The future of financial services regulation in the UK

Speaker: Nausicaa Delfas, Executive Director of International
Event: UK Financial Services Industry Beyond Brexit Summit, London
Delivered: 28 October 2019
Note: this is the speech as drafted and may differ from delivered version

Highlights

• Whatever the outcome of Brexit, we are ready for the future, to ensure that the UK remains a pre-eminent global financial centre that works well for consumers and market participants.
• Because of our common rulebooks, the UK regime will be the most equivalent in the world to the EU’s. We expect both jurisdictions to be able to find each other equivalent on an outcomes basis.
• The FCA will continue our activity in support of the development of sound international standards, rooted in strong regulatory cooperation.

It is a pleasure to be here with you today. I’ve spoken to this conference now on several occasions on our preparations for Brexit and beyond Brexit – and each time, we are in a different position to the one we would have imagined when the date for the conference was set. Nonetheless, we are preparing for whatever scenario emerges.

The FCA takes no view on the substance of Brexit – and whatever the outcome, our role is to ensure that markets work well for consumers and market participants, and to look to the future. We want the UK to remain open for business – to support companies to grow and manage their risks, and consumers to manage their finances. To do this, we must ensure that our rules are fit for the future, and that we maintain high standards.

So today I will talk about our preparations for Brexit, in whatever form it takes; how we are preparing for 'beyond Brexit', and more broadly, how we are considering the future of regulation in the UK.

Brexit preparations

Turning first to Brexit preparations. This morning, the political position remains fluid – indeed there may be developments as I speak – and we continue to prepare for all scenarios, including the default position of a no-deal exit.

We have undertaken extensive preparations to be ready for a no-deal exit, and have provided extensive guidance for firms. The result of the progress and preparedness of both regulators and industry, is that the Financial Policy Committee has concluded that the UK financial system has prepared for a disorderly Brexit. Major UK banks and insurers are strong enough, and the biggest risks of disruption to UK users of financial services have been addressed. This does not mean a no deal exit will not be difficult or disruptive, but we are ready to ensure as smooth a transition as possible.

Our preparations should mean that should we leave the EU without a deal:

• our legislative and regulatory frameworks will provide much needed continuity for firms, so the rules when we leave will be much the same as today
• where there are changes, firms will generally have time to comply with the new rules – up to the end of December 2020
• UK consumers can continue to receive services from EEA financial firms without interruption through our temporary permissions regime
• for firms that do not enter the temporary permissions regime, firms will have time to wind down their UK business under the financial services contracts regime, and
• there will be continuity in our relationships and agreements with regulators around the world, and our EU relationships will remain strong – we have agreed Memoranda of Understanding (MOUs) with all European Supervisory Authorities and Member States, as well as with countries across the globe

Our European counterparts have also taken action to mitigate disruption. The European Commission has taken steps to deal with financial stability, but has said it will not take steps to deal with market disruption. EU Member States and regulators have stepped in to smooth the transition – through agreeing MOUs and through national laws.  

Overall, whilst we strongly welcome these steps, the solutions on the European side represent a patchwork. For example, national regimes are partial and differ across Member States in terms of scope and duration. In particular, there are a number of issues that in one form or another require further action, either in the UK or the EU – our CEO, Andrew Bailey, set these out in his speech in September – in particular, the Share Trading Obligation, the Derivatives Trading Obligation, clearing, uncleared derivatives, data exchange, contract repapering and retail financial services preparation.

This is all the more important since some of the areas where we have not seen action were part of the concerted international response to the global financial crisis in 2008 – which the UK, EU and other regulators from around the world worked together closely to achieve.

And these issues have consequences for the financial wellbeing of many people here in the UK and across the EU, for example:

• restricting trading in any shares limits the investment options open to EU consumers, increases the costs of transactions, and undermines, or results in poorer execution quality for clients – the principle of best execution enshrined in law that firms must take 'all sufficient steps to obtain the best possible result' for their clients
• failing to recognise clearing houses would impose significant costs on EU firms as well as potentially straining market capacity, as contracts would have to move
• limiting the flows of personal data between the EU and the UK, or restricting servicing of contracts cross-border, risks consumers being unable to access the financial services products they rely on for their everyday lives

So, these risks and other factors mean that firms need to continue their preparations. Many firms have made good progress but we want to ensure that the whole population, including smaller firms, are appropriately prepared.

Therefore, alongside our regular supervisory engagement with firms, we have since the summer stepped up our communications to improve awareness. We have provided extensive information on our website and communicated through a range of channels.

