When Brexit takes place, responsibility for a host of financial regulation will pass from Brussels to the UK, meaning relevant bodies will need a huge increase in funding, an influential think-tank has warned.
International Regulatory Strategy Group (IRSG) in collaboration with City law firm Linklaters has published a report that, post-Brexit, all regulatory powers will transfer back to the UK, with the Financial Conduct Authority (FCA), the Bank of England (referenced in the report as the Prudential Regulation Authority, PRA) and the Treasury set come under greatly increased pressure.
“This will create a new balance of power,” says the report, “which poses important questions around political scrutiny and engagement with industry and customer groups.”
Titled The Architecture for Regulating Finance After Brexit, the report can be downloaded here.
Under the European Union (Withdrawal) Act, the report points out, EU financial regulations will be domesticated, and become part of a special category of UK law known as ‘retained EU law’.
While EU financial regulations can currently only be amended through EU legislation, in future the UK will be able to amend retained EU law unilaterally, representing a transfer of power to the UK.
So the time has come, argues the report, to determine who will be able to exercise this power, enabling UK regulation to diverge from EU regulation, and what the objectives of and potential constraints on any such divergence should be.
As the Bill stands, the FCA and PRA would have broad powers to amend the body of retained EU law.
The regulators, says the report, will need much greater funds to cope with this great increase in their responsibilities, especially so if the UK leaves the Single Market.
Four primary areas of concern
The key areas of concern highlighted in the report can be summarised thus:
- The powers and resources of UK regulators, including how any significant policy decisions are reached, and how regulators can be better resourced to achieve their objectives.
- Framing the responsibilities of regulators to make sure regulation continues to be at the forefront of global standards while also remaining flexible and adaptive to market needs.
- The scrutiny and oversight of regulators, how they interact with Parliament, key stakeholders and the public.
- The legislative and regulatory process, including consultation and review mechanisms, as well as an assessment of areas for consolidation and simplification.
IRSG chair Mark Hoban, a former Treasury Minister, pointed out that, whatever the outcome of the Brexit negotiations, the UK will continue to need an “effective and internationally respected structure” for financial regulation.
“We believe the system we have is already very good,” he added, but said that it would need to be updated to meet the challenges of Brexit.
Crucially, any system must remain independent, but also subject to “appropriate checks and balances to keep it accountable and responsive”, he said.
And it will need sufficient flexibility to anticipate and respond to market developments and innovations if the UK is to maintain its “well-respected and globally leading regulatory regime”, he added.
Linklaters’ Lucy Fergusson, pictured above, added that leaving the EU will mean that the UK’s financial regulators will be operating in a “different context”.
That made it essential, she noted, that the UK’s regulatory architecture remains “robust and fit for purpose” after Brexit.
“When the UK withdraws from the EU, it will be able to choose whether to amend, retain or remove EU-derived regulation,” she said.
“Such policy choices will of course be affected by the terms of any future relationship with the EU. In any case, the UK institutions will inherit new powers and responsibilities,” she concluded.