Written evidence submitted by the International Regulatory Strategy Group (IRSG)

The IRSG is delighted to share with you a contribution to your inquiry into the Future of Financial Services on behalf of the IRSG Architecture for regulating finance workstream. The IRSG is a practitioner-led body comprising leading UK-based figures from the financial and related professional services industry. It provides a forum in which the whole industry can come together to discuss issues of public policy that are horizontal in nature.

The regulation and supervision of the UK’s financial services sector has a significant impact on the ability of firms to meet the needs of their customers, on the country’s position as the leading global financial centre, and on the nation’s broader economic and social wellbeing. With the end of the transition period the UK has a unique opportunity to review its regulatory framework and to consider reforms that will ensure that it remains appropriate to meet the social, economic and geopolitical challenges that are ahead.

The IRSG has produced two reports on this issue, the first ‘The Architecture for regulating finance after Brexit[1]’ began a debate and set out the principles of an effective regulatory framework. It made recommendations on how to strike the balance between competing regulatory objectives and ongoing consideration of broader public policy objectives. In the second report ‘The Architecture for regulating finance after Brexit: Phase II[2]’ we updated our findings as the process of onshoring had provided clarity on the transfers of powers post-Brexit and key stakeholders were beginning to engage in the conversation.

As you will appreciate, given the workstreams focus on regulatory framework, we have answered only the questions focused on related issues.

We hope you will find this a useful contribution to the debate and would be happy to discuss any points in further detail.


What changes should be made to the UK’s financial services regulations and regulatory framework once the UK is independent of the European Union?

Given the IRSG Architecture for regulating finance workstream focus is on regulatory framework, the response below is purely focused on that element of the question.

The regulation and supervision of the UK’s financial services sector has a significant impact on the ability of firms to meet the needs of their customers, on the country’s position as the leading global financial centre, and on the nation’s broader economic and social wellbeing. With the end of the transition period the UK has a unique opportunity to review its regulatory framework and to consider reforms that will ensure that it remains appropriate to meet the social, economic and geopolitical challenges that are ahead.

The IRSG has made a number of contributions to this policy debate including ‘The Architecture for regulating finance after Brexit’[3], ‘The Architecture for regulating finance after Brexit: Phase II[4]’ along with various position papers submitted to stakeholders. The IRSG will be also be submitting a response to the HM Treasury Financial Services Future Regulatory Framework Phase II Consultation and would be happy to share our response which sets out in detail our position on a number of options for reform.


There are a number of different options for improving the effectiveness and efficiency of the UK’s regulatory framework, some of which we go into detail on below. Broadly there is a need to develop a regulatory framework that recognises and responds to three critical features of the post-Brexit landscape:


Through what legislative mechanism should new financial regulations be made?


While the UK was an EU member state the role and responsibilities of the UK regulators were effectively circumscribed by the Union’s institutional set-up and by the interplay between its entities and those in the UK.

The IRSG supports the principles of division of responsibilities as described in the HM Treasury Financial Services Future Regulatory Framework Phase II Consultation (“the Consultation”).  However, we note that there will be an inevitable significant reduction in scrutiny and accountability of the UK regulators as a result of departure from the EU. The IRSG therefore welcomes the recognition in the FRF Consultation that the post-EU framework proposal should enhance policy input from the government and Parliament by ensuring they play a strategic role in financial services regulation to set out the key policy issues and outcomes which must be pursued in the formulation of regulatory requirements.

The post-EU framework proposal should enhance policy input from the government and Parliament by ensuring they play a strategic role in financial services regulation. This involves:

(i)                  setting out in law the key policy outcomes that the regulators must pursue in the specific regulatory requirements that they develop; and

(ii)                 then providing scrutiny of those regulators in order to hold them to account for delivery of those policy outcomes.

In the model that is envisaged by the Consultation, there would be broadly four “levels” to financial regulation in the UK:

  1. the regulators’ statutory objectives;
  2. the general regulatory principles in FSMA;
  3. the specific policy framework legislation that Parliament adopts for each area / activity and which sets the principles/policy goals for it; and
  4. the detailed regulation that the UK regulators adopt to deliver on the relevant mandate.

The IRSG is generally supportive of this approach. However, all four levels must be considered together and each one carefully calibrated against the others to ensure that the requirements or expectations established at one level do not diverge from or undermine the others, and that overlap between them is minimised. In addition, the purpose of the obligations imposed at each level must be clearly articulated and understood.

For the third level, the scope of each “area of activity” should be carefully defined, and the industry should be engaged to ensure the boundaries of each area are set appropriately. There is an open question as to how broadly each “area of activity” will be set, and in any case the potential for overlap or insufficient delineation is significant. For example, whilst a number of “areas” such as insurance or particular types of market infrastructure have been quite clearly delineated, this has not been the case for, for example, asset management or other activities which e.g., have traditionally fallen within the very broad category of “investment business”.   The benefits of delineating between different areas could be compromised if firms performing particular business models were caught by multiple areas of regulation simultaneously or if the categories were drawn too broadly.    

In addition, even with the insertion of a new third level, if the first two levels (statutory objectives and FSMA principles) are not appropriately updated and reviewed for this new context, this may (1) lead to a confused approach to the overall financial regulatory system; and (2) give the regulators tasked with developing detailed rules the message that nothing has changed in their most general/fundamental operating principles and objectives.

If the regulators are expected to perform a different role post-transition period an amendment to both their statutory objectives and the general regulatory principles in FSMA are an important signal. Hence, all four levels must be considered carefully and reviewed as we enter this new era, rather than just a new third level introduced. The IRSG therefore welcomes HMT’s consideration of these levels as a whole.

