Financial services regulation in the UK

December 2020  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

December 2020 Issue

Though the COVID-19 pandemic has dominated the regulatory agenda in the UK through much of 2020, pressing issues for the future of financial services also require urgent attention. Most notably, the end of the year will bring to a close the UK’s transition period following its exit from the European Union (EU). The government has maintained that this transition period will not be extended, so from 1 January 2021 the UK will make its own decisions on rules governing its financial sector.

On 23 June, the Treasury announced the first concrete steps it plans to take, specifically in respect of prudential and markets regulation. Its policy statement provided the first “details on the UK’s continued commitment to high regulatory standards for the financial services sector post-EU withdrawal”. These were laid out in the Financial Services Bill.

The Treasury’s proposed framework includes solutions for tackling the ‘tough legacy’ of contracts which reference the London Interbank Offered Rate (LIBOR) and do not have robust reference rate fallbacks and which cannot be amended ahead of LIBOR’s discontinuation at the end of 2021. According to the announcement, the Treasury also has plans for transposition of the Bank Recovery and Resolution Directive II (BRRDII).

In addition, the Treasury intends to legislate for updated prudential rules to reflect international Basel standards, as well as a new regime for investment firms. It further seeks to implement prudential standards for banks and other credit institutions relating to the EU’s revised Capital Requirements Regulation (CRR II) and the new Investment Firms Prudential Regime (IFPR).

The Treasury aims to introduce the IFPR and updated prudential standards for credit institutions based on CRR II by summer 2021, subject to the timeline for the proposed bill passing through parliament. According to the statement, the Treasury will delegate responsibility for implementation to the UK Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

The Treasury is also focused on maintaining the soundness of UK capital markets and managing future risks. The UK will consider the future approach to its settlement discipline framework, given the importance of ensuring that regulation facilitates the settlement of market transactions in a timely manner while sustaining market liquidity and efficiency.

The UK will not, however, implement the EU’s Central Securities Depositories Regulation (CSDR), due to come into force in February 2021. UK firms will continue to apply the existing industry-led framework.

According to John Glen, UK financial services minister, the Bill will create a modern, flexible and robust system of financial regulation. “Now we have left the EU the UK is making its own decisions about regulation,” said Mr Glen. “There will be changes to some of the details, but our values as an open, global, responsible financial centre are staying the same. The best rules for Britain are those that maintain or enhance the world-leading standard of regulation that has underpinned our success to date.”

Given the short timescale involved, it is heartening to see the UK’s regulatory approach beginning to take shape. However, regulators are grappling with questions about implementing EU legislation that the UK played a significant role in drafting, but whose implementation dates fall in 2021.

With regard to LIBOR, the government intends to legislate to amend and strengthen the existing regulatory framework for benchmarks, rather than imposing legal changes on LIBOR-referencing contracts governed by English law. By the end of 2021, the FCA should be granted the regulatory powers necessary to manage an orderly transition away from LIBOR. Specifically, the FCA may be able to help market participants identify certain legacy LIBOR contracts for specific limited continued use where there are no appropriate alternatives, and no realistic ability to renegotiate or amend them.

Another factor set to influence financial services regulation is the outcome of any EU-UK trade agreement. Given the delicate nature of ongoing negotiations over a future trading relationship, it was a bold decision by the UK to announce its divergence from the EU in terms of prudential and capital markets oversight in this way. According to the UK’s chancellor, Rishi Sunak, rules designed as a compromise for 28 countries cannot be expected in every respect to be the right approach for a large and complex international financial sector such as the UK.

In 2021, the UK also plans to bring forward a review of certain features of Solvency II, to ensure it is tailored to take account of the structural features of the UK insurance sector.

Next year is set to be a pivotal one for UK financial services regulation.

© Financier Worldwide

BY

Richard Summerfield