First Report - Future of financial services regulation

Select Committee

Treasury Committee HC 141 16 June 2022

Report Status Government responded

Conclusions & Recommendations 25 items (12 recs)

Source View on Parliament website

Government Response (AI assessment · 25 of 25 classified)

Accepted 6

Accepted in Part 2

Acknowledged 16

Deferred 1

Recommendations

12 results

7 Acknowledged

There is a clear view from the financial services sector that co-operation between regulators is...

Recommendation

There is a clear view from the financial services sector that co-operation between regulators is more significant than trade deals for ensuring reciprocal market access for financial services. While trade deals can open up new markets for financial services, the … Read more

Government Response Summary

The government notes the recommendation. The UK has a range of tools to pursue new market access opportunities and closer regulatory cooperation in financial services with key international partners. The government works closely with the regulators to achieve progress. The government also operates a range of equivalence regimes and uses this as part of its range of tools to support the openness of the UK’s international financial services and facilitate cross border market access.

HM Treasury

8 Accepted

Para 72

We recommend that there should be a secondary objective for both the Financial Conduct Authority...

Recommendation

We recommend that there should be a secondary objective for both the Financial Conduct Authority and the Prudential Regulation Authority to promote long-term economic growth. The wording will be crucial: pursuing international competitiveness in the short term is unlikely to … Read more

Government Response Summary

The government has implemented new secondary objectives for the FCA and PRA to focus on medium to long-term growth and competitiveness, while maintaining high regulatory standards.

HM Treasury

12 Accepted

Para 90

The FCA should make every effort to ensure that it is not designing or implementing...

Recommendation

The FCA should make every effort to ensure that it is not designing or implementing regulation in a way which could unreasonably limit the provision of financial services to consumers who might benefit from them. When placing new requirements on … Read more

Government Response Summary

The government states that the FCA's existing objectives and regulatory principles are already well-aligned with financial inclusion objectives.

HM Treasury

13 Accepted

We welcome the clearer acknowledgement that the FCA is working to support financial inclusion, and...

Recommendation

We welcome the clearer acknowledgement that the FCA is working to support financial inclusion, and we would urge the FCA to continue to do so. The FCA should provide an annual report to Parliament on the state of financial inclusion … Read more

Government Response Summary

The government states that the FCA's existing objectives and regulatory principles are already well-aligned with financial inclusion objectives, and the government already publishes an annual report on financial inclusion.

HM Treasury

14 Deferred

Para 96

The Treasury and regulators should publish a forward-looking schedule of approximately when they expect each...

Recommendation

The Treasury and regulators should publish a forward-looking schedule of approximately when they expect each EU financial regulatory file to move across to the regulatory rulebooks, including timelines for consultation, and when they expect the overall project to conclude. This … Read more

Government Response Summary

The government notes the recommendation and recognizes the need to set out further information on the process of moving from retained EU law to a comprehensive FSMA model, indicating that it expects to do so in due course.

HM Treasury

16 Acknowledged

Para 105

The Treasury should be sparing in its use of the proposed power to require regulators...

Recommendation

The Treasury should be sparing in its use of the proposed power to require regulators to review their rules, and should not use it to implicitly require the regulators to consider a general ‘public interest’ requirement for rulemaking. Each use … Read more

Government Response Summary

The government states that the power to require a regulator to review its rules is designed to be used only in exceptional circumstances where the Treasury considers that it is in the public interest.

HM Treasury

17 Acknowledged

Para 106

The Treasury has not set out the expected impact of this new power on regulatory...

Recommendation

The Treasury has not set out the expected impact of this new power on regulatory resources. In order to avoid imposing a significant burden on regulatory resources to conduct these reviews, and to safeguard regulatory independence, the Treasury should fund … Read more

Government Response Summary

The government notes the recommendation that the Treasury funds reviews conducted under this power and states the FSM Bill includes a requirement for the Treasury to ‘have regard’ to the desirability of minimising the impact of a direction on the regulator’s other functions before directing the regulator to undertake a review.

HM Treasury

19 Accepted

Para 119

The information the FCA has made available on how it is performing against its service...