The IRSG also feels it is important to highlight that these levels should be calibrated with a recognition of how the regulators and the financial market regulation that they promulgate sit within the broader context of public policy. i.e. the regulators should not be regarded simply as agents for the delivery of a narrow objective and a constrained set of technical rules, but equally there needs to be clarity as to where public policy issues, which are rightly the domain of elected representatives stop and regulatory policy starts.  The level of detailed regulation (the fourth level mentioned above) cannot alone be expected to deliver a balanced approach that reflects and addresses both traditional financial regulatory objectives and other policy objectives that government and Parliament have set. Hence, the other three levels must also be deployed for this purpose.

What role does Parliament have to play in influencing new financial services regulations?


As the transition period ends a significant transfer of power back to the UK will occur and it is right that Parliament – alongside government, the regulators, and other stakeholders – consider how that power should be exercised, and by whom, in the field of financial regulation.


The IRSG believes that Parliament has a vital role to play in ensuring that the new UK model both delivers flexible and agile financial services regulation, based on the independence of the regulators, and provides appropriate democratic oversight of, and influence over, the detail of that regulation.


Core to this will be how Parliament decides to treat the activity-level policy framework legislation (the third level of activity mentioned on page 1) that Treasury envisages as key to the new approach. In particular how much detail will be set in this legislation; how far will it direct the regulators to achieve particular social or economic policy objectives; and how will the regulators then be held to account for doing so?


If Parliament determines that it wishes financial regulation to, for example, promote lending to SMEs or investment in infrastructure, then it may want to ensure that the regulators are given an explicit and unequivocal mandate to this effect in the policy framework legislation that it adopts. The more vague or high-level the mandate and the looser the terms in which it is expressed (for example, the use of language such as “consider” or “take into account”) the less certain Parliament can be that its intentions will be delivered in the regulation that is ultimately developed.


Whatever the specific terms that Parliament chooses to express its policy intentions in framework legislation, the IRSG believes that its influencing role over financial services regulation should also include monitoring that those intentions have been executed appropriately.


Parliament may wish to perform this role directly, undertaking its own assessments of the regulatory measures that the independent regulators have undertaken.  While it is, of course, for Parliament to decide for itself how it might wish to organise this aspect of its work the IRSG believes that it is likely to require significant resource given the volume and complexity of much of the regulation in question.  We cover this in more detail in our answer to the next question.


An alternative approach would be for Parliament to rely on an external party to undertake such analysis. One option that could considered is to create a new, independent public body with the specific mandate to provide expert analysis of the regulatory measures that the financial regulators introduce and of the regulatory landscape more broadly. Such a body could have a more or less formal relationship with Parliament but would be expected to have the resources and expertise that would enable it to produce robust analysis and recommendations.  This would provide genuine scrutiny while preserving the regulators’ operational independence.


We have set out more detail on how this might work in Annex A to this response.


How should new UK financial regulations be scrutinised?


In practice accountability and scrutiny will often tend to go together as the framework’s capacity to achieve the former will be heavily dependent on its ability to perform the latter. To be held to account in a meaningful way the regulatory policies the regulators pursue, their impacts, cost and benefits, need to be properly scrutinised, on both an ex ante and an ex post basis. Across the globe a variety of mechanisms are utilised, including:

While it is not essential that the new UK framework includes all of these, they each have merit and are worthy of consideration.


The IRSG feels Parliament’s scrutiny role in the new framework could fall into two spheres:

The current mechanisms for scrutiny work well within the context for which they were designed.  But they are unlikely to be able to offer the level of scrutiny that will be required in the future and that will be appropriate given the significant increase in power and responsibility over financial regulation that they will acquire following the end of the transition period.

But certain aspects of Parliament’s existing scrutiny and oversight should, we believe, continue.  Inquiries that the Treasury Select Committee (TSC) undertake in the current framework already provide for the direct accountability of the financial regulators to Parliament. These have historically focused on supervisory failures rather than on the detail of new regulatory policy proposals or initiatives. Given the need for Parliamentarians to reflect issues of immediate public concern this is both inevitable and appropriate: there needs to be a forum in which public bodies can be held to account when things go wrong and in which issues of current concern can be speedily considered.  This role will continue to be required in future.

The IRSG believes that the Treasury Select Committee could also retain its existing role overseeing all of those aspects of policy (both macro and micro economic) that are the responsibility of the Treasury and its agencies.  It is important that there is a forum within Parliament competent to shadow the Treasury’s entire suite of departmental responsibilities and that can make connections between (and identify any inconsistencies or trade-offs between) the different components of government economic policy.  Only the Treasury Select Committee is capable of forming a holistic view of how taxation, public spending, monetary policy, micro-economic reform, and financial market regulatory policy co-exist.

But the new, post-transition framework requires Parliament to, in addition, oversee the detailed financial regulatory measures that are being introduced.  Although the regulator is, rightly, operationally independent and has the authority to implement binding regulatory measures it performs this role in accordance with a mandate from Parliament. This mandate derives from both general (as set out in FSMA, for example) and specific (in future the activity-level policy framework legislation that Treasury proposes) legal instruments. 


It is therefore not only legitimate but, the IRSG would contend, essential that in the new regime Parliament performs an additional challenge and scrutiny function in order to ensure that its mandate is delivered appropriately. 


There are many ways in practice that Parliament could perform this function and one option could be for a new financial services (sub-) committee could then be set up to provide a more focused venue for ongoing scrutiny of regulation, allowing the TSC to conduct thematic inquiries, as necessary. Such a sub-Committee – perhaps comprised of members of both Houses, perhaps drawn (at least in part) from members of the TSC and the EU Services Sub-Committee – could look in detail at specific pieces of financial services regulation.  It would place a particular emphasis on:


Parliamentary scrutiny would operate primarily (though not exclusively) on an ex post basis, ensuring that regulators are accountable for the regulatory measures that they have introduced but in a way that respects their operational independence and that does not jeopardise their ability to act decisively and flexibly. Ultimately the regulators should continue to have the final decision on the content of new regulations but such mechanism would ensure transparency and the continuous improvement of making new regulation.

