Nausicaa Delfas, the Executive Director of International, Interim Chief Operating Officer and a member of the Executive Committee at the FCA delivered a speech at the City & Financial Global’s Future of UK Financial Services Regulation Virtual Summit in April 2021 where she outlined the approach of the FCA in the post-Brexit landscape.
Ms. Delfas confirmed that much will stay the same in the FCA’s attitude, approach and outlook. However, it was noted that the UK’s departure from the EU presents the FCA with opportunities to do things differently; an opportunity they intend to grasp.
The key take-away’s from the Speech:
• The FCA are fully committed to maintaining open and fair UK markets and will continue to regulate in the interests of consumers, competition and market integrity.
• Whilst the UK markets are open to our global partners, firms serving UK customers and businesses will need to meet consistently high standards.
• There is a need for strong supervisory co-operation between regulators across jurisdictions.
• The FCA will continue to work with its international colleagues to shape global standards, to work towards regulatory convergence and cooperation on cross border issues.
Regulation of UK markets
The UK regulatory framework has always been characterised by setting high standards whilst supporting and encouraging innovation. The FCA remain committed to adapt dynamically to changes in the markets they regulate with standards that encourage a competitive and open financial system.
The FCA remain mindful of their statutory objectives to protect consumers, enhance market integrity and promote competition in the interests of consumers in FCA regulated markets.
They will continue to regulate by taking into consideration global consumers of the UK markets to ensure the UK continues to attract financial institutions, talent, capital and investors from all over the world environment. In order to achieve this the FCA acknowledge that they must collaborate closely with its international partners by sharing expertise and experience and by work together to drive closer regulatory convergence and coherence on shared cross-border issues.
The FCA intend to utilise their new position in the new environment to have a new, more nimble approach to domestic policymaking. They will focus on using this new flexibility for the global markets hosted 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.
The FCA are committed to grasping this opportunity but are mindful that they are guided by the principles of robust regulation: to be proportionate, dynamic and innovative; supporting global cooperation and open markets.
In the wholesale market they are already taking steps to better tailor their rules and practices. Following the UK’s withdrawal from the EU, they can now focus on what works for UK markets whilst always having an eye to global standards. As such they will ensure that new measures are proportionate, meet real needs and concerns, and give extra flexibility to market participants without compromising the protections they see as necessary for both markets and consumers.
The Longer Term:
In the longer term, there are several important areas the FCA need to address including sustainable finance and the future regulatory framework.
In relation to sustainable finance, 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 they regulate. The FCA welcome this challenge and acknowledge that 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 they intend to play their part. One important way in which they are supporting these efforts is through fostering transparency by promoting good disclosures along the investment chain. They intend to extend the obligations for premium listed issuers to align with the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (“TCFD”) to TCFD-aligned disclosures by asset managers.
In terms of the future regulatory framework 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 it has 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. It will provide for an even more agile and coherent regulatory regime for the UK; one that will enable the FCA to keep pace with the changing needs of firms, markets and consumers over time. The FCA 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, the FCA 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.
The FCA’s approach to international firms in the UK:
Ms. Delfas made clear that all firms operating in the UK can expect to be held to the same high standards. The FCA’s Policy Statement on their Approach to International Firms, published in February 2021, set out how the FCA will authorise and supervise firms operating in the UK in future.
Whilst the FCA has not made any changes to the rules in the Handbook or threshold conditions, the Policy statement gives 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. The FCA has 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 applied to international firms seeking authorisation will be the same as those applied in the ongoing supervision of firms. In this context, the FCA will 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. The FCA has also clarified that they expect firms seeking authorisation to have an active place of business in the UK to enable the FCA to effectively supervise their UK activities.
The FCA will expect more from international firms where they pose higher risks to the FCA’s objectives, particularly where there are risks to retail consumers, client assets and wholesale financial markets. For example, they 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 the FCA 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. The FCA has a long history of working collaboratively and effectively with 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.
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.
In terms of cross border agreements and structures for future co-operation, the FCA 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 signed with regulators across Europe and with the European Supervisory Authorities.
The FCA 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 the FCA have had the opportunity to build stronger ties between UK markets and authorities, facilitating a higher degree of openness and reciprocal access.
The FCA have also been working closely with their US counterparts to ensure UK firms’ access to US markets continues and is strengthened, where possible. The Securities and Exchange Commission (“SEC”) recently published 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. 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.
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 the FCA are supportive of an ambitious outcome on financial services that benefits both UK and US industries whilst preserving our regulatory objectives and safeguards.
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 demand a global response. In the process, the FCA are seeking to improve outcomes for participants in UK markets.
IN CONCLUSION, there were no major surprises or causes for concern in Ms. Delfas’ speech. Rather it was encouraging to hear confirmation that the UK remains very much open for business on the global stage. The FCA appreciate that there are opportunities available in this “autonomous” environment however they need to take a cautious approach and the new freedoms must be tempered by accounting for the interests of our EU counterparts.