The UK government signals a diversion from the onshored regime towards a more flexible financial services regulatory framework.
By Rob Moulton, Anne Mainwaring, and Anna Lewis-Martinez
HM Treasury has published a consultation paper marking the start of Phase II of its financial services review, which will focus on the broader regulatory framework for financial services regulation in the UK post-Brexit.
HM Treasury acknowledges the drawbacks of the EU approach to financial services regulation. Namely, this approach has complicated the operation of the regulatory model under the Financial Services and Markets Act 2000 (FSMA), which HM Treasury considers to be an appropriate framework for financial services regulation in the UK after the end of the transition period. HM Treasury therefore proposes an adaptation of the FSMA model as the most effective approach to the post-EU regulatory framework, acknowledging that the onshored regime of EU legislation will fail to provide an adequate long-term solution for the UK’s post-EU financial services regulatory framework.
The consultation will remain open for three months, closing on 19 January 2021. The government will use the feedback to inform a second consultation in 2021, which will set out a final package of proposals. Phase I, which concluded in March 2020, examined the co-ordination arrangements between the regulators and policymakers responsible for financial services.
HM Treasury proposes amending the existing FSMA model
HM Treasury’s proposed post-EU framework provides for the following three-step approach:
- The UK government and Parliament would set the policy framework in key regulatory areas.
- HM Treasury would have affirmative procedure secondary powers to update the framework as needed.
- The regulators would then design and apply all direct requirements applying to financial services firms and markets in accordance with the policy framework set out in the legislation.
This approach is consistent with that taken in the Financial Services Bill and would mean that the majority of retained EU provisions would be transferred to regulator rulebooks.
HM Treasury’s proposal also calls for FSMA to include policy framework legislation for key areas of regulated activity. This change would enable the government and Parliament to give the FCA and PRA policy steers in these areas of regulation, whilst deferring to the regulators on how to design the details of these policy requirements.
Additionally, HM Treasury has proposed updates to existing FSMA transparency requirements so that they reflect new activity-specific policy framework legislation. The government will also review the existing cross-cutting regulatory principles set out in FSMA, and will seek to strike a sensible balance between these cross-cutting and activity-specific regulatory principles.
HM Treasury considers long-term disadvantages of onshored regime
HM Treasury, with assistance from the regulators, has been onshoring EU legislation into UK law to ensure that the majority of EU financial services legislation will continue to apply after the end of the transition period. In the interests of continuity and uncertainty, HM Treasury recognises that the onshored regime is optimal in the period immediately following the end of the transition period. However, the consultation paper clarifies that the UK government does not consider the onshored regime as an intended or desirable long-term approach for financial services regulation in the UK.
HM Treasury cites several disadvantages to retaining the onshored regime in the long term, including namely:
- Retaining the onshore regime would be inflexible.
- The regulatory framework would fail to benefit from the resource and expertise of the regulators.
- Parliament would be required to provide ongoing maintenance of detailed financial regulation.
- The resulting legislative framework would be a mixture of domestic and retained EU legislation, regulator rules under FSMA, and onshored technical standards.
UK government takes preliminary steps in exercising its power to devise a bespoke financial services regulatory framework
HM Treasury’s decision to publish proposals indicating a long-term diversion away from the onshored regime signals the government’s openness to making fundamental changes to the UK financial regulatory framework. This proposed shift away from the onshored regime provides further confirmation of the government’s continued move away from the focus of equivalence, as it edges towards the creation of a bespoke financial services regulatory framework based on FSMA, which would not be required to align with EU legislation.
This post was prepared with the assistance of Timi Afolami.
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