As mentioned above (and expanded upon in Annex A) we believe that there is also the option of establishing a new independent public body with the expertise and capacity to undertake detailed analysis of financial regulation.  Such a body would need to complement, rather than substitute for, Parliamentary scrutiny given the vital role that MPs and peers play in ensuring the overall legitimacy of the system of financial regulation.

Should the mandate and statutory objectives of the financial services regulators change to include wider public policy issues?


The regulators’ objectives must be considered in the context of their significantly changed role and the evolution of their practical role over time. The regulators are increasingly expected – even if only informally - to further public policy objectives that do not sit neatly within their existing statutory objectives – for example contributing to climate policy or using supervisory and rulemaking powers in a manner that is consistent with trade negotiations and policy.

Under the model proposed by the FRF Consultation, the regulators also seem to be expected to be more directly responsible for the achievement of wider policy objectives. If it is the government’s and Parliament’s intention in future to ask the regulators to use their regulatory/rule-making powers in order to contribute to the delivery of such wider public policy objectives than those they have been pursuing for some years then their objectives should be explicit on this topic, so as not to be incongruous with the general or specific regulatory principles they are expected to implement. Notably, the primary objectives that an organisation has send an important signal to its people and to its stakeholders about what it ultimately values and how it will (and should) exercise its judgement. If in the new model we intend the regulators to enjoy a high level of independence and autonomy in relation to regulation but to exercise this in a way that will deliver on overarching social and economic policy priorities that government and Parliament have set then the regulators’ statutory objectives should reflect this.

With this in mind, the IRSG supports changing the statutory objectives of the regulators to reflect consideration of the economic and social contribution of the UK financial services sector, and specifically so that the need to maintain and enhance the UK financial services ecosystem is reflected. There are different views as to how such an objective should be framed. It could take the form of an objective that considers the relative international position of the UK financial services industry. For instance, we note that the Financial Services Bill proposes in its activity specific principles that regulators should have regard to “the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active investment firms to be based or to carry on activities”, and we see no reason why this could not be adapted to be applied as a general statutory objective. Alternatively, it could take the form of an objective that considers the role of effective regulation in promoting sustainable economic growth in the UK economy. Both approaches have their own merits, but the IRSG believes at least one should be implemented.

We note the suggestion in the FRF Consultation, that these types of objectives or another objective that makes explicit the social and economic impacts of financial regulation, might suggest encouragement of a “race to the bottom”. However, as noted in the Architecture Report, regulators in other countries (such as Hong Kong, Australia and Singapore) manage the consideration of wider policy goals such as competitiveness, or economic growth, without undermining their delivery of other policy objectives such as financial stability or consumer protection. There is no reason why the UK could not follow this approach. Similarly, high, well implemented and effective regulatory standards can clearly be good for competitiveness and economic growth, and so there is no necessary tension between an effective regulatory regime and this objective. Notably, the desire for harmonised and high regulatory standards as a method of promoting economic growth was part of the EU’s rationale for the recent increase in the powers of the ESAs.

It is important to highlight that such an objective would not just be about ensuring the UK financial sector is “best in class” as compared to the rest of the world. It is also about ensuring that customers of that sector (including domestic consumers) are able to access the best financial services in the world and realise the full benefits of innovation.

However, probably the most important benefit of such a change is that the regulators would, if subject to such an objective (or others that recognise their broader economic and social responsibility), need to be more transparent as to how they have balanced such considerations against other existing objectives. The regulators undoubtedly have to consider and balance such trade-offs today, but without doing so under a formal framework. Hence, how they have settled upon their chosen approach is not always clear, and it is difficult for outsiders (including Parliament and the government) to appropriately scrutinise this process.

How important is the independence of regulators and how might this best be protected?


The operational independence of the financial regulators is a central feature of the UK system for financial regulation. Market participants, like all other stakeholders, need to know that regulators are impartial and free from inappropriate influence when setting the rules under which firms operate. They must be acting, and be seen to be acting, solely in accordance with their publicly stated objectives and roles and in pursuit of the policy goals that the executive and legislative branches have set out for them.

This independence enables market participants to have confidence in the regulatory environment they face and assures them that they are competing on a level playing field – something particularly crucial for an international financial centre. Such an environment is essential to maintaining the pre-eminence of the UK as a centre for financial and professional services and for encouraging broader investment in the UK.

Following the end of the transition period, the UK regulators are an outlier internationally in having a very high-level of independence and significant rule-making powers, but with relatively little systematic scrutiny of their role in delivering the broader policy outcomes set by government and Parliament. Regulatory independence does not mean that regulators are unconstrained in formulating regulatory policy. Their objectives (both those that are horizontal in nature and those that are specific to a particular sector) are set through political processes and the regulators must operate within the parameters set out in legislation. In this broad sense, the regulators are directed by – and accountable for their contribution to - the priorities of wider society, even while they pursue their objectives independently.

The challenge that must be addressed now that the UK is no longer a member state of the European Union is to work out how in practice our system of financial regulation can preserve the regulators’ operational independence within a new framework of scrutiny and accountability.

As the IRSG has noted in its response to Lord Faulk’s inquiry into administrative law [Annex 2 as attached] while judicial review plays an important role in holding those exercising executive power to account its utility in the context of financial services is limited.  The close and continuous model of supervision creates strong disincentives for any individual firm to use the courts in this way and it seems unlikely that this will change.

The IRSG believes that it is therefore even more important that alternative forms of accountability and scrutiny of the sorts outlined in this response are put in place.


