The government and the UK regulators have taken steps to ensure that the UK regulatory system can continue to function effectively following Brexit and the end of the implementation period agreed in the Withdrawal Agreement. But Brexit offers an opportunity to re-think the foundations of the UK regulatory system more fundamentally. The International Regulatory Strategy Group (IRSG)’s report on “The architecture for regulating finance after Brexit: Phase II”, published in January 2020, is an important early contribution to the debate. The report makes a number of recommendations, which are summarised below under the categories of “the logical”, “the reasonable” and “the ambitious” .

The logical

The proposed allocation between Parliament, the government and the regulators of powers to make and amend regulatory requirements is a workable approach to the onshoring of directly applicable EU legislation, but is not where anyone would end up in designing a coherent regulatory framework from scratch. Onshored Level 1 regulations may only be amended by Parliament and Level 2 delegated acts may only be made (and onshored delegated acts may only be amended) by HM Treasury (HMT), subject to various levels of parliamentary oversight. Both the Level 1 regulations and the Level 2 delegated acts contain detailed provisions of the type which in in other areas (for example, those where the UK has implemented directives through regulatory rules) are made by the regulators. The report argues for a more coherent overall framework under which more extensive powers to make and amend regulatory rules would be granted to the regulators, both to achieve greater flexibility and to benefit from the regulators’ greater expertise. The reason for embodying much EU legislation in regulations rather than directives was to encourage uniformity within the EU. This original motivation is not relevant to determining which UK body is best suited to make and amend the rules in question when the UK is no longer part of the EU.

Another proposed reform falling within the “logical” category is to consolidate financial regulation to improve its accessibility. Following the end of the implementation period, the location of rules on particular topics will be split between the regulators’ rulebooks, UK primary and secondary legislation and onshored EU legislation, often with no obvious logic or signposting. The consolidation of legislation and regulators’ rules, alongside the re-allocation of powers suggested above, would greatly enhance the accessibility and coherence of the body of regulatory rules.

The reasonable 

The report points out a hidden consequence of the onshoring process: regulatory rulemaking will be subject to reduced scrutiny. Most obviously, UK regulators currently operate within a defined regulatory framework within which they have only limited discretion to make or interpret rules. In addition, the EU’s framework for the making of primary and secondary legislation has a number of checks and balances that will no longer apply. Primary legislation requires approval by the European Parliament and Council of Ministers after it has been proposed by the European Commission and undergone a consultation exercise. As regards secondary legislation, the Commission has the power to reject or amend binding technical standards made by the European supervisory authorities (ESAs), which HMT will only have in limited circumstances in relation to binding technical standards made by the UK regulators. Furthermore, the ESAs have a number of scrutiny and co-ordination roles that they exercise in relation to national regulators.

Good rulemaking requires procedures for thorough and informed scrutiny and robust challenge. The report recommends measures to achieve this in view of the greater autonomy that the UK regulators will enjoy following the end of the implementation period. Recognising the broad remit and limited capacity of the Treasury Select Committee of the House of Commons, the report recommends the establishment of a parliamentary committee with specific responsibility to scrutinise the regulators’ exercise of their functions (and also the exercise by HMT of its functions under the regulatory system, such as the making of equivalence decisions). There are also suggestions for improving the transparency of decision making by the regulators and HMT and for enhancing scrutiny by more active engagement with other legal expert groups such as the Law Commission, as well as by broadening the remit of the regulators’ practitioner panels. Other suggestions for improving the quality of legislation are to establish an independent Financial Regulatory Policy Review Committee in order to examine proposed new rules and cost -benefit analyses, and a statutory requirement to review new rules or legislation within a specified period after they come into force.

Mindful of the absence of the Joint Regulatory Committee of the ESAs, the report suggests the establishment of a similar co-ordinating body between the various UK regulators which could ensure, for example, visibility and management of the combined pipeline of proposed new regulation.

The extent to which the UK regulatory system should diverge from that of the EU is a political question. Nevertheless, divergence may have implications for any determinations of equivalence that have been or may in the future be made, and the report sensibly proposes that mechanisms should be put in place to track such divergences. A more controversial proposal is that HMT should have the power to constrain the regulators’ ability to diverge where it considers this to be appropriate.

The ambitious

The report also makes a number of recommendations which are not directly tied to Brexit but which it considers would enhance the UK regulatory framework.

The report notes the increasing expectation that financial services should contribute to broader public policy goals, such as intergenerational fairness or the transition to a carbon-neutral economy, and considers ways in which the regulatory system could accommodate such pressures in a transparent way. It recommends either imposing specific secondary objectives on the regulators in relation to certain public policy objectives or granting HMT a power to indicate such objectives to the regulators. Measures along these lines would be controversial, but the risk in their absence is that public policy expectations are imposed on the regulators or goals are formulated by them without adequate transparency or accountability.

The report also considers the position of UK financial services in an international context. Looking beyond Europe, it points out the growing importance of international standards for financial regulation and suggests the introduction of a requirement under FSMA for regulators to take these into account when discharging their functions. The report also continues the debate as to the desirability of the regulators having an objective to enhance the international competitiveness of UK financial services, which it favours as a counterweight to the tendency of the system to encourage regulators to use their powers only to impose additional constraints on the provision of financial services.

We can expect the debate to continue during the implementation period – and beyond.