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What is the Future Regulatory Framework Review?
The Future Regulatory Framework (FRF) Review was introduced by HM Treasury in June 2019 to ensure that the UK’s financial services industry would be able to adapt to future challenges, in particular those arising from the UK’s new status outside the European Union.
HM Treasury has characterised the review as part of an effort to create a regulatory framework with “the agility and flexibility needed to respond quickly and effectively to emerging challenges and to help UK firms seize new business opportunities in a rapidly changing global economy.”
In late 2020, HM Treasury launched Phase II of the FRF review. While Phase I examined the future of regulation and Parliamentary policy-setting, Phase II is a consultation focused on adapting the UK’s broader regulatory framework for its post-Brexit future. As the review continues, it is important that companies doing business in the UK stay up to date with its findings, and understand the shape that the UK’s future regulatory framework will take.
What does the FRF Review involve?
Phase I of the FRF Review explored the relationship between the various UK authorities responsible for financial regulation and policy. In response to the findings of the review, the UK government announced the creation of the Financial Services Regulatory Initiatives Grid and the Financial Services Regulatory Initiatives Forum to serve as platforms for inter-agency coordination and information sharing.
Phase I also highlighted the need for the UK’s regulatory framework to evolve to adapt to the specific challenges of the post-Brexit financial landscape. In Phase II, the government is focusing on the UK’s broader financial services industry and the need to build regulatory framework with the following important characteristics:
- A coherent division of responsibilities between Parliament, government, and independent financial regulators.
- A provision for democratic institutions to contribute to policy.
- Effective accountability of HM Treasury and financial regulators.
- Regulations that are agile and responsive to new conditions, new opportunities, and emerging risks.
- Coherence and user-friendliness for persons affected by financial regulations.
- A regulatory approach that promotes international confidence in the UK.
- Effective stakeholder engagement in the policy-making process.
What is the current UK financial regulatory regime?
In order to ensure that there were no gaps in its financial regulatory regime when it left the EU, the UK implemented the European Union (Withdrawal) Act 2018. The Act ensured that the majority of applicable EU financial legislation continued to form part of UK legislation after the departure date, in what was essentially an ‘onshored’ regulatory regime. While the government suggested that onshoring the regulatory framework was the right approach in the short-term, its disadvantages necessitated the need for the development of a new regulatory framework and, consequently, the FRF review. The disadvantages of the onshored regime include:
- Inflexibility: The technical detail of onshored financial regulations do not reflect the changing market conditions and challenges of the UK financial system.
- Regulatory separation: The regulatory requirements of the onshored regime are disconnected from the direct experience and expertise of HM Treasury and other dedicated regulators. That separation means that the regime does not benefit from, and is not informed by, an understanding of UK practice.
- Demands on Parliament: Maintenance of the onshored regime is the responsibility of Parliament. Given the transitional nature of the scheme, the ongoing need for attention places potentially disproportionate demands on Parliamentary time.
- Fragmentation: The integration of the onshored regime with existing UK legislation risks the creation of a patchwork of regulation and significant compliance challenges for firms.
What is the Post-EU regulatory framework proposal?
The UK government has proposed that the new regulatory framework will be built upon the existing framework introduced by the Financial Services and Markets Act 2000 (FSMA). The government’s position is that, while the FSMA has significant regulatory strengths, the FRF Review will, once complete, set out and inform opportunities to build on those strengths and meet the desired framework features (listed above). The government has framed this approach as preferable to creating an entirely new regulatory framework.
With the FSMA provides “a tried and tested foundation” for the new framework, the UK government has proposed adapting the existing regulatory arrangements in the following ways:
Division of responsibilities
The FSMA framework envisages a clear division of regulatory responsibilities with the UK government and Parliament setting legislation, and UK financial regulators setting requirements applicable to firms and markets. Under the FRF Review, the government has proposed that the majority of EU regulatory provisions are transferred to the appropriate regulator. Since the FSMA already confers rule-making powers on the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) no significant legislative reform will be necessary to facilitate this transition.
Where EU provisions are not appropriate for regulators, such as those involving international trading relationships, responsibility will remain with Parliament.
Policy framework for key regulatory activities
The FSMA did not originally make provisions for the UK government to set policy for key areas of financial activity, such as the insurance industry. Accordingly, the FRF Review includes a proposal that a new policy framework for key areas be introduced, with opportunities for strategic input from the UK’s democratic institutions.
Under the division of responsibility measures (noted above), the policy framework will be applicable at a high level and applicable to particular regulatory regimes. Responsibility for setting requirements for regulated firms will remain the responsibility of regulators.
While the FSMA already sets out transparency requirements for regulators, the FRF Review recommends an update to those requirements to account for the new policy framework. Under the new regulatory framework, regulators would have to explain how policy proposals meet their statutory objectives (an existing FSMA requirement), and how policy proposals meet the statutory purposes of specific regulatory regimes.
What is next for the FRF Review?
The FRF Review consultation period closed on 19 February 2021, with the results anticipated over the course of the year. The consultation will be used to inform the ongoing development and delivery of the new regulatory framework. Insight gained from the review will serve “as a blueprint for financial services regulation”, with a focus on the division of responsibilities and legislative approaches.
As regulatory requirements are moved from EU into UK law, HM Treasury anticipates that a significant programme of domestic legislation will be necessary. The UK government has stated that the FRF review consultation period will incorporate input from industry stakeholders in the form of roundtables and workshops.
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