What are the strengths and weaknesses of the European Union model of scrutinising financial services legislation?

EU-wide single market rules are arrived at through a defined political process, which includes input from, and scrutiny by, parties with a democratic mandate, such as the European Parliament and national governments. Under this process, limited discretion is granted to National Competent Authorities, and legal accountability to single market rules limits the UK regulators freedom of action in setting their rules.

The key strength of this approach is the way in which the European Parliament and the Council of Minsters provide a forum in which the significant – and by their nature often highly political – trade-offs between competing policy objectives can be discussed and settled by those with an electoral mandate. Because the Level 1 measures (Directives and Regulations) adopted by the EP and Council often go into significant detail many of the sensitive or political issues are settled directly by politicians.

The EU system also provides an ongoing role for those with an electoral mandate, providing oversight of the more detailed or technical regulatory rules (Level 2 measures) – frequently prepared by the European Supervisory Authorities - that that are required to put them into effect.  Such Level 2 measures are often overseen by the Council and the EP, who are able to intervene directly (e.g. via a ‘negative assent’ procedure) if they feel that the proposals are not consistent with the policy intentions that they expressed in the initial legislation.

In addition, the EU model provides a mechanism by which any detailed rules that are introduced by member states’ national competent authorities can be monitored for compliance with the requirements of the underlying legislation. The European Supervisory Authorities and the European Commission both play a part in overseeing national regulators’ compliance with and delivery of the requirements set out in legal acts adopted by the co-legislators.

The key downside of this approach is its inflexibility and the amount of time that it can take to achieve regulatory changeWhile there are exceptions, it is common for the Level 1 process to take 18 months or more to move from the presentation by the European Commission of its proposal to the adoption of the final legislative act by the co-legislators and its publication in the Official Journal.  (Once one factors in pre-proposal consultation and evidence-gathering and post-adoption timetables for transposition the timetable is extended significantly).

This means that once a particular regulatory provision or requirement has been embedded in a Level 1 legislative act it can be a time-consuming and arduous process to amend it.  If experience demonstrates this regulatory provision to have been wrongly conceived (e.g. the ‘real world’ experience of implementation proves that key assumptions about the likely impact were inaccurate); should political priorities change (e.g. if the value society attaches to particular policy outcomes changes, leading to a different view on the trade-offs); or should the state of technology or the market change (e.g. if new solutions or innovative technologies emerge) then it can take longer for the EU system to respond than we would hope will be the case in the new UK model.

Should the UK seek to replicate the EU’s model for drafting and scrutinising financial services regulation?

The IRSG does not believe that the UK should seek to wholesale replicate the EU’s model for drafting and scrutinising financial services regulation. The EU’s model for financial regulation reflects the Union’s particular institutional arrangements and the decisions it has taken on the distribution of power between different agents and the UK’s model is fundamentally different.

Following the end of the transition period the UK regulatory system has the opportunity to be nimbler, more flexible and more focussed on the technical effectiveness of rules. There are however two important features of the EU approach that the UK should look to replicate:

Whilst the EU processes do involve more democratic input than the FSMA model, detailed technical rules can become politicised, something the UK should seek to avoid.







Annex A – ORFR

The response to question [6] summarises the challenges that an ORFR would address: the need for independent, expert scrutiny of the detail of the regulatory initiatives that the regulators introduce.

This annex sets out in greater detail how a new Office could function.

Core Functions of the ORFR

This could translate into four core functions:

-          contribute to high quality financial market regulation in the UK by promoting continuous improvement in how financial market regulatory measures are developed;

-          ensure that the full social and economic impacts of proposed financial market regulations are identified and considered before final decisions are taken;

-          evaluate existing financial market regulatory measures in force in the UK with a view to identifying their full social and economic impacts;

-          identify any gaps in the UK’s regulatory framework and the social and economic impacts of these gaps.

Composition of the ORFR Board

Section 3.51 of the consultation document suggests that “Securing appropriate membership of the committee, so that it provides impartial expertise without becoming a conduit for any particular stakeholder interest, would be challenging”.

But this challenge is one that the IRSG feels could be met, as it is for other such entities in public life. There is no reason to believe that this challenge would be any greater for the ORFR than it is for other public bodies and it could be held to the same standards as other such bodies. The Code of Conduct for Board Members of Public Bodies, for example, would apply to its work, thereby ensuring that the risk of it becoming a vehicle for a “particular stakeholder interest” would be limited.

The ORFR would be an advisory non-departmental public body appointed by and answerable to Treasury Ministers, which would provide further protection.   Its board would be drawn from those in (or with experience of) the wider public sector; academia; the financial and professional services industry; the business community (e.g., representatives of the SME sector); and other civil society groups (e.g., the voluntary sector). 

By setting criteria for individual members of the board (to ensure their expertise and independence) and by creating rules around the overall composition and diversity of the board collectively the risk of it becoming a “conduit for any particular interest” could be reduced to an acceptable degree.

Senior HM Treasury officials and those from other government departments could be invited to participate in the work of the ORFR but would not sit on its Board or be part of its day-to-day decision-making and governance. Engagement with senior officials from government departments would facilitate the ORFR’s consideration of the implications of financial market regulation for the UK’s overall public policy objectives.  A framework document – similar to that existing between HMT and the Office for Budget Responsibility – would be negotiated to determine the specifics of the interaction between the ORFR and government departments and to establish the details of the ORFR’s own governance.

The Work of the ORFR

ORFR would be a statutory consultee for all new financial market regulations proposed by the UK regulators and its formal opinion would be required before any new regulatory proposal could be enacted. In practice ORFR would be selective in determining which regulatory proposals it would progress to a full assessment; not all would be ‘called in’ for such assessment and there would be a sifting process – conducted according to published criteria – that would allow certain proposals to proceed without a full ORFR assessment.

