Clifford Chance

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have recently published updates on their progress regarding the Secondary International Competitiveness and Growth Objective (SICGO) introduced under the Financial Services and Markets Act 2023 (FSMA 2023). These reports highlight initiatives aimed at enhancing the UK's global economic competitiveness and growth. The PRA's report, separate from the FCA's, includes responses to related recommendations from the Bank of England's Independent Evaluation Office (IEO).

Early Implementation

Both regulators have indicated that, despite being in the early stages of implementing the SICGO, they can point to a range of initiatives showcasing their progress. The PRA highlights Solvency UK as an example of how the SICGO "has already significantly impacted our policy decisions". The extensive Solvency UK material released by the PRA over the past year underscores its proactive commitment to integrating the new objective into its regulatory framework from the outset.

Meanwhile, the FCA emphasises the use of its existing framework to avoid creating new barriers to growth. For instance, it leverages the Consumer Duty to ensure the right customer outcomes when firms deploy artificial intelligence, rather than rushing to draft new rules that may not be fit for future growth in AI usage. This strategic use of existing frameworks reflects a thoughtful approach by the FCA to regulation that balances innovation with consumer protection, alongside a clear drive by the PRA to implement post-Brexit reforms.

The forewords by the FCA's Nikhil Rathi and the PRA's Sam Woods strike different tones, reflecting their respective organisational priorities and perspectives. The FCA calls for a mature debate about society's risk appetite, stating "Let us not be so afraid of failure that we stifle innovation." This call to action highlights the importance of fostering an environment where innovation can thrive, even if it involves taking calculated risks. The FCA also advocates collective action focused on a long-term vision, involving other key stakeholders such as those responsible for tax, skills, and physical and digital infrastructure. This holistic approach underscores the interconnected nature of factors that underpin international competitiveness and growth.

In contrast, the PRA focuses on its track record of engagement and research on the SICGO, as well as the conclusions of the IEO report on the PRA’s approach to its secondary objective. The IEO's positive assessment, coupled with encouragement to further improve, indicates a solid foundation for future progress. This difference in emphasis between the FCA and PRA highlights the roles that they play in enhancing the UK's financial regulatory landscape, with the FCA pushing for innovation and broader systemic changes, while the PRA builds on its prudential oversight.

Insurance Sector Initiatives

The reports detail several key initiatives aimed at advancing the SICGO, specifically within the insurance sector:

• Solvency UK: The PRA has undertaken substantial reforms within the Solvency II framework through recent publications including Policy Statements PS2/24 and PS3/24. These are designed to simplify regulatory requirements, reduce reporting burdens and provide greater operational flexibility. Notably, raising thresholds for small firms to be subject to Solvency UK and a new 'mobilisation' regime encourages new market entrants and is provided as evidence of the PRA’s commitment to fostering a growth-oriented insurance environment.
  
  The upcoming implementation of the Matching Adjustment (MA) reforms (PS10/24) is an indicator of the PRA's approach in enhancing the life insurance sector's role in UK investment. The government expected these reforms to bolster insurers' ability to invest in long-term assets, although there remains some scepticism in the industry as to the potential extent of its impact on changing investment decisions.

• Solvent Exit Planning: The PRA's January 2024 Consultation Paper CP2/24 introduced new rules requiring insurers to prepare for an orderly 'solvent exit' as part of their regular business operations. The PRA make the case that this supports the SICGO by ensuring that firms can leave the market smoothly, so minimising disruption and reducing the need for PRA intervention. However, the rules require insurers to produce a substantial amount of documentation, which makes implementation a challenge.
• Third-Country Branches: In May 2024, the PRA published PS8/24, solidifying its approach to the authorisation and supervision of third-country insurance branches, following the October 2023 Consultation Paper CP21/23. This policy framework is designed to enhance the UK’s attractiveness as an international insurance hub by allowing foreign insurance firms to establish branches in the UK under clearly defined criteria, while safeguarding against potential risks from differing regulatory standards in their home jurisdictions.
  
  The PRA has also expanded its global reach by establishing 79 Memoranda of Understanding with regulators across 50 countries, facilitating supervisory cooperation and information sharing. Furthermore, the authorisation of 135 third-country branches from the EU’s Temporary Permissions Regime highlights the UK's openness to international firms, critical for sustaining long-term economic growth and market resilience.

