The Future Framework for Regulation of Financial Services Contents

2Future scrutiny of financial services

58.The Treasury’s consultation paper proposes a new framework for financial services. In this chapter we consider the legislative requirements of the new framework, and how scrutiny of the rules drawn up under the new framework might be conducted.

Proposed legal structure of framework

59.The Government’s proposals can be separated into three phases. The first is to create a new, over-arching regulatory framework using primary legislation. The second is to move the EU-derived financial services rules which have been on-shored out of statute and into the regulators’ rule books. The final and enduring phase would be where regulators make changes to rules as they feel appropriate over time and to discharge the duties given to them by Parliament in primary legislation. Any changes needed to the over-arching framework thereafter would be brought into effect through secondary legislation.48

60.When we asked the Economic Secretary how the on-shored rules would be moved out of statute, he said that it was his intention to use primary legislation to create the overall framework, and then to use secondary legislation to move the rules across:

My preference would be for us to have framework legislation that would then allow for those transfers through secondary legislation. […] That cannot be done overnight. The complexity involved means that it is going to take some time to deliver, but I hope it will allow us to get it right and ensure that the responsibilities lie in the right place.49

Scrutiny response to new framework

61.Any primary legislation that is required to create a new regulatory framework, or activity-based frameworks, would be subject to the usual procedures in each House for scrutiny of primary legislation.

62.The Treasury suggests in its consultation that because the financial services regulators would gain substantial new rule-making powers, Parliament would want to consider its approach to scrutiny of the exercise by the regulators of those new powers:

The government recognises that [the consultation proposals] will involve delegating a very substantial level of policy responsibility to the UK financial services regulators. […] It is therefore right to review the framework arrangements for accountability, scrutiny and public engagement in the policy-making process, particularly in relation to the regulators. […] Parliament will also wish to consider how its scrutiny of financial services regulation may need to adapt, particularly in relation to the financial services regulators.50

63.The consultation goes on to suggest that “Parliament may wish to focus on the select committee system when considering its future approach to Parliamentary scrutiny of financial services policy”,51 adding that this is because the Government believes that “enhanced Parliamentary focus on the key public policy issues related to financial services would improve the overall operation of the UK’s regulatory framework”.52

64.The consultation does not propose any specific scrutiny approach, instead stating that “It is of course for Parliament to decide whether and how it will adapt its approach to scrutiny.”53

65.Parliament has choices about how it will conduct scrutiny of rules made under the future framework. It might seek to replicate the level of scrutiny which the European Parliament conducts in relation to draft texts which are to apply across the EU; but there would be alternative approaches.

Previous EU Parliamentary scrutiny of financial services

66.Baroness Bowles, former Chair of the European Parliament’s Committee on Economic and Monetary Affairs (ECON), told us how that Committee worked, and what work it did:

There are 60 members. The work consists of both pre-legislative scrutiny and consultation, then actually doing the legislation itself and then also scrutinising what happens afterwards through oversight of the regulators. […] A committee of the whole House is the nearest thing that we have in our Parliament, where you are using your numbers and your expertise.54

The size of committees in the European Parliament reflects the need to be representative of 27 Member States as well as of multiple party groupings.

67.The European Parliament’s standing committees broadly combine the functions of both select and public bill committees. As such, ECON plays a role both in drafting of Level 1 legal texts and in scrutiny of how they are subsequently implemented. ECON is where the Parliament’s initial position on each Commission proposal for new financial services legislation is discussed and provisionally approved. This position then forms the basis for the “trilogue” talks with the Member States in the Council. It is also the Committee where any subsequent provisional agreement with the EU Member States in the Council on a Level 1 text is discussed and voted on.

68.ECON is also the main forum for European Parliament scrutiny of Level 2 legal texts. These technical measures set detailed rules supplementing the Level 1 legislation, in a similar way to the way in which the PRA and FCA rulebooks supplement FSMA. They are drafted and adopted by the European Commission and take the form of either Delegated or Implementing Acts. For all Delegated Acts, the European Parliament (EP) has a veto. Therefore, ECON conducts systematic scrutiny and produces a recommendation to the Parliament. This states in each case whether or not the EP should vote to block the draft Level 2 rules, which is then subject to a vote in the Plenary. For Level 2 rules where the EP has no formal role (Implementing Acts), ECON can conduct ad hoc scrutiny on a case-by-case basis, if it has particular concerns over the policy being pursued.