Recommendation

The information the FCA has made available on how it is performing against its service standards shows a deteriorating picture. The FCA has a reputation for being too slow in its authorisation work, and this will inevitably hold back British … Read more

Government Response Summary

The FCA wrote to the Committee alongside the publication of their Annual Report and Operating Service Metrics and will keep the Committee updated on the progress made to reduce authorisation queues.

HM Treasury

20 Acknowledged

The FCA should consider how to improve its engagement with the poorest consumers, including seeking...

Recommendation

The FCA should consider how to improve its engagement with the poorest consumers, including seeking opportunities to improve the availability of data about people who are on the lowest incomes. The FCA must seek data on the issues vulnerable consumers … Read more

Government Response Summary

The FCA contributes to HM Treasury’s yearly report on financial inclusion and supports the Government’s leadership on this issue and is willing to discuss with the Government how any additional duty to report on their part could avoid duplication and provide benefit to those who need support the most.

HM Treasury

22 Acknowledged

Para 147

In their review of Solvency II, the Treasury and Prudential Regulation Authority (PRA) should aim...

Recommendation

In their review of Solvency II, the Treasury and Prudential Regulation Authority (PRA) should aim to secure a robust insurance regulatory regime that adequately captures risk and incentivises investment in infrastructure and business, but one that is also appropriately tailored … Read more

Government Response Summary

The government notes the recommendation, referencing its objectives for Solvency II reform which include a vibrant insurance sector, policyholder protection, and long-term capital support.

HM Treasury

23 Accepted in Part

Para 154

The Prudential Regulation Authority should consider where there is more that can be done to...

Recommendation

The Prudential Regulation Authority should consider where there is more that can be done to reduce the advantages from which large banks and insurers benefit through modelling their own capital requirements. The purpose of doing so would be not only … Read more

Government Response Summary

The government agrees with simplifying the regulatory framework, citing the "Strong & Simple" initiative and insurance reporting simplifications, and highlights planned enhancements to cost-benefit analysis, but does not specifically address reducing advantages from modelling capital requirements.

HM Treasury

24 Accepted

Para 160

The FCA should investigate whether there are more opportunities to enable larger firms to undertake...

Recommendation

The FCA should investigate whether there are more opportunities to enable larger firms to undertake controlled, supervised experiments with innovative products. For example, it may be desirable to allow firms to be more experimental with the designs of new products, … Read more

Government Response Summary

The FCA will explore using market innovation services to support more large firms in controlled testing of innovative products, with measured safeguards.

HM Treasury

Conclusions (13) Observations and findings — click to expand

1 Conclusion Acknowledged

Para 20

The EU has reasons to be very prescriptive when setting its financial services rules: it must ensure that all member states are acting together and implementing the same rules consistently across multiple national legal systems. The UK, now that it is outside the EU Single Market, can operate with greater …

Government Response Summary

The government acknowledges the committee's observation and emphasizes the importance of regulatory independence, referencing the Financial Services and Markets Act 2000 (FSMA) and the FRF Review, and the need for parliamentary oversight.

2 Conclusion Acknowledged

Para 21

Given that the UK has historically exercised significant influence in the framing of EU regulations, the UK’s exit from the European Union should not in itself be the cause of instant or dramatic changes to financial services regulation in the UK. Nevertheless, there will be opportunities to tailor inherited EU …

Government Response Summary

The government notes the recommendation, reiterating that regulatory independence is at the heart of the UK’s financial services model and referencing the FRF Review's proposal for a comprehensive FSMA model, balanced with effective policy input and oversight from Parliament and government.

3 Conclusion Acknowledged

Para 22

The Treasury should respect the principle of regulatory independence, and must not pressure the regulators to weaken or water down regulatory standards, or to accept changes to the regulatory framework which could impede the regulators’ ability to achieve their primary objectives. The regulators have been made operationally independent for a …

Government Response Summary

The government acknowledges the importance of regulatory independence and highlights measures in the FSM Bill to increase regulator accountability to Parliament and strengthen their relationship with the Treasury.

4 Conclusion Acknowledged

Para 23

We will remain alert for any evidence that regulators are coming under undue pressure from the Treasury to inappropriately weaken regulatory standards.

Government Response Summary

The government states that regulatory independence has been at the heart of the UK’s domestic model of financial services regulation for over two decades, and this remains central to the government’s approach.

