Taking stock - what next for the UK’s financial services regulatory framework review
23 October 2019
Financial services is going through a period of technological disruption and change. The sector is responding to macro-trends such as climate change, changing demographics and the risks from economic protectionism. Technology is changing the way financial services firms operate and interact with customers. Incumbents are facing increased competition from challenger firms and, perhaps increasingly BigTech firms. Policymakers are starting to respond to these developments and the scope for a change in focus is perhaps most pronounced in the UK - and not just due to Brexit.
In the years since the financial crisis protecting financial stability, market integrity and consumer protection have been the primary goals of regulators. However, with growing emphasis on the challenges mentioned above, policymakers such as the Financial Conduct Authority’s (FCA) Andrew Bailey are seeking to also reinforce regulation’s role as an enabler of change. The City Minister, John Glen took a similar stance, saying that ‘Regulation should support, not stifle…[It] should enable the maximum exploitation of our competitive advantages’. Building on this, HM Treasury (HMT) launched a review in July looking at what the UK’s future financial services regulatory framework should look like. The review began with a call for evidence asking how regulatory interventions and change can be better coordinated, more efficient and how technology can help to achieve these aims.
So what should the Government and regulators do to deliver Mr Glen and Mr Bailey’s vision and make UK regulation fit for the future? Since the call for evidence launched, we have held detailed conversations with clients, colleagues and policymakers to discuss these issues and set out some of the key themes that have emerged below.
In our own response to the call for evidence we discuss how the pace and scale of regulatory change in recent years has been unprecedented. While the need for change has been clear, the process has been very challenging for firms. So a framework which coordinates regulatory change among the UK’s authorities would be very welcome. There also appears to be more that can be done to coordinate supervisory interactions with firms to reduce the operational burden from duplicative or overlapping requests across different regulators, as well as within them. In 2018 the Monetary Authority of Singapore published a roadmap aimed at eliminating all duplication of data requests from the firms it supervises. Supervisors need the right information to do their job properly, but if this can be done in a more efficient, less costly way it certainly should.
The need to improve international coordination can’t be overlooked either given the global origin of much of financial services regulation today. If anything, Brexit makes the need for closer regulatory coordination with international peers and standard setters even more important given their interconnectedness with financial services in the UK. Better coordination like this alongside standardisation of data requirements can smooth processes for firms and regulators.
Firms are investing significantly in technology and talent to address the challenges posed by complex regulatory requirements, as well as adopting new business models and ways of understanding and engaging consumers. This investment is essential for businesses to remain competitive, but it’s equally important that regulators are keeping pace too. RegTech and SupTech are providing solutions to firms and regulators to monitor and address risks, as well as helping to collate, interpret and report key data more efficiently.
Simplifying regulation has clear benefits for reducing the complexity and burden associated with compliance. Making rules machine-readable is key to this. UK authorities are already committed, but it’s important that this remains a priority as rulebooks are reviewed, particularly in light of Brexit. This can boost the ability of RegTech to make these processes less painful and costly to firms and improve the quality of oversight for regulators.
So what should future stages of HMT’s review cover? There are a number of important questions that need to be answered if the UK’s regulatory regime is going to help support the success of the financial services sector post-Brexit. These include how can the regulatory framework best support innovation and keep pace with an increasingly rapidly changing and tech-enabled sector? If the UK pursues a more principles based approach to regulation how will this work in practice? What should the split of responsibilities between HMT, the regulators and Parliament be post-Brexit? Is the principle of proportionality embedded sufficiently in the UK framework and does the regulatory perimeter currently sit in the right place?
That so many important questions have emerged shows the value of HMT undertaking this process and that there is a need to keep going whatever happens in UK politics in the coming weeks and months. The UK is already thought of as a world leader in regulation, particularly around innovation. The review is an opportunity to build on those competitive advantages that John Glen highlighted.