What is happening?
The prospects of the UK leaving the EU present a unique opportunity for the Financial Conduct Authority (FCA) to review its regulatory framework with a view to making it fit for the future, and preserving London’s status as a leading financial centre. Numerous senior FCA officials have been giving speeches recently trying to imagine how the UK’s regulatory regime might look once the country has left the EU (if it ever does).
Clearly, there is an interest in returning to some old ways, such as a more principles-based approach. But there has been talk of looking at the outcomes that rules produce, rather than just their objectives. Mention was made that simply piling on ever more reporting requirements may not deliver as many benefits as supervisors assumed. One speech referred to borrowing from concepts of behavioural economics, where subjects are nudged towards certain actions rather than being obliged to do them.
Also, industry will have plenty of opportunity to make its views felt, with the FCA promising both consultations and white papers, and a "conversation" with stakeholders about how UK regulation should evolve.
Why is it happening?
Other than Brexit, the FCA is keen to review its regulatory regime as the bulk of global regulatory reforms to address the 2007 to 2009 global financial crisis have pretty much reached an end. Increasingly, the focus is shifting on how to regulate a financial services industry that is rapidly digitising, on attracting new types of players and on using new technologies such as artificial intelligence and machine learning.
There is a concern within the FCA that a regulatory regime devised for an analogue era may not be up to scratch when it comes to managing risks associated with new technologies and increasingly complex financial ecosystems. In fact, these developments are a bigger consideration than Brexit for the FCA. It is just that Brexit is a good catalyst to trigger a review, particularly as the UK should have more sovereignty to shape its regulatory framework.
The scope for this will depend on what kind of deal is struck between the UK and the EU. If the latter insists on strict regulatory alignment in exchange for market access, this would greatly restrict the UK’s freedom. However, that is a political discussion.
What do the bankers say?
Bankers cautiously welcome the FCA’s rethink, particularly if it makes compliance easier. One of the problems with the EU’s approach is that it tends to be prescriptive with lots of detailed requirements – many of them are considered unnecessary or overly demanding. Banks point to some requirements in the Markets in Financial Instruments Directive and the Market Abuse Regulation as being examples of box ticking overkill for no apparent regulatory benefit.
However, taking an outcomes-based approach hinging on principles could create divergence with the EU’s regime, which in turn could affect UK access to the union’s financial markets. Before granting access, the EU compares a third country’s regulatory regime with its own to see how different it is and whether it has similar requirements. A less prescriptive regime could be shunned as EU supervisors do not particularly trust outcomes-based approaches.
Will it provide the incentives?
An outcomes-based approach – favoured by the US and Australia, for example – has the advantage of being more flexible and adaptable. For overseeing a rapidly evolving financial industry, this could be important for keeping pace with changes.
However, unless ordered otherwise by their political masters, the UK’s regulators are not about to rip up the country’s regulatory regime. It will remain based on EU frameworks for a long time to come. What they might do is simplify or adapt some requirements to make compliance easier. The FCA has made clear there will be no return to the discredited ‘light touch’ supervision that existed before the financial crisis, and no major deregulation.
Where change will be most apparent (at least in the shorter term, if the speeches by FCA officials are anything to go by) is in the financial retail space and possibly conduct – mainly the UK’s domestic financial market. However, the EU should also take the opportunity to do in-depth reviews of its own regulatory frameworks – basically, to ensure that these can adapt to new risks from changes in financial services while also containing those risks.
But if the recent consultation on Market Abuse Regulation is any guide, there is not much hope the EU will conduct a thorough review of its regulatory framework, even though it is well aware of recent technological developments in financial services.
