The Government charts a new regulatory course for financial services in the UK

26 June 2020

by Conor MacManus Director

Email +44 (0)7718 979428

For some time now the UK Government and regulators have been making the point that after Brexit the UK would do things differently when it comes to financial services regulation.

Last year HM Treasury (HMT) launched a review into the UK’s regulatory framework, and in a statement to the House of Commons on 23 June, Chancellor Rishi Sunak provided some early indications of how the UK’s regulatory regime may develop once the Brexit transitional period ends on 31 December 2020.

What did we learn from the Chancellor’s statement and what does it mean for financial services firms?

The UK has historically been an advocate for internationally consistent regulation, so it is unsurprising that the Chancellor reinforced the UK’s commitment to implementing the finalisation of the Basel Committee’s prudential framework for banks (often known by the industry as Basel IV). The UK will also implement the EU’s version of a previous iteration of Basel standards, CRR II. Interestingly though the UK will ‘tailor’ these rules to reflect the number, size and nature of banks in the UK, as well as the structure of the UK market and how it operates. How the CRR rules will be tailored is, at this stage, unclear but the statement reinforces the message around doing things differently.

The Chancellor also announced that the Government would legislate to strengthen the FCA’s powers to deal with ‘tough legacy’ contracts in the context of the LIBOR transition. This is an important step and will help firms deal with the narrow pool of contracts that genuinely have no or inappropriate alternatives and no ability to be amended. Find out more about the legislative steps.

Areas where the UK will not follow the EU’s approach

The Government has also announced a number of other areas where the UK will not follow the EU’s approach, which include aspects of the Central Securities Depositories Regulation, Securities Financing Transactions Regulation and the Bank Recovery and Resolution Directive II. HMT has also launched a review into aspects of Solvency II which have been of concern to the UK sector. The impact of these announcements on equivalence determinations by the EU remains to be seen. The UK’s position has always been that there will be divergence over time and that the focus should be on assessing regulatory outcomes, rather than requiring identical standards between the UK and EU.

The new prudential rules

The way in which the new prudential rules will be developed and implemented in the UK is also perhaps illustrative of how the regulatory framework will work more generally after the transitional period. Rather than these rules being implemented into legislation (as has been the case in the onshoring exercise of EU rules up to now), they will be part of the Prudential Regulation Authority (PRA) and Financial Conduct Authority’s (FCA) rulebooks. This is a pragmatic approach in light of the very technical nature of financial regulation. HMT will also legislate to create an accountability mechanism which will frame the regulators’ rule-making powers. The PRA and FCA will have to take into account UK competitiveness, international developments, the UK’s relationships with other jurisdictions (for example the impact on equivalence determinations) and (in the case of the PRA) the impact on lending in the UK, when developing these new prudential rules for banks and investment firms. It is too soon to say whether this model of constrained discretion will be the norm for other areas of regulation, but it would seem to be a model which balances the need for regulatory autonomy with broader economic priorities.

What happens next?

The Chancellor’s announcements represent another important indication of how the UK’s regulatory framework is likely to develop in future. As the Government and regulators chart a new course for UK regulation, finding a balance between robust standards, competitiveness and growth while avoiding unnecessary divergence from the EU will be key. For financial services firms the priority will be to stay informed about regulatory changes in the UK and engage in the ongoing debate on how the UK’s regulatory framework should develop.

 

by Conor MacManus Director

Email +44 (0)7718 979428