On 19 October 2020, HM Treasury issued phase II of its consultation on the financial services future regulatory framework review.
Phase I of the review looked at coordination between the UK authorities that have responsibility for the regulation of, and policy for, the financial services sector. HM Government published its response on 11 March 2020, announcing that it and the UK financial services regulators were creating a Financial Services Regulatory Initiatives Grid to help firms plan ahead and improve co-ordination and transparency across the regulatory landscape for financial services. HM Government also stated that there were a broader set of issues concerning the UK regulatory framework that needed to be addressed. The operation of the UK regulatory framework had evolved to accommodate the UK’s membership of the EU, but the UK’s withdrawal from the EU meant that aspects of that regulatory framework were no longer optimal. The second phase of the review would examine how the UK should adapt its approach to regulation outside of the EU building on the strengths of the existing UK framework.
Therefore the consultation on phase II on the financial services future regulatory framework review seeks views on proposals and options for adapting the current UK financial services regulatory framework following the UK’s departure from the EU. Central to HM Government’s proposed approach is the adaptation of the regulatory model introduced by the Financial Services and Markets Act 2000 (the FSMA model).
HM Government feels that whilst the onshoring approach is right for the immediate period after EU exit, it is not designed to provide the optimal, long-term approach for UK regulation of financial services. HM Government believes that there are significant disadvantages to retaining the onshored regime over the long term. This includes that the onshored regime has a certain amount of inflexibility. The technical detail of financial services regulation needs to flex in response to changing market conditions and new regulatory challenges so that the regulatory regime continues to operate effectively. Having regulatory requirements in legislation can make it difficult to flex requirements and is not conducive to a dynamic and efficient regime.
HM Government’s proposed blueprint involves adapting the FSMA model to address the challenges of managing the onshored regime and creating a more coherent and accountable framework for the development and application of future UK financial services regulation. The key policy challenge is adapting the FSMA model to make the most of independent regulator expertise and flexibility in setting regulatory standards, while at the same time ensuring regulators take full account of broader public policy issues and priorities when designing those standards. The approach in the consultation envisages a high level of policy responsibility for the UK regulators. It also envisages a coherent way for HM Government and Parliament to set out what the broader public policy issues and priorities are. At paragraphs 2.32 to 2.38 of the consultation paper HM Government provides an illustration of the post-EU framework approach covering five key elements: an obligation for the regulator to maintain a specific regulatory regime; the purpose of this regime; the scope of the regime; any core elements to the regulatory approach that HM Government and Parliament wish to set for the regime; and regulatory principles highlighting specific policy considerations to which the regulators must have regard.
The deadline for comments on the consultation is 19 January 2021. HM Government will carefully consider the responses received to the consultation and use these to inform a second consultation in 2021, which will set out a final package of proposals and how they will be delivered.