Contributors
At his Mansion House speech on 1 July 2021, the Chancellor announced the government's aspiration for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses, and powering growth across the UK. In a step towards achieving this vision, the Treasury is now consulting on detailed proposals for reform of the financial services regulatory framework, building on its initial consultation which closed on 19 February 2021.
Why the need for review?
The predominant catalyst for review of the financial services regulatory framework was the impact of Brexit on the existing model. The current framework was introduced by FSMA 2000 and splits responsibilities across Parliament, HM Treasury and the regulators. Sitting above this was EU financial services regulation which became significantly more detailed over time, impacting the operation of the FSMA model by requiring the regulators to operate within the EU framework. The Future Regulatory Framework (FRF) Review was set up to consider how the existing framework should be adapted to ensure its sustainability and suitability for the UK's new position outside the EU.
Phase II of the FRF Review involves two consultations regarding how financial services policy and regulation are made in the UK. The second consultation: 'Financial Services Future Regulatory Reform Review: Proposals for Reform' is now underway. The paper sets out the government's detailed proposals on how it believes the strengths of the existing financial services regulatory model should be adapted to deliver the intended outcomes of the FRF Review. It also responds to feedback received on the first consultation.
Objectives of the review
The initial consultation outlined the overarching objectives of the FRF Review. The current consultation states that the approach set out within it is consistent with those objectives, which are as follows:
- The clear, coherent and effective allocation of regulatory responsibilities
- Appropriate policy input by democratic institutions
- A clearer basis for effective accountability and scrutiny
- An agile regulatory regime
- A coherent and more user-friendly regime for end-users
- Establishment of an internationally-respected approach.
What does the consultation propose?
Despite changes in the landscape, the government believes that the current structure and roles of the FCA and PRA remain the best way to deliver the financial services regulatory framework in the UK, and that the overarching model in FSMA remains the appropriate basis for regulation.
Initially, EU legislation that applied directly in the UK at the point of exit was onshored by the European Union (Withdrawal) Act 2018. This programme required HM Treasury and the regulators to legislate to amend the retained EU law to ensure that it would continue to operate effectively. The expectation is that although provisions were initially carried over in (broadly) their existing state, they will subsequently be tailored over time. To allow for this, the consultation proposes a power for the government to repeal the direct regulatory requirements so that the appropriate regulator can replace the provisions with their own rules.
The consultation proposes a significant change to the model in that the UK financial services regulators will, in the long run, assume responsibility for designing and implementing regulatory requirements applicable to firms. In order to balance this substantial increase in policymaking responsibility, the proposals include enhanced mechanisms for the regulators to be overseen and held to account by HM Treasury, Parliament and stakeholders. These include:
- A statutory requirement for the PRA and FCA to respond to HM Treasury recommendations
- Formalising in statute the mechanisms through which the regulators provide Parliament with information to ensure it has sufficient information to effectively conduct its powers of scrutiny over them
- A power for HM Treasury to require the regulators to review their rules where the government considers that this is in the public interest
- Placing the FCA's Listing Authority Advisory Panel and PRA Practitioner Panel's insurance sub-committee on a statutory footing
- New accountability mechanisms that require the regulators to assess the impact of exercising their rule-making powers and impose policies on supervision upon the UK's deference arrangements
- A requirement that regulators draft and publish a statement covering their approach to the recruitment of statutory panel members to ensure the diversity of stakeholder views within membership.
The government also plans to amend the regulatory objectives and principles. In particular, the consultation sets out its plans to introduce new statutory secondary growth and international competitiveness objectives, applicable to both the FCA and PRA. Correspondingly, the consultation proposes that the existing principles should be amended to clarify that growth should be sustainable and consistent with the commitment to achieve a net zero economy by 2050.
Finally, the consultation includes a proposal for the establishment of a new 'designated activities' regime through which certain activities which are outside the scope of FSMA and the RAO may nevertheless be regulated – for example, to enable the current EU-style short selling rules to come within the remit of the regulators without the need to amend the regulated activities perimeter.
Since the focus of the FRF Review is on the necessary adaptations of the framework following Brexit, the FRF Review does not propose any changes to the structure or functions of the existing complaints (FOS) or compensation (FSCS) processes.
What else?
In many ways, this consultation represents the culmination of many announcements and initiatives, ranging from the drive to sustainable finance through the mechanisms for moving legislation on post-Brexit to FCA's new look as an "innovative, assertive and adaptive" regulator. It is clear that the basic regulatory architecture is not changing, but the opportunity has now presented itself for stakeholders to comment on regulatory powers and future ways to address the need for updating pre-Brexit laws.
Next steps
HM Treasury has acknowledged the fact that the proposals constitute a significant undertaking which is likely to take several years, not least due to the extensive secondary legislation that will need to be put in place to deliver many of the changes.
The current consultation closes at 11:45pm on 9 February 2022 and HM Treasury is encouraging responses from all stakeholders who will be impacted by the proposed changes including:
- Financial services institutions and firms
- Businesses impacted by financial services regulation
- Trade associations and representative bodies
- Consumer groups.
HM Treasury will consult separately on the regulatory perimeter for systemic payments firms, which are regulated domestically rather than by retained EU law, in the first half of 2022.
