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

Peter Grant Excerpts

Tuesday 7th December 2021 General Committees

[Peter Grant (Glenrothes) (SNP)]

It is always a pleasure to serve on a Committee that you are chairing, Ms Rees. Like the official Opposition, I do not intend to divide the Committee on the regulations, because there is a clear need for them in place of the existing temporary fix. As the Minister has said, the regulations are intended to make sure that, where the Prudential Regulation Authority—the UK’s regulatory body—is group supervisor of a UK insurance group whose parent company is in a third country, it can defer to that third country’s supervisory authority under certain circumstances. That includes the essential requirement that the insurance group supervision regime in the third country has been assessed by the UK Government as being equivalent to the UK’s regime.

A few questions arise from that. I have been trying to find out how big an issue this is in the world of insurance in the United Kingdom. Can the Minister tell us how much of the UK insurance market is likely to come under the scope of the regulations? If we did not agree to these regulations or similar ones, how big a problem would we be leaving ourselves with, either by percentage or by value in pounds? Related to that, are there particular sectors or specialist types of insurance that might be especially exposed to the additional costs of duplicate regulation?

Conversely, how significant is the issue of UK insurers whose parent companies are in countries that are not recognised as equivalent? Does that continue to create a difficulty? I would hope that UK companies that are complying with legislation and regulatory requirements in the UK are more likely to be controlled by parent companies that act responsibly and would not give us any concerns about their governance, but it would be interesting to hear whether the Minister can answer that question.

The Minister has given us a list of the countries that are currently recognised as being equivalent. Are there any assessments currently under way that might add further countries to that list? How often will such an assessment need to be redone if there is divergence in the regulatory environment between the UK and some of these countries? Remember, we were told that one of the big business pluses of Brexit was that the UK’s regulatory framework could diverge from the European Union’s in all sorts of areas. Will these assessments need to be redone periodically to ensure that the equivalence that is there today is still there in future?

Related to that, does the Minister have any concerns about the current review of the Solvency 2 directive that the European Union is undertaking? Is that likely to mean that decisions that have been made about equivalence or anything else will only have to be reviewed when that directive is reviewed by the European Union? Of course, this time when the European Union reviews the directive, we are not there. Previously, the UK Government had an equal part on the commission that would carry out that review, but now it is being carried out without one of western Europe’s biggest insurance markets being represented, so are there any potential problems coming along the road as a result of the review?

As the Minister has said, the Lords Secondary Legislation Scrutiny Committee did not flag this up as an instrument that needed particular attention, but it did highlight the fact that the UK Government, the UK Parliament, is about to address the issue from one side even though there is no definite indication that the European Union will address the same issue from the other side. Does that create any advantages or disadvantages, either for a UK insurance company that has subsidiaries trading in the European Union or for UK companies that are subsidiaries of EU-based parent groups? It seems at the moment that we are heading towards a lop-sided equivalence, and I would be interested to know whether that creates any difficulties for any UK insurance companies. I cannot understand how something can be equivalent in one direction and not in the other, but perhaps the Minister or somebody from the European Commission could explain that one.

I have a couple of other questions. I suppose the main one is whether the Minister can confirm that the effect of this regulation is just pretty much to put us back where we were before Brexit, because if it is, there might have been a way to avoid it in the first place.

[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.