Written evidence submitted by Legal & General Group

Thank you for the opportunity to input to this important inquiry. 

As you know, Legal & General strongly supports the government’s three strategic goals of building back better, levelling-up and the ten-point green strategy.  Under our heading of Inclusive Capitalism, we have been putting very similar ideas into practice for almost the last ten years, investing over £26bn of patient capital in UK towns and cities including Edinburgh, Glasgow, Newcastle, Sunderland, Leeds, Sheffield, Manchester/Salford, Birmingham, Oxford, Bristol and Cardiff, while also investing significantly in assets which will help the UK reduce carbon emissions. This programme continued through the pandemic in 2020 and we have a further pipeline of investments in prospect.

Effective regulation with appropriate Parliamentary oversight is in itself a competitive strength for the UK. It is vital to the delivery of investment on this scale, and we now have the opportunity to make changes which will enable long-term capital to play an even greater part in driving an investment-led, UK-wide economic recovery. 

As you know Legal & General is one of the UK’s leading financial services groups and the UK’s largest institutional investor with over £1.25 trillion in total assets.  We are a market leader in defined benefit and defined contribution pensions, as well as pension risk transfer, life insurance, workplace pensions and retirement income, which gives us access to significant and growing pools of long-term capital.  Housing is a major driver of economic growth and of levelling up: Legal & General is also a major supplier of housing across all tenures and last year facilitated over £70bn of mortgage transactions.

I’m conscious trade bodies will respond to you in detail so I have focussed on three key areas that we think could be most advantageous in 2021 to ensure rapid delivery of this important agenda.  They are:

  1. Regulatory Framework for the Insurance Sector;
  2. The UK’s regulatory framework – oversight and structure; and
  3. The UK’s approach to international trade.

I set out briefly our thoughts on each of these below and, where relevant, which questions from your Inquiry our comments most obviously relate to.


Regulatory Framework for the Insurance Sector

As you will be aware the Chancellor has announced a review of Solvency II, which we have warmly welcomed. We believe that targeted and meaningful reform could create a more robust, efficient, effective and resilient framework for UK insurance prudential regulation, as well as allow our sector to play its fullest part in investing in the UK economyWhilst we believe that Solvency II (SII) has delivered many positive outcomes for customers and the sector more generally and would not be in favour of repealing the regime, there are a number of issues which mean that the regime cannot deliver the best possible framework for policyholders, and UK plc more generally. 

The central aim of Solvency II was to implement a risk-based approach to insurance - something we already had in the UK - on a pan-European basis.  After many years in the making, issues arose with the treatment of long-term liabilities across different EU Member States owing to specific differences in markets.  For example, only the UK and Spain have annuity markets of any significant scale, and the French and German markets operated very differently. As such different “versions” of SII emerged.  Of these, the UK “version” is the most intellectually respectable, although as the product of EU compromise it now needs some tailoring to the specifics of the UK sector, to ensure competitiveness, efficient and effective regulation, good customer outcomes and on-going financial soundness. The reforms that we suggest are evolutionary, not radical.  But equally, as we set out, they could help support billions of pounds of additional productive economic activity within the UK whilst reducing the need to offshore activity to other (non-EU) jurisdictions.

You will also be aware that there is a second HMT consultation (Financial Services Future Regulatory Framework Review Phase II Consultation [FRF]).  Principally, FRF creates both an issue of timing (when reform is made) and responsibility (reform through Parliamentary time or PRA rule-making powers).  We welcome many of the concepts in the FRF (subject to further consultation), especially the concept of “activity-specific regulatory principles” (ASRPs) which would allow Parliament to set out the strategic aims of regulation for a sector – paragraph 2.38 of the FRF consultation document suggests three sensible ASRPs for our sector.

We set out below, and in our response to HM Treasury, a straightforward set of proposals that can be implemented quickly; we recommend they are delivered through legislative change, via Parliament, as soon as possible in 2021. The key changes are:

a)      A 75 - 85% reduction in the Risk Margin from current levels could support an additional c£20bn of GDP growth over the next 5 years.  This is in addition to c.£150-190bn that could be made available to invest in infrastructure from pension risk transfer business over the coming decade;

b)      Matching Adjustment reform to support increased investment opportunity in, for example: solar and wind farms; financing of electric and hydrogen buses; science parks; data centres; affordable housing and build to rent property assets; and direct SME lending; and

c)       Reducing reporting requirements which will allow thousands of hours of employee time to be spent on more productive activity.

