Tens of billions of pounds in investment is to be unleashed by City insurers after ministers pledged to ax controversial EU-era red tape in a major post-Brexit shakeup.
Two years after the UK officially left the EU, John Glen, the City minister, said the Government will ditch swathes of the controversial Solvency 2 rulebook governing insurers.
It came as Sir Nigel Wilson, chief executive of Legal & General, and Andy Briggs, chief executive of Phoenix Group, said they could collectively plough around £80bn into the UK economy in the wake of rules being relaxed in an investment “Big Bang” .
Unveiling the shake-up at the Association of British Insurers’ annual dinner, Mr Glen said: “EU regulation doesn’t work for us anymore and the Government is determined to fix that by tailoring the prudential regulation of insurers to our unique circumstances.
“We have a genuine opportunity to maintain and grow an innovative and vibrant insurance sector while protecting policyholders and making it easier for insurance firms to use long-term capital to unlock growth.”
The rules were adopted by ministers once the UK left the bloc, but Rishi Sunak, the Chancellor, had placed the rulebook under review to determine whether it could be relaxed to boost British insurers and increase investment in areas such as infrastructure.
A consultation will be launched in April, with the Bank of England’s Prudential Regulation Authority to look into the finer details later in the year.
The changes are expected to reduce the reporting and administration burden on businesses, increase their flexibility to invest in long-term assets including infrastructure, and free up funds by reducing the risk margin insurers face.
At the same time the “matching adjustment” mechanism covering long-term investments, which the industry says pushes it away from projects such as wind farms and into low-yielding sovereign and corporate bonds, will also be tweaked with “more sensitive treatment of credit risks”.
The Government’s move comes amid growing concern in the City and in Whitehall that the UK has been moving too slowly as Brussels has already published proposed reforms to the Solvency 2 regime.
Sir Nigel said: “The EU is reforming the Solvency 2 rules themselves, so we need to make the changes or fall behind.
“The UK has the opportunity to bring regulations up to date, making it possible to invest in asset classes that didn’t exist when they were originally written.”
He added that L&G could invest more than £30bn in “levelling up” projects such as renewable energy and social and affordable housing in the coming years if the rulebook is revised.
Insurance has been touted for years as an industry that could benefit from relaxing the EU rules introduced in the wake of the 2008 financial crash.
Mr Briggs said: “Sensible Solvency 2 reforms represent a unique and very significant opportunity to ensure more private-sector capital can be directed by insurers and asset managers into long-term infrastructure assets in the UK.
“With the right regulatory and policy changes, Phoenix could potentially invest up to £50bn in illiquid and sustainable investments in the UK, which will support and accelerate the decarbonisation and ‘levelling up’ agendas.”
Mr Sunak and Boris Johnson, the Prime Minister, have been urging UK institutional investors to direct more of their funds into the domestic UK market and buy back Britain’s infrastructure, which has increasingly been snapped up by foreign wealth funds in recent years.
However, insurers and pension funds have argued that their hands are currently tied due to restrictions on how much they can plough into illiquid assets like infrastructure.
Yet the commitments from the two FTSE 100 bosses will come as a boost to Jacob Rees-Mogg, the new Brexit opportunities minister, who on Monday said Solvency 2 was “ripe for reform” and should be rapidly rewritten.
Last month, Amanda Blanc, chief executive of Aviva, also told The Telegraph that it was time to reform the EU rulebook and “put our country’s hard-earned pensions funds to positive national use”.
But the Bank of England’s Prudential Regulation Authority (PRA) has sounded a more cautious note on reforms to the rulebook, warning against an overhaul that “materially decapitalises the insurance sector”.
Sir Nigel said: “The strong evidence is that minor regulatory changes can provide more investment to grow the UK economy while still providing best value and security for our policyholders.”
Andrew Bailey, the Governor of the Bank of England, has been another longstanding critic of the EU-era regime.
In recent months, he said “the case for reform is clear”, adding that Solvency 2 was “never well suited” to the UK market, as it threatens the financial soundness of insurers and the protection of policyholders.
Mr Glen said it will form an important part of the plan to turn the UK into a more dynamic and green financial centre.
It comes at a time when the City is under siege from EU politicians seeking the lever parts of the financial services industry from Britain and over the Channel, including the coveted market in clearing derivatives.