The UK’s Prudential Regulation Authority (the “PRA”) has published its third and final consultation on the changes that it will need to make to its rules and other policy materials to implement the government’s proposed reforms of the UK’s Solvency II framework. CP5/24 proposes the restatement into PRA policy material of those parts of the Solvency II regime which have not already been subject to consultation as part of the Solvency II review process.
Background
Since 2020, the government and the PRA have been working to identify potential improvements that might be made to the post-Brexit, onshored version of the Solvency II regime. The framework will eventually be known as “Solvency UK”.
The work to date has included the publication by the government in November 2022 of its final package for reform and its subsequent finalisation of two sets of regulations needed for it to make good on its plans. The PRA has also published two previous consultations – one in June 2023 covering the bulk of its proposals and a second last September on the matching adjustment – along with two policy statements, released in February 2024, reflecting its final policy on most of its planned changes and in relation to the reporting and disclosure aspects of the Solvency II review.
The PRA has been clear that, in total, it expected to publish three principal consultation papers on Solvency II reform. CP5/24 is the third of these.
Assimilated law will be moved into PRA materials
CP5/24 covers the restatement into the PRA Rulebook and other policy material (e.g. supervisory statements and statements of policy) of those Solvency II requirements from assimilated law which have not already been the subject of consultation as part of the Solvency II review process.
“Assimilated law” was previously known as “retained EU law”, with the change in name having taken place at the beginning of this year. Relevant assimilated law which the PRA has considered for the purposes of the current consultation includes the UK’s onshored version of Commission Delegated Regulation (EU) 2015/35, the Solvency 2 Regulations 2015 and related Technical Standards. The PRA has not put forward proposals to restate references to the credit quality step mapping tables in BTS 2016/1800, which will be the subject of further proposals in due course.
Preserving the status quo…
Some changes will be required as part of the restatement process. For example, cross-references to the EU’s prudential framework will need to be removed, while the PRA will also correct some areas of inconsistency in assimilated law (e.g. inconsistent or incorrect cross-references or missing definitions) and make consequential changes.
However, the PRA has indicated that the restatement process should not generally result in significant policy reforms: the broad intention of these proposals is for the requirements on firms and the PRA’s approach to be kept as they are for now.
The policy reason given by the PRA for maintaining the status quo is that priority areas for reform have already been identified and consulted on; adding to them by proposing further substantive reforms as part of the current consultation might complicate and delay their implementation. The PRA notes, however, that it might at some future point in time consider further reforms to the policy material being restated under CP5/24.
…with two exceptions
While this process will generally maintain the status quo, the PRA highlights two exceptions where requirements on firms will change:
- The PRA says that it is aware of a small number of UK insurers that have outstanding preference shares with dividend stopper features (i.e. typically restricting distributions that can be made on ordinary shares). Those features have the potential to undermine the Tier 1 classification of ordinary shares when certain transitional measures expire on 1 January 2026. The PRA is therefore proposing a new time-limited transitional rule which would allow firms to continue to treat transitioned preference share instruments with dividend stoppers issued prior to 18 January 2015 as not relevant when assessing the compliance of their ordinary shares with certain unrestricted Tier 1 own fund requirements. The rule would take effect from 2 January 2026 and would last for 25 years.
- The PRA proposes to restate EUR-denominated amounts into the UK framework in GBP using the same conversion rate adopted in PS2/24 for a similar purpose.
Mapping the move
In terms of where the existing provisions will end up:
- where assimilated law places requirements on firms, these will be restated into the relevant part of the PRA Rulebook;
- regulations that currently describe how the PRA exercises its supervision will be restated in an applicable statement of policy; and
- where regulations currently provide further expectations or clarifications, these will be restated in the relevant supervisory statements.
The chapters of CP5/24 describe the restatement process in some detail, broken down by different topics (e.g. technical provisions, own funds, solvency capital requirement). Mapping tables containing further information are also included by way of an appendix.
No full review of EIOPA guidelines for now
EIOPA guidelines – which the PRA currently expects firms to continue to consider as relevant – are generally not restated by the proposals in CP5/24. However, some guidelines will, as an exceptional matter, be incorporated into PRA policy materials at this stage for the purposes of clarity. The PRA says that it will review the status of any remaining EIOPA guidelines “at a later stage”.
Next steps
Any comments on the consultation should be provided by 22 July 2024. The proposed implementation date for the changes described in the consultation is 31 December 2024.
Chapter 1.60 of the consultation contains a chart showing a timeline for the broader reform process.
For further information, please contact:
Duncan Barber, Partner, Linklaters
duncan.barber@linklaters.com