The £26bn that we have invested in UK-wide urban regeneration broadly equates to delivering c£75bn of economic activity with associated jobs - a significant improvement to the UK’s GDP as well as the investment the country needs.  These reforms could help turbo-charge the next £75bn of economic activity and be a key early “win” for both building back better and levelling-up, as well as  early evidence of the value to the U.K. of post-Brexit flexibility, including for the financial services industry. 


Delivering these key reforms would, moreover, be significant in allowing firms like ours to invest even more into a green revolution and would support the sector to do more as we look ahead to COP26 and beyond.  As matters currently stand under the Solvency II Matching Adjustment (MA) regulations, many climate and other socially important investments are rendered somewhat un-investable.  In the last twelve months asset classes where the MA rules have prevented or hindered investment have included new Solar and Wind Farms, financing of electric and hydrogen buses, science parks and data centres, affordable housing and direct SME lending.


There may also be merit, should time allow, to reform both the Solvency Capital Requirement (SCR) and the Transition Measures on Technical Provisions (TMTP). We are generally supportive of the SCR framework but believe that there are areas where the calibration could allow more judgement e.g. the treatment of infrastructure assets, and that the regulatory review and approval processes for internal models could be streamlined. The TMTP has proved to be an effective bridge to smooth the transition between Solvency II and the previous regime – particularly in respect of the Risk Margin. If the solutions we propose to the Risk Margin are implemented, it will significantly reduce the need to reform the TMTP.  However, we note a risk that should the proposals to remove uneconomic prudence in the Matching Adjustment be followed through, this could have unintended consequences on the TMTP which lead to a reduction in solvency capital.  Our detailed response to HM Treasury sets out reforms to the TMTP that, if appropriately applied, will address this issue.

We consider that other issues raised in the SII consultation are less urgent and could be delivered by the PRA should Parliament determine that the on-shored rulebooks transition from Parliamentary legislation to the PRA rulebook.  Should a future regulator want to make further revision to the above three issues then they would of course be able to, but in a way that is mindful of any potential legislation enacted by Parliament.  In practice, the reforms proposed in the FRF consultation should ensure that HMT are made aware of any proposed changes in advance so Ministers can, if they deem appropriate, provide input to the regulator.  Parliament may conclude it wants a similar review mechanism.

We also believe that further changes to the PRA’s Solvency II regime could be made to support the Government’s climate change agenda, but these will require close engagement with interested stakeholders.  We therefore propose that the Government should establish a joint HMT-PRA rapid taskforce of stakeholders, including industry representatives, to take forward the development of a comprehensive “green framework” to ensure that any reform supports climate transition but avoids any unintended consequences.  We would suggest that the taskforce should report at, or before, COP26.  It could be similar, or linked to, existing activity such as the newly created Productive Finance WG or the Climate Financial Risk Forum.

Should you require a fuller response to this high-level overview we’d be happy to provide this to you or your team.

The UK’s regulatory framework – oversight and structure

Inquiry question:  Through what legislative mechanism should new financial regulations be made?

HM Treasury’s FRF consultation, as referenced above, is timely given the onshoring of EU regulation that was undertaken following the UK’s decision to leave the EU.  Overall, we recognise that Parliamentary time is not necessarily best spent on maintaining technical financial services legislation and that the overall intention of FSMA is for the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) to create rules that are, in effect, secondary legislation. Therefore, bringing the on-shored legislative texts together with the existing regulatory rulebooks is a logical next step, provided it is implemented effectively to avoid unintended consequences.  Maintaining the independence of the regulators, within a legislative framework set by Parliament, is also vital to the success of the overall regulatory framework that we operate in. Equally, it is important that the framework can be agile and can flex to enable the regulatory regime to adapt to changing circumstances.

Having reflected on HMT’s consultation there are four key points we would like to raise with respect to their proposals:

1)      Robust and independent regulation is key:  We believe that the proposed measures by government do not inhibit this, but much will depend on the detail that flows from HM Treasury’s consultation, particularly on the new “activity-specific regulatory principles” which could help direct the regulators to consider broader public policy issues as well as the specifics of the regulation of that sector. The examples given in paragraph 2.38 (a)-(c) of the consultation paper in the context of prudential insurance regulation seem to capture this appropriately. It may be more difficult in other areas of financial services, such as asset management, where defining “activities” may be more complex.  It will be important to calibrate the level of granularity of such principles. We support the regulators being ambitious about their public interest objectives which, although related to financial services, sit within broader public policy and public interests.


2)      Accountability and transparency:  We are supportive of the route that the development of regulation takes – i.e. the approach FSMA takes with respect to the role of Parliament, Government and Regulator. We do however think that there needs to be greater clarity on roles and responsibilities. We agree with the proposed direction of travel; it will be important to understand how each participant in the framework will be held accountable and the level of transparency in the process. Given the consultation process is at an early stage, we expect that this will be addressed in a subsequent consultation.