The ORFR would be subject to obligations regarding the timeliness of its contribution to ensure that the regulators, market participants and other stakeholders had certainty about timetables for regulatory developments.  There would also need to be an ‘emergency powers’ clause, allowing the regulators in exceptional circumstances to proceed to enact new regulations without having received the input of the ORFR. Each use of this power by a regulator would need to be explained in full and the reasons made publicly available.

The ORFR and the regulators may in addition wish to agree specific working arrangements in order to facilitate their cooperation and collaboration, but that would rightly be left to the institutions themselves.

On the assumption that the regulators’ objectives have been broadened as proposed above, the ORFR’s powers would cover:

-          the issuance of a formal opinion on whether the regulator had (i) adequately identified and considered the broader economic and social policy implications of its draft regulations; and (ii) whether appropriate mitigation of any negative impacts had been proposed;

-          making recommendations for alternative approaches where it regards the regulator’s proposals as incomplete or ineffective with regard to these broader economic and social policy implications;

-          performing a ‘quality assurance’ role for the impact analyses and other evidence that the regulator produced to support a specific piece of regulation, indicating whether any specific piece of analysis accompanying a proposal was credible and comprehensive;

-          issuing requests to regulators to provide or produce data or other supporting analysis or evidence that the ORFR needs in pursuit of its mission and objectives;

-          identifying and reporting on horizontal trends in the impact of UK financial market regulation on particular social or economic objectives or on particular social cohorts or economic sectors.

-          evaluating and reporting on the social and economic impacts of existing UK financial regulation. (Review clauses are not a standard feature of the UK’s domestic regulatory framework but the power to review legislation is an important tool to understand the impacts of transposition, implementation and enforcement of initiatives. While the ORFR should be able to undertake its own review of existing regulation the regulators should also be encouraged to practice this discipline.  Any proposals for further changes to policy following a review should themselves be subject to Cost-Benefit Analysis/Impact assessment in the normal way: once compliance with the original requirement has been achieved the costs of further change have to be considered).

The ORFR would be able to establish sub-committees and technical working groups.  These might be standing sub-committees (with expertise in a particular market or segment, such as insurance or banking, or in a particular aspect of social or economic policy, such as housing) or ad hoc expert groups convened to provide input on a particular regulatory proposal or instrument where the ORFR feels that additional input is required to supplement their own expertise.

This model would ensure that the regulators retain their independence and that they continue to have the final decision on the content of new regulations. But to ensure transparency – and consistent with the aim of securing continuous improvement in the performance of all parties - this should be on a ‘comply or explain’ basis, according to which the regulators would be expected to set out their reasons if they chose not to follow any recommendations from the ORFR.

It should be emphasised that the ORFR would have no role in enforcement policy or in the day-to-day supervision of firms or markets; its role would be exclusively on regulatory standards.

Avoiding Duplication with the Statutory Panels

In its consultation document the Treasury notes the need to avoid duplicating the work of the statutory panels that are already in place and this is clearly important, not least for reasons of cost.  While there would be some overlap the IRSG believes that this would be limited in practice (and could be made to be so by drawing clear distinctions between the different bodies).

The ORFR would focus exclusively on regulatory initiatives and policy and would not consider any other aspects of financial market policy or any other dimensions to the work of the regulators.  While the FCA Practitioner Panel is, for example, considering such important issues as the “principles-based supervisory approach” or “behaviour, values and diversity” in financial markets these would be outside the remit of the ORFR.  Its sole and exclusive role would be in relation to regulatory policy and initiatives (as set out in the section above), and it would have the expertise and analytical capability necessary to produce authoritative, independent assessments of these.

The statutory panels would remain a valuable source of insight for regulators, as seen in the work of the Markets Practitioner Panel on market developments during the Covid-19 pandemic.

But their work does not extend to the provision of systematic analysis and assessment of regulatory proposals and the consideration of the implications of that regulation for the Government’s broader social and economic policy objectives. The website of the Markets Practitioner Panel, for example, does not record any consultation responses since 2017 and those from the Practitioner Panel (the last is from October 2019) are usually high-level in nature and do not contain detailed assessment of effectiveness or impacts.

The IRSG therefore believes that in practice there will be little overlap between the role that the ORFR is intended to perform and the role that the statutory panels in practice are performing.

It is possible to conceive of a reconfiguration of the panels such that they could also perform the functions envisaged for the ORFR.  But this would also require significant change and it is not evident to the IRSG that this is necessarily preferable to the creation of a new entity with a targeted mandate.

Staffing and Resources

To perform the roles that are envisaged the ORFR would require its own staff. This team would need to be of appropriate size to be able to:

ORFR staff would need experience of, and expertise across:

The team would include a combination of permanent employees and secondees from the regulators themselves; industry; academia; and central government.

The ORFR would not be looking to second-guess the regulators or to duplicate their work – there would be a clear separation between analysis and oversight of regulation (which is for the ORFR) and regulatory policymaking and enforcement (which is for the regulators).  But by providing an expert and informed challenge function the ORFR would be able to contribute to ensuring that UK financial services regulation continues to be of high quality, that it is developed in a way that ensures that broader social and economic policy goals are considered, and that it enjoys a high degree of legitimacy amongst all stakeholders.

Use and application of the ORFR’s work

Consideration will need to be given to who formally takes receipt of ORFR analysis and recommendations and what (if any) obligations are placed on the regulators as a result.  One might, as a minimum, expect the relevant Parliamentary committees that are providing scrutiny of the regulators to use the ORFR’s outputs.

It is clearly important that the regulators retain their day-to-day independence and that they have the ultimate responsibility to adopt regulatory measures in line with the mandate they have been given.  The ORFR would not become a parallel regulator.

