A new blueprint for financial regulation

Brexit was always going to mean change for the financial services sector and the way it is regulated in the UK. Over the past 20 years, financial services firms in the UK have become used to the regulatory agenda increasingly being set in Brussels (albeit with significant UK input). As the transitional period nears its end firms will have to get used to a new reality and HMT has now set out its blueprint for the UK’s post-Brexit regulatory architecture in a consultation on the topic. This is perhaps the biggest shake up in the UK’s approach to regulation since the establishment of the FSA in the early 2000s. So what does it mean for financial firms?

HMT is proposing a new institutional framework for developing regulation in the UK. HMT has, rightly, judged that having granular regulatory rules in legislation is not practical. Under the proposals, the regulators will be given the powers to make regulatory rules that are currently developed at the EU level.

The regulators already have significant powers to make rules for domestic initiatives, but the powers HMT is proposing to give them will broaden this remit considerably. Financial regulation is an important part of broader economic policy. So it is understandable that HMT is proposing that for specific aspects of regulation - prudential rules for insurers for example - HMT and Parliament should be able to set out broader public policy objectives that the regulators must have regard to when making rules. The regulators will be held accountable for showing how they have considered these broader objectives and will be required to coordinate more closely with HMT prior to consulting on rules.

Firms are of course very familiar with engaging with the UK regulators and dealing with their rules (something that may become more straightforward if HMT introduces a regulatory principle requiring accessible rulebooks, as they are considering). The delegation of increased powers to the regulators will make this engagement process even more important, for firms and I’d argue the regulators themselves.

The proposed powers for HMT and Parliament to set broader public policy goals for the regulators will introduce an interesting dynamic into the regulatory process. Ensuring the regulators take into account a range of public policy objectives when developing regulation is a welcome idea, as long as these objectives do not become unduly politicised. The sector as a whole will need to think carefully about how it engages in this process and MPs, particularly members of the Treasury Select Committee, will become increasingly important stakeholders in regulatory discussions. Many financial services firms in the UK are more used to engaging with members of the European Parliament than the UK Parliament on regulatory issues and firms’ regulatory and government affairs strategies will need to adapt accordingly to reflect the different political dynamics in Brussels and Westminster.

HMT’s consultation is the first phase in a discussion on the UK’s approach to financial regulation, with further consultations due next year. This process represents an important opportunity for the financial sector and all other interested stakeholders to join in a debate on the role regulation should play in protecting consumers and financial stability, and more broadly in helping meet the economic and societal challenges the UK faces.

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