| Link(s): https://www.gov.uk/government/consultations/future-regulatory-framework-frf-review-consultation |
Context
HMT has announced that the period of consultation for its review of the regulatory framework has been extended to 19th February 2021.
The review considers how the regulatory framework for financial services needs to adapt to be fit for the future, particularly taking into account the UK’s exit from the EU.
Key points to note
- Phase I of the review (in 2019) focussed on the specific issue of co-ordination between the UK’s regulatory authorities and has led (amongst other things) to the Regulatory Initiatives Grid being established.
- Phase II will examine the broader regulatory framework for regulation of financial services in the UK and will be conducted in two stages:
- This first consultation sets out an overall blueprint for financial services regulation, focusing on the split of responsibilities between Parliament, the Government and the financial services regulators. In doing so, it highlights the importance of ensuring appropriate and effective arrangements for accountability, scrutiny and public engagement with the policy-making process, particularly in relation to the UK’s financial services regulators.
- The second stage will consist of a second consultation in 2021, which will set out a final package of proposals and how these will be delivered, considering the responses from the first consultation to help inform the content.
The consultation outlines that the Government believes the existing FSMA model continues to make sense for the UK, providing a tried and tested foundation for adapting the UK’s regulatory approach outside of the EU, and has therefore proposed a blueprint approach which would adapt existing arrangements under FSMA in three key ways:
- A clear division of responsibilities as originally envisaged by the FSMA model.
- Government and Parliament will set the regulatory framework through legislation, while the financial regulators should, in most instances, be responsible for setting the requirements which apply to financial services firms and markets.
- This would mean that the majority of retained EU provisions would be transferred to regulator rulebooks.
- Some elements of legislation would not be appropriate to become the responsibility of regulators and would need to remain on the statute book. This would include the scope of regulated activities, where the important question of whether an activity should be subject to regulation is more appropriate for Government and Parliament to decide.
- Inclusion of policy framework legislation for key areas of regulated activity in FSMA model
- The original FSMA model did not provide for Government and Parliament to set the policy approach for specific areas of financial services regulation. The proposal considers that new policy framework legislation covering key areas of regulation should be included as part of the adapted regime, which will allow for more strategic policy input by the UK’s democratic institutions.
- This proposed approach would involve Government and Parliament setting out in legislation the overall purpose and regulatory approach needed for the prudential regulation of insurance business.
- Any such legislation would include an explanation of specific policy priorities relevant to insurance prudential regulation, set out in regulatory principles, which the regulator should take into consideration when developing policy and designing regulatory requirements for that activity. The approach would need to work for specific markets where participants may be carrying out a range of different activities.
- This activity-specific policy framework legislation would be high-level, focusing on the overall purpose, approach and key policy considerations relevant to each particular regulatory regime and would not set the requirements that would apply to regulated firms, which would be the responsibility of the relevant regulator(s).
- This type of legislation should be designed to set the long-term policy framework for key areas of regulation and should be relatively stable over time but allow for adaptation to take account of emerging regulatory challenges using the affirmative secondary legislation procedure.
- Updates to existing FSMA transparency requirements to reflect new activity-specific policy framework legislation.
- FSMA already sets transparency requirements for the regulators to explain and consult on their policy and rule proposals. However, these requirements would need to be updated to facilitate transparency around how the regulators meet the obligations set out in new policy framework legislation.
- In addition to the existing requirement to explain how proposals will meet their overarching statutory objectives and how they have had regard to the general FSMA regulatory principles, it is proposed that regulators will also be required to explain how their proposals meet the statutory purpose set for a particular regulatory regime and how they have taken into consideration the activity-specific regulatory principles.
The Government believes that the post-EU framework blueprint builds on the strengths of the existing FSMA model and meets the objectives set for the future regulatory framework review as follows:
- Clear, coherent and effective allocation of regulatory responsibilities – a clearer split of responsibilities than has so far existed under the FSMA model and while the UK has been a member of the EU.
- Appropriate policy input by democratic institutions – the post-EU framework proposal aims to enhance policy input, giving Government and Parliament a strategic role in financial services regulation which enables them to set out key policy issues which must be considered in the design of regulatory requirements.
- Clearer basis for effective accountability and scrutiny – the post-EU framework proposal would support more effective accountability and scrutiny, particularly in relation to the work of the regulators. Activity-specific policy framework legislation will provide a clearer set of purposes and policy considerations by which the performance of the regulators can be assessed in each key area of regulation.
- Agile regulatory regime – activity-specific policy framework legislation should be sufficiently high-level to be durable and require infrequent updating, while specific requirements set through regulator rules can be flexed and updated efficiently in order to take account of changing market conditions, address emerging risks early on and facilitate innovation in financial services provision.
- Coherent and more user-friendly regime for end-users –the post-EU framework proposal aims to bring about, as much as possible, a single source of requirements for firms – the regulators’ rulebooks and ensure those regulatory requirements can be designed and expressed in ways best suited to UK circumstances.
- Internationally respected approach – the post-EU framework proposal makes the most of the UK’s internationally respected regulators. Given the UK’s position as a global hub for financial services and the important role it plays in the international financial system, a regulatory approach which commands confidence internationally should be a priority for the UK framework.
Next actions
The consultation has been extended and now closes on 19th February 2021. Firms can respond via email to: FRF.Review@hmtreasury.gov.uk