Regulating the UK as a global financial centre

Speaker: Nausicaa Delfas, Executive Director of International
Event: City & Financial Global's Future of UK Financial Services Regulation Virtual Summit
Delivered: 13 April 2021
Note: this is the speech as drafted and may differ from delivered version

Highlights

• We are fully committed to maintaining open and fair UK markets – and we will continue to regulate in the interests of consumers, competition and market integrity.
• Whilst our markets are open, firms serving UK customers and businesses will need to meet consistently high standards, and there will need to be strong supervisory co-operation between our respective jurisdictions.
• We will continue to work with our international colleagues to shape global standards, to work towards regulatory convergence, and co-operation on cross border issues.

It is a pleasure to speak at this year’s City and Financial Summit.  

At previous events, I have focussed on our preparations for EU Withdrawal, and for the end of the transition period.  Now that 15 weeks have passed since that major milestone, I would like to focus on our approach to:

• regulating the UK as a global financial centre to international firms in the UK
• global co-operation and standard setting

Overall, much is staying the same in our attitude and outlook. But importantly, the departure from the EU presents us with opportunities to do things differently. It is an opportunity we intend to grasp.

Regulating for UK markets

So starting with our approach to regulating the UK as a global financial centre:  

Our approach has always been characterised by setting high standards. Standards that support and encourage innovation. Standards that adapt dynamically to changes in the markets we regulate. Standards that encourage a competitive and open financial system. We remain committed to this approach. 

And as ever our approach to regulation is grounded in our statutory objectives – to protect consumers, enhance market integrity and promote competition in the interests of those who use our markets.

The users of our markets are global, reflecting the UK’s role as an international financial services hub. Our markets attract financial institutions, talent, capital and investors from all over the world – drawn in no small part by the strength of our regulatory environment.

And as a result, we collaborate closely with our international partners, to share our expertise and experience, and to work together to drive closer regulatory convergence and coherence on shared cross-border issues.    

A strong, sustainable financial system supports our objectives and serves the real economy, both in the UK and beyond. Where markets are efficient, clean, open and fair, market participants have a wide range of choices and can secure the best outcomes for their clients. 

Clearly as today’s line-up of speakers demonstrates – achieving this is a shared endeavour. It requires concerted efforts with both our domestic and international partners.

So, what is the FCA’s role in particular, and how do we work to further our shared aims? 

The UK has entered a new phase. We have taken on new freedoms – and obligations – as a result of leaving the EU. 

Our newfound position allows the FCA to have a new, more nimble approach to domestic policymaking. We can focus on using this new flexibility for the global markets we host in the UK, and to better meet consumers’ needs. This, in turn, will make the UK an even more attractive place for global financial services.

We are committed to grasping this opportunity. But in doing so, we will be guided by the principles of robust regulation: to be proportionate, dynamic and innovative; supporting global cooperation and open markets. 

In the wholesale market we are already taking steps to better tailor our rules and practices. Following the UK’s withdrawal from the EU, we can now focus on what works for UK markets, whilst always having an eye to global standards.  Three examples come to mind: 

• The first is the Double Volume Cap – or “DVC” – provision in UK MIFIR. The DVC limits the level of dark trading to a certain proportion of total trading in an equity. We can apply the DVC if, for example, we are concerned that dark trading is harming the ability of market participants to make well-informed decisions. We are, however, yet to see evidence of this. So, late last year we announced that we would not automatically apply the DVC to UK equities. We are now extending this to trading in all equities. 
• Secondly, working with our partners in HM Treasury, we are currently designing the mechanics of the forthcoming Long-Term Assets Funds regime. It is an investment vehicle designed to allocate long term capital towards illiquid assets such as infrastructure. This initiative will support the wider drive to increase long term, patient, sustainable and climate-friendly investment in our real economy. This also makes sense for investors with long time horizons, like pension funds, who can earn a greater return by allocating some of their investment towards these less liquid, and so higher yielding, assets.
• Thirdly, I would highlight the Investment Firms Prudential Review, or “IFPR”. We support the overall goals of the EU’s prudential regime, including for investment firms. But through the IFPR we are taking the opportunity to introduce a new UK specific regime that will achieve similar outcomes while taking proper account of the specifics of the UK market. 

These measures are proportionate, meet real needs and concerns, and give extra flexibility to market participants. 

