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Since June 2023, UK law has required the Prudential Regulation Authority (the PRA) and the Financial Conduct Authority (the FCA) to advance a “competitiveness and growth objective” (the CGO). The CGO involves:
“Facilitating, subject to aligning with relevant international standards, (a) the international competitiveness of the economy of the United Kingdom (including in particular the financial services sector), and (b) its growth in the medium to long term.”
The CGO is introduced as a “secondary objective” that the PRA and FCA must advance when discharging their general functions, in so far as this is possible without undermining their primary regulatory objectives.
In this article, we look at how the PRA and FCA have embedded the CGO in the UK and consider potential lessons for Ireland in terms of the growth of our insurance industry.
One year on
Both regulators have now been operating with the CGO for over a year and have reported on their work in advancing it. In their recent reports presented to the UK Parliament, both the PRA (report available here) and FCA (report available here) have noted increased efficiencies in authorisation and senior manager approval applications, with 98% of applications now determined within statutory deadlines and the majority “significantly ahead” of the deadlines. This has been achieved by making authorisation forms quicker and easier to complete and by collaboration between the regulators to reduce overlaps in assessments.
Noting that regulators should not be “so afraid of failure that we stifle innovation”, the FCA also points to its regulatory sandbox programme as something that has advanced the CGO. It points out, in particular, the success firms have had in securing funding after participating in the sandbox programme.
The PRA notes that it has engaged widely with stakeholders including hosting a major conference on the role of financial regulation in international competitiveness and economic growth in September 2023. Crucially, the PRA also cites its “Solvency UK” reforms as advancing the CGO including the simplification of complex requirements including reporting requirements and improved flexibility. These reforms facilitate new entrants into the UK insurance market by removing certain requirements for branches of international insurers. From 31 December 2024, the PRA will introduce a new “mobilisation” regime for new insurers. This will involve giving new entrants to the insurance market an option to be subject to a more proportionate regulatory regime, including lower minimum capital requirements for a period of time when initially building up their business. A similar mobilisation regime is in place currently for banks.
More broadly, both the FCA and the PRA are in the process of simplifying their handbooks to make them more user-friendly and are embedding the CGO in their internal policies and procedures.
Both regulators emphasise that the CGO is a “secondary” objective and that the stability and resilience of the financial system are crucial to secure economic growth. Noting the PRA’s determination to continue to maintain strong prudential standards, Victoria Saporta, Executive Director, Markets, at the PRA said that “this approach preserves growth prospects in the medium-to-long terms because it reduces the harm from future financial instabilities and creates trust in the prudential regime.” The PRA has also emphasised that the CGO must align with international regulatory standards. The FCA says that stability and resilience of the financial services sector provide investors with the confidence to invest and cite in this regard its own consultation on new operational resilience rules aimed at reducing systemic risk caused by UK firms’ reliance on critical third parties to provide material services.
The Irish perspective
The Irish government’s updated “Ireland for Finance” strategy (available here) sets out the government’s priorities in to “grow and expand Ireland, in a sustainable manner, as a premier European financial centre and a location of choice for specialist international financial services.” However, a recent Insurance Ireland pre-budget submission (available here) notes that this goal is inhibited by various factors. In particular, Insurance Ireland notes that regulatory and supervisory consistency is a major factor for driving investment in the insurance sector. The submission goes on to say that the role of the Central Bank of Ireland (the CBI) in facilitating the welcoming nature of Ireland for insurance business should be assessed, without undermining the CBI’s independent mandate.
This submission highlights a decline in the international insurance industry in Ireland noting that:
“The number of insurance and reinsurance undertakings based in Ireland has been on a downward trajectory since the peak in 2009. Overall, the number of entities has reduced by 39% since then, with the number of life companies down 42%, the number of non-life companies down 29%, and the number of reinsurers down by 47%.”
Former mandate
Some readers will be aware that, in 2003, the Central Bank Act 1942 (the 1942 Act) was amended to give the CBI a mandate (not unlike the CGO) to; “promote the development within the State of the financial services industry”. Crucially, this mandate was subject to the proviso that it applied: “in such a way as not to affect the objective of the Bank in contributing to the stability of the State’s financial system”.
This provision came under scrutiny in light of systemic failures in the Irish banking system that culminated in the crisis of September 2008, when the State was required to step in to provide extraordinary financial support to failing domestic banks. In May 2010, a report (available here) by the then governor of the CBI, Patrick Honohan, stated that there ought to have been greater “intrusiveness and assertiveness” on the part of regulators in challenging the banks and that there had been an “unduly deferential approach to the banking industry” which he described as partly constituting “regulatory capture”. In particular, Mr Honohan noted that presentations aimed at expanding the financial services sector included an emphasis on the regulator’s approach as being “user-friendly”.
Following the Honohan report, in September 2010, the 1942 Act was amended again to remove the relevant provision with then Minister for Finance, the late Brian Lenihan noting that the amendment was necessary “to put in place an unambiguous regulatory focus”. Pat Rabbitte TD gave voice to a widely held view that “inevitably there would be compromises if the developmental role were, in any way, confused with the consumer protection role…I welcome the decision in the Bill to remove the bank's role in helping to promote the financial services sector. It is apparent why a role in promoting Ireland as a centre for the financial services sector might not be consistent with a role in the prudential supervision of that same sector.”
However, a careful reading of the Honohan report reveals that the picture is, in fact, more nuanced. Mr Honohan acknowledged that the legislation was “straightforward”, in providing that the CBI’s function to promote development of the financial services industry was subject explicitly to the CBI’s regulatory function.
Conclusion
The PRA and FCA appear to have embraced the CGO with enthusiasm. While still in its early days, it appears to have had a positive impact on the strength of the UK financial services sector and has prompted the UK regulators to take concrete steps to improve efficiency and streamline requirements without compromising regulatory standards. The CGO is a good example of how a secondary competitiveness objective can encourage regulators to be efficient and proportionate in applying regulatory standards, while also maintaining the integrity of the regulatory system.
The CBI does not have the latitude available to the PRA and FCA to depart from detailed Solvency II requirements. Nonetheless, there is scope to improve efficiency and proportionality. The CBI has begun to take some welcome steps in this regard. However, in light of the priority that insurers give to regulation in making decisions as to where to do business, the CBI becoming subject to a similar mandate to the CGO might go far in reassuring insurers that Ireland is truly open for financial services business.
For advice on any aspect of this article, please contact James Grennan, partner, Laura Mulleady, partner, Sinéad Lynch, partner, Niall Guinan, associate or any member of ALG’s Insurance & Reinsurance team.
Date published: 2 September 2024
