Blog: FCA handed major new rule-setting powers in post-Brexit shake-up – Citywire Financial Publishers

The Financial Conduct Authority is to be handed a powerful new mandate enabling it to write rules for the sector as it replaces European primary legislation with a new post-Brexit statute book.

This will be balanced by increased Treasury oversight, the government said in a response to a 2020 consultation on how the UK exit from the EU would impact regulation, and practitioner input.

Replacing the EU rulebook would require a significant body of legislation, and the decision to hand over the powers means the government will not have to devote huge chunks of Parliamentary time to overhauling the massive volume of procedural detail inherited from the EU.

It follows one of the most challenging periods in the history of the FCA and its predecessor the FSA, as a series of scandals have rocked faith in its capacity, and as the regulator has committed to a major shake-up in order to address long-running criticism of its failings.

The changes, which will also apply to the Bank of England’s Prudential Regulation Authority, will further add a new secondary regulatory objective of ensuring the rulebook enhances growth.

A growth mandate will be a key economic differentiator the Treasury predicted, helping protect the UK financial sector’s global competitiveness as it veers away from European alignment.

‘In many instances, the government would expect the regulators to initially replace the repealed provisions with rules that are similar to those which are currently in place,’ the Treasury wrote.

‘However, this approach will allow the regulators to ensure that the rules are properly tailored for the UK markets, and appropriately reflect their objectives. Regulation in financial services is evolving all the time, with new developments and technologies requiring regular amendments.

‘Transferring that responsibility to the regulators will require the government to gradually repeal significant amounts of retained EU law so that the regulators can replace it with the appropriate regulatory requirements in their own rulebooks.’

In return to taking on significant new powers previously preserved for legislators, the Treasury has proposed formalising the regulators’ duties to report to Parliament in law.

It will also impose new powers requiring the FCA and the PRA to respond to recommendations set by the Treasury and ‘a new power for HM Treasury to require the regulators to review their existing rules where the government considers that it is in the public interest’.

Statutory panels which feed into the regulators’ work will be beefed up as they take on greater rule writing powers previously reserved for EU bodies.

In a potentially significant concession to industry, the government has also proposed a much more detailed cost benefit analysis (CBA) for all new rules.

‘The government is therefore proposing the creation of a new statutory panel designed to review, and make recommendations on, the regulators’ production of CBA in order to improve the processes.’

The FCA) has this year shaken up its executive team as it embarks on a major programme of reforms, hiring a series of new senior staff members.

The planned overhaul was revealed last December, after landmark reviews into the failures of mini-bond firm London Capital & Finance and alternative fund promoter Connaught offered a damning assessment of the regulator’s competence.

Incoming chief executive Nikhil Rathi, who took over in October 2020, said the new appointments will ensure the agency is ‘able to make fast and effective decisions’.

The December reports delivered a further heavy blow to the regulator’s already scarred reputation, painting a picture of an organisation which systematically failed to scrutinise regulated businesses, failed to act on warnings it received and follow up on clear operational warning signs, and failed to use its full range of powers or understand the scope of its own rulebook.

At the time, the FCA said its strategic priorities included training its supervision staff on how to analyse regulated firms’ financial information to recognise potential fraud.

Among other things, it also said it would ensure senior managers are able to direct policy to the riskiest businesses and train call centre staff on how to respond to tip-offs.

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