Nothing much changed when we joined the EU, though some existing directives were imposed upon us. And, when the Single Market was created, it was the UK philosophy that prevailed. The principle of mutual recognition was recognised whereby countries could keep their own regulatory systems whilst companies regulated in one country could sell insurance freely in another EU country. Secondly (and surprisingly some might think today), the EU actually prohibited much of the regulation that was bearing down on the insurance industries of other countries on the grounds that it was antithetical to the Single Market.
However, what has happened since has been alarming. It is a warning both about the EU and about Brexit. A whole new regulatory system has wrapped our insurers in red tape with consumers bearing the cost. This regime is known as ‘Solvency II’ and it involves harmonising EU insurance regulation. It is estimated by the UK Treasury to cost insurance companies £2.6 billion to implement with ongoing costs of £196 million a year.
The total length of the Solvency II directive and related instruments from the European Insurance and Occupational Pensions Authority is 3,200 pages and the UK regulator has imposed further costly requirements on top. Compare that with the nine pages of law and nine pages of regulatory returns required by the 1870 Insurance Companies Act which formed the regulatory framework surrounding the UK insurance market for 100 years – a period during which there were no failures of life insurance companies that damaged policyholders.
The Solvency II regime is dangerous because it will encourage all insurers to have similar business models. If the regulatory regime has a problem it will affect the security of all companies at the same time. Amazingly, when the Solvency II regime was being developed, HM Treasury suggested that one of the points in its favour was that it was based on the Basel II regime that was in force at the time of the banking crisis (they didn’t quite put it like that!).
So, what should happen when we leave the EU? In Avoiding the Risks of Regulatory Red Tape – Insurance regulation for the 21st century, I propose that we should return to the successful regulatory regime of the past. We should require insurance companies to publish information to the market rather than apply a sophisticated regulatory model which is designed to calculate how much capital each insurance company needs to have a 1-in-200 probability of failure. The regulator should be able to correspond with the company if it has concerns and publish the correspondence.
The regulator could, additionally, have a more comprehensive regulatory regime which companies could enter if they wished. It would be very clear to customers whether their insurer was part of the regime.
So, given our liberal traditions, will that happen? Sadly, there is no chance. When it comes to financial markets, the vested interests that support regulation have taken over. In this time of so-called austerity, UK financial regulators have had their budgets increased by 46 per cent in real terms in the last five years. But, most shockingly of all, Solvency II is a British invention. It was a UK idea and pushed through the EU by the British with enthusiasm. These complex regulatory frameworks benefit the regulators, the consultants who are paid to engineer them and large companies as they keep out the competition.
Just as Britain exports garlic to the French, we have reached the stage where the UK exports over-regulation to the EU. After Brexit, the government should roll back regulatory red tape and the insurance sector would be a good place to start.
This article was originally published by BrexitCentral.