Future regulatory framework – Treasury to reform regulation post-Brexit

The Treasury’s latest consultation on the UK’s future regulatory framework proposes:

• changing the statutory objectives and principles of the FCA and PRA
• empowering the regulators to make rules to replace retained EU law
• creating new oversight structures, including a new panel to review regulators’ cost-benefit analyses

This is the final instalment of the Treasury’s review which has looked at how regulation should adapt to life outside the EU. Visit our dedicated webpage for more on the UK’s plans to shape its future regulatory framework.

Statutory objectives and principles

The consultation proposes introducing a new statutory objective for both the FCA and PRA requiring them to act in a way which facilitates the long-term growth and international competitiveness of the UK economy (including the financial services sector). The new objective would be “secondary” meaning that it would not require the regulators to act inconsistently with their primary objectives.

As well as their statutory objectives, regulators must consider certain principles when discharging their functions. One of these regulatory principles is the desirability of sustainable growth in the UK economy in the medium or long term. The consultation proposes changing this principle to clarify that such growth should happen in a sustainable way that is consistent with the UK’s net zero commitments.

Retained EU law

One outcome of Brexit and the onshoring process which retained much of EU legislation in UK law is that financial services regulations are now spread between statute books and rulebooks. The Treasury plans to address this by moving regulatory requirements to the regulators’ rulebooks via an “extensive programme of secondary legislation” which will take several years.

To achieve this, the consultation proposes that the Treasury take the power to repeal retained EU law relating to financial services. A Designated Activities Regime would be created, mirroring the current approach under the Regulated Activities Order, which would empower the regulators to make rules to replace retained EU law for specified activities (eg short selling and issuing securities) and potentially other activities in the future. The DAR represents a different kind of regulation where regulators make rules about how the designated activity must be carried out rather than requiring authorisation and generally applying those rules to the authorised firm.

The Treasury’s expectation is that the direct regulatory requirements in rulebooks would initially be similar to the equivalent requirements in the repealed legislation. However, the process of moving them off the statute books would allow the rules to be “properly tailored” to the UK and allow them to be updated more efficiently in the future. In some cases, the Treasury may specify policy considerations to which the regulators must have regards when making rules.

The Treasury does not think that the DAR approach would be suitable for financial market infrastructure, such as trade repositories, credit rating agencies, recognised investment exchanges and various entities related to payments and e-money. Instead, the Treasury believes there may be cases where it would be appropriate to bring FMIs within the FSMA authorisation framework. The Treasury is also considering granting the Bank of England more powers to make rules over central counterparties and central securities depositories.

Oversight

The consultation makes various suggestions for strengthening the engagement mechanisms that exist between Treasury, Parliament and the regulators. For example, the Treasury plans to set up a new statutory panel dedicated to supporting the development of the regulators’ cost-benefit analyses. The consultation specifically asks for views on whether it would be more appropriate for this panel to assess and challenge the regulator’s analysis on a pre- or post-publication basis.

Several of the suggestions formalise existing practices. For example, the consultation proposes requiring the FCA and PRA to publish and maintain a public version of their cost-benefit analysis framework and rule review framework. This is intended to ensure that there is a clear explanation for the cost-benefit analysis work conducted by regulators and systematise their evaluation of rules. The Treasury would also take on a new power to require the regulators to review existing rules (to be used in exceptional circumstances).

At least once a Parliament, the Treasury writes to the PRA’s Prudential Regulation Committee and FCA to make recommendations on issues related to matters of economic policy. The consultation proposes requiring the PRC and FCA to respond to these recommendations letters on an annual basis, covering their activity in the previous year.

The Treasury also suggests requiring the regulators to consider the potential impact on deference arrangements (including equivalence) and assess compliance with trade agreements when making rules and setting supervisory approaches.

Other proposals include:

• requiring the FCA and PRA to notify the relevant Parliamentary committee when they publish consultations
• requiring the FCA and PRA to respond to Parliament regularly and respond to letters and questions from parliamentarians
• placing the FCA’s Listing Authority Advisory Panel and the PRA Practitioner Panel’s insurance sub-committee on a statutory footing, in line with the PRA’s and FCA’s other panels.

Next steps

The consultation closes on 9 February 2022.