HMT sets out approach for financial services framework in the UK

On 11 July 2023, HM Treasury (HMT) published a Plan for Delivery (the Plan), setting out its approach for building a smarter regulatory framework (SRF) for financial services, tailored to the UK. This is one of a package of measures published in the wake of the Chancellor’s Mansion House Speech (see our summary here).

The plan for delivery builds on HMT’s Policy Statement (the PS), itself part of the Edinburgh Reforms announced in December 2022 by the Chancellor.

The PS set out the Government’s approach to repealing financial services-related EU law (known as REUL), which had been retained by the UK in the aftermath of Brexit. The Plan describes in more detail what steps the Government will be taking and offers more information about the SRF programme.

The Smarter Regulatory Framework (SFR)

The SFR represents a significant structural reform of how the financial services sector in the UK is regulated. As the Plan notes: “[e]ven where the rules inherited from the EU remain suitable for the UK, the institutions responsible for them, the frameworks under which they are made, and the manner in which they are reviewed and updated must change”.

This entails removing REUL from UK statute and replacing it with a mixture of legislation and regulator rules, fitting the UK’s ‘FSMA model’ of regulation (see below).

The intention is to use this opportunity to deliver a more agile and more coherent framework, ensuring that the UK’s regulators can keep detailed rules up to date and removing significant legal complexity for firms.

The Government has identified 43 “core files” of REUL in scope of the SRF programme.

As these often relate to more than one activity or type of firm or set overlapping or similar requirements, the result is a complex environment for firms.

In replacing REUL, the Plan notes that the Government will “actively consider how this can contribute to creating a more streamlined and accessible legal framework overall”.

• Regulated activities in the UK will continue to be governed under FSMA 2000 (as amended by FSMA 2023), even where activities were inherited from the EU.
• Designated activities will be set out in new Designated Activities Regulations, which will fulfil a similar purpose to the RAO.
• Sitting under the Parliamentary legislative framework will be rules made by the financial services regulators.

The FSMA model and plans for dealing with REUL

The UK’s regulatory model, based on FSMA 2000, as amended by the Financial Services and Markets Act 2023 (FSMA 2023) gives financial services regulators significant responsibilities for setting the rules with which firms must comply, albeit within a framework established by Parliament.

Under the EU model of financial services regulation, though, much of what would, in the UK, be in the regulators’ rules, was contained instead in legislation.

Following Brexit, this body of retained EU law (REUL) was transferred onto the UK statute book – even though this was a temporary fix, it means that the UK’s current regulatory landscape is complicated with regulatory requirements spread across multiple sources of law, including

• REUL
• UK primary and secondary legislation
• regulator rules and
• retained EU technical standards.

Each piece of financial services-related REUL is now within a “transitional period,” until the process of repealing it is commenced by HM Treasury in a phased and sequenced manner.

Once the transitional period is over, the UK will have created the SRF referred to above - based on the FSMA model but with enhancements to reflect increased responsibilities for the regulators.

Table 2.A in the Plan gives details about HMT’s proposed timetable for a variety of pieces of EU legislation – including the repeal of the EU’s ELTIF and Money Market Fund Regulations and a consultation before the end of 2023 on the UK’s approach to retained EU ESG taxonomy legislation as it looks to deliver the UK Green Taxonomy.

In addition, HMT is to repeal almost 100 what it calls ‘unnecessary’ pieces of REUL across a wide range of financial services policy areas, thereby opening the way for a more streamlined and accessible financial services legislative framework for the UK.

Going forward, the Government will use the Regulatory Initiatives Grid to give an overview of what is in the pipeline when it comes to updates on the SRF programme as it reviews the financial services REUL repealed by FSMA 2023 and identifies the areas where policy reform should be prioritised.

What happens next?

On 11 July 202, along with the Plan, the Government published a number of draft Statutory Instruments for technical comment. It expects to finalise these “when Parliamentary time allows” the commencement of the relevant powers in FSMA 2023.

The Plan states that the Government will deliver “significant progress on tranches 1 and 2 of the programme by the end of the year”.