Importantly - they do this without compromising the protections we see as necessary for both markets and consumers. 

Looking to the longer term

Looking to the longer term, there are several important areas we need to address in the coming years. I will focus on two: sustainable finance, and our future regulatory framework. 

In relation to sustainable finance, you may have seen the recent “remit letter” from the Chancellor to the FCA, giving his recommendations of how the FCA advances its objectives in relation to competition, growth, competitiveness, innovation, trade, better outcomes for consumers and climate change, based on the Government’s economic policy. 

For the first time, alongside other regulators such as the Bank of England, the FCA has been asked to formally integrate the goal of moving to a net zero economy in the UK by 2050, into the way that we regulate. We welcome this challenge. Financial markets will have a crucial role to play in making the transition to a carbon neutral UK, and as the supervisor of these markets, we intend to play our part.   

One important way in which we are supporting these efforts is through fostering transparency, by promoting good disclosures along the investment chain. We have already introduced rules to implement obligations for premium listed issuers which align with the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures, or “TCFD”. These rules came into force on 1 January of this year. We are looking to consult by mid-year, on proposals for TCFD-aligned disclosures by asset managers, life insurers and FCA-regulated pension providers. Alongside our domestic work, we will continue to drive progress on the international stage, as co-chair of an issuer disclosures workstream of IOSCO’s Sustainable Finance Taskforce.

Turning to our future regulatory framework, I have mentioned already some examples of where we are using the flexibility we now have to make our regime work better for our markets. An important building block of doing this at scale and into the future is HM Treasury’s review into how to adapt the UK’s regulatory and legislative framework now that we have left the EU. A central element of the new framework is the proposed transfer of responsibility to the regulators for maintaining the firm-facing requirements that currently sit on the statute book. This transfer is an essential piece of work. It will provide for an even more agile and coherent regulatory regime for the UK – one that will enable us to keep pace with the changing needs of firms, markets and consumers over time. 

We recognise that these powers come with responsibilities, and the legislative framework that will accompany the transfer of each set of provisions will come with additional safeguards. For example, additional transparency and key principles we need to have regard to when developing new rules. 

As a public body, we see robust accountability and scrutiny as an essential part of an effective regulatory regime, and are committed to working in an open, transparent and accountable way with all our stakeholders, including Parliament. We therefore welcome the broader discussions about how these processes could be improved. 

Finally, all of this work is taking place as we consider the recommendations of Lord Hill’s review of the UK Listings Regime, and Ron Kalifa’s review of UK FinTech – both are areas where the UK has a rightly earned a global reputation for quality and innovation. We are lucky to be hearing from both authors today. The work to bring these reviews to life has already begun and, following the recommendation of Lord Hill’s review, we have confirmed that we will be consulting on the regime for Special Purpose Acquisition Companies, or “SPACs”, including how they could work with appropriate safeguards.  There is more change to come.

Our approach to international firms in the UK

I will now turn to our approach to international firms. 

I should make one thing clear:  All firms operating in the UK can expect to be held to the same high standards.

Our Policy Statement on our Approach to International Firms, which we published in February this year, sets out how we will authorise and supervise firms operating in the UK in future. This is to be read alongside the PRA’s requirements for dual regulated firms.

Our approach applies to all international firms, and is particularly timely for those EEA firms currently in the Temporary Permissions Regime, or “TPR”. We have reached out to firms in the TPR to ensure they are able and willing to be authorised over the next few years, and we have set out what we expect of them whilst they are in TPR. 

Whilst we have not made any changes to the rules in our Handbook or our threshold conditions, in our Policy statement we have given more thought to the specificities of international firm supervision. International firms serving UK customers can create different risks of harm compared to UK firms because of the way their businesses are structured and operate. We have set out how these risks may be mitigated, and the factors that will be taken into account when deciding whether it may be more appropriate for an international firm to seek authorisation as a UK incorporated firm for all or part of its business.

The standards we apply to international firms seeking authorisation will be the same as those we apply in our ongoing supervision of firms. In this context, we continue to monitor very closely the implementation of restructuring plans, what the implications of those are to the integrity of UK markets, the outcomes for clients and the ongoing ‘supervisability’ of the firms’ UK activities. We continue to expect firms to discuss with us any transfers of businesses or functions that have not been previously agreed.

We have also clarified that we expect firms seeking authorisation to have an active place of business in the UK to enable us to effectively supervise their UK activities.   

