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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.

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Read more here.

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