UK Financial Services Future Regulatory Framework Review: a post-Brexit boost of competitiveness?

HM Treasury has published The Financial Services Future Regulatory Framework (FRF) Review: Proposals for Reform. It is the final package of proposals following a series of consultations on the Government’s proposed approach to the Future Regulatory Framework.

Economic Secretary John Glen MP has cited the FRF as providing “a once-in-a-generation opportunity to ensure that, having left the EU, the Government maintains a coherent, agile, and internationally-respected approach to financial services regulation that is right for the UK”.

Broadly, the proposed reforms outline a wholesale change to how regulators in the UK operate. They include:

  • Measures relating to the necessary changes to the statutory objectives and principles of the regulators (to ensure the Government’s priorities and objectives for the sector are fully reflected across the breadth of the regulators’ responsibilities).
  • Measures to ensure appropriate accountability, scrutiny and engagement of the regulators by HM Treasury, Parliament and other stakeholders.
  • The Government’s approach to returning responsibility for designing and implementing the direct requirements that apply to firms in certain areas of retained EU law to the regulators.

Setting out the process for this transition, the Government suggests that each piece of relevant retained EU law will need to be addressed individually in order to move to an approach that is consistent with the Financial Services and Markets Act (FSMA) model of regulation, once the necessary primary legislation is in place.

In practice, financial services regulators will take responsibility for setting many of the direct regulatory requirements which are currently set out in retained EU law. In all likelihood, many of the necessary changes will be delivered through an extensive programme of secondary legislation, a process which will take several years.

Change in political weather

The Government has been considering various ways to encourage growth and boost the UK's international competitiveness post-Brexit. Today’s consultation marks the first time the Government has specifically set out steps to introduce new secondary objectives for the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) based on economic growth and international competitiveness, so that they reflect the financial services sector as an “engine for growth” for the wider economy.

City Minister John Glen has long been a proponent of the change to encourage greater competitiveness by the regulators. However, both the PRA and FCA are on the record expressing their aversion to competitiveness objectives. We await to see how this apparent tension between the natural conservatism of regulators and the political ambitions of the Government plays out. 

That tension is implicitly recognised in the document. The consultation makes it clear that the FCA and PRA’s existing objectives, to maintain high regulatory standards and promote the safety of PRA-regulated activity, will have primacy. This prompts the question as to whether the Government’s proposals are mostly about optics or whether they will signal big changes as to how our financial services regulatory landscape operates.

Our view is that while the new duties will play second fiddle to their existing objectives, it does signal that the political weather has changed. The UK is not even close to going down the deregulatory route favoured by some Conservative backbenchers. However, these proposed new objectives mean that financial regulators will now be accountable both to the Treasury and Parliament on growth and competitiveness in a way they have not had to do so in the past. That should not be underplayed as it will formally now have to be incorporated in the regulatory decision-making process. 

The FRF Review makes it clear that the regulators’ responsibilities have been, and will continue to be, expanded post-Brexit through an extensive programme of secondary legislation, which is likely to take several years and not necessarily deliver industry with the clarity it is looking for. The interplay between the growing powers of the PRA and FCA, these proposed new objectives and the way the regulators are scrutinised in relation to these objectives is something to watch closely. 

Proposed measures

Today’s publication sets out proposals for reform based on the responses the Government received to its previous consultations on the FRF review. Please see below for an overview of each measure. Measures 1, 2 and 14 are ones we consider are particularly relevant to our clients:

  • The Government proposes the introduction of new secondary objectives for the PRA and the FCA in order to provide for a greater focus on growth and international competitiveness.
  • For the FCA, this will complement the regulator’s three existing operational objectives of consumer protection, market integrity and competition. As with the PRA, the FCA will be required to act in a way that facilitates the long-term growth and international competitiveness of the UK economy, including the financial services sector.
  • Both regulators will be required to report annually on their performance against their growth and competitiveness objective by the Government.
  • Alongside the proposed secondary objective to facilitate growth and international competitiveness, the Government proposes to amend the existing regulatory principles to state that this growth should occur sustainably in such a way that is consistent with the Government’s commitment to achieve net zero by 2050.
  • Under current requirements, HM Treasury must submit letters of recommendation to the regulators ‘at least’ once per Parliament. However, at present there is no requirement for either regulator to respond to the Government’s recommendations. The Government intends to introduce a new statutory requirement, necessitating the PRA and the FCA to respond to HM Treasury’s recommendations.
  • Under the proposals, HM Treasury would be required to publish the PRA and the FCA’s responses and lay them before Parliament.
  • Currently, it is at the discretion of the regulator to decide how and when to review their rules and assess the extent to which they function as intended.
  • The Government proposes the introduction of a new power for HM Treasury to be used only in exceptional circumstances, which would enable the Treasury to require the regulators to review their rules where it would be in the public interest to do so.
  • The Government proposes to introduce new accountability mechanisms which would require the regulators to consider the impact of exercising their powers to make rules and set general approaches on supervision, and to assess compliance with relevant trade agreements with overseas jurisdictions. Moreover, the Government proposes that the regulators consult HM Treasury on the general anticipated impact on these areas.
  • For trade agreements, this would require the regulators to assess, where proportionate and relevant, whether the exercise of their powers to set rules and general approaches on supervision is compliant with the UK’s obligations under trade agreements.
  • The Government intends to bring forward a new statutory requirement for the PRA and FCA to inform relevant Parliamentary Committees of the publications of consultations on any matter. This would allow Parliamentary Committees to carry out effective scrutiny.
  • Moreover, the Government intends to bring forward a new statutory requirement for the regulators to submit formal written responses to statutory consultations from Parliamentary committees.
  • The Government proposes that these bodies are placed on the same statutory footing in order to ensure consistency across the panels’ statutory underpinning. The Government proposes that this would be broadly the same as the existing statutory panels under the FSMA.
  • Regarding efforts to promote transparency around where and when panels have been consulted, the Government proposes the introduction of a new statutory requirement to systematise this existing practice and ensure clear and consistent communication by regulators on their engagement with panels across all of their work.
  • The Government proposes to implement a requirement on regulators to maintain statements on their processes for appointing members to panels, which would be subject to approval by HM Treasury prior to publication.
  • Moreover, the Government suggests that the regulators should also continue to consider the diversity of the sectoral composition of membership. In the context of emerging technologies, changing business models, and evolving consumer choices, the Government suggests that it is important that a balance of stakeholder types and views are included on panels.
  • The Government proposes a new statutory requirement that would require regulators to publish and maintain a public version of their framework for conducting cost-benefit analysis (CBA) in order to support transparency and provide stakeholders with clarity regarding when a CBA is conducted and what it will consist of.
  • The legislation will not specify the content of the framework in order to allow regulators flexibility in their operations.
  • The Government proposes the creation of a new statutory panel dedicated to supporting the development of the regulators’ CBAs.
  • The Government proposes a new statutory requirement for the PRA and the FCA to publish and maintain a framework for how they conduct rule reviews. The Government suggests that this will create an incentive for the regulators to systematise their review process.
  • The Government intends to introduce a power to repeal retained EU law, which it will use to repeal the direct regulatory requirements which apply to firms. The appropriate regulator will be able to replace those provisions with their own rules – a process which will take place over a number of years. The Government states it will work together with the regulators on this to ensure that there is a clear and transparent approach to transition.
  • At a minimum, the Government proposes that the ability to repeal retained EU law should extend to all:
    • EU Regulations and decisions related to financial services which are retained EU law by virtue of section 3 of the EU Withdrawal Act;
    • Statutory instruments made under the European Union Communities Act 1972 which are relevant to financial services, and statutory instruments made under other empowerments which implemented EU obligations relating to financial services;
    • EUWA statutory instruments relevant to financial services; and
    • Instruments made under specific empowerments contained in legislation of the type specified above.
  • There may be other elements of retained EU law that are not direct regulatory requirements, but which nevertheless should be repealed in order to facilitate regulator rulemaking.
  • The Government proposes to create a new Designated Activities Regime (DAR), which will oversee the regulation of certain activities outside of the FSMA authorisation process.
  • The DAR would only allow the relevant regulator to make rules relating to the designated activity, and not other unrelated activities of the firm.
  • The Government intends to use the DAR, where appropriate, to bring the activities currently covered by retained EU law into this new kind of FSMA regulation.
  • The Government sets out that, in some instances, it may be necessary to require the regulators to consider specific aspects of public policy which are not captured by the existing objectives and principles of the regulators.
  • It proposes to have an ability to set “have regards” which the regulators must take into account when exercising rules in specific areas of regulation.

Next steps

The consultation will remain open until 9 February 2022. The government welcomes responses from stakeholders including financial services institutions and firms, other businesses impacted by financial services regulation, trade associations and representative bodies and consumer groups.

Read other items in London Market Brief - February 2022