The dogs that caught the car.

Professor Chris Grey’s analysis on Rees-Mogg’s early stumbles, a discussion of Solvency II as a case of post-Brexit regulatory change, and Ukraine.

Since its use on the very day after the referendum, it has become a cliché to say that Brexiters are like ‘the dog that caught the car’, achieving something they had never expected and then did not know what to do with. That was obvious from the very first hours after the 2016 vote when Johnson and Gove appeared on TV looking both shocked and scared.

Six years on, the Brexiters are still wondering what to do with their prize. More accurately, they are still arguing about it, because they were in fact the dogs, rather than the dog, that caught the car. Hence from the outset, they have been clawing and biting each other over who holds the pure flame of true Brexit and who is a betrayer of the faith. Only at brief periods could they unite to snarl that they embodied the will of the people in order to scarify remainers.

Embarking on a national project which had no agreed definition or destination is the fatal flaw that has run through almost all that has followed, and its latest manifestation is this period of agonizing over the specifics of what to do with post-Brexit ‘freedoms’. As I began to discuss in last Friday’s piece, this has been given particular impetus by the appointment of Jacob Rees-Mogg as Minister for Brexit Opportunities.

Rees-Mogg’s naive radicalism

That is partly because he is very clearly from the deregulatory, globalist wing of the Brexiters but also because of his political naivety. This has immediately come to the fore over the issue of conformity assessment marking. As I noted last week, Rees-Mogg appeared to endorse a proposal that the UK continue, unilaterally and indefinitely, to recognize the EU’s CE conformity assessment mark as valid for the UK market. More generally he seemed to accept that there could be other cases where the UK unilaterally accepted standards or regulations from the EU or other territories rather than duplicate them domestically.

Last week, he unequivocally endorsed this position in an interview with The Times, stating that:

This has far-reaching implications, which are at once pragmatic and sensible, but also radical and dangerous. It is pragmatic in addressing the problems (discussed many times on my blog) which multiple companies and industry bodies have raised of the pointlessness and cost of regulatory duplication, including that of conformity assessment marking and registration. It also rightly recognizes that as well as being damaging for UK companies, it is a disincentive for overseas firms to export to the UK, and an extra cost if they do, thus decreasing choice and/or increasing prices for UK (or at least GB) consumers.

So far, so good. But the idea of unilateral abolition of non-tariff barriers (NTBs) is also a radical extension of the already radical doctrine of free-market Brexiters like Patrick Minford to unilaterally abolish tariffs. In a way, it is also a more sophisticated one, in that it recognizes the importance of NTBs in a way which Brexiters have so often failed to do in relation to the implications of leaving the single market. But by the same token, in being even less protectionist than Minford, it would open the UK up to global imports with even fewer safeguards, or ‘protections’, and with no reciprocity for UK exporters. This is not, as Rees-Mogg’s deceptive rhetoric would suggest, a matter of a few “pettifogging rules”.

Which then leads to questions of what will disappear or be damaged if not protected? One clue may be in Rees-Mogg’s careful phrasing about not being “an economic nationalist” – suggesting he may be another sort of nationalist and, quite likely, he subscribes to the kind of ‘Anglo-Saxon superiority’ complex discussed in relation to free trade ideology by Professor Gerhard Schnyder in a recent blog. The implication is that, regardless of the terms of trade, British businesses will triumph simply because they are British. Or, equally likely, beneath his carefully cultivated English fogey image lies the stone-cold heart of the global fund manager. From that perspective, British businesses and consumers will simply sink or swim as they can, which is clearly not what the more nationalist and protectionist amongst leave voters had in mind.

At all events, Rees-Mogg’s version of Brexit differs markedly to that of several of the other dogs in the pack. In particular, unilateral acceptance of others’, especially EU, standards and regulations is very much in contradiction to the emphasis of so many Brexiters on sovereignty, in the narrow meaning of the UK Parliament being the source of all that governs us. To take one, highly pertinent, example, on the Rees-Mogg approach, why on earth has the UK expended so much energy on resisting SPS alignment with the EU in the context of the Northern Ireland Protocol?

