Bank of England says shake-up of insurance rules increases risks

The Bank of England on Monday warned that a much-heralded overhaul to insurance rules “increases risk” and could result in a corporate failure that ultimately hits the public purse.

The BoE’s top officials also sounded alarm bells about other aspects of the government’s sweeping plan to turbocharge the City of London’s growth, warning that some of the changes could jeopardise financial stability.

The comments from BoE governor Andrew Bailey, and Sam Woods, head of its Prudential Regulation Authority, came a month after UK Prime Minister Rishi Sunak’s government unveiled a package of 30 reforms to make the UK’s financial sector more competitive now that it no longer has to follow the EU’s rule book.

The changes to Solvency II — the regulatory regime that governs insurers’ capital — have been the most contentious element of the government’s reform package, inspiring clashes between Treasury officials and the UK’s top regulators.

Woods told the House of Commons Treasury select committee that the proposed relaxation of insurance regulations increased the risk that a pension provider would run out of capital to back their promise.

“The reform package as a whole increases risk,” he said. “That’s a trade off that the government has made.”

The regulators said the insurance reforms did not threaten the UK’s financial stability. “The way it comes home to roost is if there is not enough capital backing pensions,” Woods told the committee.

“I would say it is highly likely that comes back to the public purse if that occurs,” Woods added. He stopped short of calling for MPs to vote against the plans, which are currently moving through parliament, noting that the government had “made its position plain, we need to . . . move on to the next stage”.

The regulatory chiefs agreed to undertake further work to quantify additional risks created by the Solvency II reforms, which the government has said will lead to insurers redirecting tens of billions of pounds into the real economy.

Woods also cited concerns from some insurance executives that regulators would use their new powers to ensure a more conservative approach from companies via the “backdoor”. “I don’t think we should or we can use those tools to reverse-engineer the same effect that we were trying to get.”

Bailey rejected the suggestion that the BoE accepted a more radical approach to Solvency II in order to quash controversial call-in powers that would have allowed politicians to challenge regulators’ decisions. “We did not trade Solvency II for the call-in power,” he said.

The government’s broader reform package includes a promise to review the senior managers regime, introduced in the wake of the financial crisis to hold executives personally accountable for failings on their watch.

It also proposes a review of the ringfencing regime that insulates retail banks from shocks in other more volatile divisions such as trading desks.

Woods said there were “things that you could do with those regimes which could present” a risk to financial stability, and that the BoE would “want to be very closely engaged” on the reviews. Bailey had previously warned the government against going too far with the post-crisis reforms.