By Pritpal Virdee

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On 11 July 2023, HM Treasury published a plan for delivery (the Plan) setting out how it will deliver the Government’s approach to the repeal of financial services retained EU law (REUL) as part of the drive to build a Smarter Regulatory Framework (SRF) adapted specifically for the UK economy.

The release of the Plan follows the publication of a related policy statement on building the SRF back in December 2022. The introduction of the Financial Services and Markets Act 2023 (FSMA 2023) marked the first significant step on the road to achieving the implementation of this (read our blog on this here). The UK is now in a transitional period as work progresses to implement the SRF in line with the FSMA 2023. The shift will be significant, requiring systematic changes to the entire structural framework of the UK’s financial services sector.

A summary of the key takeaways from the Plan are set out below:

  • The Plan includes a table which is designed to assist the financial services industry in planning ahead as the UK moves through its transition to a more streamlined and fit for UK purpose financial services environment. The table shows progress so far and illustrates the proposed progress of the phased repeal of the high-priority tranches 1 and 2 of REUL, the benefits expected for each area of legislation, the timing of further legislative changes and consultation responses going forward.
  • Looking ahead, the Government intends to use the Regulatory Initiatives Grid to communicate the direction of travel and log the progress of further regulatory steps and developments made along the SRF programme. As the UK moves through the transitional period, the Grid should be updated to reflect and record each of the sequential steps involved in repealing and replacing REUL.
  • The Plan emphasises the importance to the delivery of the SRF of cooperation and shared responsibility between the Government and the individual financial services regulators, each of which will have the responsibility for making appropriate rules to replace repealed REUL. In essence, under the FSMA model, the Government delivers the framework and the regulators, will deliver the more granular detail and firm-facing rules through regulator rulebooks.
  • Where FSMA 2000 does not provide the necessary and appropriate powers, the Government will use the additional powers provided by the FSMA 2023, to create any necessary supplemental legislative framework. This legislative framework will fulfil five essential functions for the financial services industry: (1) it will define the regulatory perimeter, (2) it will enable the individual financial services regulators to make detailed rules so that they can regulate activities and persons operating within the perimeter, (3) it will determine the regulatory objectives of the financial services regulators and set the legal parameters within which they will operate, (4) it will provide a framework to ensure that the regulators have appropriate supervisory, investigatory, and enforcement powers to ensure that the rules that are made, are followed and (5) it will set procedural requirements governing the conduct of the regulators themselves so as to ensure accountability, consistency and transparency.
  • Work to supplement the existing regulatory framework, using the powers granted by the FSMA 2023, is expected and the Plan illustrates some examples of the kind of supplemental provisions that will be needed. These include: defining the regulatory perimeter; defining the prohibitions applicable to the new Designated Activities Regime; providing appropriate regimes for registrations, notifications and approvals to carry out regulated activities; enabling the financial services regulators with appropriately scoped rule-making powers together with specific broader public priorities which the regulators must consider when exercising their rule making powers; ensuring that supervisory and investigatory powers are exercised proportionately; and providing a consistent set of disciplinary tools for enforcement purposes.
  • To manage the inevitable burden on and disruption to industry resulting from the significant level of change required to deliver the SRF, proportionality will underpin targeted policy change. As such, the Government and the individual regulators, will cooperate in order to identify those areas where policy change is not immediately appropriate so that a level of status quo and certainty can remain (the Plan refers to this approach as “lift and shift”) while changes are made to areas of priority where impactful changes are desired more quickly. The Government will make announcements about the programme of work in place to achieve the reforms required, providing clarity to industry participants as to what is likely to remain unchanged.
  • To achieve the overall goals of reducing legal complexity and streamlining the legislative framework applicable to financial services, and with the added aim of making changes in ways that is familiar to the sector, the Government intends to build on the FSMA model where (in contrast to very specific and focused EU rules) most parts apply broadly across a range of activities, the Government will take advantage of the cross-cutting benefits that much of the secondary legislation in the financial services area already has. New secondary legislation is expected around: (1) the new area of “Designated Activities”, (2) areas of public policy to which the individual regulators must “Have Regard” when exercising their rule making powers, (3) “Modification and Disapplication of Rules Regulations” which will enable the regulators to adapt their rules to different business models and changing practices, and (4) creating a single statutory instrument containing any “miscellaneous” REUL which it is considered essential to retain and where there is no more appropriate option (the Plan gives the example here of “Solvency II"). Overall, the intention is to create a clear and accessible regulatory framework where industry participants can easily find out what they need to know.
  • Recognising the importance of stakeholder engagement, the Government and the individual regulators will seek the views of stakeholders going forward in order to ensure that a wide range of views and needs are taken into account, technical comments are taken on, unintended consequences are avoided, and the Government’s intentions are realised. Again, a proportionate approach will be adopted, with more formal engagements initiated in areas of particular complexity or significance. Formal engagements are most likely to take the form of “Calls for Evidence” (as used already in relation to, for example, payments legislation) and public consultation (as used in relation to, for example, the PRIIPs regime (see our blog on this here)).

As to next steps, the Government has already made several draft statutory instruments available to industry for technical comment, and is expected deliver significant progress on the high-priority REUL (tranches 1 and 2) by the end 2023.

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