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UK Government Proposes Easing Banking and Insurance Rules in Post-Brexit Boost

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UK Government Proposes Reforms to Boost Financial Sector Post-Brexit

The UK government has announced plans to ease banking and insurance regulations in an effort to support the country’s financial sector following its departure from the European Union. Since Brexit, the finance industry, which contributes approximately 12% to the UK’s economic output, has faced challenges due to limited access to the EU market. To address this, industry officials have been urging the government to expedite reforms to maintain global competitiveness.

In a bid to implement the “Edinburgh Reforms” outlined in December, the UK finance ministry has released a public consultation on proposed secondary legislation. These recommendations, put forth by a panel led by Keith Skeoch, a former investment fund boss, aim to increase the threshold for ring-fencing rules from £25 billion to £35 billion.

The ring-fencing rule was introduced in January 2019 to prevent a repeat of the costly taxpayer bailouts witnessed during the global financial crisis. It ensures that deposits remain secure even if investment banking activities outside the ring fence incur losses. However, this rule has increased costs for banks. The proposed changes to the legislation seek to make the rule more adaptable and mitigate unintended consequences, according to UK financial services minister Andrew Griffith. He further stated that the adjustments would enhance outcomes for banks and customers, increase competition, and improve the competitiveness of the UK banking sector. Moreover, the changes are expected to facilitate lending to small businesses.

The government plans to present secondary legislation for implementing these reforms in early 2024, with changes taking effect upon parliamentary approval.

Addressing the insurance sector, the Bank of England (BoE) has also outlined plans to reform the Solvency II insurance capital rules inherited from the EU. The reform, perceived by the insurance industry and Brexit supporters as a “Brexit dividend,” aims to unlock up to £100 billion ($122.01 billion) for investment. However, the EU is also undergoing similar reforms to Solvency II.

One proposed reform is the expansion of the so-called matching adjustment, which provides capital relief on assets that will generate returns at the right time to cover future policyholder payouts. Currently valued at approximately £66 billion, this relief would be extended to a wider range of assets, including infrastructure under construction and sub-investment grade assets, albeit prudently.

Bank of England Deputy Governor Sam Woods emphasized that these proposals aim to safeguard policyholders while enabling the annuity sector to fulfill its commitments to the government in terms of increasing investment in the UK economy. However, the government has overridden the BoE’s suggestion of a more lenient discount. The BoE maintains that its proposed limit, in conjunction with other reforms, will not hinder insurers from fulfilling their commitments to unlock billions of pounds for potential investments.

Woods has urged the government to monitor insurers and ensure that the freed-up capital resulting from the Solvency II reforms is channeled into the economy. The Association of British Insurers has pledged that its members will utilize the reforms to direct £100 billion towards “green and good” projects while safeguarding policyholders.

The proposed changes are projected to take effect on June 30, 2024.

These initiatives signal the UK government’s commitment to bolstering the financial sector after Brexit, aiming to maintain London’s position as a global financial hub amid stiff competition from New York and Singapore.

More detail via Kitco.com here… ( Image via Kitco.com )

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