A new report by the International Regulatory Strategy Group (IRSG) in collaboration with Linklaters, urges a review of the UK’s rule making system for financial services post-Brexit.
The report, ‘The architecture for regulating finance after Brexit’, argues that Brexit will require the UK to update its regulatory structure for financial services, creating new checks and balances to ensure the system remains proportionate, coherent and fit for purpose.
Its four main areas of recommendations for review following the return of EU regulatory powers to the UK include:
• The powers and resources of UK regulators, including how any significant policy decisions are reached, and how regulators can be better resourced to achieve their objectives.
• Framing the responsibilities of regulators to make sure regulation continues to be at the forefront of global standards while also remaining flexible and adaptive to market needs.
• The scrutiny and oversight of regulators, how they interact with Parliament, key stakeholders and the public.
• The legislative and regulatory process, including consultation and review mechanisms, as well as an assessment of areas for consolidation and simplification.
When the UK leaves the EU, rulemaking powers currently jointly exercised by the European Parliament and Member States through the Council of Ministers and responsibilities from the European Supervisory Authorities (ESAs) and other EU institutions will be transferred to the FCA and the Bank of England. This will create a new balance of power which poses important questions around political scrutiny and engagement with industry and customer groups.
The IRSG urges the UK to prioritise these questions as the EU Withdrawal Bill moves its way through Parliament. Processes need to be put in place for making and implementing financial regulation remain robust, trusted and effective.
While these will not be decisions for day one of Brexit, the IRSG suggest they will be vital for long-term financial stability – balancing public policy objectives and the continued success of the UK-based financial and related professional services industry.
The IRSG is very clear that it does not want to see significant changes to regulation itself, nor a lowering of the UK’s globally renowned high standards of regulation. Its priority is to ensure that the UK regulatory system is fully equipped for the task ahead, taking a flexible and innovative approach to rule making and striking the right balance between different public policy considerations.
Mark Hoban, Chair of the IRSG, and former Treasury Minister, said,
Whatever the outcome of the Brexit negotiations, the UK will continue to need an effective and internationally respected structure for financial regulation. We believe the system we have is already very good, but it will need to be updated to meet the challenges of Brexit. It must continue to be independent, but also subject to appropriate checks and balances to keep it accountable and responsive. In order to maintain the UK’s well-respected and globally leading regulatory regime, it must have sufficient flexibility to anticipate and respond to market developments and innovations.
Lucy Fergusson, Partner, Linklaters, said,
Leaving the EU means that the UK’s financial regulators will be operating in a different context and it is essential that the UK’s regulatory architecture remains robust and fit for purpose after Brexit. When the UK withdraws from the EU, it will be able to choose whether to amend, retain or remove EU-derived regulation. Such policy choices will of course be affected by the terms of any future relationship with the EU. In any case, the UK institutions will inherit new powers and responsibilities.
Julian Adams, Group Regulatory & Government Relations Director, Prudential plc and project chair, said,
Brexit is both a challenge and an opportunity, in financial services regulation as in other areas. The challenge is to ensure that the process of leaving the EU does not weaken or upset the balance of our regulatory architecture. The UK will continue to have a strong regulatory framework after Brexit, and the report is clear that the industry does not want to see a 'race to the bottom'. But given the disruption involved in Brexit, it would be a missed opportunity not to take a hard look at the framework and ask whether it is right for the UK. Whatever options are taken, the regulators are almost certain to end up with increased powers, and these should be matched by stronger scrutiny and accountability, to parliament and public.
The report comes as Parliament continues to debate the EU Withdrawal Bill, which is critical to providing continuity and certainty as the UK leaves the EU. While legislation under the Bill is unlikely to fully address the issues discussed in the report, the IRSG sets out the main challenges and provides a menu of available solutions once there is more clarity on the future UK/EU relationship.