Big Bang 2.0 reforms put public at risk, warns Bank of England

Financial reforms aimed at boosting the growth of financial services in the UK and the City of London have “increased the risk” for insurers and policyholders, the Governor of the Bank of England (BoE) said.

The easing of rules, dubbed “Big Bang 2.0”, in a bid to unlock billions of pounds of investment in infrastructure projects has increased the risk that the pension fund may not have enough money to meet its obligations, Andrew Bailey told MPs.

“I don’t think it could pose a risk to financial stability, other things being equal, but it’s a risk to policyholders, I call it a fair life… it could happen,” Mr. Bailey said.

Equitable Life, once the world’s oldest mutual insurance company founded in 1762, was forced to close in 2000 amid scandal after it nearly collapsed due to erratic policyholder guarantees.

Many insurers lost large sums of their savings when the company stopped trading with new customers and cut payments to existing customers. Ten years later, the government announced £1.5 billion in compensation.

Ministers are proposing a series of changes to the financial market, dubbed the Edinburgh Reforms, to give the UK financial sector a competitive edge in global markets after Brexit thwarted it.

Sam Woods, Deputy Governor of the Bank of England and head of the Prudential Regulation Office, which oversees the insurance industry, told MPs on the Treasury Select Committee that changes in insurance regulation increase the risk that an annuity provider will not have enough capital to deliver on its promises. “The reform package as a whole increases the risk,” he said. “That’s a consideration the government made.”

Mr Bailey told MPs the bank “agreed to disagree with some of the reforms” but he hopes MPs will consider the bank’s arguments carefully when discussing measures.

He dismissed suggestions that the Bank of England would back the insurance proposals in exchange for the government’s agreement to remove controversial “summon” powers that would allow ministers to scrutinize and potentially veto regulators’ decisions.

He said the bank opposed the convening of the powers as they would “seriously undermine” the UK’s independence in financial regulation. Mr Bailey said he would not consider this type of “compromise” and he could not recall any issues that had ever been discussed simultaneously between the Bank of England and the Treasury.

MEPs have asked Bank of England officials to quantify the additional risk associated with the reforms.

Mr. Bailey added that the bank believes market conditions have returned to normal after last year’s mini-budget hurt the government bond market and caused mortgage rates to rise.

He said he believes the UK risk premium, which led to higher interest rates due to perceived economic instability, has largely disappeared.

But he warned that there was “something of a hangover effect”, as evidenced by the increase in sales of government bonds or UK securities after the September mini-fiscal shock. “It will take time to convince people that we are back to what it was before,” he added.

“Now banks have to treat customers who have payment problems in a very different way than before. So we are seeing fewer failures and I expect there will be fewer in the future.”