Speech by the Financial Secretary to the Treasury.
[Check against delivery]
Good morning, and thank you for inviting me to speak here today.
It’s a pleasure to speak with so many of the world’s leading Insurance companies alongside senior policy and regulatory officials from the UK and from Europe.
And I want to thank the ABI and Otto for organising today’s event.
Facing the vast agenda for regulatory reform that we do, it is vital that we continue to bring together business and regulators to share expertise, voice concerns, and find a path to reform that ensures financial stability whilst maintaining open and competitive markets.
Of course I’m sure for many of you here, the immediate concern is the ongoing Euro area crisis.
The instability in our nearest neighbours continues to undermine confidence world wide, impacting on all our economies, the UK included.
And we will continue to work with our European counterparts to reach a swift, decisive and comprehensive solution to that crisis.
But at the same time I do not believe that instability in the Euro area means we should pull the rug from under regulatory reform.
Instead, at a time when the financial sector is under intense scrutiny from the market, it is even more important to ensure that the sector has the resilience to withstand that pressure.
Stability is itself a vital precondition of growth.
And whilst the Insurance sector fared relatively well in the last financial crisis, it is not immune to the kind of contagion and crisis that absorbed the banking sector last time around.
It is vital that across the financial system, as markets, products and services evolve, regulation changes to keep pace.
But regulatory reform cannot stifle the competition and innovation that has enabled the UK Insurance sector to develop into a global leader.
The UK industry is already the largest in the EU, and third largest in the world after the US and Japan.
Within the UK economy the industry has a vital role as an investment intermediary, managing 26% of the UK’s total net worth and 13% of investments on the London Stock Market.
It is also a major investor overseas…with around 30% of premium income coming from overseas business, from both life and general insurance business.
The sector is absolutely critical to our economy, and will continue to be a key driver of growth in our recovery.
That’s why it is vital that regulation is proportionate, evidenced based, and reflects the unique risks and characteristics of the Insurance market.
This is the approach we have taken in our domestic reforms to abandon the failed tripartite regime of supervision in the UK.
We are establishing a permanent Financial Policy Committee inside the Bank of England to monitor and address overall risks in the financial system.
We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation.
But we recognise, of course, that the business model of an insurance company is different to that of a bank. This is why we are proposing to provide the PRA with a specific statutory objective for its insurance responsibilities.
And a new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers with new powers to ban the sale of toxic products.
But of course, a significant part of the regulatory agenda is being driven from Europe. And for the Insurance industry, Solvency II is the big ticket item.
The UK has been a strong supporter of Solvency II. I firmly believe that it will help support financial stability in the sector and across the financial system through better risk-based capital requirements and its focus on strong risk management in firms.
And by providing a harmonised regime across Europe, Solvency II should increase cross border competition and create new opportunities for UK firms within the Single Market.
This will in turn deliver increased efficiencies and reduced compliance costs to the benefit of both firms and consumers across Europe.
But we have worked hard, the Treasury, the FSA and the industry to reach a proportionate and acceptable version Solvency II.
As you are aware, the Commission recently issued a consolidated level 2 text, the contents of which reflect a huge amount of negotiation and work by the Treasury, the FSA and the industry on a very wide range of issues.
I am extremely grateful to the industry, notably to the ABI and those of you present today, for the vital role that you have played in ensuring that we reach a package for reform that is significantly improved from the original proposal.
In particular, I believe that we have gone a long way to deliver on the key priorities that we agreed with the UK insurance industry at the outset of the level 2 negotiations.
Matching premium and higher level text
Collectively, we have worked hard to reach an acceptable agreement on the treatment of annuities a key priority for government, industry and particularly consumers.
This has been a difficult area of the level 2 negotiations but one that was absolutely vital to protecting the role of the Insurance sector as a long term investor in the UK economy.
At the beginning of the year, we were looking at an Illiquidity Premium that didn’t work, with a transitional provision that was far too short… Through the Matching Premium we have provided a more predictable, automatic and objective method for discounting annuities.
We have also achieved significant improvements in other priority areas, such as the treatment of capital, and the calibration of the standard formula.