Once we have exited, we will continue to work with firms to make sure their contingency plans are executed effectively – and we call on our European counterparts to undertake the necessary joint activity to deal with issues that arise post exit and act pragmatically where we can.

So that is where we are right now, in preparing for our exit from the EU. There is no room for complacency and we will continue to be vigilant in the days and weeks ahead.

At the same time, we are looking to the future: to our future relationship with Europe; to our future relationships with financial services markets across the world; and to ensuring our regulation is fit for purpose.

Our future relationship with Europe

The FCA has a long tradition of working closely with our European counterparts to set high standards for firms, markets and consumers. We have played a key role in the development of important post crisis reforms, which have been onshored into our rules and domestic legislation to apply after exit.

Because of this onshoring process, at the point we leave the EU we will have identical rulebooks. We also have a history of developing common supervisory approaches and working towards common objectives.

Regardless of when and how we leave the EU, these commonalities mean we will continue to work closely with the European Supervisory Authorities, national authorities in member states and all European policymakers on shared issues and priorities, as we have to date.

Our markets are highly integrated and in some areas this integration may increase as firms both in the UK and EU27 restructure to be able to service their customers – though in other areas we may see markets fragment. This will have implications for our common supervisory approaches.

We will need to continue to cooperate on firm specific issues. The MoUs we have agreed will support this cooperation. We have also deepened our cooperation with some authorities, such as our recent supervisory cooperation agreement with the Dutch Authority for the Financial Markets.

By working together, we can be much more effective at tackling shared issues such as financial stability and market abuse. Today we share a significant amount of data with our European counterparts to help oversee European markets – doing so gives us a fuller picture of the risks we face. Since the introduction of MiFID II in January 2018, we are now passing around 70% of transaction reports – over 20 million reports a day – to counterparts across the EU. We believe it is important for there to be sufficient flow of information to support our respective objectives.

We will need to coordinate in supervising the regulatory regimes we created together, to avoid the risk of different outcomes in UK and EU 27 for the same financial instruments. If we have robust co-ordination around equivalent outcomes, as the G20 has recommended, we can avoid regulatory arbitrage.

Regardless of where we end up, the FCA will continue to engage with the future EU agenda. This is not only because our rulebooks start from the same place, but also because we share common regulatory priorities, challenges and concerns.

This includes such areas as next steps with EU Capital Markets Union, investor protection standards, sustainable finance, the fight against money laundering, financial innovation and the future regulation of crypto assets.

There are also many reviews scheduled for key aspects of EU financial services legislation that we have implemented together – including MiFID, UCITS, the AIFMD, Benchmarks and the Market Abuse Regulation.

Many of these future priorities have been highlighted over recent days by the proposed European Commission Financial Services Vice President Valdis Dombrovskis. Given our common interest in these issues, and their common impact, we hope there will be scope to cooperate on them as we develop our respective approaches.

And discussion of our future relationship with EU would not be complete without mentioning equivalence. To reiterate the FCA’s position on it: because of our common rulebooks, the UK regime will be the most equivalent in the world to the EU’s on day 1. We will also have our own equivalence decisions to take. Whilst it has not been forthcoming to date, in future we expect both jurisdictions to be able to find each other equivalent on an outcomes basis rather than line by line regulatory alignment, respecting the autonomy of one another’s rulemaking.

This is the established model currently used by the EU. We believe that equivalence decisions should be based on technical assessments. They should not be political.

Now moving on to our relationships across the world.

International engagement

The FCA regulates some of the most global financial markets in the world. And many of the challenges we face are global in nature. This means we need to work through the international standard setters such as the Financial Stability Board (FSB) and International Organisation of Securities Commissions (IOSCO), and with our counterparts in other key financial centres, such as the US, Switzerland, Singapore, Hong Kong and Japan, to collectively ensure consistent and high standards.

The FCA has been an active supporter of global standards and has played a leading role in shaping them. This will continue after Brexit. We also see international standards as a basis on which we can enhance the flow of financial services between jurisdictions, which in turn can support competition, widen the choices available to consumers, and spread the benefits of useful innovation.

So, we at the FCA will continue – and even increase – our activity in support of the development of sound international standards, rooted in strong regulatory cooperation.

I would like to outline some of the critical policy areas where UK authorities have played an important role over the past few years, and where we will continue to have an interest after exit: within IOSCO, the FCA is an active member of the Board and chairs, or vice-chairs, many of its Committees and working groups. One of these is FCA’s current Chairmanship of IOSCO’s Committee on Investment Management. This group has led on several key areas of work within the asset management industry over the past few years, covering fund liquidity and risk management; money market funds; and its current work on leverage due by the end of the year.

