One of the UK’s top regulators, Andrew Bailey, has criticised forthcoming European Union (EU) rules for the insurance industry as overly expensive, delayed and unsuitable for many UK businesses.
Bailey, one of three deputy governors at the Bank of England (BoE) and the head of the bank’s financial sector supervisor, the Prudential Regulation Authority (PRA), which is a key part of the UK’s new regulatory structure alongside the FCA, said in a letter on Tuesday 30 April addressed to the chairman of a UK parliamentary commission that he is concerned the Solvency II directive. Bailey says he fears it may prevent his PRA officials from imposing additional requirements on insurers to ensure they are operating safely.
EU officials envisage Solvency II as a single rule book that will set the standard for insurers across all 27 EU member states. The rules cover capital requirements and related issues in much the same way as the Basel III capital adequacy regime for banks.
“Although there is still much to be negotiated, a principal concern is that Solvency II will be accompanied by over- prescriptive rules," Bailey comments in a letter dated 19 April to Andrew Tyrie, a member of parliament (MP) and chairman of the Treasury Select Committee on banking standards, which is examining UK financial regulation.
He added there is a risk that Solvency “will seek to establish a single approach to risk assessment and supervision that does not reflect the realities facing us in respect of individual firms or groups. This would go directly against the PRA’s judgment-based approach to supervision, and would lead to us not having the same flexibility that we currently have.”
Bailey also criticises the EU for persistent delays in implementing a new regime for supervising the insurance industry. The process of bringing in Solvency II has effectively “ground to a halt” he said, and is unlikely to be introduced before 2016.
"Solvency II is an object lesson in how not to make law,” Tyrie commented. Sufficient flexibility must be built into the final proposals to allow national regulators to exercise their own judgment, he added.
The UK has clashed with the EU over so-called maximum harmonisation in financial regulation, with the latter insistent that a uniform standard for all 27 member states is necessary to ensure countries operate on an equal footing in Europe's single market.
In an earlier letter dated 14 February from Bailey to Tyrie but only now published, he warns: “There is a risk that this whole area of maximum harmonisation will be a battleground of the future as the judgmented approach of the PRA comes up against narrow interpretations of EU law.”