HMT Financial Services Future Regulatory Framework Review: call for evidence on regulatory coordination

The post below was first published on our FSR and Corporate Crime blog

HM Treasury ("HMT") has launched the first phase (a call for evidence on regulatory coordination) in its Future Regulatory Framework Review ("the Review"), originally announced by the then Chancellor in his Spring Statement and more recently repeated in his 2019 Mansion House speech.

This Review is focused on improving the coordination between the various regulators/government bodies in the financial sector. Responses to the call for evidence are requested by 18 October 2019.

In his Mansion House speech, the Chancellor stated feedback from business is that there is a "critical need for greater 'air traffic control' to manage the cumulative impact of regulatory change emanating from different sources" and that therefore this would form the first phase of a broader long term review into the future of the UK's regulatory framework. Subsequent phases would proceed once the UK's future relationship with the EU was more certain.

The Chief Executives of the FCA, PRA, Payment Systems Regulator ("PSR") and Competition and Markets Authority ("CMA") have confirmed that they met with the former Chancellor earlier in July to discuss the plans around coordination, alongside the call for evidence.

Purpose of the Review

The Review as a whole has been triggered primarily by:

• The UK's withdrawal from the EU which will require a recalibration of the regulatory framework.
• The completion of many reforms stemming from the 2007/2008 crisis, offering the opportunity to assess the regulatory framework in the round.

HMT has stated that how the Review proceeds will depend on the nature of the UK's exit from the EU, hence the phased approach. Subsequent phases will look at the regulatory framework in the context of key long term challenges, in particular:

• Operating outside of the EU – Significant parts of the UK's financial regulation are determined at the EU level. Once the UK leaves the EU, policy and legislative decisions will be taken by UK institutions and the regulatory framework currently in operation will need to be adapted/updated.
• New relationships – While trading (including in relation to financial services) with the EU will remain of high importance, it is predicted that future growth will come from markets outside of the EU (and Europe). UK regulation will therefore need to support these relationships and help foster international regulatory standards and supervision.
• Technological change – As technology evolves, so does the provision of financial services. Regulation will be required to support these technologies while also mitigating against risks to markets/consumers.
• Wider global challenges – The Government believes the financial services sector will be critical in addressing potential issues caused by an aging population and the current commitment to reach a net zero-carbon emission economy by 2050.

Relevant Bodies

Unsurprisingly, HMT's call for evidence identifies the following key entities operating in the financial sector:

• FCA
• PRA
• The Bank of England
• PSR
• CMA
• HMT

It also notes there are various other bodies that may interact with financial services firms such as the Financial Reporting Council, the Financial Ombudsman Service and the Information Commissioner's Office.

Existing Coordination

There are a number of existing formal arrangements for cooperation between many of these bodies. Informally, HMT and the regulators work together day-to-day to formulate policy, legislation and regulation, and coordinate.

Formal mechanisms identified by HMT include the following:

• The FCA and PRA are under a statutory duty to coordinate their functions and have agreed a Memorandum of Understanding ("MoU") which sets outs their roles/how they will cooperate where their remits overlap.
• The Bank of England, FCA, PRA and PSR are also under a statutory duty to coordinate their functions and have agreed an MoU in that regard. They have also put in place MoUs with other bodies, for example the FCA has MoUs with the CMA and FOS.
• The CEOs of the PRA and FCA sit on the boards of the other and must address regulatory cooperation in their annual reports.
• The Bank of England's Financial Policy Committee ("FPC") includes the CEO of the FCA and a representative of HMT.
• HMT must send the FPC a letter every year setting out recommendations, which include the remit for the forthcoming year and a statement of the government's economic policy.
• HMT writes to the FCA and PRA at minimum once per Parliament about the government's economic policy that the regulators should consider when advancing their objectives.
• The FCA, PSR and the CMA are members of the UK Competition Network and the FCA, PSR and Information Commissioner's Office are members of the UK Regulators Network.

First phase of the Review

The call for evidence seeks views on how the existing cooperation can be enhanced, ensuring the overall impact of regulatory interventions on firms and their consumers is well understood and managed.

The key questions posed by HMT, in the context of what works well/could be improved, are as follows:

How UK bodies, including the Treasury and regulators with jurisdiction over the financial services sector, work together to coordinate regulatory interventions for financial services firms (‘regulatory interventions’ includes regulatory changes, regulatory initiatives, publications, consultations and data/information requests), including:

• how UK bodies balance the benefits to consumers of financial services (both individual and businesses) of timely regulatory action against the impact on firms of meeting potentially challenging timeframes on requirements;
• how UK bodies understand and assess the overall impact of simultaneous regulatory interventions on firms, particularly in the way these are sequenced and how they consider the wider regulatory landscape;
• whether UK bodies request the right amount of information from firms as part of the policy-making process, and whether these processes provide an adequate opportunity for firms to highlight the impact of proposed changes.

How firms and the regulators can work together to make authorisation, supervision and enforcement more efficient, including:

• how might firms and the regulators take advantage of new technology to make supervisory reporting more efficient, flexible and less burdensome;
• how might firms allow or facilitate data sharing between regulators to improve regulatory coordination;
• how firms go about making sufficient investment in their systems and controls to ensure these are fit for the future.

Among other things, HMT has asked for specific examples wherever possible and where negatives/challenges are identified, responses should include the impact in quantitative terms and views on alternative approaches.

The deadline for responses is 18 October 2019. Given the pace of regulatory change over the preceding 10 years and increase in regulation, it is likely many firms will have suggestions for more efficient cooperation in both the enforcement/supervisory context and policy making process.