By Ashley Smith, Senior Vice President, Business Development, Silverfinch
The view goes that outside the European Union (EU), the UK will be able to jettison many of the rules that it has found inconvenient. There's no doubt that many, even those who did not support the Leave campaign, would not weep to see the back of some of the more overbearing EU financial regulations. One such unloved framework is Solvency II, introduced this year as a way of making sure Europe's insurers have the assets they need to back their liabilities – many in the industry see this as troublesome at best.
The chance of escape may have been bolstered in the past few weeks after Parliament’s Treasury Select Committee had said it wanted to examine the options for UK insurers around Solvency II after the Brexit vote. Noting what it considered the "inadequacies" of the regulations, the committee was considering whether Solvency II, was a "price worth paying." However, even against this backdrop, for those who believe Solvency II might be about to disappear, we have one simple response – think again.
There are two reasons for our view on this – market access and the long timeframe.
On the former, the UK's financial services industry provides a significant proportion of the country's GDP and London depends on its status as a global financial hub for its continuing pre-eminence. While the country may feel free to barter on the access of other industries in the European single market, it is unlikely that the government will be able to get away with cutting the ability of the City to do business in Europe. The recent sharp decline in the value of the pound after the Government hinted that it favoured a “hard” Brexit shows just how important this key trading link is to the country's economy.
Moreover, in the unlikely event, the UK did decide to leave the single market for financial services, for those British firms still wanting to do business in Europe shorn of the UK, they are still going to have to adhere to European rules. It is not as if we have not encountered situations before where companies for good commercial reasons take on regulation voluntarily – witness the fund managers who abide by Solvency II to satisfy their insurance clients.
However, even if the commercial realities were not directing UK insurers along with a continued Solvency II route, nothing is going to change in the immediate future. The Government has already said that it plans to introduce a Great Repeal Act, which will enshrine in UK law all of the present European law. Only after that would it get around to cherry picking what it wants to keep and discard. Even if Solvency II were so widely loathed that it was the Government’s priority to replace it, that effort would still take a significant amount of parliamentary time and agreement.
In addition, it is worth noting that the Government has said it will not invoke Article 50 until March 2017, which means the UK will remain within the EU, with all its rights and responsibilities, until the early part of 2019. That is still another 2 1/2 years of UK companies having no choice but to abide by Solvency II.
All of this is not to say that we do not expect any change. The weight of the Brexit vote may indeed have altered the atmosphere across Europe somewhat and made overarching, cumbersome rules that are unpopular, giving the edge to those who want to tone down the influence of overbearing regulation. UK insurers in this environment may be able to water down some of the more onerous aspects of the rules over time. However, having spent so much effort putting the rules into effect do we want to undo that, instead, in all likelihood, putting in place a UK version? Remember, regulation is not just an EU phenomenon.
So rather than the hypotheticals, it is more important for us to consider where we are in the here and now, and that is still very much under the Solvency II regime. The industry’s focus should be on dealing with the challenges that face us in the next few months such as the first 2016 end-of-year reports which are due in early 2017. Surveys are continuing to show the troubles for full implementation of Solvency II, with look-through causing real problems. Moreover, for any who cannot get their Solvency II reporting in place for its second year of operation, they may well face sanctions and/or fines.
For us, the only realistic conclusion is that Solvency II is with us for the foreseeable future and companies should do everything they can to ensure they meet their regulatory requirements.
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