Hunt defies Bank with push for Big Bang 2.0

Chancellor confirms reforms to insurance rules in an effort to unleash a wave of City investment

JEREMY HUNT has overruled the Bank of England to push through key postbrexit insurance reforms intended to unleash an investment “big bang”.

The Chancellor confirmed that the Government will overhaul the Solvency 2 rule book, which requires insurers to hold vast sums of cash on their balance sheets and dictates where they can invest, in a move that will allow companies to plough billions of pounds into the British economy.

Mr Hunt told MPS: “Nigel Lawson’s Big Bang inspires us today – but nearly 40 years on we must stay true to its mission to make the UK the world’s most innovative and competitive global financial centre.

“So to further support investment across our economy, I can also announce we are publishing our decision on Solvency 2, which will unlock tens of billions of pounds of investment for our growth-enhancing industries.”

He also slashed a tax surcharge on bank profits from 8pc to 3pc in an attempt to maintain the City of London’s international competitiveness. The cut, which will cost the Treasury about £1.4bn a year, will give lenders an effective tax rate of 28pc once corporation tax is raised next April.

The Solvency 2 announcement comes after a protracted row between the Treasury and the Bank’s Prudential Regulation Authority (PRA), which raised concerns that the reforms could negatively affect policyholders.

The Government said the reforms “will enable insurers to increase their investment in productive assets, fuelling the UK economy”.

Insurance chiefs welcomed the announcement. Amanda Blanc, at Aviva, said: “This is a very welcome boost for UK investment. We estimate reforms to Solvency 2 will allow Aviva to invest at least £25bn over the next 10 years across the UK, including in critical areas such as social housing, schools, hospitals and green energy projects.”

Andy Briggs, at pensions giant Phoenix, said the reforms “present a significant opportunity to ensure more private sector capital can be directed into the real economy and ensure we better mobilise the UK’S £3.4 trillion of pension wealth”. He added: “Phoenix plans to invest £40bn to £50bn in illiquid assets and sustainable investments over the next five years without compromising policyholder protection.”

The Treasury acknowledged yesterday that there was “no consensus” surrounding the so-called matching adjustment mechanism, which covers long-term investments. This allows life insurers to match predictable cash flows from assets against liabilities and get a capital benefit as a result. The Treasury has brushed aside concerns raised by the PRA.

The regulator will be given tools to monitor this area by requiring insurers to carry out regular stress testing and by making senior managers vouch their company’s fundamental spread – an aspect of the matching adjustment – is sufficient. The Government will also cut the risk margin, an extra capital buffer companies must hold.

It came as the Government’s tax and spending watchdog predicted taxpayers would be on the hook for more than £130bn to cover losses on the Bank of England’s stockpile of government debt amassed during the financial crisis and pandemic. This is because commercial banks are paid interest on reserves held at the Bank at the current interest rate, which climbed from 0.1pc last December to 3pc this month. The Government foots the bill for losses the Bank incurs from the difference between returns on its bond holdings and the interest it pays.

“Across the forecast, the Treasury pays £133bn to cover these losses, more than reversing the previous 13 years gains,” the Office for Budget Responsibility said. A Bank spokesman said: “The PRA supports the Government’s goal of promoting growth and productive investment, and has a primary duty to protect insurance policyholders. Following the Government’s announcements about plans to legislate reforms to Solvency 2, the key decisions will now be for Parliament and we will implement those decisions faithfully.”