69.The legislative workload of the ECON Committee is substantial. Dr Kay Swinburne, former member of the ECON Committee, explained the resources that the Committee would have at its disposal:

There are 23 members of full-time staff in the secretariat alone. That is made up of 10 policy people, five admin people and then eight people in an economic unit that sits alongside the main secretariat. There are 23 in total who are there to support the committee. As well as the full-time members of staff, certainly in my time there were always at least three national seconded experts who came from the regulators. Usually there was one from Germany, one from France and one from the UK at any one time. They would typically be the technical experts—rather than the lawyers, who were the permanent members of staff—who would support individual pieces of legislation.55

70.Lord Hill, former European Commissioner for Financial Services, explained to us why comparisons between the European Parliament Committees and UK committees may not be very useful:

The first and obvious point to make is that our system is fundamentally different from the EU system. […] What that illustrates is the fundamentally different natures of a consensus-building system, which is the European system, and ours, which operates for all of us on the basis of majority. That drives very different behaviour; it drives different attitudes to scrutiny. […] Parliament in Europe is not a bit of process that does a bit of scrutiny at the end, you have some votes and either you do it well or you do not, and it is either guillotined or it is not, and then it is shoved up to the House of Lords where they may do some more detailed stuff. The co-legislators construct, shape and drive the whole shape of the legislation and the policy. That leads to a completely different set of behaviours and, therefore, the different way that the Parliament thinks about the resources it needs and so on.56

71.The City of London pointed out that the EU model for scrutiny of legislative proposals is time-consuming due to its nature:

The EU’s model of legislative scrutiny is also designed to balance the interests of 27 Member States. This means that the system is necessarily built on compromise and can fall captive to wider political debates and tensions between groupings in the Parliament. It also means that decision making, or indeed changing legislation that has been passed, can be a time consuming and difficult process. There may be an advantage to the UK that it can now be nimbler in its regulatory approach.57

72.Both Lloyds and the City of London proposed that Parliament should not replicate the European Parliament’s model, which had been designed for specific circumstances. Lloyds wrote:

We do not advocate establishing identical mechanisms and institutions in the UK, as Parliament will need to determine the best approach for the specific circumstances of the UK’s future legislative and scrutiny framework.58

ISRG wrote that the UK should not “seek to wholesale replicate the EU’s model for drafting and scrutinising financial services regulation. […] the UK’s model is fundamentally different.”59

Ex-ante scrutiny

73.We received written evidence from Positive Money, a not-for-profit research and campaigning organisation, stating that Parliament should scrutinise every change that regulators propose:

It is essential that regulators are not left to develop regulation behind closed doors. We recommend that there are provisions to ensure that no changes to regulation can be made unless they have been properly scrutinised by Parliament.60

The Investment Association was also in favour of ex-ante scrutiny being carried out. It wrote:

There is a need for an effective, informed and appropriately resourced body to scrutinise the activity of the FCA and hold it to account in the new regulatory environment. This would do two things: to contribute to “policy formulation” (i.e. ex-ante) and to look at the “real world effects” (i.e. the ex post assessment of whether or not the regulators actually delivered on the mandate they were given).

74.In contrast, the Financial Inclusion Centre, also a not-for-profit policy research group, was opposed to more ex-ante scrutiny, stating that it prevented regulators from carrying out their duties:

It is self-evident that giving Parliament more ex-ante or even concurrent opportunities to scrutinise the operations of the main regulators will inhibit the ability of regulators to respond to those emerging threats and risks.61

75.In its written evidence, the Bank of England cautioned that “there is a risk that ex-ante scrutiny of every file weakens the independence and responsiveness of the regulators.”62 Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, told us in oral evidence that ex-ante scrutiny could slow down the process of preparing new rules. He said:

If there are further mechanisms that mean it takes more time for us to change the rules, that would concern us in terms of being able to deliver against the objectives that you in Parliament have set for us. As I said earlier, we are rarely criticised for acting too quickly and are quite often criticised for being too slow to make sure that the framework is up to date. That is the heart of our concern. It is not a concern about scrutiny per se.63

76.When proposing new regulations, the regulators are already required to consult on them prior to implementation, thereby providing an opportunity for general scrutiny and for objections to be raised. The FCA told us that:

Operationally, when discharging our general functions (including the making of rules), we are required by FSMA to act (ex-ante) in a way that is compatible with our strategic objectives and advances at least one of our operational objectives. We are required to:

- consult publicly on making rules and guidance, with cost benefit analyses, before making rules,

- publish our responses to consultation feedback,

- consult, and consider representations from, a wide range of statutory panels (consumer and practitioner) on the extent to which our general policies and practices are consistent with our duties.

In addition to FSMA cost benefit analyses, we are also subject to broader accountability and scrutiny under the Enterprise Act. We must in some cases publish impact assessments, which are scrutinised by the Regulatory Policy Committee.64

77.We believe that a measure of “ex-ante” scrutiny by Parliament is necessary. But we do not believe that it would be proportionate for Parliament or its committees to carry out, as a necessary part of the rule-making process, the detailed and comprehensive textual scrutiny which the European Parliament’s Economic and Monetary Affairs Committee conducts. The European Parliament’s legislative processes, under which the existing acquis of EU financial services rules was created, were designed for a parliamentary system which is quite different from that of the UK Parliament.

