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Investment ‘Big Bang’ is the biggest test yet of Brexit opportunities

Some prominent backbench Tory Brexiteers have decried the former policy as “socialist” while claiming the latter target is making working people “colder and poorer”.

However, for the majority of people, more social housing and cheaper wind turbines are likely to fall under the heading “good things”.

It is also clear that the impetus for a rewriting of Solvency II in the UK is coming from the Treasury, which wants to be able to point at a Brexit win.

Whatever the motivation, the UK can now craft the rules to perfectly suit British insurers, which are very different beasts to their European counterparts.

However, insurers should be careful what they wish for too. Right now they’re lining up behind the Government’s investment big bang thesis. However, there’s no guarantee that the money freed up by reduced capital requirements will be invested in infrastructure or anything else for that matter.

It could just as easily be returned to shareholders in the form of dividends or buybacks. When discussing Solvency II in a speech last September, the Bank of England’s prudential policy director Gareth Truran said it was “not obvious that loosening of capital requirements per se would necessarily increase productive investment”.

Last August, Aviva returned £4bn to shareholders only for Cevian Capital, an activist investor that has built up a 5pc stake in the FTSE insurer, to complain it wasn’t enough.

So far, Aviva has stood its ground. But imagine the furore if it capitulated after Solvency II had been relaxed. From now on, every penny that insurers return to shareholders will be a penny they haven’t invested in building Britain back better. Insurers’ dividends could become the next bankers’ bonuses.

There’s also reason for caution. In 2018, the Bank of England acknowledged that risk margin was “too high at current low levels of interest rates”.

Of course, we are now going to start tinkering it just as interest rates begin to rise. The reforms will, as outlined in a speech by John Glen, the economic secretary to the Treasury on Monday, lead to “a substantial reduction in the risk margin… including a cut of around 60pc to 70pc for long-term life insurers”.

It’s also somewhat disconcerting that all of this is taking place against the backdrop of discussion about another bill – the Future Regulatory Framework, which, in essence, boils down to a turf war about where the main responsibility for setting financial rules should reside: with regulators or Parliament.

The Prudential Regulatory Authority’s overriding concern is, as its name suggests, prudence and safeguarding consumers. It has been very clear that Solvency II has no detrimental effect on policy holders; annuities, for example, are no more expensive because of it.

The Government, of course, wants other things, not least to boost economic growth and to be able to point to some tangible benefits of Brexit.

There are plenty of examples through history of cyclical regulation, of rules getting tough in the immediate aftermath of a financial crisis when arguably looser rules would help pull an economy out of its trough before becoming more laissez-faire just as bubbles reach bursting point.

Let’s hope this doesn’t turn into another example of the watchdogs falling asleep – or being muzzled – just as the burglars turn up. It would be far from ideal if, by pushing for Brexit opportunities, we are left with a Brexit calamity.

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