Why the row is brewing over Britain’s £90bn Brexit red tape

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As the government moves forward with plans to reform the pre-Brexit rules governing Britain’s insurance industry – called Solvency II – there is controversy over how far the changes should go.

Whitehall’s plans aim to unlock £90bn of investment, by reducing the amount that insurance companies must hold in reserve to protect themselves from bankruptcy. However, it has been at loggerheads with the Bank of England over the scale of the reforms and how much cash insurers should have on their books, while industry insiders have accused the regulator of putting future investment at risk.

Sam Woods, head of the Safe and Prudential Regulation Authority (PRA), said on Friday that industry response to his team’s proposals had been “largely negative”.

As the dispute escalates, we explain how the government plans to use its post-Brexit freedoms in the insurance industry.

What are the rules for the UK insurance industry ahead of Brexit?

European Union law, Solvency IIwas introduced in 2016 in all member states of the bloc, including the United Kingdom.

Regulations for insurance companies cover a range of activities, from governance and liability to risk assessment and management.

Why is the UK still sticking to this EU law?

When Britain left the EU, it didn’t throw away all its laws. Instead, the government passed an act that keeps EU law on its books after Brexit, with the aim of gradually diverging from the other 27 member states.

As part of the post-Brexit shake-up, Downing Street has said it will loosen the regulatory burden in many financial services sectors to make Britain more globally competitive.

In practice, this means that fewer policies will be defined in the legislation, and the bank will take a more active role in the regulation of key industries. As a result, regulatory powers have moved from EU institutions to British regulators.

Why did the reforms cause controversy?

The Treasury has given the PRA – which comes under the Bank of England – the go-ahead to cut red tape after Brexit. It was hoped that this would increase the competitiveness of the insurance sector and support £90bn of new investment such as infrastructure projects. By loosening regulations, insurance companies can take on more risk and allow more capital to flow into the economy.

Still, critics blamed the PRA delaying reforms and indicate a perceived bias against seizing post-Brexit opportunities to rewrite European rules.

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