Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019 — House of Lords, 2019-02-11
Topic: Domestic Commerce
Michael Bates (Conservative, Centre-right): My Lords, as this instrument has been grouped, with the leave of the House I will speak also to the draft Financial Conglomerates and Other Financial Groups (Amendment) (EU Exit) Regulations 2019 and the draft Insurance Distribution (Amendment) (EU Exit) Regulations 2019 The Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already been undertaken in this place and in the House of Commons. The SIs being debated today are part of that programme and have been debated and approved by the Commons These SIs will fix deficiencies in UK law on the prudential regulation of insurance firms, the distribution of insurance products, and financial conglomerates, in order to ensure that they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context Three SIs are being debated today: the financial conglomerates and other financial groups regulations, the insurance distribution regulations and the draft amendments to the Solvency II regulations. The financial conglomerates and other financial groups regulations set prudential requirements for financial conglomerates or for groups with activities in more than one other financial sector. The insurance distribution regulations set standards for insurance distributors regarding insurance product oversight and governance, and set information and conduct-of-business rules for the distribution of insurance-based investment products Solvency II sets out the prudential framework for insurance and reinsurance firms in the EU. Prudential regulation is aimed at ensuring that financial services firms are well managed and able to withstand financial shocks so that the services they provide to businesses and consumers are safe and reliable. Solvency II is designed to provide a high level of policyholder protection by requiring insurance and reinsurance firms to provide a market-consistent valuation of their assets and liabilities, understand the risks that they are exposed to and hold capital that is sufficient to absorb shocks. Solvency II is a risk-sensitive regime, in that the capital that a firm must hold is dependent on the nature and level of risk that a firm is exposed to. In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The Solvency II and insurance regulations, the financial conglomerates and other financial groups regulations and the insurance distribution regulations therefore need to be updated to reflect that, and ensure that the provisions work properly in a no-deal scenario I shall start by addressing the changes to the financial conglomerates and other financial groups regulations. Under the EU financial conglomerates directive, a financial conglomerate is defined as a group with at least one entity in the insurance sector and at least one in the banking or investment services sector. One of these must be located within the EEA, while the others can be located anywhere in the world. This statutory instrument will amend the geographical scope of the definition so that one entity must be located within the UK rather than the EEA in order to be subject to the UK regime. This statutory instrument also amends the definition of a competent authority, so that it no longer includes regulators based in the EEA In line with the approach taken for other statutory instruments, this instrument transfers several functions from the EU authorities to the UK regulators. For example, the EU financial conglomerates directive requires EU authorities to publish and maintain a list of financial conglomerates. This function will now be carried out by the Financial Conduct Authority and the Prudential Regulation Authority. In addition, the responsibility for developing binding technical standards will pass from the European supervisory authorities to the appropriate UK regulator.