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SOLVENCY II : I Ain’t Afraid Of No Ghost

Since the Referendum there has been a UK debate, some of it well informed, about the influence of EU bodies on British regulation. The opposite debate takes place in Europe and ghostbusters, armed with proton packs and particle throwers, have now been despatched there to deal with some voices – co-incidentally all French – that have raised the spectre of “conflicts of interest” from British authorities’ continued involvement in the development of EU legislation during the period when we are preparing to leave the EU.

I know we are close to the extended Halloween season, but really! These fears are as absurd as the assorted ghouls, hags and skeletons that uselessly occupy much valuable retail space at the end of October.

I can speak only for insurance, but it is time to correct a few misunderstandings before they turn sour.

GHOST 1 The UK has no business in developing rules that it will never apply

Let me take Solvency II as a random example. When the UK leaves the EU, we will of course need a standalone UK prudential regime, appropriate for the British insurance market. However, this is likely to stick very close indeed to Solvency II. The PRA’s starting position is Solvency II, a regime that they were intimately involved in developing. And the EU and UK regimes will likely move in close harmony for the foreseeable future. Any future trading relationship between the EU and the UK in the insurance sector – whether it be based on passporting, equivalence or something completely different – must be based on close regulatory co-operation.

From the industry viewpoint, Solvency II is by no means perfect. But we have just spent £3 billion implementing it. Why would we volunteer to spend another £3 billion to switch to another framework? In any case, where is the guarantee that a new regime would be any better? The issues that concern regulators would not have changed.

GHOST 2: The Brits will abandon Solvency II in favour of the International Capital Standard (ICS)

I sometimes worry that this is what the PRA want, but I have confidence in their judgement on this. It would be a disaster. The current draft of the ICS is simply not fit for use in the British market. It has no equivalent of the Matching Adjustment, no place for internal models, and takes little account of diversification.  In other words it would be a huge step backwards. Looking further ahead, I see no prospect that the ICS will improve. Regulators in Europe, the US and China start from very different places. They cannot even agree on a single valuation basis.

GHOST 3 If the Brits retain access to the EU market, “regulatory dumping” will inevitably follow, with British companies distorting EU markets by operating under laxer regulatory standards

This is just not going to happen. Our experience with the implementation of Solvency II is that the British authorities have set much higher standards than Solvency II. On the conduct side, the FCA’s Handbook is much more extensive than the EU Directives that underpin it.

There were those who looked forward to a bonfire of controls when the UK voted to leave the EU. I have some sympathy: insurance as a sector is over-regulated. Everybody would benefit if the regulatory thicket was thinned out and some old wood consigned to the fire. Indeed we at the ABI have a series of proposals that could achieve this without any risk to financial stability or consumer protection. But even these will be tough to achieve. Notice that the immediate reaction of the Financial Policy Committee to the Referendum was to rush to defend the current level of regulation.

GHOST 4:  The Brits will undermine the rules so they do not work, leaving the EU at a disadvantage

What possible advantage is there to the UK in messing up an EU system that we wish to do business with?

There are those who would argue that the EU members are quite capable of messing up their own rules without any effort from us to help them. But I won’t go there. The UK is no better at making its own rules.

GHOST 5: The Brits will game the rules to suit ourselves, particularly the rules applying to third countries

Actually it would be a good thing for Europe if we did this. The third country regimes in financial servcies are a patchwork of over-restrictive rules, which raise costs and reduce choice for European consumers. Easier access by third country providers would be good for Europe – even if God forbid some of the third country providers were Brits.

If we are to reach a mutually rewarding trading relationship with our EU colleagues, there are enough real issues to settle without worrying about non issues. Ion wands and Neutrona cannons to the fore!

Last updated 08/11/2016