Taking back control of prudential regulation

UK prudential regulation arrives at a crossroads in 2020 and key decisions will soon be made on its future. The UK left the EU on 31 January this year and on 1 January, the EU Exit Implementation Period will have ended and the UK will be left with an independent regime – but one identical to Solvency II.  So the thinking now for government, regulators and industry is on if, when and how to reform the EU rules we have inherited to ensure they work for the UK into the future.

At the same time, the EU is undertaking its own deep-dive review of the Solvency II Directive, the most comprehensive yet, in the “2020 Review” which has been in the diary since implementation.  Although there are still many variables, and the political discussions on the future UK/EU relationship are yet to properly kick off, these two forces combined make it possible that we’ll see in Europe two regimes that start to evolve along similar – but different – paths within the next 12 months.

The prudential regulation session at this year’s ABI Annual Conference will be an opportunity to have our sector’s questions on these issues and more put to Anna Sweeney, co-Executive Director for Insurance at the PRA and jointly the UK’s most senior insurance supervisor. How closely might the UK’s prudential regulation remain aligned with the EU? What are the PRA’s priorities for the future UK regime and what aspects of Solvency II is it likely to consider reforming first?

The ABI has been unequivocal on its position that the UK must be able to shape its own prudential regulation after leaving the EU and not become a “rule-taker” – in order for us to ensure financial stability and have a regime appropriate for the UK market.   The PRA, with Sam Woods at the helm, has tact a similar course – although also insisted there will be no bonfire of EU rules.

While some have called for a light touch regulatory regime to boost UK competitiveness, others have suggested the UK will be forced to increase capital and other prudential requirements given the size of the financial services sector relative to GDP.  In a hint of what might be expected, a May 2019 speech by the PRA Chief Executive Sam Woods suggested the UK’s financial regulation could chart a middle (and “stylish”) course through both these extremes.

All these decisions may have to be made while the PRA’s to-do list is far from empty. The impact of new and disruptive technologies, the increased cross-cutting between prudential and conduct issues, and how best to address climate change risks are just some of the major policy areas PRA regulators and supervisors have to contend with in 2020.

There is also the potential for international standards to play a bigger role in charting the course for UK prudential regulation in future. In 2020, the Insurance Capital Standard, developed by the International Association of Insurance Supervisors, will enter a five-year monitoring period. It is possible that both post-Brexit UK and EU regulation could once again converge towards this international standard further down the line, though like with much else, betting on this one way or another is not too prudent.