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Clifford Chance

Clifford Chance

Insurance Insights

The future of UK financial services and the enhanced FSMA model

On 9 November 2021, HM Treasury (HMT) published its latest consultation on the Future Regulatory Framework (FRF) Review. The FRF Review aims to support the government's vision of the UK as a globally competitive financial services hub and complements several other reviews currently underway. This includes the government’s review of Solvency II for which a Call for Evidence was published in October 2020 with further consultations expected in 2022.

There is an acknowledgement in the FRF that due to the 'onshoring' of retained EU law, detailed regulatory requirements now sit in primary and secondary legislation which should instead belong in the regulators’ rules. To resolve the constraints this causes (not to mention the confusion), the government confirms that it will implement its Financial Services and Markets Act 2000 (FSMA) 'blueprint' for the future regulatory framework. Consequently, the UK will move to a comprehensive FSMA model of financial services regulation over the next few years, with enhancements to ensure that the regime remains fit for the future.

The proposed enhancements include:

Objectives and principles 

As the regulators take on responsibility for areas currently covered by retained EU law, the government now considers it right that the regulators’ objectives better support the UK economy. The government, therefore, intends a greater regulatory focus on growth and international competitiveness through the introduction of new secondary objectives for the PRA and the FCA. The existing regulatory principles will also be amended to reflect that growth should occur in a sustainable way consistent with the government’s commitment to achieving a net-zero economy by 2050. A hard Brexit combined with the onset of the coronavirus pandemic appears to have shifted the government's mindset into supporting industry stakeholders who have long argued for flexible financial rules to allow the UK to better compete globally. 

It remains to be seen whether this new objective will step change the approach of the UK regulators and whether initiatives to give the UK a competitive edge, like the UK Insurance-Linked Securities regime and a possible new UK Captives regime, see any benefit. Andrew Bailey recently spoke on Solvency II reform at the Institute and Faculty of Actuaries, and, despite the new objective proposal, Bailey underscored that the hierarchy of the PRA's objectives is clear with the primary 'safety and soundness' objective continuing to take pole position. Bailey added: 'please don’t be surprised that, at the Bank and the PRA, we pull the debate back to the anchors of the primary objectives'. Whilst such statements do not suggest an immediate change to the status quo, Bailey did recognise that stronger sustainable growth in the economy will enhance safety and soundness and policyholder protection. Similarly, achieving the transition to net-zero will likewise enhance the PRA's primary objectives.

Relationship with HM Treasury 

As greater responsibility is given to the regulators following the 'onshoring' reforms, the government proposes to balance this with increased regulatory accountability to HMT which, in turn, will be empowered to increase policy input into the financial services sector. Measures intend to achieve this include a new statutory requirement for the FCA and the Prudential Regulation Committee (PRC), the governing committee of the PRA, to respond to HMT recommendations, with the response then published and placed before Parliament. Other measures include new powers for HMT to require the regulators to review their rules where this is in the public interest, as well as new accountability mechanisms requiring the regulators to consider the impact of their compliance with deference arrangements and trade agreements with overseas jurisdictions. The new oversight measures considerably embolden HMT's regulatory mandate. With high expectations for the UK's economic recovery, it will be interesting to watch how the interaction between HMT and the regulators unfolds, and whether there is greater alignment in policy development and implementation. 

Accountability to Parliament 

The government confirms that the existing parliamentary scrutiny mechanisms, including those provided by select committees, should be the principal means for parliament to hold the regulators to account. To support this, the government proposes two new statutory requirements on the regulators: first to notify the relevant parliamentary committee when publishing a consultation on any matter and, second, to respond in writing to formal responses to statutory consultations from parliamentary committees. Given the regulators’ wide-ranging powers, which they exercise independently of government, these proposals should assist parliamentarians to continue to effectively scrutinise the regulators.  

Stakeholder engagement 

Following concerns raised by respondents on the operation and lack of clarity on the regulators’ statutory panels, the government proposes to bring the FCA Listing Authority Advisory Panel and PRA Practitioner insurance sub-committee onto a statutory footing, consistent with other regulator panels. The question is: does this makes any difference? The answer depends on what exactly what the statutory footing will provide for. 

If, as with the other regulator panels, FSMA will require the regulators to "consider" a panel's representations and "from time to time" publish a response to these representations, then the regulators will continue to have the remit to choose and respond to the policy they agree with. A recent example is the FCA's proposal for a "new consumer duty" which followed the FCA's public response (in a form of a letter) to the Financial Services Consumer Panel's recommendation for improving customer access to financial services. Arguably then, the government's proposals could have gone further to specify the level of regulatory engagement to be expected with the panels. Additionally, given the FCA's recent pricing and consumer protection concerns, there is a need for insurance sector representation on the FCA side which the current proposal does not provide for. 

A comprehensive FSMA model

The government intends, as a general approach, to repeal direct regulatory requirements which apply to firms and then work together with the regulators to transition to new FCA/PRA requirements. This 'repeal and replace' work will go on for several years so should provide continuity and minimise the impact on firms and consumers. As there are aspects of retained EU law that set the rules for a kind of activity, product, or conduct that are not FSMA regulated activities, the government proposes a new Designated Activities Regime (DAR), which will oversee the regulation of certain activities outside of the FSMA authorisation process. 

Although the rationale for the DAR is understandable, the proposal may confuse the FSMA regulatory perimeter which is already a complex area to navigate. The DAR would be subject to a more limited rulemaking power than the general FSMA rulemaking powers for authorised persons, but the PRA and FCA will essentially be empowered to extend the UK's existing regulatory landscape. There is, therefore, a possibility for the regulators to expand into grey areas, such as those in the FinTech and cryptocurrency space, and regulate in areas where they would have needed, as a minimum, secondary legislation to do so previously.  What is clear now is that a new way to regulate is emerging. 

The consultation will remain open until 9 February 2022.