Industry sets out vision for post-Brexit financial regulation

A new report from the International Regulatory Strategy Group (IRSG) and Linklaters discusses changes to enhance the UK’s financial regulatory architecture so that it can meet the challenges and opportunities arising after the UK has left the EU.

The report, ‘The architecture for regulating finance after Brexit: Phase II,’ supports the UK’s current regulatory framework, which is among the most robust in the world and is an important competitive strength for the UK. However, it also points out that after Brexit the UK system will face important choices and will not have the same resources, oversight mechanisms or parliamentary scrutiny as exist within the European system.

The pace and scale of regulatory change over the past ten years has led to considerable regulatory overlap, presenting a pressing need for coordination between regulators.

The report describes how the rapid requirement to onshore EU regulation and competences ahead of Brexit has inescapably resulted in greater complexity, a lack of coherence, and fragmented responsibilities within the UK’s regulatory framework.

To ensure the UK regulatory system is effective, robust and capable of taking a flexible and innovative approach to rule making while striking the right balance between different public policy considerations, the IRSG and Linklaters have set out a menu of recommendations to ensure future UK financial regulation can appropriately balance: regulatory independence, regulatory accountability, coherence, flexibility and appropriateness of regulatory objectives.

Mark Hoban, Chair of the IRSG, and former Treasury Minister, said,

“The success of the UK’s world leading financial services sector is underpinned by strong and effective supervision by its regulators. But much of their rulebook has been shaped by the work of European institutions through the implementation of global standards. Brexit creates the opportunity and need to review the structures and processes of regulation so that they continue to support global standards and reflect domestic priorities. We believe our recommendations enable regulators to promote high standards as well as enabling firms to innovate and meet the needs of households and businesses in the UK and globally.”

Lucy Fergusson, Partner, Linklaters, said,

“The report’s recommendations aim to ensure that regulation of the UK-based financial services sector remains globally leading, enhances the UK’s position as a world-leading international financial centre and delivers the best possible outcomes for customers and clients, while also enabling the sector to play its role in addressing the UK’s competitiveness and productivity challenges.”

Julian Adams, Director, Public Policy and Regulation, M&G plc and project chair,

“The financial services sector and its regulators face an increasingly dynamic landscape of socio-economic and geopolitical change. New thinking is required about the respective roles of regulators and government, particularly in rule making, and the parliamentary oversight of them. Whatever options are taken post- Brexit, regulators are almost certain to end up with increased powers, and these should be matched by stronger scrutiny and accountability, to Parliament and the public.”

Summary of the report’s key recommendations:

  • Redistribute powers to amend onshored regulation to achieve better consistency with the UK’s existing regulatory architecture.
  • Given the growing importance of global standards, provide a formal role for international financial standards within the UK’s regulatory architecture.
  • Clarify responsibilities in meeting public policy objectives, increase transparency and enhance the role of Parliament and HM Treasury in co-ordinating public policy objectives with the regulators.
  • Strengthen mechanisms for scrutinising and holding regulators and HM Treasury to account, due to the loss of peer review from EU financial regulators and the ESAs.
  • Reflect in regulatory objectives the need to maintain and enhance the UK’s financial services ecosystem in a global context, while in no way engaging in any regulatory race to the bottom which would undermine the UK’s standing as a premier international financial centre.
  • Enhance engagement with and the role of the Law Commission and other legal expert groups.
  • Strengthen the role and visibility of PRA and FCA statutory panels and make them more prominent in ensuring appropriate scrutiny of the regulators.
  • Consolidate financial regulation to improve accessibility and lower compliance costs.
  • Establish mechanisms to track regulatory developments which could affect trade negotiations. For example, any domestic or international regulatory changes which should not adversely impact market access with any major trade partner.
  • Make review mechanisms mandatory to review new rules or legislation within a set time-frame to ensure they are relevant and appropriate for their desired outcomes.
  • Establish a Financial Regulatory Policy Committee with specialist sub-committees and representatives of the full range of stakeholder interests to scrutinise regulatory cost-benefit analyses.
  • Establish a Joint Regulatory Committee, similar to the ESAs Joint Regulatory Committee (JRC) tasked with ensuring regulatory coordination and coherence and designed to address any air-traffic control issues which may arise between regulators.