“The government has today laid before Parliament the second consultation on the Future Regulatory Framework (FRF) Review, Financial Services Future Regulatory Framework Review: Proposals for Reform (CP 548). The FRF Review provides a once-in-a-generation opportunity to ensure that, having left the EU, the UK establishes a coherent, agile, and internationally respected approach to financial services regulation that is right for the UK.”
John Glen, Economic Secretary to the Treasury, Written Ministerial Statement
The consultation sets out the government’s response to the feedback received on its October 2020 consultation on Phase II of the FRF Review and makes a series of proposals to deliver the intended Review outcomes, ‘building on the strengths of the UK’s existing framework’ established under the Financial Services and Markets Act 2000 (FSMA).
FSMA remains the right model for financial services regulation
The government believes that the FSMA model remains the most appropriate way to regulate financial services in the UK. Likewise, the PRA and the FCA remain the right institutions to deliver the UK’s financial services regulatory framework. The government is also not proposing to alter the macroprudential elements of the UK’s regulatory framework, taking the Financial Policy Committee outside the scope of the proposed changes.
What changes are being proposed?
- New/amended regulatory objectives and principles: The government plans to introduce a new secondary growth and international competitiveness objective for both the PRA and the FCA to reflect the importance of the financial services sector as an engine for growth across the wider economy and the UK’s position as a global financial centre. Alongside this new secondary objective, the government also proposes to amend the existing regulatory principles to clarify that growth should occur in a sustainable way that is consistent with the government’s commitment to achieve a net zero economy by 2050 to meet the obligation set out in section 1 of the Climate Change Act 2008.
- UK regulators to have responsibility for regulatory design and implementation: The government intends to return responsibility for designing and implementing regulatory requirements to the UK regulators, in a break from the approach under EU law. This will involve moving to a comprehensive FSMA model of financial services regulation, meaning 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. This will include providing the regulators with the necessary additional powers, where relevant, to make rules relating to those matters currently in retained EU law. As part of this, the government is considering granting the Bank of England general rulemaking powers over central counterparties (CCPs) and central securities depositories (CSDs), where they currently have only limited rulemaking powers.
- Increased accountability, scrutiny and engagement: The government is proposing enhanced mechanisms for accountability, scrutiny and oversight of the regulators by Parliament, HM Treasury and stakeholders, commensurate with the assumption by the regulators of the proposed significant new regulatory policymaking responsibilities.
The consultation closes on 9 February 2022. HMT acknowledges that delivering the changes – particularly those relating to returning responsibility for designing and implementing regulatory requirements to the UK regulators - will be a ‘significant undertaking’. Many of the necessary changes will be delivered through an extensive programme of secondary legislation, which is likely to take several years.
Please get in touch with any of the listed contacts if you would like to discuss the potential impact of HMT’s proposals for your business.
Authored by Rachel Kent and Virginia Montgomery.