As mentioned in our 'UK regulatory reform in 2022 (part 1)' blog, UK regulatory reform pushes on, with its key drivers of bolstering the UK’s position as a global financial centre and, as the UK Chancellor stated in a Speech in July 2021, a financial services sector that is ‘open, competitive, technologically advanced and sustainable.'. Further developments in 2022 include in relation to the UK government's comprehensive review of the UK regulatory framework as a whole.
UK regulatory framework review
The UK's Treasury Department published, in November 2021, the second and final consultation in Phase II of its review of the UK regulatory framework (the Review), established to consider how the framework should adapt to the UK’s position outside the EU and ensure it is ‘fit for the future’.
The Treasury’s first Phase II consultation, published in October 2020, set out an overall blueprint for UK financial services regulation, focusing on the split of responsibilities between the UK Parliament, government and the UK regulators, and on regulatory accountability. The second consultation builds on these areas and feedback received, providing further proposals on regulatory rule-making responsibilities, accountability and objectives and principles.
The consultation confirms the UK Treasury’s view that the regulation model set out under the key piece of financial services legislation, the Financial Services and Markets Act (FSMA) 2000, remains the most appropriate way to regulate UK financial services and, with enhancements, is overwhelmingly supported by stakeholders. The UK's prudential regulation authority, the Prudential Regulation Authority (PRA) and its financial conduct authority, the Financial Conduct Authority (FCA), remain the appropriate institutions to deliver that regulation and macro-prudential regulation will not be altered.
As proposed, the UK regulators will resume full responsibility for setting and implementing regulatory standards, as set up under FSMA 2000. They will be provided with additional powers to do so in relation to direct regulatory requirements under EU retained law through a new Designated Activities Regime (DAR). The significant process of repealing EU retained law and replacing it with regulatory rules will take place over several years through primary and secondary legislation, allowing the UK Parliament to scrutinise the changes.
The UK government will also provide the regulators with rule-making powers in relation to e-money and payment providers, and recognised investment exchanges, where needed, and is considering providing the Bank of England with such powers in relation to central counterparties and central securities depositories. It considers the FCA’s current powers in relation to trade repositories and credit rating agencies, are sufficient.
Strengthening accountability and scrutiny
The consultation also includes proposals to strengthen UK regulatory accountability and scrutiny by Parliament and the Treasury, recognising the importance of this given the increased regulatory rule-making responsibilities also being proposed.
Such measures will include formal statutory mechanisms through which the regulators will provide information to Parliament, particularly the Treasury Committee, on which it will exercise its scrutinising powers; a new requirement for the PRA and FCA to respond, on an annual basis, to the Treasury’s recommendation letters, issued at least once a Parliament, covering their activity in the previous year; and a new Treasury power to require the regulators to review existing rules where the government considers this would be in the public interest.
These proposals have been welcomed by industry and Parliamentary Groups, both of which expressed strong views following the first consultation that the increased rule-making powers of the regulators needed to accompanied by increased accountability and scrutiny. That said, there have been calls for the Treasury to go further and introduce a regular and independent review of the UK regulatory regime, with UK financial services industry body, CityUK, stating that this would ‘ensure the rules are proportionate, coherent and achieve their goals in the most efficient way possible.’.
New regulatory objective and principle
Also reflecting the regulators’ greater responsibility for rule-making going forward and the fact that, while the UK was in the EU, the government was able to ensure wider public policy matters, such as growth and international competitiveness, were considered as part of the EU negotiation process, the consultation proposes the introduction of:
- a new growth and international competitiveness regulatory secondary objective (the PRA and FCA, of course, have existing secondary objectives of promoting competition between firms and in the interests of consumers respectively); and
- an amendment to the existing regulatory principle - to take into account the desirability of sustainable growth in the UK economy – so that it is clear such growth is consistent with the government’s commitment to achieve net zero emissions by 2050.
In introducing the objective but placing it at the secondary level, the Treasury may have satisfied both industry, which called for such an objective at the primary level, and the UK regulators, who expressed concern at its introduction at either level given, in the regulators’ view, the Financial Services Authority’s (predecessor regulator to the PRA and FCA) similar objective was partly to blame for the light-touch regulation seen in the lead up to the financial crisis.
“[While] these proposals have been welcomed by [UK] industry and Parliamentary Groups…. there are calls for the [UK's] Treasury [Department] to go further.”