But to the extent that the Treasury – or another body – is given a power of direction to be used where that mandate has been disregarded it would be legitimate for the work of the ORFR to be an input to that process. 


Annex B

Call for evidence

Does judicial review strike the right balance between enabling citizens to challenge the lawfulness of government action and allowing the executive and local authorities to carry on the business of government?

Submission of the International Regulatory Strategy Group in relation to the role played by judicial review in scrutinising the work of financial services regulators

1                   Introduction

1.1              This submission:

This submission is made by the International Regulatory Strategy Group (“IRSG”) in response to the call for evidence issued by the Independent Review of Administrative Law (“IRAL”) panel.

1.2              Our experience and expertise:

The IRSG is a practitioner-led body comprising leading UK-based figures from the financial and related professional services industry. It is one of the leading cross-sectoral forums in Europe for our industry to discuss and act upon regulatory developments. We aim to engage proactively with governments, regulators and European/international institutions to promote an international regulatory framework that will facilitate open, competitive capital markets which enable the industry’s customers and clients to have confidence in the products and services it is providing.

This response to the Call for Evidence is informed by the IRSG Architecture for regulating finance workstream, chaired by Julian Adams, M&G plc. The IRSG have previously published two reports on the UK’s current regulatory framework, which can be found at https://www.irsg.co.uk/publications/the-architecture-for-regulating-finance-after-brexit-phase-ii and https://www.irsg.co.uk/publications/the-architecture-for-regulating-finance-after-brexit/.

We feel we can best use our expertise to assist the Call for Evidence by providing our collective view on the role that judicial review should play in ensuring appropriate financial market regulation and supervision. We have chosen to respond in general terms rather than addressing the specific questions in the Call for Evidence. We consider that judicial review is an effective (and increasingly important) means of testing the legality of administrative decisions which should remain as accessible as possible to those affected by them. In the context of financial services, it plays a limited, but nonetheless important role in enabling firms to hold regulators to account. However, we consider that judicial review is both an unsuitable and incomplete means of ensuring full oversight of the work of organisations involved in regulating UK financial services activity (including the FCA, the PRA, the Bank of England, the Payment Systems Regulator and the Financial Ombudsman, together, the “Financial Regulators[5]”). It is unsuitable because, unlike other regulated sectors, the UK financial services regulatory regime places firms, the FCA and PRA in an ongoing relationship, the strength of which is likely to be damaged by engagement in adversarial litigation, and incomplete, because judicial review offers a binary remedy focused on illegality, irrationality or procedural impropriety, whereas comprehensive supervision of a regulator needs to encompass much more than this. For the financial services sector we would suggest instead that a statutory appeal and review regime, specifically tailored to the financial services sector, is a more appropriate and complete means of securing external scrutiny over the work of these regulators. We also recommend that a parliamentary committee with a mandate specifically focused on the regulators is established to ensure the broader range of financial regulatory activities are subject to meaningful scrutiny. 

We would be pleased to discuss this response further with the IRAL if that would be helpful – laura.dawson@thecityuk.com.

2                   The role of judicial review in scrutinising the work of Financial Regulators

2.1              The role of judicial review in preserving the rule of law and supporting growth

The existence of stable and predictable laws plays a key role in supporting economic growth. Business can only thrive where the law provides fairness and certainty, such that firms can plan their relationships with third parties based on clear and predictable expectations, rules and rights of redress. Judicial review plays an important role in facilitating challenges to the exercise of executive power (including that held by regulators), enabling businesses and individuals to hold those exercising public authority to account and helping to preserve the rule of law.

2.2              Judicial review as a source of accountability from Financial Regulators

The UK regulatory system for financial services is based on the delegation by Parliament of extensive powers to regulators. These powers are flexible and, when combined with the principle of regulatory independence, give Financial Regulators significant freedom of action. Given the extent and potential impact of the delegated powers Financial Regulators exercise, regulated firms and other interested parties must have mechanisms available to scrutinise and review the exercise of these powers to ensure that they are not misapplied[6]. At present, this occurs mostly through the use of judicial review and reports by the Financial Regulators to HM Treasury setting out how they have discharged their statutory objectives and requirements. Regulators must also operate complaints schemes, with the Financial Regulators Complaints Commissioner empowered to hear unsuccessful companies and make recommendations.[7]

We have argued (in our January 2020 publication “The architecture for regulating financial after Brexit: Phase II) that none of the mechanisms listed above currently provide an effective check on the full range of activity of the Financial Regulators[8]. Judicial review provides an important route for financial market participants to challenge the means by which a regulator has come to a decision, its adoption of rules or its interpretation or application of existing rules and law. However, as we will argue in the remainder of this response, it addresses only a very narrow subset of the activity of Financial Regulators and is unsuitable to be extended beyond this. There are also limits on its availability. In terms of government oversight, there is no obligation on HM Treasury to act on the reports they receive from Financial Regulators. The Financial Regulators Complaints Commissioner has no powers beyond making recommendations (and has been particularly critical of the FCA’s handling of complaints).[9] 

The purpose of our response to this Call for Evidence, therefore, is to set out why we believe that judicial review currently does not provide full and effective scrutiny of the work of Financial Regulators and that a statutory appeal and review regime, specifically tailored to the financial services sector, is a more appropriate and complete means of securing external scrutiny over the work of these regulators.

2.3              Limitations of judicial review as a means of securing accountability or scrutiny in the context of financial services

2.3.1           Ongoing relationship

Judicial review is an inappropriate tool with which to hold Financial Regulators to account as firms operating in the sector need to preserve an ongoing working relationship with their regulator. This is perhaps the most significant barrier to the regular use of judicial review as a means of checking the exercise of regulatory power in this context. The need for authorised firms to maintain a positive relationship with the regulators responsible for their authorisation and ongoing supervision is a unique aspect of the financial services sector. Its importance cannot be overstated.

