Draft Risk Transformation Regulations 2017 Draft Risk Transformation (Tax) Regulations 2017

Jonathan Reynolds Excerpts

Wednesday 29th November 2017 General Committees

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It is a pleasure as ever to serve under your chairmanship, Mr Davies, and it is always nice to find time to talk about insurance.

One of the first visits I made to the City after I became shadow City Minister was to the iconic Lloyd’s of London building at the heart of the square mile. It is extraordinary modern architecture with a fascinating history, from simple beginnings as Edward Lloyd’s coffee shop to the insurance behemoth we know today, underwriting £30 billion every year. As a country, we should be very proud of the history of the insurance industry and its potential for the future.

The question of opening the insurance market up internationally is therefore of significant importance to the UK. The London Market Group, which, as the Minister said, has contributed in considerable depth to the initiative, has said that greater tax revenues on the insurance-linked securities market may come from an expansion and updating of the legal regime that the regulations cover.

We should always bear in mind the potential risks around securities markets, with the insurance-linked securities market being particularly affected during the global financial crisis and the collapse of the collateralised debt obligations market a decade ago. We also cannot ignore the context. I could not help but notice that the Minister said that this package of measures was announced in the 2015 Budget—that is a long time ago in political terms. Now we face an entirely different landscape, due to our exit from the European Union. I find it odd that the Government are taking this approach to ensuring the London market is well-equipped to compete globally, while ignoring the elephant in the room, which is that a “no deal” Brexit would cut off the industry at its knees.

We have already seen reports that Lloyd’s has picked Brussels as the location for its new EU subsidiary, given its concerns about retaining access to the single market. The success of the UK insurance market is inextricably linked to cross-border market access and so the sector is perhaps more dependent than any other on the need for sound transitional arrangements. The ongoing validity of insurance contracts across borders is vital to the economy, but we have no insight as yet on the Government’s proposals for mutual recognition.

I have spoken with industry representatives who have made it abundantly clear that Solvency II provisions on equivalence will fall short of what is needed. They have also said that a transition must be agreed by the end of this year to have real value and prevent them from needing to enact their contingency plans.

Without considering the wider context of how the industry will thrive outside the EU, this initiative seems to me to be hamstrung from the beginning. Therefore, I wish to ask the Minister some key questions. First, will he assure the Committee that safeguards will still be in place to secure the stability of the insurance-linked securities market following the adoption of the regulations? Is he comfortable that the processes are sufficient to ensure that there will be no contagion between different parts of the securities market and beyond? Most of all, will he say how the market will continue to operate in the absence of any deal with the European Union, and a hard Brexit taking place? Finally, will he commit the Government to reviewing the legislation after a short period and placing a report in front of the House on the operation of the insurance-linked securities market as a whole and the effect the regulations have had upon it?