A Bank of England deputy governor has sounded the alarm over City deregulation, saying proposed easing of rules for financial firms would put billions of pounds of pension fund savings at risk.
Speaking out against a bill backed by Rishi Sunak while he was chancellor, BoE deputy governor Sam Woods said the changes, which could allow insurers to reduce their cash reserves, which are supposed to act as a buffer against sudden downturns, were “unbalanced”.
The UK life insurance industry, which specializes in managing pension savings, directly invests around £1.3 trillion in savings held in approximately 21 million individual pension funds.
In a stark intervention, Woods said: “Leaving the EU should not lead us to lower standards of financial regulation in the UK.
“Changing prudential regulations in the UK should not simply be a one-way street, especially when it would mean weakening protections for businesses that cater to groups such as pensioners.”
In addition to his role at the bank, Woods is chief executive of the Financial Conduct Authority, which oversees banking and insurance companies.
Speaking at an online event on Friday, Woods said the reform of insurance capital rules should not lead to weaker controls. “I worry that some might see something like this as a free lunch, but actually less capital, less checks and less asset restrictions, with no steps to strengthen the part of the regime where it’s needed, means more risk to retirees and other policyholders.”
The Bank of England inherited the regulation of the rules governing the financial industry after the financial crash of 2008. It was widely acknowledged that the previous watchdog had allowed banks and insurers to reduce their reserves, leaving them with little capital during a crisis.
With the Treasury, the BoE set up the Prudential Regulation Authority, which oversees 1,500 firms in the City, to take a tougher stance.
The change to insurance rules, known as Solvency II, which were inherited from the European Union, are seen by the government as a key Brexit “dividend” for Britain’s financial industry.
Jacob Rees-Mogg, the Brexit options minister, has called for a rewrite of EU financial rules to spark a “big investment boom” in Britain, driven by the City of London.
However, the pace and nature of the reform has alarmed insurers as the EU moves ahead with its own amendments.
A UK bill was due to be introduced this month to implement insurance and other reforms, but disputes between Number 10 and the Treasury forced the legislation to be delayed.
“The world is not going to collapse if we don’t have a city minister for a day or two. I think we’re going to get one very soon,” Woods said.
“It is possible, of course, given the political situation that the government should take a little longer to make decisions,” Woods said.
The bill gives the bank powers to amend Solvency II in a way that Woods says will free up the equivalent of 10-15% of current capital held by life insurers, which could support between £45bn and £90bn in additional investment in the economy.
The bank has proposed amending three key parts of Solvency II to make it easier for insurers to invest in long-term assets such as infrastructure to help Britain reach net zero targets.
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Woods said there was general agreement on two of them, but there was opposition to the third, which deals with the so-called matching adjustment (MA), which allows insurance companies to recognize future income from investment returns as current capital.
“In our view, a package that did not address the issues we identified with the compliance fix would be seriously unbalanced,” Woods said.
This would remove those items that insurers wanted to shed, he said, adding that MA already represents capital relief equivalent to two-thirds of the entire capital base of the life insurance industry.
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