1.The development and implementation of Solvency II has been a major event for firms and regulators across the European Union. During the last Parliament, the Treasury Committee received over 50 pieces of written evidence on EU insurance regulation, and held three oral evidence sessions, from a diverse range of stakeholders including insurance firms, financial regulators, consultants, trade bodies, expert associations, and individuals. This report draws on that evidence and concludes an inquiry for which much of the groundwork was done by the previous Treasury Committee.
2.With such a large piece of legislation, it should not be a surprise that there are a number of areas that need to be refined. Specific areas explored in this Report include:
3.The evidence submitted to the previous Committee highlighted problems both with the legislation as drafted and with the way it has been implemented in the UK by the Prudential Regulation Authority (PRA). While some differences of opinion are to be expected, the current Committee is as concerned as its predecessor at the extent of disagreement between the PRA and industry on matters that should be relatively factual–for example, around the availability of investment grade long-term assets. Such disagreements do not foster good policymaking.
4.The Committee understands that the PRA can act on its own initiative in a number of policy areas, whereas in others it currently has to act within the EU legal framework. However, the PRA and industry differ as to precisely where this line is drawn. The Committee strongly encourage the insurance industry and the PRA to come to an understanding on what aspects of Solvency II can be changed unilaterally while the UK remains an EU member state.
5.There will be some areas where it is clear that the PRA cannot act on its own initiative and where it may look to discuss changes as part of the ongoing review of Solvency II initiated by the European Insurance and Occupational Pensions Authority (EIOPA). Clearly it will be helpful and constructive if EU member states can agree changes together because, regardless of Brexit, there is a value to harmonisation of the industry’s regulation.
6.However, the overriding priority is to develop a system of regulation which is right for the UK insurance industry, and which meets all the current and future needs of consumers, providing a prudent regulatory structure without stifling competition and innovation. We would expect the UK regulators—with close input from the industry and HM Treasury—to work on this task. It will be desirable to keep in step with the EU and other international initiatives as far as this is possible.
7.The Committee notes the views of many of those who gave evidence to the previous Committee that the PRA’s approach is overly focused on solvency—to the detriment of its secondary competition objective, and to the ability of the industry to meet the savings and protection needs of consumers. Many respondents had advocated a clear competition objective for the PRA—to act as a counter balance to the solvency objective. The Committee advocates a review of this alleged conflict by HM Treasury.
8.Given the complexity of the task and the importance of the industry, both domestically and internationally, the Committee would like to see the development of a clear agreed strategy designed to provide a roadmap for:
25 October 2017