Small wonder, then, that there were immediate reports that ‘Number 10’ has “distanced itself” from Rees-Mogg’s comments and that these comments did not imply any change in the government’s policy. This would seem to reflect Boris Johnson’s awareness of how radically Rees-Mogg is at odds with the broader Brexit ‘coalition’ that supports but also constrains his government. It also reflects Rees-Mogg’s failure to have understood where the vapid Brexiter talk of sovereignty has already led in terms of things like the conformity assessment fiasco. He hasn’t so much caught the car as missed the bus.

Why are we waiting?

The difficulties that Rees-Mogg’s early remarks have caused tell us something else. It’s not just about the contradictory overall framing of what Brexit means (e.g. in terms of globalism versus nationalism), it’s also about the mechanics of policymaking and delivery. In the case of conformity assessment, it fell to the Department for Business, Energy and Industrial Strategy (BEIS) to tell industry leaders last week, to their disappointment, that what Rees-Mogg had said did not indicate a change in policy.

For Rees-Mogg doesn’t run the government, even though his brief has implications across government. This might suggest that the entire idea of creating ‘Brexit opportunities’ as a ministerial specialism is rather stupid – or, perhaps, just a symbolic sop to the ever-restive ERG – when Brexit is now an endemic state. At the very least it means that whatever plans he may harbour can only be delivered through other departments, especially BEIS and the Treasury, and via the ‘government machine’ for which his only previous cabinet role as Leader of the House has ill-prepared him. So, to take a crucial example, whilst he talked in his interview about wanting to “look at” employment protections Rees-Mogg isn’t in a position to do this himself. These political and processual constraints on regulatory change are a reminder that Brexit has not suspended or over-ridden ‘normal politics’.

This infuriates Brexiters, with Iain Duncan Smith last week denouncing the government for having “done sweet FA” about his TIGRR proposals of last year. Sometimes, they blame Johnson’s lack of resolve – perhaps because, according to Nigel Farage, he is “a Remainer at heart”, although the reality is that at heart he believes in nothing but his own interests. Other times, the fault is seen to lie with the inertia, or even resistance, of the civil service, perhaps especially the Treasury. Again, it’s a familiar refrain from the last six years, with the denunciation of ‘Theresa the Remainer’ and of individual civil servants like Olly Robbins, as well as the civil service as a whole. Naturally, nothing is ever the Brexiters’ fault, nor their responsibility.

What they are only very slowly starting to recognize, and then only when forced by events, is just how complex it is to drive this ‘car’ they have caught and how unavailing their simplistic nostrums are when faced with this complexity. Last week, I discussed in some detail the case of gene editing regulation as an example of the Brexiter idea that new, high-tech industries are where independent regulation will be successful. I finished by quoting the ‘Bioscience’ section (pp. 48-50) of the UK in a Changing Europe’s report on post-Brexit public policy, where Dr Adrian Ely explains that “in its rush to diverge on this issue, the government is coming to understand the complexities of reconfiguring a tightly interwoven set of technical, legal, and institutional arrangements, and the political challenges of balancing public opinion, strategic industries, and different trade interests”.

Solvency II reforms

It’s this complexity – which is both technical and political, and political in both the narrow sense of process and the wider sense of competing interests and stakeholders - that Rees-Mogg is already running into and which he will keep running into. In last week’s piece, I also mentioned in passing the case of insurance companies’ solvency requirements, which has come to fore last week. It’s at almost the opposite end of the spectrum to gene-editing since the insurance industry is extremely long-established both in itself and in its regulation. But it’s also one of the Brexiters’ paradigmatic cases for their claim that ‘nimble’, independent UK regulation will yield Brexit dividends.

Again, it is a fiendishly technical area (some readers may want to skip – I only include some detail to demonstrate that it’s the details not the slogans that matter). The core issue is reform of the Solvency II regime and the rules this creates for insurance companies including how much capital they must hold in their reserves, the nature of the assets they are allowed to invest in, and how they calculate and report their liabilities and assets. Solvency II is an EU Directive (though to a considerable degree derived from UK regulation, and very much shaped by the UK when a member) which was in part a response to the 2008 financial crisis, although it only came into force in 2016. By regulating the quantity of reserves and the kinds of assets insurance companies can hold, it seeks to reduce the risk to policyholders and also to the financial system as a whole.

