Government responds to Treasury Select Committee Solvency II recommendations

The UK Government has said it believes that it would be wrong to give the Prudential Regulation Authority’s (PRA) secondary competition objective equal primacy with the PRA’s other statutory objectives. This is in response to a recommendation of the Treasury Select Committee on the Solvency II directive and its impact on the UK insurance industry, which says: “The Treasury should immediately review the PRA’s approach to its competition objective, at least for insurers, and consider giving the secondary competition objective equal primacy with the PRA’s other statutory objectives, introducing primary legislation if necessary.” The PRA has two primary objectives: a general objective to promote the safety and soundness of the firms it regulates; and an objective specific to insurance firms, to contribute to the securing of an appropriate degree of protection for those who are, or may become, insurance policyholders. The Treasury said: “The secondary competition objective of the PRA states that, when discharging its general functions in a way that advances its primary objectives, the PRA must, so far as is reasonably possible, act in a way which, as a secondary objective, facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying out regulated activities. This ensures that where there are choices to be made by the PRA as to how it advances its general objective to promote the safety and soundness of the firms it regulates, it must consider which course of action is the best for facilitating competition.” The Treasury said that giving the PRA a primary objective on competition “would distract from their crucial role in ensuring the safety and soundness of firms”, adding: “It would also create duplication with the role of the primary concurrent competition regulators active in the financial services sector, namely the Financial Conduct Authority, the Payment Systems Regulator, and the Competition and Markets Authority.” It went on: “The government believes that the benefits of the regulatory regime are best achieved if the primary focus of both the FCA and the PRA are on their own core responsibilities (as set out by their primary objectives), but with both institutions fully committed to working together and coordinating firm supervision and regulation across the full range of regulated activities.” The Treasury Select Committee also recommended that the insurance industry should be regarded as a priority sector during the Article 50 negotiations. “The government should consider bespoke reciprocal agreement with the EU, similar to, but far more comprehensive than, the agreements that the EU has with Switzerland and more recently with the United States. Such an agreement could provide a solution for other parts of the financial services sector. At the very least, if the government wants to meet its objective of a ‘smooth and orderly exit’ from the EU, then it needs to address the urgent issue of pre-Brexit cross-border contracts, perhaps through the mutual recognition of pre-Brexit insurance contracts written in UK or EU member states,” said the committee. The Treasury responded that the government “has already committed to faithfully implement prudential standards as set at the international level, but its ambition is for a new EU-UK relationship where there is a strong shared commitment to regulatory coherence”, adding: “The details of a new EU-UK relationship are a matter for the negotiations.” It added that the government is considering all options for mitigating risks to the continuity of outstanding cross-border financial services contracts. In a letter to Nicky Morgan, chair of the Treasury Committee, Sam Woods, deputy governor and CEO of the PRA, writes: “Facilitating competition is given a high priority in the PRA and has a strong, practical influence on our policy and supervisory approach for insurance, within the constraints of Solvency II.” He points to the new, commercially viable framework for insurance special purpose vehicles in the UK, which he says is an example of the PRA both pursuing its secondary competition objective and having regard to the competitiveness of the UK in what is a global market. Mr Woods goes on: “We are considering areas in which we can do more to facilitate effective competition, and will provide a fuller report by March. More generally, I see prudential regulation as an essential pre-requisite for effective competition in insurance markets.”

Government responds to Treasury Select Committee Solvency II recommendations

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