HM Treasury Publishes Final Policy Following Financial Services Future Regulatory Framework Review

HM Treasury has published its final response to the Financial Services Future Regulatory Framework Review in which it sets out the government's policy approach to reforming the U.K.’s regulatory architecture post-Brexit. The response is published on the same day as the Financial Services and Markets Bill is introduced to Parliament, which will implement in legislation these significant reforms.

HM Treasury confirms that the government intends to proceed with establishing a comprehensive model for financial services regulation using the Financial Services and Markets Act 2000. This involves the creation in FSMA of a Designated Activities Regime for the regulation of activities related to the financial markets. HM Treasury will be empowered to designate activities relating to financial markets, exchanges, instruments, products or investments. Examples of activities to be included in this regime are short selling, offering securities to the market and admission of securities to trading on a securities market, and activities related to entering derivatives contract. The Financial Conduct Authority will be empowered to make rules relating to designated activities but will not be able to make rules that apply to the wider activities of firms carrying out designated activities.

New secondary statutory objectives will be introduced obliging the FCA and PRA, in carrying out their functions, to support long-term growth and international competitiveness. In addition, a new regulatory principle will require the FCA and the PRA to consider the need to achieve the U.K.’s statutory climate change target (i.e., a net-zero economy by 2050).

HM Treasury is proceeding with the proposals to strengthen the measures by which Parliament may hold the regulators to account by introducing new statutory requirements for the regulators. The first is a requirement for the regulators to notify the relevant Parliamentary committee of a consultation launch. The second is to require the regulators to respond in writing to formal Parliamentary committee responses to a consultation. Regarding the relationship between HM Treasury and the regulators, there is a mix of new obligations for the regulators and new powers for the government, including:
 

• requiring the regulators to respond to HM Treasury's recommendation letters;
• requiring the regulators to consider the impact of their new rules on the U.K.'s deference mechanisms and also assess compliance with trade agreements;
• a new power for HM Treasury to require a regulator to review its rules if it would be in the public interest, which would involve, where appropriate, an independent individual being appointed to conduct the review.

Notably, these reforms do not include any measures to ensure that the regulators are more readily subject to judicial review and court judgments in line with common law principles. In his new book, entitled Rules for the Regulators – Regulating Financial Services After Brexit (published with Politeia), Shearman & Sterling partner Barnabas Reynolds makes recommendations, such as requiring the regulators by statute to make clear and predictable rules under Parliamentary oversight and to supervise and enforce predictably in accordance with their rules. The reforms also fall short of requiring the regulators to follow decisions of the Financial Regulators Complaints Commissioner, despite the FCA’s recent and high-profile decisions in the London Capital & Finance case to ignore the independent Commissioner which was set up by Parliament to hold the FCA to account.
 

HM Treasury has also today published its final policy approach to the regulation of central counterparties and central securities depositories under the Future Regulatory Framework Review.

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