The Financial Services Bill was introduced in the Commons on 21st October 2020 and, having received Royal Assent on 29th April, is now law. It was hailed as a major step towards constructing a regulatory framework for UK financial services outside the EU, Economic Secretary to the Treasury, John Glen, announcing, “For the first time in decades, the UK has full control of its own financial services regulation. This Act will protect people who rely on financial services day-to-day and boost the competitiveness of our dynamic global financial centre.”
The Treasury insists the legislation will protect consumers and businesses and make sure the UK remains an open and dynamic financial centre with the highest regulatory standards. Are some commentators right to question its likely consequences?
The Act is the first primary financial services legislation passed by the UK Parliament since we left the EU and it makes reforms in 22 individual areas. Included within the amendments are measures to:
- boost the UK’s prudential standards and promote financial stability by supporting completion of the principles internationally agreed after 2008’s crash (Basel III standards)
- encourage openness between the UK and international markets by simplifying the marketing of overseas investment funds in the UK
- provide long-term access between the UK and Gibraltar for financial services
- protect consumers by bringing interest-free, buy-now-pay-later products into regulation
- improve access to cash by making it easier for retailers to offer cashback without an accompanying purchase
This last point is good news for the 8 million UK adults (17% of the population) who rely on cash for day-to-day expenditure. We discussed the move towards a cashless society in a previous blog.
The government claims the Act is progress towards its vision for a more open, technologically advanced and greener industry. However, there are critics who doubt enough attention has been given to improving the sector’s green credentials.
The House magazine reports many believe the Act is a missed opportunity to enforce measures that align financial services with the UK’s carbon emissions reduction targets. The original bill made no reference to climate change and the government initially rejected amendments proposed by the opposition. After pressure from the Lords, the changes were adopted and the Act now requires the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) to consider the UK’s net-zero target when drafting regulation.
Baroness Hayman, Crossbench Life peer, was confident the “new requirements for the FCA and PRA to consider climate change commitments across the whole of their remit send a welcome signal on the direction that the financial sector needs to take.” The FCA’s CEO has announced it’s recruiting a dedicated director of ESG.
Others feel the rules fall short, however. Lord Oates, Lib Dem Lords spokesperson for energy and climate change, proposed companies should be forced to set aside extra capital for any ‘high-risk’ investments in fossil fuels. Also, firms should have to fund new fossil fuel ventures with their own equity without assuming any debt. Despite significant support, the proposals did not make it into the Act, leaving some frustrated the UK’s net-zero ambitions could have been far better supported.
The government’s assertion that the milestone Act will enhance the sector’s competitiveness has also caused concern, some fearing the UK is forgetting crucial lessons it learned in the aftermath of the global financial crisis. The FCA and PRA were established in 2012 to replace the FSA, multiple financial debacles causing the regulator to be unceremoniously broken up. 2012’s legal reforms also abolished the regulator’s ‘competitiveness’ duty, previous legislation requiring the FSA to ‘have regard’ to ‘the desirability of maintaining the competitive position of the United Kingdom’ when making and enforcing regulations.
Critics blamed this clause for enabling the FSA to let the banks participate in risky activity rather than cracking down on it. The government eventually agreed, the Treasury announcing, “The case for making global competitiveness and innovation in financial services part of the responsibility of a regulator… needs to be reconsidered.” In fact, the 2012 Financial Services Act doesn’t mention the word ‘competitive’ once in its 448 pages.
Not everyone believed then or thinks now the emphasis on competitiveness contributed to the financial crisis, however. Rather than focusing on the market’s stability, they stress post-Brexit UK must make sure it’s an attractive and competitive place for financial services companies to do business when they could choose to operate elsewhere, in New York or in the Far East for example.
The 2021 Act is just the first step in a long journey from financial services regulation ruled by Brussels to UK autonomy. The government’s future regulatory framework review (FRF), which will determine how different parts of the financial sector are regulated post-Brexit, is expected to take several years. The roles competition and climate change should play within a regulator’s duties, if any, will undoubtedly be frequently debated.