Unlike many other sectors, firms providing financial services have a close relationship with their regulators. The Financial Services and Markets Act obliges the FCA and PRA to ensure that regulated firms continue to act in accordance with relevant regulatory principles and rules. This requires a continual dialogue between firms and their relevant regulator[10]. Although the level of face-to-face communication varies depending on the size of the firm, all regulated firms are expected to engage with their regulator on an open and co-operative basis. Maintaining an effective ongoing relationship with the regulator is therefore essential if a firm is to continue to offer financial services. This militates significantly against entering an adversarial court dispute with that same regulator in which an allegation of an overreach of power or misinterpretation of the law must be made.

The role of the Financial Regulators in the authorisation and supervision of authorised firms places both sides in a relationship for as long as the organisation in question wishes to conduct authorised business in the UK. This deters firms from using judicial review, as most are unwilling to risk damaging their ongoing relationship with the regulators by pursuing a judicial challenge. This is evident if one compares the relatively low number of judicial review cases involving the financial regulators with the relative frequency with which firms in other sectors judicially review decisions by other regulators (for example, Ofcom, in the communications sector or Ofwat in the water sector).

Most forms of judicial review require parties to adopt an adversarial approach which necessarily nominates one side as the ‘winner’ and the other the ‘loser’, on the assumption that at the end of proceedings parties will have no future contact. Its binary nature excludes all notion of conciliation. The experience of our members is that judicial review applications are rarely settled ahead of litigation. Parties are unwilling to compromise in respect of what are often public law rights or propositions which will set a precedent for the industry. This is not a position that a firm wishing to continue conducting financial services business in the UK is voluntarily going to adopt vis a vis the regulator whose authorisation is essential if it is to continue trading.


2.3.2           Procedural barriers

Even if a financial services firm wants to pursue judicial review of a Financial Regulator, the cost of doing so makes this a difficult remedy for smaller businesses to access. This is particularly the case following Treasury Solicitor Guidance[11] in 2010 which suggests that, in order to discharge the Duty of Candour, defendants must conduct an exercise that comes close to satisfying the requirements of standard disclosure in civil litigation – a time consuming and expensive exercise. The type of alternative appeal structure we outline below would be more accessible for small and medium-sized financial services firms than the existing judicial review procedure.

In addition, for those applications that make it through the permission stage, full argument may reduce important points of principle to relatively small, fact-specific points. These have limited broader application nor are they likely to improve, in more general terms, the efficacy of a Financial Regulator.  

2.3.3           The use of expert evidence

Comprehensive scrutiny of the exercise of powers held by Financial Regulators requires a broader understanding of financial services law and the wider purpose of financial regulation. In civil litigation, where judges require additional information to determine a case, they will admit expert evidence. However, expert evidence is rarely admitted in judicial review cases as it is generally not reasonably required to enable a court to assess the merits of a decision. Where expert evidence is required (as it might be in some cases involving financial services) its deployment can be problematic. Oral evidence is unusual in judicial review cases, so expert evidence is not tested through cross examination.  In addition, if a judicial review case concerns an issue on which it was reasonable for experts to have disagreed, as a general proposition an argument that a decision was irrational will fail. In cases concerning complex areas of law such as financial services, however, there will almost always be scope for even the most qualified experts to disagree, yet the decision may still have been ultra vires on the facts. Whilst this will not be an issue in every judicial review of a Financial Regulator, the approach to expert evidence demonstrates the limits of this remedy in a financial services context.

2.3.4           The nature of the remedy

Judicial review is a specific, narrowly circumscribed remedy which focuses solely on the legality of a single point in time decision, in terms of either the procedure by which it was made, the outcome, or both. This makes it an unsuitable mechanism for ensuring the level of comprehensive scrutiny of all aspects of Financial Regulators’ work required if investors and society are to have confidence in the financial regulatory system. Whilst it enables clear cases of the ultra vires exercise of regulatory powers to be challenged, relatively few regulatory decisions will be sufficiently flawed to fall within this category. There are many ways in which a regulator might be failing in its operations that fall short of illegality, irrationality or procedural impropriety, yet this is all the judicial review allows to be assessed. We expect more from our regulators than simply getting the law right and acting in accordance with it.

There is also an argument that the limited grounds for challenge as part of judicial review are difficult for a court to apply to much of the work of regulators, including the Financial Regulators. Illegality is difficult to apply to an organisation that makes and interprets many of its own rules. Similarly, procedural impropriety is difficult to judge when the Financial Regulators largely set their own processes. Irrationality is difficult for a court to apply as it is part of a regulator’s role to judge what is relevant[12]. Judicial review of Financial Regulators is therefore arguably not the right mechanism for assessing whether they are acting in a fair and proportionate way.

In formulating regulatory policy, governments and regulators must balance a range of different interests and policy objectives.  Financial stability must be considered alongside the protection of consumers, ensuring market stability, preserving and enhancing the attractiveness of the UK as a place to do business, and the lowering of barriers to entry to promote competition in the domestic market. These same interests will need to be considered and balanced when assessing how well a Financial Regulator is doing its job. Judicial review was not designed to secure this kind of balance and is ill-suited to doing so. It allows for only two competing viewpoints to be considered (the applicant’s and defendant’s) and demands that only one can triumph. We consider that a different structure is required if we are to factor in broader regulatory or socio-economic concerns into the review of a regulator’s actions (see further below).


