UK Financial Services Future Regulatory Framework Review: Proposals for Reform

As part of the introduction of the Financial Services and Markets Bill to Parliament on 20.07.2022, HM Treasury has also published its responses to the November 2021 consultation on the Future Regulatory Framework review (FRF Review). The FRF Review had initially been established to consider how the financial services regulatory framework should adapt post-Brexit to remain fit for the future.

Subject to Parliamentary review, HM Treasury’s recommendations to the FRF Review will be implemented through the adoption of the Financial Services and Markets Bill.

What’s the discussion about?

The November 2021 consultation had asked for responses on 11 key questions relating to the government’s proposals for the regulatory regime. Amongst others, HM Treasury had requested views on proposals to: (i) amend the regulators’ statutory objectives and regulatory principles; (ii) strengthen their relationship with HM Treasury; (iii) enhance their engagement with stakeholders; (iv) repeal retained EU law; and (v) create a Designated Activities Regime (DAR) so that certain activities carried out by unauthorised persons can be regulated in manner which reflects the level of risk these activities pose.

Key takeaways from the FRF Review

We have summarised below the key outcomes of the FRF Review:

1. New secondary growth and competitiveness objectives for the PRA and the FCA

The Government is expected to introduce new secondary growth and competitiveness objectives both for the PRA and the FCA. The new objectives are aimed at ensuring the maintenance of high regulatory standards and alignment with international standards following Brexit, whilst facilitating the competitiveness of the UK economy, including this of the financial services sector.

It should be noted, however, that the Government’s proposal did not go as far as to propose a modification to the statutory objectives of the Payment System Regulator (PSR). In particular, the Government explained that the PSR, in its capacity as an economic and competition regulator for payment systems and service, already has its own unique objectives and, in this respect, a potentially new growth and international competitiveness secondary objective for the PSR would, in effect, be “duplicative”.

2. Climate change to be embedded into the UK’s regulatory principles

In facilitating growth and international competitiveness, the existing regulatory principles will be amended to ensure that such growth should occur in a sustainable way that is consistent with the Government’s commitment to achieve a net zero economy by 2050. This requirement is also in line with the obligation set out in section 1 of the Climate Change Act 2008.

The regulators will now be required to include an explicit reference to the net zero economy commitment by 2050 into their regulatory principles. The PSR’s sustainable growth principle will also be amended and require the PSR to have regard to section 1 of the Climate Change Act 2008.

3. New rule review frameworks for the regulators

HM Treasury will be able to require the regulators to review their rules when this is in the public interest. The Government had previously noted in the November 2021 consultation that it expects the proposed rule review power to only be used in exceptional circumstances, by way of illustration when there has been a significant change in market conditions or other evidence suggests that the rules in question are no longer relevant.

In addition to this, the legislation will provide for: (i) HM Treasury to have powers of direction on the scope, conduct, timing and making of reports; (ii) a requirement for HM Treasury to lay directions before Parliament; and (iii) a requirement for the regulator to report the outcome of the rule review to HM Treasury; and (iv) a requirement for HM Treasury to lay reports before Parliament and publish them, unless this would not be considered in the public interest.

As part of their new frameworks, the regulators will need to ensure that there are clear and appropriate channels for industry and other stakeholders to raise concerns.

4. New approach in the interaction between regulator’s responsibilities under FSMA and the government’s overseas arrangements and agreements

The regulators will need to consult HM Treasury on rule changes and supervisory policy that could interact with existing deference arrangements and assess the compliance of said rules changes with any relevant trade agreements with overseas jurisdictions.

5. Strengthening the role of the panels in providing important and diverse stakeholder input into the development of policy and regulations

As part of their general duties to consult, regulators are currently required, under the Financial Services and Markets Act 2000 (FSMA), to maintain stakeholder panels. The FCA’s Listing Authority Advisory Panel (“LAAP”)[1] and the PRA Practitioner Panel’s insurance sub-committee will now be placed on a statutory footing.

The regulators will also be required to report on their engagement with panels as part of the regulators’ annual reports and public consultations as well as to publish and maintain statements on their processes for appointing members to the panels. It should be noted that those requirements will also extend to the PSR.

6. The PRA and the FCA to set up a panel/s to support the development of their Cost Benefit Analysis (CBA)

The Government has opined that the introduction of such panels will improve the production and will increase stakeholders’ confidence that there is regular and independent input into the regulators’ CBA[2].

The panels will be required to provide feedback both at the “pre-publication” and “post-publication” stages of a consultation. The pre-publication input will be provided as part of the development of CBA for individual consultations. Post-publication, the panel will be asked to scrutinise regulators’ approach after the implementation of the relevant rules and consider more systematically the regulators’ approach and methodology for conducting CBA.

7. A new Designated Activities Regime to regulate certain activities

A new legislative framework for the DAR will be established, enabling HM Treasury to bring activities related or connected to financial markets within the scope of FSMA and provide for proportionate regulation of those activities. In outlining the rationale behind the introduction of the new regime, the Government has explained that there are currently certain activities related to financial markets that are regulated by retained EU law. Whilst the Government intends to bring these into the FSMA framework, it does not consider it appropriate to require all firms that are engaged on financial markets to become FSMA authorised persons, and to be supervised as if they are offering financial services directly themselves.

Pursuant to the DAR, HM Treasury will be able to ‘designate’ activities and enable the regulator to have rule making powers in relation to them. That having been said, the regulator will only be able to make rules in relation to the designated activity, and not to the wider set of activities performed by persons carrying out the designated activity. It must be noted that persons intending to carry out a designated activity will not require authorisation but would need to follow the relevant rules of said activity.

8. HM treasury to have the power to apply “have regards” and to place rule-making obligations on the regulators

HM Treasury will have the power to set ‘have regards’ which the regulators must consider when making rules in specific areas of regulation. This power is aimed at ensuring that regulators are required to consider aspects of public policy beyond those that are ‘generally applicable’, and which are not captured by the regulators’ objectives and principles. HM Treasury will also have the power to place rule-making obligations on the regulators, thus ensuring that essential regulations are contained in the regulators’ rulebooks.

What’s next?

Subject to Parliamentary approval, the outcomes of the FRF Review will be incorporated into domestic legislation through the adoption of the Financial Services and Markets Bill.

Alongside implementing the outcomes of the FRF Review, the Financial Services and Markets Bill aims to (i) maintain the UK’s position as an open and global financial hub following Brexit; (ii) harness the opportunities of innovative technologies in financial services; (iii) bolster the competitiveness of UK markets and promote the effective use of capital; and (iv) support the levelling up agenda, promote financial inclusion and consumer protection.

The Financial Services and Markets Bill has been scheduled to be laid for a second reading before Parliament on 7 September 2022.

Our Financial Services Regulatory team will be monitoring the next steps for the adoption of the Financial Services and Markets Bill and shall keep you up-to-speed with the latest developments.

[1] The FCA’s Listing Authority Advisory Panel (“LAAP”) is a non-statutory panel advising the FCA on policy issues that affect issuers of securities, and on policy and regulation proposals from the FCA listings function.

[2] CBA provides a structured way to assess what costs and benefits a policy is expected to generate. It attempts to describe and quantify where possible the likely impacts of a policy. This includes impact on industry, consumers, markets and the FCA.