78.We believe that effective scrutiny of regulatory proposals should be carried out through a targeted approach. Each new proposal made by the Financial Conduct Authority or by the Prudential Regulatory Authority under the future financial services regulatory framework would be put out for consultation. Industry stakeholders and civil society groups would have an opportunity to put forward views, as would Parliament, both through the select committee system and through the work of individual Members of either House. If any matter of public interest were to arise that we deemed sufficiently important to scrutinise in more detail, or indeed challenge, we would do so.

Options for how Parliament should scrutinise financial services

A new financial services committee

79.We received several written submissions65 either proposing a sub-committee or the alternative of a new separate select committee specifically for financial services. Innovate Finance, a body representing some of the FinTech community, wrote:

With [the] increased role [for the regulators], we recommend that there is greater scrutiny of the regulators regarding the performance of their functions and rulemaking than is currently the case. This should be formalised under the Financial Services and Markets Act 2000 (FSMA). Given the significant resource and expertise such scrutiny will require, we recommend such scrutiny should be performed by a new, independent committee set up for the purpose. It is essential that the committee be sufficiently resourced, including sourcing appropriate expertise from the financial services sector.66

A Joint Committee

80.A different suggestion was made by Barclays, the Association of British Insurers, and the Investment Association, that a Joint Committee be created with Members from both the House of Commons and the House of Lords. Barclays wrote:

A potential solution to increase the resource and expertise within Parliament would be to create a Joint House of Commons and House of Lords Committee. […] A Joint Committee would potentially increase expertise and experience of the membership and provide extra resource to enable the Committee to address a wide variety of policy matters. Its remit should also be differently and narrowly drawn to focus on regulatory scrutiny so as not to conflict with the work of other, established committees. This approach would closely mirror the committee system for financial services that is used in the US, with both Senate and House Banking Committees scrutinising financial regulation.67

Independent organisation to carry out scrutiny and report back to Parliament

81.A further suggestion is that an independent body be created to assess whether the regulators were fulfilling their statutory objectives in line with what Parliament had intended. That organisation might then report back to this Committee, or to Parliament more generally. The idea, which was endorsed by the City of London, was put forward by the International Regulatory Strategy Group (IRSG), a practitioner-led group comprising leaders from across the UK financial and related professional services industry:

One option that could considered is to create a new, independent public body with the specific mandate to provide expert analysis of the regulatory measures that the financial regulators introduce and of the regulatory landscape more broadly. Such a body could have a more or less formal relationship with Parliament but would be expected to have the resources and expertise that would enable it to produce robust analysis and recommendations. This would provide genuine scrutiny while preserving the regulators’ operational independence.68

The status quo

82.While recommending changes to how financial services are scrutinised, TheCityUK, a representative group of the financial services industry, did make the case that scrutiny of the financial services system as a whole needed to be informed by the wider context within which the system was regulated. It wrote:

[…] Certain aspects of Parliament’s existing scrutiny and oversight should, we believe, continue. Inquiries that the Treasury Committee undertake in the current framework already provide for the direct accountability of the financial regulators to Parliament. […]

The Treasury Committee could also retain its existing role overseeing all of those aspects of policy (both macro and micro economic) that are the responsibility of the Treasury and its agencies. It is important that there is a forum within Parliament competent to shadow the Treasury’s entire suite of departmental responsibilities and that can make connections between (and identify any inconsistencies or trade-offs between) the different components of government economic policy. Only the Treasury Committee is capable of forming a holistic view of how taxation, public spending, monetary policy, micro-economic reform, and financial market regulatory policy co-exist.69

Conclusion

83.It will be for Parliament to decide how to conduct scrutiny of rules drawn up by regulators under the future framework for regulation of financial services. Various suggestions have been put forward to this inquiry, and we have summarised them above.

84.It should be borne in mind that there are already scrutiny committees in Parliament within whose remit scrutiny of financial services regulation might fall. Besides our Committee, there is a very significant body of relevant expertise in both the House of Lords Economic Affairs Committee and the House of Lords Industry and Regulators Committee.

85.We have set out above reasons why we do not believe that Parliament or its committees need necessarily carry out detailed and comprehensive textual scrutiny for every new draft regulation or rule, although it would always be open to a committee of either House to do so. We envisage that scrutiny would be both “ex-ante” and “ex post”. “Ex-ante” scrutiny could be based upon expert analysis of draft texts, together with an exploration of representations made by industry stakeholders, consumer representatives and others, with robust challenge to the regulators when warranted. “Ex post” scrutiny might entail reviews of the impact of regulations and an assessment of the balance struck between protection for the consumer and effective operation for the industry.

