Parliament must make sure it can properly scrutinise financial regulation post-Brexit
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With the regulatory future of the UK's multibillion pound financial services industry still unclear post-Brexit, it is imperative that Parliament takes ownership of proper scrutiny
At the beginning of the Brexit negotiations in March 2017, many UK firms thought that mutual recognition would allow for market access on similar terms to those they’d enjoyed as part of the EU. UK regulators and the Treasury had been in agreement that the UK would not become a ‘rule-taker’, and the financial regulatory regime would be less prescriptive and more agile than EU regulations.
Following the EU’s rejection of a financial services chapter in any trade deal, hopes turned instead to the possibility that both the UK and the EU would find each other’s regulatory regimes equivalent. This would have given considerably less access than the passporting system the UK currently enjoys, as it is only available for a small subset of regulations; however, it would have meant that UK regulations would remain broadly in line with EU regulations governing areas such as the trading of stocks or derivatives and capital requirements. As we approach the end of the transition period, these hopes are now diminishing.
The EU has long been worried that once it is out of the EU, the UK would make their regulations much more business friendly, becoming more competitive. Therefore, the EU withholding most of its equivalence decisions isn’t surprising. According to the Chancellor Rishi Sunak, the UK has sent thousands of pages in questionnaire answers to the EU – but not heard anything back. The UK has now published some of its own equivalence decisions, but it remains unlikely the EU will return the favour.
In time, this will leave the UK with a gaping divergence from EU’s own rule book. However, the government argue this is advantageous, allowing the UK the freedom to write financial regulation its own “stylish” new way.
Whereas before the prescriptive rules written by the EU legislators left the UK regulators with limited flexibility, they will now be given the freedom and responsibility to write rules based on standards and principles set out directly by the UK parliament.
In October, the Treasury launched a consultation on how the UK should write financial regulation, the relationship between the Treasury, the regulators and parliament, and the mechanisms of accountability, scrutiny and public engagement with the new process of policy making. Two weeks ago, the Treasury Select Committee opened an inquiry into the same topic, also looking at the funding of regulators.
Under the model proposed by the Treasury, Parliament will set out specific policy priorities, relevant to specific markets and activities, that the regulator should take into consideration when developing policy and designing regulatory requirements.
The new framework will in turn mean that Parliament would have scrutinise both the legislation and the performance of the regulators according to the new activity-specific policy framework. Parliament would be solely responsible for this, due to the loss of the peer review of other EU financial regulators.
Inevitably this raises questions about Parliament’s own expertise and capacity to scrutinise. In the Lords’ EU services committee session on Monday, City minister John Glen was asked if he envisioned giving committees more resources to scrutinise similarly to the European Parliament. Glen did not want to make any commitments and invited the committee to participate in the consultation.
A report sponsored by TheCITYUK at the beginning of the year suggested that a parliamentary committee should focus specifically on the work of the regulators and the Treasury, undertaking “meaningful scrutiny” of financial regulation and ensuring that the watchdogs regularly report to the committee.
Failure to carry out proper parliamentary scrutiny could mean poorer consumer protection, for example, in potentially misleading disclosures of financial products. This is something that the EU’s PRIIPs regime has been previously been criticised for.
It could also risk moral hazard if regulation does not strike the right balance when it comes to making money markets more resilient. This appears to be the next regulatory battlefield aimed to avoid another shock in financial markets like the one experienced in the March 2020. Only having central banks backstopping markets might not be the most efficient solution.
But for meaningful scrutiny of these types of regulatory issues, parliament needs to ensure it is well equipped to do so. It needs experts to ask the right questions, and the resources and time to look closely at the new rules. EU regulations won’t be there to blame when the next Woodford scandal happens.
Maria Busca is Dods senior political consultant for finance