelines ceased to have effect in the UK following EU exit. Consequently, existing waivers are due to expire on 31 March 2022. The instrument confers on the PRA the power to issue new waivers.

The instrument brings advantages to UK insurance groups with a parent in an equivalent third country, to the PRA and 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 they are reviewing duplicative materials.

On 2 December 2021, in its 22nd report, the Secondary Legislation Scrutiny Committee listed the instrument as an “instrument of interest”. In the report, the Committee noted the

“absence of a level playing field: while the UK has granted equivalence to the EU in relation to the supervision of insurance groups, the EU has not reciprocated.”

Although that is true, I urge the Committee not to conflate those two separate matters. Equivalence determinations are made by the UK and EU unilaterally. One decision is within the power of the UK Government and another is beyond the power of the UK Government. Where the UK Government have unilaterally determined equivalence, we have a duty to ensure that our decisions are meaningful and achieve their objectives in full. The instrument ensures that we do not undermine our own equivalence decisions with deficiencies in our domestic law.

Rejecting this instrument does not increase the probability of the EU reciprocating equivalence decision. Conversely, it would penalise UK insurance groups and our regulator by increasing regulatory compliance and supervisory cost.

To conclude, the Treasury has worked closely with the PRA in the drafting of the instrument. The Treasury has also engaged with the UK insurance industry through its industry body, the Association of British Insurers. The ABI has informed the Treasury that the industry welcomes the instrument and has no concerns with it. I hope the Committee has found my explanation useful and I commend the instrument to it.

--- Later in debate ---

[John Glen]

I very much appreciate the comments of the Opposition Front-Bench spokesperson and I welcome her to her place this afternoon. I will try to address three or four points that she made about this regulation, and I will come on to the wider issue of equivalence and the broader Solvency 2 reform.

This statutory instrument just re-establishes the PRA’s power to exempt UK insurance groups from duplication. It affects 11 groups. If it were not done, that would mean an annual recurring cost of half a million pounds. The hon. Lady asked about the objectives and who would define them. The PRA has a statutory objective to take account of policyholder protections. That is part of its remit and something that it has an enduring and ongoing responsibility for.

The ongoing evaluation of prospective alternative countries is a matter for the PRA. The context here needs to be understood. We were completely aligned up till the end of the transition period. As a Government, we were very transparent about how we were approaching equivalence. Indeed, we made a number of determinations —I think 17 or 18 out of the 32—in November of last year. We complied fully with the EU and filled in 2,500 pages on equivalence. We also advanced a conversation around a regulatory dialogue and were ready for the memorandum of understanding to be signed. It is now a matter for the EU how it determines the way forward.

Both Opposition spokespeople spoke about the broader Solvency 2 reform. That is being looked at by the PRA and the Treasury, which are looking at the risk margin and the matching adjustment. We are looking at that closely with industry to determine the best way forward. That is completely distinct from this statutory instrument, but there is encouraging progress there.

This is not, though, a deregulatory move on the part of the UK. I think the whole Committee will understand that financial services is a dynamic industry where changes of regulation occur all the time, both on the EU side and here. This SI does not mean lower prudential standards. The PRA cannot issue waivers if by doing so it so adversely impacts the advancement of its objectives, which, as I said, are statutory ones of policyholder protection. The SI simply prevents a cliff edge that would otherwise happen on 1 April 2022. The hon. Member for Glenrothes asked whether the SI takes us back to the pre-Brexit position. The answer is no, it just restores the mechanism by which we can continue to grant equivalence.

I do not think there is too much else I can say to assist, but what we doing is pretty straightforward and uncontroversial. It will ensure that the UK’s equivalence decisions, which assess that the insurance group supervision regime in another country is equivalent to the UK—

[Peter Grant]

I am grateful to the Minister for giving way, and I thank him for the answers that he has provided to almost all of the questions I raised. I do not think he has yet covered the possible issue of UK insurance companies whose parent companies are headquartered outside the equivalent regulatory countries. Is that a significant issue? Is he aware of any UK companies that will still have to face duplicate regulation because their parent company is regulated somewhere else?

[John Glen]

Offhand, I cannot give the hon. Gentleman a list of countries, but I am happy to look into matter and write to him if I can say something edifying. I do not want to complicate this anymore than I already may have done by my responses.

The instrument simply reduces the regulatory compliance cost for those affected insurance groups and reduces that supervisory cost for the PRA and equivalent third country supervisory authorities. There is nothing that I am trying to do here that represents a significant policy deviation, and I hope that my response has been sufficiently helpful to the Committee to allow the SI to be passed.

Question put and agreed to.