Government consults on Future Regulatory Framework for financial services

On 9 November 2021 the Her Majesty's Treasury (HMT) published a second consultation for its Future Regulatory Framework (FRF) review. The review is a result of Brexit and the need to transfer detailed rule-making powers from Parliament to the likes of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

Proposals include changes to the regulators’ statutory objectives and enhanced mechanisms for accountability, scrutiny and oversight.

We have summarised the salient points below.

New objectives: growth & international competitiveness

New secondary statutory objectives are proposed for the FCA and PRA of growth and international competitiveness. It is important to note that these are secondary objectives, so the FCA's primary objectives of protecting consumers, markets and promoting competition in the interests of consumers come first.

The new objectives could give regulators scope to do away with rules that are not fit for purpose. Climate considerations are also baked into the growth objective, with regulatory needing to ensure growth in a way that is consistent with the government's commitment to achieve net zero by 2050.

By enshrining growth and international competitiveness as statutory objectives, the Treasury is expanding the FCA's and PRA's scope of considerations when making rules. Now, they will need to consider broader economic factors and the need for the UK to remain an attractive place to start and grow a financial services business.

Accountability mechanisms

As a result of more power being delegated to regulators, the government has proposed to strengthen accountability mechanisms.

There will be a new requirement for the FCA to respond to the recommendations letters issued by HMT. Within the response, the FCA will need to set out an overview of how it has taken account of each recommendation along with any impact on its policy that result. It is also expected that the government will increasingly make use of 'have regards', an existing steering mechanism through which regulators are directed to focus on specific policy outcomes.

HMT will also be given the power the require regulators to review their existing rules where the government considers that it is in the public interest. 

Regulators will also be required to respond formally in writing to to statutory consultations from Parliamentary committees. 

Finally, regulators will need to publish more details on the methodologies associated with their Cost and Benefit Analyses (CBA) when rule-making.

Practical implications for firms

The FRF review has not proposed anything groundbreaking in terms of how it will impact the day-to-day operations of existing and aspiring firms. It simply creates a forward looking framework that builds on the existing FSMA model to provide for better regulatory coordination and enhanced public scrutiny in the absence of EU lawmakers. It creates interesting new objectives that might help firms by opening up possibilities for deregulation, but there is no concrete impact in terms of operations proposed just yet.

More material changes may result from the Treasury's ongoing inquiry into the Future of Financial Services. We wrote about that recently here.

How we can help

Whilst the regulatory framework itself may seem like it doesn't matter that much, understanding where your firm sits within it and what its obligations are does. Contact us today if you require some strategic guidance on what you need to know and do to stay compliant.