Sarah Hall / Jun 2022
The financial services sector has been identified by the UK government as a key area in which Brexit dividends can be triggered through post-Brexit regulatory reform. Most recently, in the Queen’s Speech, delivered on 10 May 2022 by Prince Charles, the Government put forward a broad legislative agenda for the new parliamentary session which included the announcement of a Financial Services and Markets Bill (FSMB).
The main aim of the FSMB is to utilise the UK’s post Brexit control of its financial services regulation to develop a regulatory framework tailored to the needs of the UK economy. This is important because at the end of the Brexit transition period, in order to prevent financial instability, the UK converted EU legislation as it relates to financial services into UK domestic law.
This onshoring of EU legislation has been successful in preventing significant and rapid regulatory changes at the point of the UK’s departure which could have been costly to business. However, questions remain regarding the extent to which on-shored EU regulation is appropriate for the UK’s financial services sector given that it was initially developed in the very different institutional, regulatory and legislative context of the EU.
The FSMB seeks to address these issues through operationalising the proposals from the Treasury’s Future Regulatory Framework review. This review makes a number of important interventions aimed at better tailoring the on-shored EU regulation to the specific needs of UK financial services. In particular, it seeks to empower UK regulators (namely the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority) to develop regulation through their own rulebook, rather than regulation being run through legislative processes. In so doing, the review aims to deliver a regulatory framework that is “fit for the future” and that reflects “the UK’s new position outside the UK”.
In addition to giving regulators more control, the review also introduces a new secondary objective of growth and competitiveness for UK regulators. This is aimed at addressing the government’s vision for post Brexit financial services as articulated by the Chancellor in his July 2021 Mansion House speech in which he set out plans to enhance the international competitiveness of UK financial services.
However, important questions remain.
First, to what extent can the speed with which regulatory reviews are announced be matched by implementation? There are already concerns that the government has been stronger on announcing potential areas for change and less effective on implementing and delivering change. This is a thorny issue with regard to regulatory change post Brexit and it is by no means limited to financial services. Whilst the costs of adapting to life outside the single market are felt up front, it necessarily takes time to make the changes needed, meaning there is a gap between Brexit and the delivery of any Brexit dividends.
Second, the government is keen to emphasise the deregulatory opportunities Brexit presents for financial services, in common with other parts of the economy. However, given that the UK now needs to undertake regulatory activity that was previously the work of the EU, Brexit may be better thought of as a re-regulatory exercise. This raises concerns about the capacity of UK regulators to deliver. For example, in evidence given to a recent House of Lords inquiry into UK-EU financial services relations, Sam Woods stated that the PRA would “need to staff up if Parliament approves the proposal to give us a bigger rule-making responsibility”. He went on to note that his organisation was “in a very challenging environment from a recruitment and retention point of view” which reflects more wide ranging issues regarding the staffing of UK regulatory bodies post Brexit beyond financial services.
Third, delegating more powers to regulators raises important questions about how the work of regulators will be scrutinised and what the role of Parliament could or should be in that process. Most recently, the Treasury Select Committee has announced plans to establish a sub -committee “to take the lead on scrutiny of regulatory proposals”. Again the issue of capacity is raised with the committee going on to state that “work on scrutiny of financial services regulatory proposals will be a substantial addition to our existing programme of work. It will impact upon both members and staff of the Committee and it is likely that we will need to call on more staff support, to assist in the analysis of proposals and their likely consequences”.
In order to address these challenges, the UK will need to have a clear strategy for post Brexit financial services that allows different regulatory opportunities to be prioritised. Beyond the international competiveness of the City which has received the most attention to date, this will also need to consider how policy for financial services resonates with other key policy objectives including net zero, productivity and the cost-of-living crisis. Without such a strategy, there is a risk that the sector finds itself caught in a period of ongoing regulatory change that hampers delivery of key policy objectives.