Last week, the government (specifically, the Treasury – not Rees-Mogg) announced its long-trailed intention to “seize on its post-Brexit freedoms” to “slash this red tape”, the basic idea being that if insurance companies can invest more of their assets and with less restriction on what they can invest them in, then it will unlock a ‘bonanza’ of investment, with UK infrastructure and Net Zero projects a particular beneficiary (even though in other contexts Brexiters aren’t very keen on Net Zero). This will be achieved partly by cutting the amount of capital reserves insurers must hold and partly by allowing them to invest more in illiquid assets (like infrastructure projects) rather than holding liquid assets (like, in particular, bonds).

Are these changes (in broad terms – we don’t know the detail yet) desirable? As with the gene-editing reform there are different views which, as with most regulatory questions, are to do with the balance of risk and benefit. An independent review of the Prudential Regulation Authority’s (PRA) Quantitative Impact Study (QIS) of possible changes to Solvency II (itself a response to the Treasury’s call for evidence on post-Brexit changes to insurance regulation) argues that these would actually hinder investment in infrastructure and other assets, and that there would be risks to the stability of insurers’ funds. Downstream, this could impact on income security for pensioners.

By contrast*, the outgoing Director-General of the Association of British Insurers argues that the risks to policyholders are over-stated and that the opportunities to contribute to decarbonising, amongst other things, must be weighed against them. Meanwhile, Bloomberg banking and finance columnist Paul Davies considers that in practice the changes will make little difference either to UK investment levels (because the real problem in the UK is lack of suitable projects to invest in, not lack of available funds) or to policyholder risks (because the UK has unusually high numbers of annuity policyholders, so the Bank of England, via the PRA, is unlikely to allow some of the technical changes that might otherwise be made).

As even this very cursory summary shows, not only are there different views there are also multiple actors and stakeholders, within and outside of government. It also shows that what sound like, and are, dry technical questions have potentially major impacts on the general public, for both good and ill. The government statement last week asserts that “protection for policyholders will remain a top priority”, but the word “a” does a lot of heavy lifting: the issue is balancing that protection against other priorities, especially that of expanding the types of investments that can be made and the amount available for such investments.

The reforms envisaged probably do entail slightly more theoretical risk for policyholders (and ultimately for the government). But even from a policyholder perspective that doesn’t necessarily make them a ‘bad idea’. If the existing regime is over-cautious and over-weighs avoiding risk to policyholders then it may also be the detriment of policyholders’ interests as it can mean higher premiums and lower returns, for example for annuity holders, than would otherwise be the case.

Solvency II and Brexit

The head of the ABI also points out that (contrary to the rosy picture Brexiters paint) Brexit has done considerable damage to the UK insurance industry, and it will be compounded if Britain lags behind the EU on reforming Solvency II. This latter refers to the fact that – as, again, with gene editing - whilst being presented as a use of post-Brexit freedoms there are parallel developments underway in the EU, where the Commission has already produced similar draft proposals for consultation to those the government announced it would bring forward in April. Indeed there are criticisms, including from Rees-Mogg, that the UK is lagging behind the EU. On the other hand, as FT Lex columnist Andrew Whiffin points out, it means that these changes would be coming with or without Brexit.

As with my discussion of gene-editing regulation, I don’t have the expertise to judge the merits of reforming Solvency II, though perhaps slightly more in this case, as I wrote a PhD on the regulation of, specifically, life insurance (but that was 30 years ago so, although many of the principles are familiar, the specific details have changed almost beyond recognition, especially as regards the EU). For what very little it’s worth I think the current regime probably is excessively cautious (and that, as regards pensions, there are far more significant risks than insurers’ solvency, especially those of mis-selling) but it is really a judgement call. However, my point here is that the insurance case poses similarly fundamental questions about post-Brexit regulation to those arising from gene editing.

Of course, it is inevitable that the government will trumpet, as it has already started to, any changes that are made as some huge triumph of post-Brexit freedom to impress its core voters. But the real questions include: will the outcome be much, or any, different to having been an EU member? If there are benefits that accrue that wouldn’t have been possible but for Brexit, how do they compare with the costs of Brexit to the insurance industry and more widely? Can the UK really be quicker in making changes because it acts alone, and does being quicker really matter? As Helen Thomas, the Financial Times’ Business columnist, writes of Solvency II reform “the implication that it is important that Britain go further and faster than its nearest neighbours is a concern … a few months at this stage makes little difference except in the fevered minds of politicians seeking a Brexit dividend”.

