Financial Services – Future Regulatory Framework Review: Proposals for Reform
Now that the UK has left the EU, HM Treasury wants to ensure that the government maintains a coherent, agile, and internationally-respected approach to financial services regulation that is right for the UK. The Future Regulatory Framework (FRF) Review sets out the government’s proposals for important changes to the UK’s financial services regulatory framework. This includes changes to the regulators’ statutory objectives and enhanced mechanisms for accountability, scrutiny and oversight of the regulators by Parliament, HM Treasury and stakeholders. The consultation also sets out how responsibility for implementing regulatory requirements will be given to UK regulators, as opposed to those in the EU.
This article focuses on the main aspects of the consultation that will affect the majority of our clients.
The European Union (Withdrawal) Act 2018 enabled EU law to be converted into UK law, which is referred to as retained EU law. So now many of the direct regulatory provisions applying to firms are set out in retained EU law, rather than in the rulebooks of the regulators. The Act allows HM Treasury, the Bank of England and the regulators (the Prudential Regulation Authority and the Financial Conduct Authority) to make changes to the retained law where it is no longer appropriate for the UK, and is referred to as onshoring. This can only be amended through primary legislation, meaning it is not possible in many areas to regulate in an agile and flexible way to reflect changing markets.
If the proposals in the FRF Review are implemented, the regulators will take responsibility for determining the direct regulatory requirements that will apply to firms, whereas previously they were set by the EU.
The government considers that rulemaking is a specific area of regulators’ responsibilities where the relationship with HM Treasury requires strengthening. At least once during every Parliament, the government makes recommendations to the PRA and FCA, but currently there is no requirement for these bodies to respond, and so the government intends to make it a statutory requirement that they do so. The proposals will also see the regulators take on increased responsibility for direct regulatory requirements which apply to firms, whilst Parliament’s focus will continue to be on setting the strategic framework and objectives for financial services regulation, and holding the regulators to account for their actions.
Direct regulatory requirements are the obligations that firms must follow, for example a requirement to hold a certain level of capital, or to act (or not act) in a particular way. In order to move to a comprehensive model of financial services regulation, the government intends to ensure that the financial services regulators have the ability to determine the direct regulatory requirements which are currently set out in retained EU law. This will ensure that there is a consistent approach taken to financial services regulation across UK markets, allowing the development of coherent and user-friendly rulebooks. But in order to confer this responsibility on the regulators, it will be necessary to repeal a significant amount of retained EU law, although the government aims to ensure that continuity is maintained where appropriate. Furthermore there may be other elements of retained EU law that are not direct regulatory requirements, but which nevertheless should be repealed. This process will take place over a number of years, although any particular piece of retained EU law will not cease to have effect until the regulator rules which replace it are in place.
The government is also proposing to create a new Designated Activities Regime (DAR) to cover certain activities that are currently covered by retained EU law but in their view do not need to be fully regulated. Such activities should still remain subject to an appropriate level of regulation but it would not be appropriate to make it a regulated activity. However the government does not intend to restrict the DAR to retained EU law only, and it will be possible to designate other activities in the future if necessary.
By repealing the direct regulatory requirements that apply to firms in retained EU law, the regulators can determine which requirements will apply to firms in their rulebooks. However, there are also provisions in retained EU law which do not set direct regulatory requirements on firms, which form the wider “regulatory architecture” that establishes the regulatory regimes. Deleting significant parts of retained EU law is a complex task, and is likely to require a number of other changes in order to keep this regulatory architecture functioning effectively.
The process of moving from retained EU law to a comprehensive model of regulation will be a significant undertaking, and will take a number of years. This will involve the government identifying the areas of retained EU law which need to be repealed, and putting in place any necessary obligations through secondary legislation. The government and the regulators will ensure that there is sufficient time for HM Treasury and the regulators to consult where necessary, and that there is a sufficient time for firms to adapt to any rule changes before they are applied.
In many instances, the government would expect the regulators to initially replace the repealed provisions with rules that are similar to those which are already in place. However, this approach will allow the regulators to ensure that the rules are properly tailored for the UK markets, and appropriately reflect their objectives. It will also mean that the rules can be more efficiently updated in the future, for example in response to new global standards, or to take account of new business models. The government and the regulators recognise the importance of providing stability and continuity for firms and their customers by avoiding unnecessary changes.
In theory, the changes should lead to more appropriate regulation for insurers, including more proportional regulation for smaller insurers. But the process will take time and the actual outcomes remain to be seen.
The consultation closes on 9 February 2022.