Such a bill was not a surprise, with the Treasury, Financial Conduct Authority and Prudential Regulation Authority carrying out a number of consultations in recent years about the future of financial services regulation in the UK, including the Wholesale Markets Review in July 2021 and the Future Regulatory Framework Review in November 2021.
These reviews indicated that the government was beginning to consider not only potential reforms of the EU legislation on-shored in the lead up to Brexit, but also look at how the UK could use Brexit as an opportunity to further develop the financial services industry.
The government has said that the aim of this bill is to enhance the UK’s position as a global leader in financial services following its departure from the EU by establishing a “coherent, agile and internationally respected approach to financial services regulation that best suits the interests of the UK”.
Until the bill is formally laid before parliament it will not be clear how this is to be achieved. However, the briefing document that accompanies the Queen’s Speech indicates that the government will be “cutting red tape” in the financial services industry with the purpose of making the UK a more attractive place to invest.
New rules
The government’s rhetoric as to how this would be achieved indicates a potentially ambitious agenda. They have explained that the purpose of the bill would be to revoke the “retained EU law on financial services and replacing it with an approach to regulation that is designed for the UK”.
This mechanical process of revoking EU law would, however, be of little significance unless the replacement law departs from what is contained in the retained EU law.
This reform will mean repealing the legislation that implemented EU financial services law in the UK and asking the FCA and PRA to replace it with their own rules.
The aim of this bill is to enhance the UK’s position as a global leader in financial services.As a result, regulators will take on responsibility for setting the regulatory requirements currently contained within the retained EU law.
In the FRF review the government stated that this process would require a substantial amount of work and would likely take a number of years.
This reform may be seen as sensible given that the regulators are at the coal face of the financial services industry and should be able to react more quickly to emerging risks than parliament.
UK-specific needs
The government, in discussing how the financial services industry can be enhanced and remain internationally competitive, has talked frequently about tailoring the regulatory regime towards the specific needs of the UK.
This would appear to indicate a willingness for the UK’s financial services regulatory regime to diverge from the EU’s. However, the government in the FRF review suggests that they expect, at first, the majority of rules to be similar to those contained within the repealed EU laws.
Regulators will take on responsibility for setting the regulatory requirements currently contained within the retained EU law.We can begin to see the outline of what this initial agenda could look like with the Wholesale Markets Review, discussing reforms to a variety of areas covered under Mifid II, including trading venues, systematic internalisers and trading transparency.
In each instance only limited reforms are suggested, with the government believing that a substantial amount of the existing regulatory regime is acceptable.
This limited approach has also been present in early attempts by UK regulators to take advantage of their new freedom, with the FCA in a consultation paper in April 2021 suggesting a number of tweaks as opposed to radical reforms of various Mifid II rules.
Any divergence could prove to be beneficial for those businesses exclusively operating in the UK. For those businesses continuing to operate in the EU from the UK and vice versa, while the divergence remains limited it should not increase the regulatory burden they face.
For these businesses the greatest regulatory burden remains the UK’s decision to leave the single market. An issue exacerbated by the limited market access offered by the UK-EU trade deal and the EU only providing a limited number of equivalence decisions.
With no indication that more equivalence decisions will be forthcoming, this burden is unlikely to ease in the near future.
The government has also proposed a new secondary objective to focus on growth and international competitiveness.In instances where the UK chooses to diverge from an EU requirement or lower the standard required, UK businesses seeking to operate in the EU may well choose to continue with the EU standard to save on the cost of implementing a new compliance system just for the UK.
Going forwards, however, if this reform agenda begins to become as ambitious as the government indicates, then this could lead to further reorganisations in order to achieve compliance for businesses currently operating in both the UK and EU.
This may not only be driven from the UK choosing to diverge from EU standards but also by the EU looking to on-shore as much financial services business as possible.
This could lead to increased standards and regulatory scrutiny on the arrangements some businesses are currently operating under.
Regulatory objectives
In keeping with this increased responsibility for rule-making for the regulators, the government has also proposed a new secondary objective to focus on growth and international competitiveness.
This secondary objective will only need to be satisfied once the regulators believe that their primary objectives, such as consumer protection, are being met.
This secondary objective, while sensibly aligned with the increased responsibility held by the FCA and PRA, will require the UK regulators to embrace a new role that differs from the traditional supervisory and regulatory role they inhabit.
As a result, the government will need to carefully build a framework that not only protects the independence of the regulators, but also provides parliament with sufficient capabilities to oversee whether the regulators are fulfilling this new objective.
With the UK’s post-Brexit strategy remaining hotly debated, it remains to be seen whether the regulators and government can harmoniously navigate this new era when it comes to planning the future of regulation for one of the country’s leading industries.
Jake Ghanty is a partner and Henry Paulley is an associate at Deloitte Legal