5 Conclusion Accepted

Para 30

Deregulation or simplification will in themselves impose costs on industry in the short term. Regulators should make every effort to limit the costs of compliance with the rules, for example by communicating planned changes in advance, grouping sets of changes together, and minimising the frequency of changes to those where …

Government Response Summary

The FCA seeks to balance costs imposed on firms with delivering a strong system of regulation, prioritises work based on evidence of consumer harm or risks to market integrity, and makes use of cost benefit analysis and post-implementation reviews.

6 Conclusion Acknowledged

The UK’s exit from the European Union has had an impact on the UK’s ability to export financial services to the EU. However, it remains the case that the UK still has many competitive strengths as a global financial services centre. Brexit has served as a catalyst for a renewed …

Government Response Summary

The government acknowledges the impact of Brexit on financial services exports but notes the UK's competitive strengths and the focus on competitiveness. It highlights tools for market access, regulatory cooperation, equivalence regimes, and FTAs.

9 Conclusion Acknowledged

Para 73

In designing the new secondary objective, there should also be some consideration for the ways in which financial services serve the ‘real economy’. The financial services industry can help deliver economic growth not simply by growing itself but also by facilitating economic growth by providing capital, credit, insurance and other …

Government Response Summary

The government notes the recommendation and states that new secondary objectives for the FCA and the PRA introduce a new focus within the regulatory framework on the medium to long-term growth and competitiveness of the UK economy.

10 Conclusion Acknowledged

Para 74

The Treasury should continue to reject any calls for a growth and/or competitiveness objective to become a primary objective. This would increase any pressure on regulators to trade off competitiveness against resilience, and would undermine the regulators’ ability to deliver on their core functions. There is a danger that as …

Government Response Summary

The government notes the recommendation and has implemented new secondary objectives for the FCA and PRA to focus on growth and competitiveness, while maintaining high regulatory standards.

11 Conclusion Acknowledged

Para 89

The regulations made by the FCA, and the manner in which it supervises and enforces those regulations, could have a significant impact on financial inclusion. However a primary role of the FCA should not be to carry out social policy, or to fill the gaps where it is Government that …

Government Response Summary

The government notes that the FCA's objectives are already aligned with financial inclusion and does not consider a separate 'have regards' duty necessary.

15 Conclusion Acknowledged

Para 100

Regulatory independence is critical for the competitiveness and effectiveness of UK financial services regulation. The host of new accountability mechanisms proposed by the Treasury must be carefully reviewed in this light, to ensure that regulatory independence is not compromised. These mechanisms largely seem reasonable as individual changes, but there is …

Government Response Summary

The government is confident that the final package strikes the right balance between democratic accountability, regulatory agility, and regulatory independence and that the regulators will be responsible for operationalising the new accountability requirements set out in the Bill.

18 Conclusion Accepted in Part

We expect the regulators to prioritise changes where the cost for consumers is lowest in comparison to the benefit. Regulators’ approaches to assessing the marginal impact of new policies is already well-developed. We therefore believe that the creation of a new statutory panel to advise regulators on cost-benefit analysis—in addition …

Government Response Summary

The government acknowledges concerns about regulators' cost-benefit analysis and proposes establishing CBA panels but does not agree that the panels would impact the regulators' independence.

21 Conclusion Acknowledged

Para 136

We will conduct scrutiny of the Prudential Regulation Authority’s ‘Strong and Simple Framework’ proposals. We will examine the impacts of the proposed reforms on the safety and soundness of smaller firms, and whether the reforms would successfully reduce the burden of regulation for these firms.

Government Response Summary

The PRA agrees that transferring retained EU law would allow for a comprehensive and efficient policy framework, and is committed to working with Treasury and other regulators on the process.

25 Conclusion Acknowledged

There is a range of innovations taking place in payments systems and with alternative means of exchange, including crypto-assets, stablecoins, and central bank digital currencies. These innovations could provide opportunities to address weaknesses in international payments systems and potentially to serve consumer needs, and in the case of central bank …

Government Response Summary

The government notes the opportunities and risks with innovation, outlining steps to regulate stablecoins, cryptoasset activities, and consumer protection measures.