The Future Framework for Regulation of Financial Services Contents

Conclusions and recommendations

The Treasury’s proposed future framework

1.We agree with the Treasury that the body of EU financial services rules that was on-shored during the process of leaving the EU should be moved into the regulators’ rule books. Keeping rules in statute could require Parliament to amend or pass new legislation every time that the regulators wish to make changes to them. This would be resource-intensive and impractical. The regulators have a key role to play in designing and developing the rules with appropriate Parliamentary oversight. We acknowledge that the process of moving rules out of statute will be time-consuming for the regulators and will be a heavy demand on their resources. It is important that the required resources are provided to ensure this process takes place efficiently. (Paragraph 27)

2.The Treasury consultation alluded to certain UK-derived rules that are set out in UK statute, and it suggested that regulators might be constrained as a result. But we found that the regulators did not appear to feel constrained by the existence of any domestic rules being set out in statute. We therefore conclude that while periodic review of domestically-derived rules to see whether they would fit better in rule books rather than in statute may be necessary, they do not need to be included in the exercise that moves the EU on-shored rules out of statute and into the regulators’ rule books. (Paragraph 28)

3.We understand the need for Treasury Ministers to be well informed of the regulators’ policy intentions as a matter of routine. However, we have not been provided with compelling evidence to justify changing the law to allow Ministers the absolute right to see financial services regulators’ policy proposals before they are published for consultation as opposed to the current arrangements whereby significant interaction between Ministers and regulators happens informally as a matter of routine. By doing so, the perception of regulatory independence from government could be damaged. The independence of regulators to be free from political interference is one of the key aspects of UK financial services regulation, and it is, arguably, one of the reasons why the UK is a world-leading financial centre. Regulators must continue to be free to choose what they share with the Treasury in this respect. (Paragraph 36)

4.The Treasury has in the past been able to delay policies in the interests of the wider negotiations that took place during the UK’s departure from the EU. This suggests that there is already sufficient and appropriate Treasury oversight of the regulators’ policy proposals without needing to put such a power in law. (Paragraph 37)

5.If the Treasury does wish to give itself the formal power to see policy proposals before they are made public, comments or suggested changes to them using this power should be published alongside the public consultation. (Paragraph 38)

6.It is not clear to what extent the Treasury wishes to implement activity-specific regulation. While the proposal is a key aspect of the Treasury’s future framework consultation, when we asked the Economic Secretary whether the Treasury intended to move more towards regulating by activity, he said it did not. We note, however, that the Financial Services Act 2021 already sets regulatory principles for the FCA to follow at an activity-based level in regulating investment firms, and it gives the Treasury a power under secondary legislation to specify further matters to which the FCA must have regard when regulating in this field. We conclude that the Treasury intends to pursue this policy irrespective of the findings of this consultation. (Paragraph 49)

7.If done with a deft approach, there may be a role for activity-based principles or “have regards” to allow the Government to instruct the regulators, at a more micro level, how it wishes them to approach specific types of business sector. The Government can already instruct regulators more broadly on how to do this through remit letters. But the Government should be sparing in its approach: the strategic and operational objectives, combined with principles and ‘have regards’ that are set out in their remit letters, are already numerous and expanding, to the point where regulators have to choose which to prioritise on a regular basis when drafting new policy proposals. The creation of too many activity-based principles would add a further layer of issues to which regulators must have regard. (Paragraph 50)

8.Regulating a company as a whole rather than by activity carried out should provide greater flexibility to regulators to respond to new activities as they develop, rather than needing new activity-specific principles or frameworks each time a new activity emerges. (Paragraph 51)

9.We will only be able to conclude with more certainty on the merits or risks of activity-based regulation once the Government provides more details on their proposals in its next consultation. (Paragraph 52)

10.Decisions by the Financial Ombudsman Service set precedents and form a critical part of the consumer conduct-focussed element of the regulatory environment for financial services in the UK. Given that the aim of the Treasury’s consultation is to create a more coherent framework for how financial services are regulated, the Treasury should consider as part of this consultation how the decision-making processes of the Financial Ombudsman Service would interact with the future regulatory framework for the FCA. (Paragraph 56)

11.If Parliament itself is to play a role in the setting the regulatory principles of the FCA, it needs to be satisfied that the principles which it has set the FCA are not being undermined by decisions by the Financial Ombudsman Service. (Paragraph 57)

Future scrutiny of financial services

12.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. (Paragraph 77)

13.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. (Paragraph 78)

14.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. (Paragraph 85)

15.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. (Paragraph 86)

16.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. (Paragraph 87)

17.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. (Paragraph 88)

18.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. (Paragraph 91)

19.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. (Paragraph 92)

20.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. (Paragraph 93)

Published: 6 July 2021 Site information    Accessibility statement