Government publishes Financial Services and Markets Bill

The UK government this week (20 July 2022) published its long-awaited Financial Services and Markets Bill and introduced it to parliament, where it is currently at second reading in the House of Commons.

The bill will allow the government to repeal European Union (EU) laws that currently govern UK financial services businesses and markets, such as Solvency II requirements. This action aims to strengthen the competitiveness of the United Kingdom as a global financial center after Brexit.

Currently, the Financial Services and Markets Bill is expected to be enacted in the first half of 2023.

Increased competitiveness

The Government Bill introduces a new secondary requirement for the FCA to ‘promote the growth and competitiveness of the UK economy, including the financial services sector’.

It will also give the FCA new powers linked to its responsibility to ensure “the security and soundness of business”, according to the new Chancellor of the Exchequer Nadhim Zahawi.

Voices within the insurance industry have long been calling for this requirement to be implemented – for example, Biba made this topic a key part of its annual manifesto, launched earlier this year (January 25, 2022).

Graeme Trudgill, Chief Executive of Biba, said: “We welcome the inclusion in this bill of an international competitiveness and growth objective for regulators. Biba has campaigned on this for the past four years and it should make the regulator more balanced and accountable.

“It is important for the future that the FCA [tests itself] against this objective when [proposing] new policy or requirements and we expect to see [the regulator] realize this.

Biba’s head of compliance and training, David Sparkes, added: “We are concerned that setting this new target for growth and international competitiveness below FCA’s operational targets – which themselves are below its statutory objective – has the effect of making it a tertiary objective rather than a secondary one.

“It raises questions about the degree of importance with which it will be held.”

A statement from Biba added that it was seeking assurances from the FCA that its new competitiveness requirement would not be considered a minor consideration.

The London Market Group echoed Biba’s sentiment. Its chief executive, Caroline Wagstaff, said: “The London Market Group has been asking for a growth and competitiveness target for regulators for several years, so it’s good to see that this is a key part of the reforms.

“There remain questions about what regulators need to do to show that they have full regard for our competitive position. The bill gives them a lot more power, but on our first reading it seems they also have the power to establish and correct their own duties.

“We need to see more detail on the accountability measures that the government and parliament will have to make sure we get the culture change we need.”

Transition to Solvency II

The Solvency II requirements, which were implemented in January 2016, are a holdover from EU law that the new bill targets.

control, responsibility

The Solvency II regime defines the regulatory requirements for insurance companies in terms of financial resources, governance, liability and risk assessment.

Originally intended to codify and harmonize European insurance regulation, the Solvency II rules focus on the amount of capital that EU insurance companies must hold to reduce their risk of insolvency.

By changing Solvency II requirements, the UK government hopes to free up billions of pounds for investment – ministers hope that by relaxing the amount of capital that must be held in reserve, UK insurance companies will be able to use the freed-up capital to make investments in the growth of the UK.

In a Mansion House speech delivered last week (July 19, 2022) – before the new bill was released – Zahawi explained that the bill would “allow [government] reform Solvency II and give UK insurers more flexibility to invest in long-term assets, such as infrastructure”.

Claudio Gienal, Managing Director of Axa UK and Ireland, said: “These reforms will help keep the UK insurance industry competitive and unlock investment in long-term infrastructure, sustainable buildings and large-scale renewable energy generation.

“This investment is fundamental to the upgrade program as well as the UK’s transition to net zero. However, we urge the government to provide greater certainty in the market by introducing a framework that protects long-term investments from political and policy changes.

How does the British government plan to reform Solvency II?

  • Reduce the risk margin of long-term life insurers.
  • A more sensitive treatment of credit risk in the matching adjustment, which incentivizes insurers to issue long-term life insurance products by “matching” them to assets with similar characteristics.
  • Reduce the current burden of business reporting and administration.

Additional work needed?

Trade association ABI is more skeptical of the Solvency II reform proposal, however – it said current plans needed “further work to achieve the objectives”.

The ABI estimates that the current proposals would fall short of the suggested release of 10% to 15% of capital for reinvestment.

Hannah Gurga, Chief Executive of the ABI, said: “We all want to see a reform of the Solvency II regime that best meets the needs of the UK and enables investment at a crucial time.

“The current proposals fail to realize this opportunity and would risk penalizing pension plan customers due to the increased costs associated with the proposed reform.”

Brokerage giant Willis Towers Watson (WTW) released a report today (July 22, 2022) – commissioned by the ABI – which stated that it did not believe the current reform proposals “would realize the opportunity to free up more capital for investment”.

He explained: “For the majority of annuity purchasers, the proposals would result in a drop in capital available and would not provide the types of releases shown to meet [the Treasury’s] Goals.”

WTW Director and co-author of the report, Anthony Plotnek, added: “It is damaging to the UK economy and to future policyholders to have overly conservative protection for existing policyholders, as it will drive up future prices, will likely increase reliance on foreign reinsurance and reduce UK government climate change capital and mean less investment in productive assets.

“A more balanced set of reforms is needed to avoid a significant change in the level and volatility of the equalizing adjustment and lead to a less polarized outcome for different types of insurers.”

The devil is in the detail

The new bill will now go through the amendment process as it passes through both houses of the legislature.

Jonathan Herbst, global head of financial services regulation at law firm Norton Rose Fulbright, said: “Anyone who thought that after Brexit there would be a period of inactivity must change their minds.

“The bill is proof of the seriousness of the EU’s divergent agenda. The new powers of regulators must be seen in this context.

“All the devil will be in the details to follow – this is nothing less than the start of the development of a new UK regulatory regime.

“Financial and other institutions, such as technology companies and other critical third parties, must now position themselves to ensure they can operate in this new regulatory landscape.”

About Alexander Estrada

Check Also

Developers could have prevented 2022 crypto hacks if they had taken basic security measures

Users who lose funds due to malicious activity are virtually unheard of on Ethereum. In …