Regulation is a risky business – pun intended. Reducing the possibility of something going completely Pete Tong is at the heart of the work of all of the City’s rulemakers, but it should not be the be-all and end-all. It is this trap into which the Bank of England and its Prudential Regulation Authority appear in danger of falling.
The letter published by the Treasury Committee yesterday, written by Bailey, is a masterclass in pass-agg prose. After Bailey indicates that the risk of a life insurance firm going belly-up under the proposed Solvency II capital reforms in any given year would go up from 0.5 per cent to 0.6 per cent, the Governor sniffily writes that “if the PRA’s preferred… reforms have been taken forward, we estimate that less than half of this increase would have occurred.”
Bailey and the PRA are no doubt right that some level of enhanced risk comes with the reform. But the PRA’s proposed reforms, as Bailey himself notes, would have reduced the amount of capital released by half – for minimal risk.
It is worth diverting briefly on why the reforms are worthwhile. Currently, insurers and pension funds struggle to invest in more illiquid assets; the reforms discourage investments in longer-term projects. Phoenix Group estimate they’d invest £50bn in the UK with genuine reform; Aviva reckon they’d chip in £25bn in the next ten years. Legal and General and others have made similar pledges.
Yet here we are, with the Bank and the insurance regulator huffing that their overly cautious reforms have been sidelined in favour of something that could be genuinely transformational for the UK economy. Perhaps Bailey and Woods just feel it’s their job to raise concerns – both are broadly supportive of the reforms at large, albeit on a timetable best described as glacial.
As the ABI have noted, though, “the announced changes to Solvency UK do not change the fundamentals of the system and will continue to uphold the highest standards of policyholder protection.”
Being Governor of the Bank of England requires not just regulating the City, but understanding it. Forget governing with an eyebrow – Bailey et al need first to listen.