We will expect more from international firms where they pose higher risks to our objectives, particularly where there are risks to retail consumers, client assets and wholesale financial markets.  For example, we will look carefully at a firm whose home jurisdiction’s insolvency rules are not well aligned with the UK’s – creating potential for harm to clients if their assets cannot be returned to them safely and quickly.   

In practical terms, the specific approach we take to international firms will depend both on how strong the level of cooperation is with individual jurisdictions, as well as consistency of regulatory outcomes. 

We have a long history of working collaboratively and effectively with our fellow global regulators, and that will continue. These relationships are built on robust standards, the open exchange of information and data, strong cooperation (particularly in a crisis), and ultimately – trust.

These relationships are particularly important where business is carried out cross-border, without an establishment in the UK.  This is an area in which we have also been considering whether regulation is fit for a new environment – most importantly, through working with Government on the Treasury’s Call for Evidence on the Overseas Framework. 

This is important to a range of overseas operators, for example, recognised overseas investment exchanges, “ROIEs”.  This review is an important chance to look at the different ways overseas firms can access UK markets, and whether any changes need to be made given the passage of time and evolution of financial markets regulation.

The Treasury’s Call for Evidence closed on 11 March 2021. We look forward to the next steps in this work.

Global activity

More broadly, it is a fundamental principle of cross-border regulation that regulators can defer more to each other’s regulatory and supervisory frameworks where outcomes are consistent and where there is strong co-operation.  

And this brings me on to our broader international work – both our work establishing cross border agreements, and our work at global standard setting bodies. 

In terms of agreements and structures for future co-operation, we have provided technical advice to HM Treasury as part of their recent agreement on the UK–EU Memorandum of Understanding. This will be one of the pillars of the UK’s future relationship with the EU – alongside the Memoranda of Understanding we have signed with regulators across Europe, and with the European Supervisory Authorities.

We are closely involved in the negotiations for a Mutual Recognition Agreement with Switzerland, and other bilateral work. The Swiss agreement is a great example where we have the opportunity to build stronger ties between our markets and authorities, facilitating a higher degree of openness and reciprocal access.  We are building here on existing shared ties, and on our many years of supervisory experience both internationally and domestically. 

We have also been working closely with our US counterparts to ensure UK firms’ access to US markets continues and is strengthened, where possible. We were pleased to see the Securities and Exchange Commission (“SEC”) recently publish a notice and draft order of the UK’s application for substituted compliance for securities-based swaps dealers. If granted, the UK will be one of the first jurisdictions to be granted this recognition by the SEC.  

Our cooperation with the US also includes the ongoing efforts between the FCA and Commodity Futures Trading Commission (“CFTC”) to ensure the current time-limited relief provided to UK trading venues is put on a permanent footing with a CFTC-issued final order. If granted, this recognition will provide UK firms with the certainty they need to conduct their business in the US with confidence.   

And as I’m sure you will all know, the FCA will support the Government in its ongoing Free Trade Agreement negotiations with the United States. There is much still to be agreed, but we are supportive of an ambitious outcome on financial services that benefits both UK and US industries whilst preserving our regulatory objectives and safeguards. 

With regard to our work at global standard setting bodies, the UK regulators, whether it is us, the PRA or Bank or HM Treasury, continue to be at the heart of global standard setting work. We bring a depth of experience and innovation to bodies such as FSB, IOSCO, the OECD, or IAIS, and we receive much in return from our international partners.

Our participation in these organisations and their committees, often in leadership roles, allows us to promote consistent, beneficial outcomes for all types of consumers and market participants. This helps support the system of open, global markets. 

The FCA currently holds leadership roles in international bodies working on issues such as financial benchmarks, sustainable finance, innovation, cyber security and non-bank finance.   

These issues are global in nature, and they demand a global response.  In the process, we can improve outcomes for participants in UK markets.

Looking forward

So to close, I would like to reiterate three key points:

• We are fully committed to maintaining open and fair UK markets – and we will continue to regulate in the interests of consumers, competition and market integrity.
• Whilst our markets are open, firms serving UK customers and businesses will need to meet consistently high standards, and there will need to be strong supervisory co-operation between our respective jurisdictions. 
• We will continue to work with our international colleagues to shape global standards, to work towards regulatory convergence, and co-operation on cross border issues.