Since the UK left the European Union, financial services regulatory reform has been high on the political agenda.
The global competitiveness of the City of London could be increased by cutting back legislation and freeing the City to compete with global financial centres, argues the Government.
Trimming regulation like capital liquidity ratios for insurers to allow them to better compete with global insurers is one way it wants to harness its Brexit freedoms, and it has opened a consultation on the rules as they stood under the EU’s Solvency II laws.
Rule changes had been tempered by a desire to maintain equivalence with the EU financial regulation to better aid access to the EU market. This 'onshoring' is now subject to proposals for changes to the rules.
Critics of rule changes point to the UK’s current high consumer protection standards, the guards against financial crime, and the prevention of market failures as seen in the global financial crash of 2007-8 as being worth keeping.
Millennials who lived through the 2007-08 crisis and the resulting social rebellion against the financial services sector during the 2011 Occupy movement can point to the reputational risk of slackening regulatory standards.
Gen Z’s would also have a problem with the stale, male and pale culture and lack of inclusion and diversity in a sector that in many regards has not moved with the social changes of the last decade, and therefore loses out on talent to more attuned sectors like Big Tech.
The crux that the government is faced with is: would cutting rules or keeping them better stimulate economic growth?
Changes so far
In October 2020, the Treasury published a consultation on Phase II of its Financial Services Future Regulatory Framework Review. In November 2021, it published a second consultation paper stating that it wanted financial services regulators to be given responsibility for setting many of the regulatory requirements which are currently set out in primary legislation as part of the retained EU law that has been brought into UK statute.
The Government proposes to gradually repeal significant amounts of retained EU law in the field of financial services regulation, with the intention that regulators will replace it with relevant regulatory requirements in their own rulebooks.
John Glen MP, Economic Secretary to the Treasury, told MPs in the Treasury Select Committee that this work “cannot be done overnight. The complexity involved means that it is going to take some time to deliver.”
The Treasury said in its November 2021 consultation that, “there will [ … ] be instances where it is appropriate for the regulators to take the opportunity to tailor the rules to reflect the specifics of UK markets, and to make targeted improvements, in line with their objectives.”
The Treasury Select Committee reviewed the government’s plans and was set the invidious task striking a balance of recommendations.
Here we look at eight key recommendations from their report.
- The Treasury Select Committee asked that the Treasury not weaken regulators or pressure them to water down standards. This also included making regulators accept changes to the regulatory framework that could impede their ability to achieve primary objectives.
- The government should strive to make progress on mutual recognition as an element of any free trade agreement. MPs thought that the financial services sector saw cooperation between regulators was more significant than trade deals for securing market access.
- Weakening standards could reduce the financial resilience of the UK’s financial system and undermine international confidence in that system and the firms within it. The Treasury Select Committee wanted a secondary objective for the FCA and PRA of promoting long-term economic growth. “The wording will be crucial: pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK’s strong regulatory standards,” they wrote.
- A new secondary objective should see financial services better serve the ‘real economy’. This would see a responsibility to provide capital, credit, insurance, and other services to firms.
- The Treasury should continue to reject any calls for growth and competitiveness to become the primary objective, said the MPs. This would undermine regulators and pressure financial resilience. “There is a danger that as memories of the financial crisis fade, its lessons are forgotten,” wrote MPs.
- FCA supervision may influence financial inclusion. The FCA’s primary role should not be to carry out social policy, or fill the gaps for the Government, said MPs. The Government, community and individuals should tackle poverty, the dominant force in financial inclusion, through wider legislation.
- Regulatory independence is critical for the competitiveness and effectiveness of UK financial services regulation and should not be hampered by new accountability mechanisms proposed by the Treasury. “These mechanisms largely seem reasonable as individual changes, but there is a risk that the collective impact could be excessive in its impact on regulators’ resourcing, as well as their ability to make decisions quickly where needed,” said MPs.
- The Treasury should be sparing in its use of the proposed power to require regulators to review their rules, and should not use it to implicitly require the regulators to consider a general ‘public interest’ requirement for rulemaking. “Each use of this power is a potential weakening of the independence of the regulators” they said. Regulators should not be expected to reverse or adjust regulation where such regulation is deemed to remain appropriate to carry out the regulators’ statutory objectives. “The regulators should not impose costs without being able to show benefits,” they added.