Exactly six years following the UK voting in a referendum to leave the EU, the House of Lords European Affairs Committee (“Committee”), on 23 June, published a report on the relationship between the UK-EU in financial services sector. We summarise the key points from the report below:
- Equivalence. In essence, the Committee concluded that it would be misguided to base the UK’s future strategy for the financial services sector on equivalence decisions. The Committee felt that the UK is being held to a higher standard than other countries, and several witnesses stated that the EU equivalence process was more political than technical. The Committee concluded that the industry has adapted to operating without equivalence and sees limited benefit in now in making further adaptions to accommodate it. The Committee also looked at whether the fact that other jurisdictions having more equivalence decisions than the UK (e.g., the US has 21 equivalence decisions and the UK only has one) – put the UK at a competitive disadvantage. The Committee noted that the evidence that it had received suggested that the impact of this on the UK’s competitiveness had been limited. The Committee also noted that the EU currently seems unlikely to grant further equivalence decisions without the UK constraining its regulatory flexibility and ability to diverge.
- Regulatory co-operation. The Committee stated that it regrets the fact that the UK-EU Memorandum of Understanding (“MoU”) on regulatory cooperation is still not in place, but noted the widespread view is that the MoU has become a casualty of wider tensions between the EU/UK, particularly regarding the implementation of the Protocol on Ireland/Northern Ireland. The Committee urged the Government to aim to get the MoU in place at the earliest possible opportunity and then use the MoU to the fullest extent to facilitate effective cooperation with the EU. That said, the Committee acknowledged that the non-implementation of the MoU did not appear to have posed major practical problems to date. Alongside formal regulatory cooperation, the Committee urged the Government to increase its political and diplomatic engagement on financial services both with the European Commission and with key Member State capitals.
- Regulatory reform. Following the UK’s departure from the EU, most EU law was retained and ‘onshored’ into UK legislation. The Committee recognised that this was the best approach, but noted that it is now complicated, unwieldy, and difficult to amend. Accordingly, they welcomed the Government’s Future Regulatory Framework Review. By way of reminder, the Future Regulatory Framework (“FRF”) review, published in November 2021, stated that the Government intends to transpose large parts of the financial services regulatory framework from legislation to the regulators’ own rulebooks. The Committee agreed that, in the interests of flexibility, agility and proportionality, many of the regulations currently contained within primary legislation would be more appropriately managed by the regulators themselves. However, it stated that it is essential that this transfer of powers is accompanied by appropriate mechanisms for Parliament to scrutinise the regulators and hold them to account, and that the regulators are given sufficient resources to allow them to accommodate the increase in their workloads resulting from such a change. The FRF review also recommend that that the FCA and the PRA are given a ‘competitiveness’ objective. The Committee has asked the Government to explain in further detail how a ‘competitiveness’ objective would be applied by the regulators in practice and how success will be measured.
- Divergence. The Committee recognised that diverging from EU law may present opportunities for the UK’s financial services sector. That said, the Committee felt that it is nonetheless vital that the Government balances the benefits of reform against the cost of implementing new rules, and that the sector is not now subject to a constant process of piecemeal change. The Committee noted that some pieces of EU regulation were unpopular with businesses when they were implemented but are now regarded by the sector as a sunk cost, further reform of which would impose an additional, unnecessary cost burden on the sector. The Committee said that it was concerned by the Government’s apparent unwillingness to use its wider influence and diplomatic resources in order to engage with the EU and its institutions to further the UK’s interests, as other third countries do.
- Opportunities. The Committee concluded that the Government has been right not to adopt a ‘Fortress UK’ approach, and to prioritise openness. The Committee urged the Government to adopt a principle of openness in all aspects of its regulation and support of the UK’s financial services industries.
Broadly speaking, the Committee was fairly optimistic about the future of the UK financial services and generally backed the approach that the Government has been taking. It is welcomed that the Committee supported the approach of appropriate divergence and not seeking to rely on EU equivalence decisions – given the limited market access granted by most equivalence decisions. Most firms will support the Committee stating that the Government should ensure that the regulators have sufficient resources. In our view, this is a critical issue, as an application for authorisation, appointing an ARs, and making changes of control, are now incredibly slow processes – often taking many months just to be allocated a case officer. The under-resourcing of the FCA/PRA is having a real impact on firms and is putting the UK at a competitive disadvantage.