One of the world’s most important financial watchdogs has reacted to criticism that it blocks billions of pounds in UK investment by not taking advantage of post-Brexit freedoms.
Parts of the insurance sector claim that UK regulators’ caution about how pension savings can invest will hinder levelling up and net zero ambitions.
It could pit the Treasury against Bank of England, which some fear could compromise its independence.
The pension savings of millions upon millions of workers are at the heart of this battle.
On Friday, a senior Bank official stated that although there was the potential to alter regulation, there was also a responsibility for protecting savers.
“Following Brexit, we have an once-in-a generation opportunity to re-shape the insurance regulation to work better in the UK,” stated Sam Woods, the head of Prudential Regulation Authority which is part of Bank of England.
He said that while we can loosen parts of the EU’s regime and make it easier for insurers and investors to invest in a wider variety of assets, we must also strengthen it in one area to prevent risks for the millions of future and current pensioners who depend on insurers for their retirement income.
The UK was bound to EU rules when it was a member. These were known as Solvency II. They govern how pension savings can be invested.
Even though many projects like wind farms, social housing, and toll roads offered the type of returns that are suitable for long-term savings plans such as pensions, the freedom to invest in illiquid assets, which can be difficult to sell quickly, was severely limited.
The government and insurance companies want these rules to be relaxed to allow for more investment opportunities.
The primary function of the Bank of England’s Insurance Watchdog is to protect policyholders.
The Bank proposed loosening the rules but the insurance companies felt it was being too conservative and appealed to Number 10 and the Treasury to overrule them.
Officials at the Bank say there is a “reasonable chance” that they will be overruled due to the importance that the government places on its levelling up and net zero policies and billions of dollars that could be available.
Investors may not be able to invest in these UK projects, however.
Regulators believe there are good chances that insurance companies will use the additional money they have by relaxing rules for overseas investments, or return it to their shareholders rather than spend it on government projects.
These numbers are staggering. The Bank of England proposes giving enough firepower to the insurance industry to invest an additional PS45bn to PS90bn.
According to the industry, it could double if the Bank was more cautious.
Some leaders in the insurance industry have warned the government that the UK could find itself in a less competitive spot if the EU does not reform its rules.
Most economists think that the list of economic gains from Brexit is short, but for many, they include these reforms.
Officials at the Bank of England are well aware that they are engaging in a political battle they might lose.
Insiders fear that if this happens, it could signal the beginning of an erosion in the Bank’s independence from the government.
It’s a battle that is entering a crucial phase. On 21 July, the Treasury and regulators will conclude their consultations.