86.We do not see a clear need for the creation of a new committee or a new independent body to carry out this work. It would seem a more efficient use of Parliamentary resources to use the structures that are already available in both Houses. Although the scrutiny task will be substantial, it will be an extended one as new regulations are drafted, rather than a short-term surge of activity. There is already expertise in select committees in the Commons and the Lords, and both have the power to appoint specialist advisers and commission research.

87.The creation of a new independent body to assess whether regulators were fulfilling their statutory objectives would not remove the responsibility of this Committee to hold the regulators to account, and it would also add a further body to the financial services regulatory regime which we would need to scrutinise.

88.The remit of our Committee is broad. It mirrors all the departmental responsibilities of the Treasury. It therefore incorporates public spending and taxation, financial services policy, other aspects of the Treasury’s own departmental work,70 and those of the bodies that are ultimately accountable to the Treasury. This includes almost all of the public bodies operating in financial services71 and therefore entails scrutiny of the Bank of England, the Financial Conduct Authority, the Financial Ombudsman Service, and the Payment Systems Regulator. Our Committee has been consistent in its regular monitoring of the work of the Financial Conduct Authority and of the Prudential Regulatory Authority, the extent to which they meet the objectives set for them by Parliament, and their responsiveness to consumer expectations. There is a strong logic in aligning the scrutiny of draft regulations and policy proposals with that of policy implementation and the day-to-day work of the regulators.

A Treasury sub-committee

89.We received a number of written submissions, including those from PwC, the CBI and the Transparency Taskforce, which were in favour of a sub-committee of the Treasury Committee being created to specifically scrutinise financial services. The CBI wrote:

The CBI believes fresh mechanisms, with active support from specialists, would have the headspace and authority to be a neutral critic for a changing sector. […] One approach is to set up a TSC financial services sub-committee, which could provide effective scrutiny over a financial services regulation and taxation culture that puts customers first. It would scrutinise new regulatory and tax policies, ensure that a meaningful and effective impact assessment has been conducted, as well ensure that new policies have been formulated in consultation with firms, regulators, HMRC/government and end users. This could take the form of a Financial Services Scrutiny Committee. Such mechanisms would also ensure effective post-evaluation of new legislation and regulation.72

90.The most common reason given for the creation of a sub-committee was to free up time so that the sub-committee could concentrate its efforts on financial services without constraining the work programme of the full Committee. However, under the House’s Standing Orders, the membership of a sub-committee would be drawn exclusively from the membership of the full Committee; so the capacity of the sub-committee to do that work would depend on the capacity of its members to participate in the work of both the full Committee and of the sub-committee. Furthermore, any report from the sub-committee would need to be agreed by the full Committee; so delegating work on financial services to a sub-committee would not necessarily relieve the full Committee significantly.

91.The House could, if it thought it necessary to increase the capacity and broaden the expertise of the Treasury Committee in order to undertake scrutiny of financial services, expand the facility under Standing Order No. 137A(1)(e) for non-members of the Committee to take part in certain proceedings. This provision currently enables only members of other committees to participate, but it could be adapted so as to permit the Committee to invite any Member of the House to do so.

92.The House might also consider increasing the resources available to the Committee if it were, as we anticipate, to expand its existing responsibility for the scrutiny of financial services. Although the Committee already has the power to appoint specialist advisers, there may be merit in making provision for the Committee to have the assistance of the Counsel to the Speaker, in a manner similar to that provided to the BEIS Committee in its scrutiny of draft orders under Standing Order No. 141, on scrutiny of regulatory and legislative reform orders.

93.We will continue to maintain an open mind as to how best to scrutinise the significant flow of financial services proposals that will be made by the regulators, and we look forward to engaging constructively with the Government and with others in Parliament once more detailed proposals emerge from the Government’s consultation response later this year.

54 Q2

55 Q3

56 Q5

57 Office of the City Remembrancer, City of London Corporation (FFS0045)

58 Lloyd’s (FFS0047)

59 International Regulatory Strategy Group (FFS0048)

60 Positive Money (FFS0044)

61 Financial Inclusion Centre (FFS0073)

62 Bank of England (FFS0080)

64 Financial Conduct Authority (FFS0027)

65 CBI, APPG for Financial Markets, City of London, PwC, The True and Fair Campaign

66 Innovate Finance (FFS0052)

67 Barclays (FFS0066)

68 International Regulatory Strategy Group (FFS0048)

69 TheCityUK (FFS0068)

70 The full responsibilities of the Treasury can be found on its website.

71 Financial reporting and accounting is regulated by the Financial Reporting Council accountable to the Department for Business Energy and Industrial Strategy. Some elements of pension regulation and policy are accountable to the Department for Work and Pensions.

72 Confederation of British Industry (FFS0025)




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