HM Treasury has published proposals to reform the way the regulatory framework for the financial services industry should change now that the UK is no longer part of the European Union.
John Glen, economic secretary to HM Treasury, said that, by taking advantage of the UK’s “new freedoms”, “the government wants to build upon our historic strength to renew the UK’s position as the world’s pre-eminent financial centre”.
“The Future Regulatory Framework (FRF) Review will, therefore, play a critical role in delivering the vision for the sector set out by the chancellor. The FRF Review provides 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.”
The main change would be to move away from “retained EU law” as it is “difficult and time-consuming to update, and places substantial resource pressure on parliament, which is asked to consider a large volume of highly technical provisions”, the Treasury said.
As the vast majority of the feedback to the last consultation in October 2020 was in favour of retaining the model under the Financial Services and Markets Act 2000 (FSMA), that is going to be the government’s starting point.
It intends to keep the current framework as it “remains the most appropriate way to regulate financial services in the UK”, but it will expand it with a greater focus on growth and competitiveness.
This will entail introducing additional statutory secondary objectives for both the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The changes will also be in line with the UK’s commitment to achieve a net zero economy by 2050.
In detail
The Treasury added: “The government intends to move to a comprehensive FSMA model of financial services regulation, with the appropriate enhancements to ensure that the regime remains fit for the future, and can support the UK’s high standards of regulation.
“This means that the financial services regulators will take responsibility for setting many of the direct regulatory requirements which are currently set out in retained EU law. Direct regulatory requirements are the obligations that firms are expected to follow, with the framework within which the regulators must operate being set by parliament and the government.
“Regulation in financial services is evolving all the time, with new developments and technologies requiring regular amendments. Empowering the regulators to set the direct regulatory requirements will allow for the necessary evolution of the rulebook, in a way that maintains the UK’s high standards of regulation.
“Transferring that responsibility to the regulators will require the government to gradually repeal significant amounts of retained EU law so that the regulators can replace it with the appropriate regulatory requirements in their own rulebooks.”
The FCA and PRA already have extensive rulemaking powers under FSMA, but the Treasury believes they are not “sufficiently broad enough” to allow them to make rules covering all areas of financial services that the retained EU law legislates on.
Initially, the watchdogs will be expected to replace the repealed provisions with rules similar to the ones currently in place. This will ensure that rules are “properly tailored for the UK markets” and reflect their objectives.
Such a move will also give the FCA and PRA the ability to update regulations more efficiently in the future.
Balancing act
Tim Sargisson, chief executive of Sandringham Financial Partners, told International Adviser that while the move towards greater regulatory independence is welcome, the government should make sure costs to firms and consumers are not affected by the proposed changes.
“Clearly a laudable approach by Sunak to remove laws originally imposed by Brussels, thus giving British firms more flexibility to boost the national economy. The proposals outlined are designed to give the FCA and PRA the ability to replace EU laws with their own, which are better suited to the UK economy.
“I’m in favour of amending and strengthening the regulators’ existing proportionality principle to reduce regulatory burdens on firms and including new principles relating to financial inclusion and duty of care to increase the regulators’ focus on harm to consumers.
“The FCA has consulted on the introduction of a new ‘consumer duty’, which seeks to set higher and clearer expectations for the standard of care firms should provide to consumers.
“Very important that existing objectives of ensuring that UK firms remain safe and sound, that the UK’s markets function well, and that consumers and users of financial services receive an appropriate degree of protection.”
Sargisson continued: “The FCA’s operational objectives are to secure an appropriate degree of protection for consumers, protect and enhance the integrity of the UK financial system, and to promote effective competition in the interests of consumers.
“The regulator must ensure that any burden or restriction via regulation is proportionate to the expected benefits, taking into account costs to firms and consumers.
“Redress the balance so that the general principle that consumers should take responsibility for their decisions is reinforced,” he added.
