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How the rules could change for financial services after Brexit

Following the UK’s exit from the EU, ICAEW’s John Mongelard looks at the future regulatory framework for the UK and the risks ahead.

The rules for financial services firms were historically set in Europe but will now migrate to the UK. The EU’s rules were set out in laws to deliver ‘maximum harmonisation' across the then 27 member states. However, ‘harmonisation’ is no longer a prime concern for the UK after 1 January 2021, so what changes will we see?  

Parliament views on the new rules 

HMT are consulting on a new approach that delegates the detailed rule-setting work to the UK’s regulators but which also gives more weight to government policy in the rule-setting process. There are pros and cons to the new proposals. Parliament’s Treasury Committee raised three points with the Governor of the Bank of England and the Prudential Regulation Authority’s CEO Sam Woods.  

  1. They asked about the disadvantages of converting the EU law to UK law, a process referred to as ‘onshoring’. This had been the only realistic option to deliver a workable regime for 1.1.21 but over the medium term there is an opportunity to make the framework less clunky and better able to respond to things like climate change, pandemics and cryptocurrencies.  The unwinding of the ‘onshoring’ will be a considerable piece of work for the UK regulators in coming months, to convert the laws to regulations but also to organise them more rationally. Expect a raft of consultations in coming months and years. 
  2. The proposals also stipulate an early dialogue between government and regulators, which was felt to be important to ensure they remained accountable to Parliament. The regulators’  new rule making powers would grant significant powers to ‘unelected technocrats’ so discussions with government were framed as an opportunity to ensure accountability to the public. 
  3. The discussion also covered competitiveness and whether it should feature as a more formal objective rather than something regulators should ‘have regard to’. The regulators were comfortable with the status quo; safety and soundness having primacy over competitiveness.  

Take back control – banking and insurance 

The committee highlighted two specific area where the UK may eventually diverge from the EU. Alignment with EU rules would help the case for ‘equivalence’ and restoring access to the EU market for UK firms, but it is by no means certain and other jurisdictions (eg, US) have access and ‘equivalence’ without their laws replicating the EU’s.  

For example, the Risk Margin is one of the prudential regulatory capital requirements under Solvency II which is felt to be overly cumbersome. In due course we may see a UK approach which delivers similar outcomes to Solvency II, but which is simpler in its implementation. Similarly, how CRD IV or Basel 3.1 flows through to UK laws and regulations is an opportunity where we may adopt a proportionate approach.

Where does ICAEW stand? 

ICAEW’s response to the HMT consultation will highlight several risks in the proposals: 

  • If we are to see a raft of new regulations then the consultation process needs to better engage with stakeholders. The views of smaller firms and the voices of those impacted by financial services need to be given more prominence.  The tapestry of financial services regulation is likely to be linked to a greater extent than before with wider societal changes. For example, it will be important for the rule makers to look at the impact on climate change, sustainability and aspects like operational resilience when drafting financial services regulations. 
  • There is a role for regulators being more accountable and having a dialogue with government. However, political interference in rule-setting could mean more ‘boom and bust’.
  • An empowered UK regulator, one with more rule-making powers will need stronger oversight, consistent with their greater powers. This could mean a specialist Treasury Sub-Committee, better reporting and/or more use of impact studies and cost benefit analysis for new rules.
  • There are inevitable tensions in the regulatory objectives and greater clarity may help around how to balance safety and soundness vis a vis competition.
  • Post Brexit there is an opportunity to have fewer rules for smaller firms.  Too often the rules cater for the voices of larger firms who want consistency with international regulations (eg, Basel). Proportionate rules would allow smaller UK firms to grow and foster a competitive market.   

If you would like to feed into our consultation response, please contact fsf@icaew.com FAO John Mongelard.