• Insurance Market Access: The FCA, in collaboration with the PRA, state that they have streamlined the process for new players to enter the insurance market. They have applied the principle of proportionality to reduce overlaps in regulatory assessments and introduced a 'mobilisation' stage. This mobilisation stage, set to be fully operational by 31 December 2024, lowers the barriers to entry and could encourage a diverse range of new players, such as insurtech's, to enter the market. This is anticipated to stimulate increased competition and innovation within the insurance sector.
• Insurance Distribution Directive (IDD): To ensure continuity and regulatory consistency, the FCA has 'lifted and shifted' the IDD delegated regulations into its Handbook. This approach maintains the existing regulatory framework, avoiding the introduction of new requirements that could disrupt the market.
• Multiple Occupancy Building Insurance (MOBI): The FCA has intervened in the MOBI market to address challenges such as rising premiums and limited product availability. By ensuring these products remain accessible and affordable, the FCA not only upholds its commitment to consumer protection, but also aligns with the SICGO by fostering a stable and competitive market environment where consumers' needs are effectively met.
• Employers’ Liability Insurance: The FCA has introduced simplified rules for matching employee reference numbers (ERNs), which streamline regulatory compliance for insurers and improve the reliability of claims data. These changes should reduce the administrative burden on insurers and enhance the accuracy and efficiency of claims processing. Improved data reliability not only benefits consumers but also contributes to a more transparent and trustworthy insurance market, further supporting the SICGO's objectives of growth and competitiveness.

Beyond these specific initiatives, both regulators have made broader progress to reduce the administrative burden on firms. There is also a general focus on improving operational efficiency (such as an authorisation process), international cooperation, and new initiatives including the permanent digital sandbox and Innovation Pathways service. These efforts are important for advancing the UK's interests globally.

EIOPA’s Proportionality Paper

Like the UK, the EU recognises the benefits of a competitive insurance market. In line with this, the European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation paper on 2 August 2024 to assess the future implementation of the new proportionality framework under Solvency II. EIOPA's consultation paper proposes a revised framework around proportionality that sets clear criteria for identifying small and non-complex insurers in relation to the nature, scale and complexity of their risks. It also empowers supervisors to grant – and withdraw – similar concessions to other non-small insurers who do not fit strictly within the definition but whose risk profile nevertheless justifies the use of some proportionality measures. This approach has similarities with the FCA and PRA’s efforts to reduce burdens on smaller firms, although EIOPA’s methodology is more comprehensive, promoting proportionality across governance, risk management and reporting.

EIOPA also underscores the importance of continual monitoring and recalibration of proportionality measures to ensure their ongoing effectiveness. This proactive stance will encourage EU regulators to adapt their approaches as market conditions evolve, maintaining a responsive regulatory framework. Additionally, EIOPA places significant emphasis on cross-border supervision and collaboration, promoting a harmonised approach to proportionality across EU member states. EIOPA's approach could offer valuable insights for the UK as it navigates its post-Brexit regulatory landscape, ensuring that its regulatory framework remains competitive at the very least with EU best practices.

Moving Forward

The UK regulators' reports highlight advancements in integrating the SICGO into the processes, policymaking and organisational culture of the FCA and PRA. For the insurance industry, these developments and the application of proportionality are particularly crucial. That said, the impact of some of these initiatives remain to be seen (such as an increase in the number of newly approved insurers) and there is an element of the regulators "marking their own homework" at this stage.

For instance, the FCA has indicated its recognition of the importance of the commercial insurance sector and recently addressed this in its Discussion Paper (DP24/1) published on 29 July 2024. Here, the FCA take a proportionate approach by seeking to remove or simplify rules that overlap with the Consumer Duty to lower regulatory costs and increase the competitiveness of the commercial insurance sector, which the FCA has stated is worth £15.5bn to the UK economy.

Similarly, the PRA is working to simplify its approach to insurance-linked securities, with the hope of gaining traction for the reinsurance market segment in the UK. There is also optimism for the introduction of a new UK captive regime, where the PRA will need to apply proportionality to ensure the UK can compete with well-established domiciles, particularly those of neighbours such as Guernsey and the Isle of Man.

While recent improvements in the insurance market are encouraging, perceived missteps like the FCA's recent proposal on enforcement investigations could hinder the UK's competitiveness as a global financial centre. For the insurance sector, this means ensuring that regulatory reforms are not only well-intentioned but also effectively implemented to support growth, innovation and consumer protection. Industry stakeholders should collaborate with regulators to achieve these goals and maintain the UK's attractiveness as a destination for insurance business and investment. As progress is monitored and benchmarks are established, a clearer picture will emerge. In the meantime, the reports provide valuable insights and demonstrate regulatory accountability.