On 9 November 2021, HM Treasury published its response to the feedback received to its earlier consultation on the launch of the second phase of the Future Regulatory Framework (FRF) Review, which considers how the regulatory framework for financial services needs to adapt to be fit for the future. The response makes a series of proposals to deliver the intended outcomes of the FRF Review, building on the strengths of the UK’s existing framework. The deadline for comments on the proposals is 9 February 2022.
The proposals in the response include:
- Introducing new statutory secondary objectives for the PRA and the FCA:
- For the PRA, the government intends to introduce a new growth and international competitiveness objective as a secondary objective to sit alongside the PRA’s existing secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised persons. This will mean that, as the PRA advances its general objective to promote the safety and soundness of PRA-authorised persons and its insurance specific objective on policyholder protection, the PRA will be required to act in a way that, subject to aligning with international standards and so far as is reasonably possible, facilitates the long-term growth and international competitiveness of the UK economy, including the financial services sector. As with the PRA’s competition objective, this would not require or authorise the PRA to take any action inconsistent with its primary objectives.
- For the FCA, the government similarly intends to introduce a new growth and international competitiveness objective as a secondary objective. This will mean that the new objective will complement the FCA’s three existing operational objectives of consumer protection, market integrity and competition, all of which sit underneath the FCA’s single strategic objective to ensure that relevant markets function well. As will be the case for the PRA, as the FCA advances its operational objectives, the FCA will be required to act in a way that, subject to aligning with international standards and so far as is reasonably possible, facilitates the long-term growth and international competitiveness of the UK economy, including the financial services sector. This new objective would also not change the FCA’s competition duty which requires it to promote effective competition in the interests of consumers so far as is compatible with meeting its objectives to protect consumers and enhance market integrity.
- Alongside the new secondary objective to facilitate growth and international competitiveness, the government proposes to amend the existing regulatory principles to be clear 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 to meet the obligation set out in section 1 of the Climate Change Act 2008.
- Moving to a comprehensive FSMA model and introducing a new Designated Activities Regime:
- The government intends to move to a comprehensive model of regulation as set out by the Financial Services and Markets Act 2000 (the FSMA model), with the appropriate enhancements to ensure that the regime remains fit for the future, and can support the UK’s high standards of regulation. This means that the financial services regulators will take responsibility for setting many of the direct regulatory requirements which are currently set out in retained EU law.
- The government will ensure that the deletion of retained EU law happens in a way that maintains continuity. Any particular piece of retained EU law will not cease to have effect until the regulator rules which replace it are in place. Transferring that responsibility to the regulators will require the government to gradually repeal significant amounts of retained EU law so that the regulators can replace it with the appropriate regulatory requirements in their own rulebooks. This process – of repealing the relevant retained EU law and concurrently replacing it with the appropriate regulator rules – will take place over a number of years.
- The government proposes to create a new Designated Activities Regime (DAR). The DAR will be a mechanism to allow the regulation of certain activities outside the FSMA authorisation process. This will mirror the existing approach for the Regulated Activities Order (RAO): the government will determine the activities that are in scope via secondary legislation (within a framework established in primary legislation) and this will empower the regulators to determine the rules that will regulate these activities. Persons carrying out a specific activity would be required to follow the regulators’ rules relating to that activity, and there would be appropriate enforcement mechanisms and penalties for failure to comply with the relevant rules. A flow chart concerning the application of the RAO and DAR can be found on page 61 of the response.
- Strengthening the accountability mechanisms that exist between HM Treasury and the regulators:
- Introducing a new requirement for the PRA and the FCA to respond to the recommendations letters issued by HM Treasury, and a new power for HM Treasury to require the regulators to review their existing rules where the government considers that it is in the public interest.
- Introducing new accountability mechanisms requiring the regulators to consider the impact of exercising their powers to make rules and set general approaches on supervision, and to assess compliance with relevant trade agreements with overseas jurisdictions. This would consider the possible impact on relevant deference arrangements afforded to the UK by overseas jurisdictions, where proportionate and relevant, as well as where the UK has provided deference to overseas jurisdictions (including equivalence decisions and Mutual Recognition Agreements). When making rules and when setting general approaches on supervision where appropriate and proportionate, the government proposes that the regulators would be required to consult HM Treasury on the general anticipated impact on these areas, providing the opportunity for further dialogue to assist the government with the management of the UK’s deference arrangements. For trade agreements, this would require the regulators to assess, where proportionate and relevant, whether the exercise of their powers to set rules and general approaches on supervision is in compliance with the UK’s obligations under the UK’s trade agreements.
- Granting the Bank of England general rulemaking powers over central counterparties and central securities depositories, where they currently have only limited rulemaking powers.
- Requiring the regulators to publish a statement on their approach to the recruitment of panel members, to ensure that their membership represents a truly diverse range of stakeholder views. In addition, the government proposes to put the FCA’s Listing Authority Advisory Panel on a statutory footing, in line with the PRA’s and FCA’s other panels.
- Creating a new statutory panel designed to review, and make recommendations on, the regulators’ production of cost benefit analysis in order to improve the processes.
- Introducing a new power for HM Treasury to be able to require the regulators to review their rules where the government considers that it is in the public interest. This would allow, where appropriate, for an independent person to be appointed to conduct the review.The government expects the proposed power would only be used in exceptional circumstances.