In addition, an effective vehicle for scrutinising the work of Financial Regulators would also enable interested parties to challenge regulatory inaction, prompting positive change. For example, it is important that Financial Regulators keep their rules under review and that those which are no longer needed are removed or reformed. Whilst inaction can be challenged under judicial review if the decision not to act is irrational or unlawful, this sets the bar higher than is required for the effective scrutiny of Financial Regulators. Approaches to individual areas of financial services work or sectors may also need to be revised as markets develop. Judicial review does not provide any mechanism for triggering proactive steps like this – it is solely focused on decisions that have already been taken.

Proper oversight of the Financial Regulators also requires the ability to consider whether a wide variety of external and internal decisions and procedures are operating effectively and in line with the relevant regulator’s objectives. Over-reliance on a mechanism that rests on the evaluation of one ‘point in time’ decision as a means of securing scrutiny and accountability of Financial Regulators (as judicial review does) risks over-extrapolation leading to inaccurate conclusions. The focus on a single decision judicial review precludes further systemic review of the operation of the organisation or the root cause of an issue. A more effective means of reviewing the full range of work of Financial Regulators would involve a procedure that produces a thorough, more inquisitorial examination of the functions of the organisation. This would allow for decisions to be reviewed in a holistic way and would, crucially, preserve the ongoing relationship between regulated firms and the Financial Regulators.

2.4              A new approach to scrutinising the Financial Regulators

Ensuring the sound operation of the Financial Regulators, for the benefit of all market participants, is a complex operation. It requires a system that can offer more than binary decisions on specific points provided following a judicial review hearing. It should be able to offer complex and often multifaceted solutions to improve the operation of modern financial services regulation.

Outside of financial services, the decisions of several economic regulators are reviewed and appealed according to bespoke statutory regimes and determined by specialist bodies, including the Competition and Markets Authority and Competition Appeals Tribunal[13]. These regimes generally preserve the ability to challenge the decisions of a regulator on the same terms as judicial review (albeit before a specialist panel or tribunal). They may also go further than this, in some cases offering a full merits review of decisions. They offer the advantage of scrutiny by an expert body which understands both complex technical issues and the broader financial and economic context. As they are not limited to the narrow grounds permitted in judicial review, such bodies are better able to mitigate the risk of unfair or disproportionate decisions (against either a regulated firm or its competitors), the application of retroactivity to the interpretation of the rule book and regulatory capture (where the balance tips too far in favour of regulated firms and insufficient weight is given to consumer interests). The decision-makers’ expertise would reduce the need for expert evidence and their more informal nature offers the ability to minimise procedural hurdles. Whilst they would not entirely remove the delicate issue of preserving financial services firms’ ongoing relationships with the Financial Regulators, it is submitted that the offer of an alternative mechanism for challenge before specialists might provide a more appropriate forum for disputes.

2.5              Conclusion

Judicial review plays an important and significant role in holding those exercising executive power (including Financial Regulators) to account. It is vital that it remains open and accessible to any firm or member of the public with sufficient standing to bring a claim. Its utility in the context of financial services, however, is limited by firms’ unwillingness to enter into an adversarial legal process against a regulator with whom they must have an ongoing (and vitally important) supervisory relationship.  In addition, the grounds of review are narrow, focusing solely on the legality of decisions of the Financial Regulators. This makes judicial review an unsatisfactory means of comprehensively scrutinising the full spectrum of financial regulatory activity.

We do not, for the reasons listed above, consider that judicial review can or should be deemed an appropriate vehicle to facilitate the necessary broader scrutiny of the Financial Regulators. If the current framework for applying scrutiny and accountability to the actions of the Financial Regulators is to be improved, a bespoke, specialist body of the type we suggest above would offer a more positive and effective means of fully supervising the Financial Regulators.


February 2021






[1] IRSG ‘The Architecture for regulating finance after Brexit’ December 2017, available at: https://www.irsg.co.uk/assets/The-Architecture-for-Regulating-Finance-after-Brexit.pdf

[2] IRSG ‘The Architecture for regulating finance after Brexit: Phase II’ Jan 2020, available at:  https://www.irsg.co.uk/assets/Resources-and-commentary/The-architecture-for-regulating-finance-after-Brexit-Phase-II.pdf

[3] IRSG ‘The Architecture for regulating finance after Brexit’ December 2017, available at: https://www.irsg.co.uk/assets/The-Architecture-for-Regulating-Finance-after-Brexit.pdf

[4]IRSG ‘The Architecture for regulating finance after Brexit: Phase II’ Jan 2020, available at:  https://www.irsg.co.uk/assets/Resources-and-commentary/The-architecture-for-regulating-finance-after-Brexit-Phase-II.pdf

[5]              Whilst the majority of the Bank of England’s regulatory powers are exercised by the PRA, the Bank itself exercises regulatory functions, including under Part 18 FSMA 2000 and Part 5 of the Banking Act 2009.

[6]              See further The architecture for regulating financial after Brexit: Phase II, para 2.3.1.

[7]              Ibid para 2.3.2. Note however that these complaints schemes are limited – they do not, for example, cover the exercise by the FCA and PRA of their legislative functions. 

[8]              Ibid para 2.3.3

[9]              See further the Complaints Commissioner’s 2019/20 Annual Report.

[10]              The conduct of regulated firms is supervised by the FCA. Prudential supervision may be by the FCA or PRA. depending on the significance of the firm. Payment Services firms are also supervised by the PSR.

[11]              Treasury Solicitor Guidance on the Duty of Candour and Disclosure in Judicial Review Proceedings

[12]              See further the comments of Sir John Donaldson MR in R v Panel on Take-overs and Mergers ex p. Guinness plc [1991] 1 QB 146.

[13]              For example, decisions of the communications regulator Ofcom may be challenged before the Competition Appeal Tribunal and/or the High Court. Under the Financial Services (Banking Reform) Act 2013, certain decisions of the Payments Systems Regulator are appealable to the CMA.