Financial Services and Markets Act: five key developments

On 10 July 2023, the Chancellor announced the Mansion House Reforms at the City of London. The significant reform package aims to boost outcomes for pension savers, incentivise companies to grow and list in the UK, and support the financial services industry to innovate.

Important in themselves, these reforms also build on the new regulatory regime legislated for in the Financial Services and Markets Act 2023, which received Royal Assent on 29 June. Combined, the Act and the Mansion House Reforms mark a new stage in the UK’s regulatory system for financial services.

The Act contains many reforms but most importantly, it sets out how the UK will regulate financial services now that it has left the European Union. Here are five of the key changes that could help ensure the UK’s regulatory framework stays competitive for financial services into the future.

A secondary objective of international competitiveness and growth for regulators

One of the Act’s critical changes is a new secondary objective for UK regulators: to facilitate the UK’s international competitiveness and enable economic growth. This vital change reflects that regulatory action can have significant effects on the economy. It is important that the regulators take this into account when making decisions.

As it is a secondary objective, the regulators’ important primary objectives on financial stability and protecting consumers have priority. However, regulators are now empowered to think about how their actions can promote growth and international competitiveness. This reform is new to the UK, but other jurisdictions already have similar provisions.

Even though the Act has just been passed, attention needs to turn quickly to how to implement this new objective effectively. The regulators need to embed changes: in culture, training, policy making, supervision and governance. To get real buy in, these changes need to be led from the top.

It is encouraging that the PRA has already issued a discussion paper on how the secondary objective could change its approach to policy making. Its conference in September will explore the issue further.

Measuring progress on regulators’ competitiveness objective

What gets measured gets done.  So HM Treasury has issued a call for proposals on metrics on regulators’ implementation of the secondary objective. The City Corporation submitted a response which identified five key drivers that will help contribute to the secondary objective. These are:

• access to talent and skills
• attracting new entrants
• sustainability
• tech and innovation and openness

Many of the metrics that measure progress against these outcomes can be found in our annual publication: Our Global Offer to Business – which benchmarks UK competitiveness against other key financial centres. And also in our annual State of the Sector report, the latest edition published to coincide with the Chancellor’s speech on 10 July at Mansion House, which is developed with HMT to provide an evidence-based assessment of the competitiveness of UK financial services. Repeated annually, the State of the Sector is a mechanism that tracks competitiveness.

This focus on metrics will be backed up by a new requirement on the regulators to report on their progress in implementing the secondary objective after 1 and 2 years.

Enhancing accountability in UK regulation

In the EU, financial services regulation is negotiated between the European Commission, the European Parliament (made up of elected Members) and the Council of Ministers (made up of elected governments). In contrast, the new Act sets out the revised regulatory framework in the UK: that includes independent regulators taking the lead on writing new regulation, following consultation and within a remit set by Parliament.

Given that the regulators will gain more power, there is a strong argument for more accountability.

To enhance accountability the Treasury Select Committee has set up a subcommittee for scrutiny and oversight of financial regulation. The industry and City of London welcome this. And the subcommittee has explored topics such as Solvency II, sustainability disclosure requirements and broadening access to financial advice. The sector would like more democratic accountability, and late changes to the Bill mean that one way to do this could be via a joint committee between the House of Commons and the House of Lords. This would increase the pool of expertise that Parliament can draw upon to scrutinise this important activity.

Bespoke legislation for the UK

Another important part of the Act is that it enables legislation to be transferred to the regulators’ rule books. When the UK left the EU many financial services regulations, such as MiFID II, were copied on to the UK statute book. This is known as ‘Retained EU Law’. The Act enables this legislation to be cut from the statute book and then transferred on to the rule books. This gives the UK an opportunity to edit the rules and put them in the right place in the rule books, so that the rules are bespoke to the UK and its markets. This work – called the ‘smarter regulation’ programme - has already started. It is complex and will be a multi-year project.

Using cost benefit analysis to change policy

A new panel will advise the FCA on how to make better use of cost benefit analysis. This critical analysis will help decide if and how the FCA should intervene in individual policy areas. It should only act if the evidence suggests that the expected benefits of a policy outweigh the expected costs.

As the Act progressed through its stages in Parliament, the City Corporation provided its views to Parliamentarians. We now look forward to working with firms, HM Government and regulators to implement the Act effectively and make the most of the reforms.

Read reflections from City of London Policy Chairman Chris Hayward on how reforms will reinvigorate UK competitiveness in the Telegraph (paywalled article)