3)      Scope:  We note the consultation does not cover the full range of regulatory bodies that oversee financial services such as The Pensions Regulator, The Financial Ombudsman Service and Information Commissioner’s Office.  As this work progresses, we think HM Treasury will need to look at any changes it makes with regard to all regulators to ensure consistency of approach, as well as the cohesiveness of the legislative and regulatory framework.


4)      Timing: We understand that the government’s intention is to undertake a review of regulatory rules that go beyond just the EU on-shored areas. We consider this the right thing to do and it will result in efficiencies for the industry and our customers, as well as having benefits from an international perspective. As you will be aware, such a wide-ranging review will be resource-intensive for firms and have significant cost implications. Therefore, we have welcomed HM Treasury’s stance that there will need to be a full consultation process and a staged approach to implementation.


The UK’s approach to International Trade

Inquiry questions:

              How can the UK financial services sector take advantage of the UK’s new trading environment with the rest of the world?

              What should the Government’s financial services priorities be when it negotiates trade agreements with third countries?

Although some sectors may benefit from trade deals with other jurisdictions, we are mindful that for L&G, as a global player in asset management and a participant in selected international insurance markets (principally in the US), there is very little that we cannot currently do without trade deals.  We have successfully transitioned following Brexit, and we have been able to grow our global footprint.  Therefore, we believe that a trade deals are not a prerequisite to firms like ours growing our international business in the future.  What we have found is that regulatory dialogue - for example dialogue between UK and US authorities, has often provided more tangible and useful benefits.  An example would be the Covered Agreement for insurance signed by the US and UK Authorities to ensure continuity following Brexit.  Ironically, a detailed FS chapter may actually create the risk of unintended consequences – i.e. activity that we currently undertake is not formally part of a trade deal, therefore potentially bringing into question whether that activity is permissible going forward.  For us, we therefore think that the UK Government should prioritise regulatory dialogue – which may also align more with, for example, President Biden’s priorities for the United States.

With respect to the EU, we are aware that the UK-EU Agreement includes a declaration to create an MOU to allow for structured regulatory cooperation on financial services.  While this is to be welcomed, and seems to suggest the creation of a similar forum that exists between the EU and the US, we do not believe that this will be a vehicle to deliver determinations of all matters of equivalence.  Indeed, our observation would be that whilst equivalence with the EU could be useful, we should not be aiming for equivalence at any costs.  We need to balance what we could achieve from equivalence with the EU with the UK’s ability to be both internally and internationally competitive beyond the EU.  Clearly the importance of equivalence will vary from sector to sector, but a blanket approach could create unintended consequences.  This is especially so given that the EU can, if it chooses, withdraw equivalence determinations at short notice or allow decisions to lapse, as has been observed between the EU and SwitzerlandOne area where we know the UK will need to advance its thinking is with respect to clearing, where the EU have only granted temporary equivalence until June 2022.   

Therefore, to help the UK maintain and grow its position of a global leader in FS requires us to ensure that we have a robust and fit for purpose regulatory regime that will (i) attract business to the UK and (ii) allow existing firms to maximise their UK and global opportunities.  This requires modest reform, as outlined above, as opposed to significant reform.

Effective funding of financial services regulators

Inquiry questions:

Regulators need to have sufficient funding to deliver their statutory objectives and to both regulate and supervise firms effectively.  Equally, we think it appropriate that the financial services sector pay these fees, i.e. it should not be funded by the taxpayer via the Exchequer.  Overall, we believe that there are two key principles that needed to be considered when regulators charge fees: (i) does the calculation ensure that the polluter pays and (ii) is the charge commensurate with the level of regulation and supervision that the firm requires and receives.  Our observation is that the calculation is weighted too heavily towards new business and customer number metrics as opposed to these principles.  We think that a review of the funding calculation should be undertaken looking at best practice from other jurisdictions, as well as the regulators looking at where their energies are focussed, and resources deployed to see if that matches to where charges are applied.  Equally, the same standards and expectations should apply – i.e. timely payment of regulatory fees – like all forms of taxation, those who don’t pay increase the costs of those who do.  We would also observe that although regulators have to consult prior to charging fees, there is no review mechanism to ascertain whether there should be fiscal restraint.  Given regulators can write secondary legislation, and enforce it, there may be a role for Parliament, should it choose, to ensure resources are effective and proportionate – ultimately, it is customers who pay.

I appreciate I have covered a lot of ground in in summary form in this letter, so would be pleased to expand on any of this further at your convenience.


February 2021