Brexit freedoms in the City of London risk triggering an Equitable Life-style scandal that could leave policyholders nursing huge losses, the governor of the Bank of England has warned.
Andrew Bailey said the package of reforms, which are intended to boost the competitiveness of the UK’s financial industry, increased the risk that pension providers could run out of capital to back up their promises.
Mr Bailey cited the collapse of Equitable Life as an example. The demise of the world’s oldest mutual insurer was described as a “Ponzi scheme”, and resulted in almost one million victims losing their life savings.
It comes after Jeremy Hunt, the Chancellor, overruled the Bank in November to push through reforms to the EU-era Solvency 2 rulebook in a bid to unleash an investment “big bang”.
Sam Woods, deputy governor of the Bank, told the Treasury committee on Monday that the overhaul to Solvency 2 rules “increases risk”, adding that the decision to go ahead with the reforms represented a “trade-off” by the Government.
He said: “The way it comes home to roost is if there is not enough capital backing pensions. I would say it is highly likely that it comes back to the public purse if that occurs.”
Mr Bailey said: “I don’t think that it’s likely, all things equal, that it’s a risk to financial stability, but it is a risk to policyholders… I will mention Equitable Life … it can happen.”
Equitable Life was the world’s oldest mutual insurer prior to its collapse when it was forced to honour unsustainable guarantees to policyholders.
A black hole was revealed in its finances in 2000, with later inquiries revealing government failures had played a part in policyholders losing billions in retirement savings.
Mr Bailey and Mr Woods’ comments are likely to reignite a row between the Bank and the Treasury about the long-awaited reforms to insurance regulation.
Insurance has been touted for years as an industry that could benefit from relaxing the EU rules introduced to make financial institutions safer after the 2008 financial crash. However, ministers and regulators were at loggerheads about proposals to water down Solvency 2 rules.
Industry leaders have said they want to invest more capital in illiquid assets such as wind farms and other infrastructure projects, but their hands have been tied as a result of Solvency 2 restrictions.
When announcing the reforms in November, the Treasury acknowledged that there was “no consensus” surrounding the so-called matching adjustment mechanism in the Solvency 2 rulebook, which covers long-term investments.
The matching adjustment mechanism allows life insurers to match predictable cash flows from assets against liabilities and get a capital benefit as a result.
However, the Treasury decided to brush aside concerns raised by the Bank’s Prudential Regulation Authority (PRA) on this issue.
Mr Bailey also said that the market chaos caused by Liz Truss’ mini-Budget is “pretty much gone”.
He said: “I hoped that we would see mortgage rates come down, and that has happened, we have seen new fixed-rate mortgage rates come down since.
“We have seen corrections in that respect and, of course, that benefits people seeking mortgages.”
Separately, the UK has failed to deliver a post-Brexit “bonfire of red tape”, according to Tory MP John Penrose, Rishi Sunak’s adviser on the Government’s competition policy.
A new report, called “The Unfinished Revolution”, concluded ministers have failed to abandon EU laws since the UK left the European bloc.
Speaking in Westminster on Monday to unveil the report, Mr Penrose said regulators such as Ofgem had been too soft in letting energy companies charge too much while offering a poor service. Rules currently mean that the industry is not mandated to pass on falling prices to household bills.
He said: “When Rishi Sunak was Chancellor, he asked me for ideas to make British businesses more internationally competitive and to help with levelling up outside London and the southeast too. For the first 12 months we made good progress, but earlier this year momentum slowed. Now he’s back as Prime Minister, and we’ve got to get moving again.”