Beyond Brexit- a new financial services regulatory framework for the UK?
11 April 2019
Since the EU referendum financial services firms, regulators and the Government have focused heavily on attempting to mitigate the risks to the sector and the wider economy from the UK leaving the EU without a deal. But the announcement in the Spring statement that the Government would set out its approach to consulting on the UK’s regulatory framework after Brexit before the summer suggests that HM Treasury (HMT) is starting to look beyond Brexit at the big question of how the UK’s financial services sector is regulated and supervised post-Brexit. So what are the major issues to decide? And how could the outcome of these consultations impact financial services firms operating in the UK?
In 2017 PwC published a joint report with TheCityUK on A vision for a transformed, world-leading industry. In this report we called for an open, strong, proportionate and internationally attractive regulatory regime in the UK. These themes are as important now as they were then. The Government has indicated its approach in these consultations will focus on protecting financial stability, ensuring the responsiveness needed to regulate a dynamic and open financial sector and democratic accountability.
If post-Brexit the UK (as the Government has committed to) leaves the European Economic Area (EEA) the UK’s approach to regulation will change fundamentally. For decades much of the UK’s regulatory framework has derived from EU rules, with an important role played by the European Supervisory Authorities (ESAs) in recent years. Outside of the EEA the UK will no longer be part of this framework. So what should replace it? First, what is clear is that it is in everyone’s interest to have a well regulated sector. Robust standards protect financial stability, consumers and investors. The UK’s regulatory supervisory framework will also need to be adaptable to structural changes (such as the emergence of large tech companies as providers of financial services) and growing risks such as cyber attacks and operational challenges in firms. So HMT is right to identify responsiveness as an important part of the regulatory framework post-Brexit. Financial services is going through a period of profound change, with technology in particular impacting on almost all aspects of business models. If the UK is to capitalise on the FinTech revolution it needs a regulatory framework which is flexible enough to allow innovation, while reacting to emerging risks. Regulators will have to embrace RegTech solutions, such as making regulation machine readable (something the PRA and FCA have committed to) while retaining the ability to apply judgement-led supervision.
It may be then that the Government’s approach to emergency ‘on-shoring’ of EU rules in a no deal scenario, which would see level 1 EU regulation (e.g. Solvency II, CRR, MiFID and EMIR) implemented through secondary legislation is not sustainable over the medium term. Legislation is not easily changed and MPs may not have the time or expertise to scrutinise technical, granular requirements. But an alternative of completely delegating rulemaking to the regulators poses questions on democratic accountability and the extent to which broader public policy goals are taken into account when regulation is developed. A balance will need to be struck to ensure the UK’s regulatory framework allows the PRA and FCA to meet their objectives in a proportionate way while supporting societal goals such as financial inclusion, diversity and support to vulnerable customers. Many consumers find navigating financial services confusing and there may be more that can be done from a regulatory perspective to help address this.
Of course the UK’s post-Brexit regulatory framework will not be developed in a vacuum. As a global, open financial centre the UK should continue to embrace internationally consistent regulatory standards. We are yet to see how the negotiations on the future relationship between the UK and the EU unfold and maximising market access to the EU and other major jurisdictions post-Brexit is likely to require a degree of alignment.
We will no doubt see further details from the Government on its plans for the UK’s regulatory framework post-Brexit in due course, but with the financial services sector in the UK at a key juncture in its history, it will be important that the sector as a whole contributes to a discussion which could have a fundamental impact on the success of financial services in the UK over the medium to long-term. Financial services firms and other interested parties should actively engage with HMT’s consultation process to help inform policy development.
Despite the on-going uncertainty around Brexit it is important that the Government, regulators and the financial services sector takes a strategic view on the future of financial services in the UK. Brexit poses undoubted risks. But as a world-class industry, the sector is also well placed to capitalise on emerging technological and global trends. To do this the UK needs a regulatory framework which is robust, flexible and reactive enough to meet the needs of a rapidly changing sector, economy and society.