HM Treasury has launched a consultation, the Financial Services Future Regulatory Framework Review: Proposals for Reform. The consultation paper presents the government's response to the feedback received to the October 2020 FRF Review consultation and numerous proposals to progress the approach. Responses to the consultation may be submitted until February 9, 2022.
HM Treasury confirms that the existing framework in the Financial Services and Markets Act 2000 will be maintained. It is considered a leading framework for financial services regulation and can easily be built upon. HM Treasury's proposals are divided into three broad themes:
- Proposed amendments to the regulators' statutory objectives and principles.
HM Treasury is proposing to:
- introduce a new growth and international competitiveness objective as a secondary objective for both the U.K. Prudential Regulation Authority and the U.K. Financial Conduct Authority; and
- amend the existing regulatory principles to make it clear that such growth should occur in a sustainable manner (i.e., it should be consistent with the government's commitment to achieve a net-zero economy by 2050).
HM Treasury is declining to make any changes to the regulatory principle on proportionality on the basis that it considers that this principle is firmly rooted in the regulator's statutory principles. The government is also not proposing an additional regulatory principle that focuses on innovation since it believes that the regulators are already able to act in support of innovation.
2. Proposals to ensure accountability of the regulators and scrutiny by and engagement with Parliament, HM Treasury, and other stakeholders.
HM Treasury is proposing to strengthen the measures by which Parliament may hold the regulators to account by introducing new statutory requirements for the regulators. The first is a proposed requirement for the regulators to notify the relevant Parliamentary committee of a consultation launch. The second is to require the regulators to respond in writing to formal Parliamentary committee responses to a consultation. There are no intended changes to the measures on how the regulators consult with consumers and industry on new proposals.
Regarding the relationship between HM Treasury and the regulators, there is a mix of new obligations for the regulators and new powers for the government, including:
- requiring the regulators to respond to HM Treasury's recommendation letters;
- requiring the regulators to consider the impact of their new rules on the U.K.'s deference mechanisms and also assess compliance with trade agreements;
- a new power for HM Treasury to require a regulator to review its rules, if it would be in the public interest, which would involve, where appropriate, an independent individual being appointed to conduct the review;
- requiring the regulators to publish a statement on the approach they have adopted to recruiting statutory panel members; and
- establishing a new statutory panel to review and make recommendations on the regulator's preparation of cost-benefit analysis.
Notably, the consultation does not include any proposals on ensuring that the regulators are more readily subject to judicial review and court judgments in line with common law principles.
3. The proposed approach to delegating to the U.K. regulators the powers to replace direct regulatory requirements currently set in retained EU law with their rules
HM Treasury is consulting on how the financial regulators can assume responsibility for setting direct regulatory requirements that currently sit in the U.K. legislation that is EU inherited. Direct regulatory requirements are the mandatory obligations that firms must comply with. This change will give the regulators considerable new policymaking powers. The process will involve the government repealing a large amount of retained EU law and the regulators concurrently replacing it with their own rules. HM Treasury states that it expects the regulators to initially make similar rules for the repealed provisions. The entire program will likely take several years.
The existing rule-making powers of the U.K. regulators are not wide enough for them to make rules on all areas of EU retained law. The regulators will need to establish rules for the activities, products or conduct which are not U.K. regulated activities under the Financial Services and Markets Act 2000 and which apply to a wider range of entities than FSMA-authorized firms, such as the rules in the Short Selling Regulation. To address this issue, HM Treasury is proposing to establish a new Designated Activities Regime, allowing the regulation of certain activities outside of the FSMA authorization framework. The government will determine the scope of activities, which will be set out in the primary legislation creating the DAR. The regulator's rule-making powers would be limited to making rules relating to the designated activity only and not any other activities of a firm.
HM Treasury is also contemplating giving the Bank of England general rulemaking powers over central counterparties and central securities depositories and will consult on this in the future.