Perhaps a meta-question, which relates to the question of speed and the supposed ‘nimbleness’ that independence from the EU brings, is whether the UK state has the administrative bandwidth to undertake huge and complex regulatory reforms across multiple sectors of the economy simultaneously**? That last question becomes all the sharper considering Rees-Mogg’s other main statement in his Times interview, namely his desire, under the ‘government efficiency’ part of his portfolio, to slim down the civil service.

In the end, as in so many regulatory areas, but especially in insurance because of its often long-term nature, time will be the test. As was seen with the scandals over the mis-selling of endowment policies and PPI, it can take years or even decades for the effects of lax regulation to play out. I think it is quite likely that across a very wide range of areas, though probably not this particular one, future scandals will be seen to have been rooted in post-Brexit zeal. That zeal isn’t necessarily about de-regulation for, as I’ve argued before, whatever Rees-Mogg and the free marketers want, much of it will be about re-regulation. But the impetus will have been to demonstrate quick post-Brexit dividends by small or large changes to highly complex systems, with much scope for unanticipated consequences.

Northern Ireland Protocol and Ukraine

Finally, some brief comments on the Northern Ireland Protocol (NIP). That’s not entirely unrelated to regulation though because, in a way, the extent to which UK and EU goods regulations diverge is central.

I wrote an extra ‘unscheduled’ blog last Monday responding to Iain Duncan Smith’s latest salvo against the NIP, which itself seemed designed to pressure the government away from any compromise and towards even greater confrontation with the EU. But last week his week’s meeting of the Joint Committee seems to have been fairly harmonious, albeit with no ‘breakthrough’. That may mean nothing, but it prompts two thoughts.

One is just that, in general, Liz Truss is avoiding all of the combative speeches about the EU that her predecessor David Frost revelled in. That seems a good sign, as does the non-mention of the ECJ, which suggests that the government is continuing to row back on this belatedly introduced demand (goodness, how convoluted this is).

The other thought is that the abomination of the Russian attack on Ukraine may well help to reduce or even resolve UK-EU tensions over the NIP. Frost wrote a snide tweet last week jeering at the EU for being preoccupied with ‘olive oil’ whilst working with the EU on matters of war and peace. But that cuts both ways. How can the UK government sustain the absurdity of regarding agreement to the Agri-food regulations of a friendly neighbour as an affront to sovereignty whilst witnessing the obscenity of a real, and brutal, violation of sovereignty? And why should the UK continue its dogmatic stance on the NIP when wanting to work constructively with the EU and the US to counter Russian aggression?***

Not only are the shared interests of the UK and the EU in this crisis obvious but also (if perhaps less creditably) I think that Johnson and Truss both enjoy the trappings of global statesmanship, and don’t want that sullied by ongoing and actually rather arcane disputes about customs checks. Nor does the international pariahdom that would follow from the Ultras’ proposal to rip up the NIP sit comfortably with being part, let alone a supposedly leading part, of an international coalition to uphold the rules-based order.

Meanwhile, the blatant Putin apologism on display from Nigel Farage and Arron Banks is a reminder of whose best interests two of the mangiest purse dogs in the Brexit pack most consistently serve.

(*) It’s much more complicated than I’ve presented it here – for example, it’s not that the independent review just mentioned is against Solvency II reforms and the D-G ABI in favour, rather that they are both engaged in a highly technical debate about the particular ways the PRA analysis approaches such reforms. In my reading, D-G ABI is making the point that if the PRA approached the issue differently, then the problems identified in the review need not arise. Thus the ‘contrast’ is really with the PRA QIS approach rather than with the review of it. But, for my purposes, the point is that this debate shows that what is at stake is a calibration of risks and rewards under different regulatory scenarios.

(**) It’s also, by the way, going to be completely beyond any one individual, such as me, to keep abreast of the multitude of proposed reforms and consultations that are likely to flood out in the next few months.

(***) For an initial discussion of the UK’s post-Brexit independent sanctions policy and Ukraine see my piece of a month ago. More to come on this in the future, no doubt. Given the world-changing events of last week, the self-imposed schism with the EU seems more stupid than ever.

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Sources

• Text: This piece was originally published in Brexit & Beyond and re-published in PMP Magazine on 2 March 2022, with the author’s consent. | The author writes in a personal capacity.
• Cover: Unsplash/Terry Jaskiw. (Licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.)