Although, the details of the Counter-cyclical Premium have not yet been finalised, I am confident that the long term guarantees package, and the level 2 as a whole, will work for UK industry.
It’s a package that will continue to encourage insurers to provide stable, long-term finance for business and infrastructure, which was reflected in last week’s Autumn Statement.
And in that ambition, I’m sure you’re all aware of the Chancellor’s announcement last week that we would establish an Insurers’ Infrastructure Investment Forum to explore ways of attracting even more debt finance from the insurance sector in our country’s infrastructure needs.
I encourage all of you here to engage with the Treasury on ways that we can tap into even greater private finance to renew our country’s infrastructure, and invest in long term sustainable growth.
Third country equivalence
And while we believe the level 2 is now largely stable for these issues, discussions are ongoing on Omnibus II.
As well as heading off any amendments that could alter the interpretation of the Matching Premium, and getting clarity over implementation, our main priority will be to secure an acceptable agreement on transitional arrangements for third country equivalence.
We have to take proper account of those third countries working towards equivalence so that UK or European firms are not put at a competitive disadvantage.
In a global economy, and with break neck growth in the likes of India, China and Brazil, it is absolutely right that we support our firms to expand into emerging economies.
Many UK firms already have a global footprint and I am firmly committed to supporting those businesses to export their expertise and their services to new markets.
While the level 2 proposals cannot be formally proposed until next year, they are sufficiently stable to provide a more detailed basis on which to prepare for implementation.
I am sure many of you are already, but I would encourage you to focus your energies on that task.
We are keen however to provide greater certainty on implementation which is why we have recently published a consultation which, together with the FSA’s own paper, addresses the transposition of Solvency II into UK legislation and the regulatory Handbook.
You will also be aware there is a broad consensus in Europe to separate out the transposition and the implementation dates.
The likely effect will be that firms will be required to comply in full from 1 January 2014, potentially with some ‘soft implementation’ from early 2013.
Our overarching aim will be to ensure that both the industry and the regulators have adequate time to prepare for implementation.
Solvency II and the industry
These are changes that will of course have a significant impact on our Insurance industry in the years to come.
We have worked hard to reach an acceptable level 2 agreement on Solvency II, and I believe by creating a harmonised regulatory framework across Europe, there is great potential for the UK industry to exploit new growth opportunities.
As well as growth in new markets, there is also potential for insurers to provide a more granular range of products as insurers target different market segments.
There are also opportunities for the re-insurers to capitalise on their economies of scale, geographical diversity, and product variety to provide a cheaper alternative to additional capital raising for insurers.
In the short term I appreciate there are costs involved with Solvency II, but in the longer run it will lead to efficiency gains and increased investment returns for insurers.
Of course, in similar spirit, we have been working hard to level the playing field for UK firms when it comes to insurance tax, and in particular, our reforms to the taxation of foreign profits.
We have listened to the industry’s concerns over the compliance burden and the tax barriers to restructuring for optimal capital efficiency under Solvency II.
That’s why on Tuesday we announced details of major changes in our approach to reduce those burdens, and provide flexibility to UK headquartered groups which will make Solvency II related cross-border restructuring easier.
Together with branch exemption introduced in the Finance Act 2011, and our reductions in the corporation tax rate, and our work to rewrite the life tax regime, we are committed to creating the most competitive tax system in the G20 for our businesses and for our insurance companies…
…ensuring that we continue to attract the most innovative, successful and ambitious businesses and insurers to the UK.
Of course, there are some issues that remain to be resolved across Solvency II, but the level 2 agreement represents significant progress for the UK industry.
The priority now has to be to protect the progress we have made in the level 2 proposals, and avoid any further delay on its implementation.
It is important to remember how far the level 2 has come in resolving some of the key concerns we had, at times in the face of strong opposition, and I believe we have reached a sound position for the industry.
It’s not a success we have managed on our own. It’s also testament to the work of the ABI, and to the firms present today, working with the Treasury and the FSA to be actively engaged and provide the evidence.
It is essential that we continue to work together on the final details for implementation of Solvency II, and on the range of other regulatory and tax measures the sector will face in the close future.
I look forward to working with you in that task to ensure that we protect and promote a competitive UK insurance sector in the years to come.