Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019

Lord Deben Excerpts

Monday 11th February 2019 Lords Chamber

To briefly mention FICOD, I looked at this and thought, “My goodness, has that not been updated yet?” I seem to spend a lot of time trying to get it updated. I think we made some little tweaks somewhere. There were always deep suspicions that there was a double counting of capital in the European bancassurance model. I am not sure whether the Minister can reassure me whether we managed to get that loophole closed in the end, but I remember there was always muttering about some sort of foul play going on in the depths of the Treasury. Otherwise, again, the way the statutory instrument transposes over to the UK regime is as one would expect. I can only say that is the same for the insurance distribution. I spent some time on Solvency II because I want to set this record straight that it was not the fault of the EU.

[Lord Deben (Con)]

My Lords, I point out my declaration of interest, particularly as chairman of PIMFA, the wealth management and independent financial advisers organisation. My noble friend will know that these SIs are not very acceptable to me because they are based on a number of hypotheses that are quite difficult to deal with. I will not repeat what I have said before on that, but I just want to remind my noble friend of those facts. However, there are some particular ones that I am concerned about.

The first is that anyone who deals with these issues is concerned about costs. Once again, we have a new system that means there is more work for the financial regulators. Every time we talk about that, no one tells us how much it will cost and quite how it will be paid for. Each time my noble friend explains with charm and elegance that there is not an awful lot of cost just here and that the FCA and Prudential Regulation Authority are both happy that they will be able to deal with this within their present resources.

The trouble is that I have heard that so often now that I am not sure this really works. There does not seem to be a position in which we have added these costs up. I have a suspicion that if we are not careful we shall end up with a lot more costs. One of the issues about people saying how much we pay into the European Union and how much we get out of it is that we forget an awful lot of things which, if you do them together, are much less expensive than if you do them apart. When I was Minister of Health and Safety I remember how useful it was that there was only one authority that tested ladders. We did not all have to test them ourselves. I am afraid we are in that situation here. I would like my noble friend to tell me whether these bills have been added up and how they will be paid. What sort of assurances can he give us that we will not find ourselves with significantly greater regulatory costs as a result of this?

The second point I want to raise is, in a sense, to pick up something raised by the noble Earl, Lord Kinnoull, about gold-plating. I think he and I are on the same side here. I do not think we disagree, but it is terribly important to say that most of the gold-plating I have ever found has been put there by the British. Gold-plating is a mechanism that happens in our system particularly. Having been a Minister in these circumstances, I know how it happens. A civil servant arrives and says, “Minister, we thought that if you do it this way round then somebody could find this answer, and it would be better therefore if we make sure that we close off all possible ways of avoiding whatever it is we’re talking about. Better not leave it until we discover—better do it first”.

Therefore, almost all our regulations, way outside the financial services area, are much more expensive regarding time, regulation and the rest of it than many other European countries. So the noble Earl was right to say that quite a lot could be done here about the reduction of gold-plating, but we could do that anyway because this is our gold-plating. There is no advantage in leaving the European Union to do this. The sad thing is that we have not done it before, and how we have managed to organise it.

There may be some things that we can do that we could not otherwise, but that leads me to my third point, which worries me considerably. In dealing with each of these SIs the Minister used the fascinating phrase—I would love to know who produced it—that were we to leave the European Union without a deal we would no longer have to inform the other authorities in the European Union of what is happening here. However, it will be discretionary to whatever the British regulator is to share this information, if that would be sensible, regarding our own regulation.

I am worried about this word “discretion”. Who decides that the discretion will be used? Is it something that the Government will press on these regulators? What do we mean by using “discretion” if this were, in the particular circumstances, valuable to regulation? Do we mean merely to our own regulation, or that we will be in a friendly situation because the regulation of others nearby will have a great effect on us? Is this really a cover word for saying what we do now together, because we are in the same organisation, we will sort of do in the future but pretend we are not doing and call it “discretion”? It seems that is precisely what is really happening here. This is a mechanism of recognising the need to do things together, but not actually putting ourselves into a position in which we have to do things together. Therefore it will be much less good, we will have to do a good deal of it and it will be much less possible to run regulation properly.

The last of my four points is simply that we are now creating a whole new language in which quite a lot of words are used without any clear meaning. The one I want to press my noble friend on is “equivalence”. It is a very useful word but I suspect it does not mean anything very precise. When we want to say that we will not be difficult with our neighbours, that we will recognise that markets, particularly financial markets, are very much interlinked, then we talk about the search for equivalence—no doubt we shall use discretion to search for that equivalence. I would very much like to know exactly the definition of “equivalence” as used with reference to these three SIs, because it matters quite a lot. If my noble friend could answer my four relatively simple questions, I would be most pleased.