Another is the FinTech Network. This group, established last year, enhances collaboration and understanding between authorities on emerging technologies. So far, the Network has assessed areas such as the deployment of distributed ledger technology within capital markets and use-cases for RegTech. Most recently the FCA has led work on new digital 'coin' ideas, assessing the possible implications of such a product for securities regulators. The IOSCO Board will consider this assessment in a few days’ time. Such fora enhance our abilities as a regulator, and ensure we can assess the risks and benefits of new market developments across the world.

The FCA, along with a group of other regulators, launched Global Financial Innovation Network, or GFIN last year, which has brought together 50 international organisations that are committed to supporting financial innovation in the interests of consumers, so that we can also continue to meet our respective objectives. The FCA currently chairs GFIN’s Coordination Group, and we are delighted to see it progress so quickly. Last week we welcomed 12 new members into GFIN, with several US federal and state regulators including the SEC and CFTC.

Never too far from questions relating to technology are cyber security risks, which are a concern for us all, and demand an international response. Our joint discussion paper with the Bank and PRA on operational resilience last year attracted considerable domestic and international attention. We shall be publishing our response soon.  Cyber risks are also on the agenda at many international standard setters, including CPMI-IOSCO’s Working Group on Cyber Resilience, which I co-chair, and at FSB and the G7 cyber group in which FCA also participates.

Market fragmentation is an area of focus for both the FSB and IOSCO. The risks of market fragmentation are well known: increased costs for firms, potentially weaker or complex oversight for regulators, and opportunities for firms to engage in regulatory arbitrage.  

The issue was given renewed impetus under the leadership of the Japanese G20 Presidency. In June, the FSB delivered its report to G20 Finance Ministers and Central Bank Governors examining known fragmentation issues. Since then, both the FSB and IOSCO have begun working to address problems arising from market fragmentation. This work covers 4 areas:

• deference – how to recognise others’ regimes, and thus enable market access – led by IOSCO
• pre-positioning of capital and liquidity
• regulatory and supervisory coordination and information sharing
• exploring market fragmentation as part of the evaluation of post-crisis reforms – led by the FSB

This work has the potential to realise significant benefits, and the FCA will play its part in encouraging practical solutions to problems identified.

The final area I will point to is sustainable finance, one of the key topics of concern among international regulators.  

Our recently published feedback statement on green finance highlights a number of priorities, including consulting on new rules to improve climate-related disclosures by certain issuers and clarifying existing obligations, as well as challenging firms where we see greenwashing, to prevent consumers being misled. This work will contribute to creating an environment where market participants can adequately manage the risks from moving to a lower carbon economy, whilst also being able to capture the opportunities to benefit consumers.

It is an area where there is plenty of scope for us to learn from others, and work collaboratively to ensure regulatory responses work for the market as a whole.

Our future approach to regulation

Just to turn to the FCA’s role, the FCA will continue to work closely with Europe, and will expand its involvement in global policymaking. But many of you will know that the FCA has also initiated a debate in recent months about the future of regulation in the UK.

It has been 10 years since the financial crisis and the subsequent reforms we put in place, and now is the right time to review our approach to regulation. And Brexit provides added impetus to look at things again.

We are not questioning the commitment to high standards. Rather, we want to be sure that our regulatory approach is fit and adaptable to the challenges of the future. We want to put outcomes at the heart of the debate.

Depending on what type of future arrangements we agree with the EU, we may have some flexibility around EU rules we have onshored, particularly where experience shows them not to be working efficiently or effectively. We will exercise our flexibility consistently with our objectives, whilst staying committed to high standards and the outcomes we sought to achieve when shaping legislation as a member of the EU.

As part of this, we may be able to deepen our relationships with other financial centres, as part of our commitment to supporting open capital markets which support global growth.

We are working closely with HM Treasury to explore options for enhancing our regulatory cooperation with key jurisdictions post-exit, and new mechanisms for market access. This includes supporting the Government as it develops its position on trade.  

Our role will be to provide technical support and advice on free trade agreements covering financial services, as well as other mechanisms for enhancing trade and regulatory cooperation. We are hopeful that agreeing these mechanisms with key counterparts globally will help to ensure that cross-border markets can continue to operate, and that enhanced regulatory cooperation can support greater regulatory alignment.

So, to conclude: whatever the outcome of Brexit, we are ready for the future, to ensure that the UK remains a pre-eminent global financial centre that works well for consumers and market participants.We believe this approach – ensuring our rules are fit for the future, whilst maintaining high standards, coupled with our work to deepen our connections to other financial centres around the world – will support deep and liquid markets here, competition and ultimately better outcomes for consumers and companies in the UK.