Written evidence submitted by UK Finance


UK Finance is the collective voice for the banking and finance industry in the UK. Representing more than 250 firms, we act to enhance competitiveness, support customers, and facilitate innovation.

We welcome the opportunity to provide evidence to the Treasury Committee’s inquiry into the future of financial services. The recent end of the Brexit transition period and the Government’s financial-services future regulatory-framework review make this particularly timely.

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

As Phillip Hammond recognised in his June 2019 Mansion House dinner speech as Chancellor,[1] the context for financial-services regulation has changed—and will continue to change—profoundly since the current framework was established by the Financial Services and Markets Act 2000 (FSMA).[2] The UK has left the EU, and the subsequent transition period has now ended. Technological change is fundamentally transforming the nature, provision and consumption of financial services. And the need to address climate change has highlighted the pivotal role the sector has to play in supporting a just transition to a net-zero economy.

Taken together, these drivers constitute a compelling rationale for a once-in-a-generation review of the UK’s regulatory framework. As the financial-services sector in the UK evolves, the framework can and should:

We welcome the Government’s and the Treasury Committee’s recognition of these challenges. Over the past year, HM Treasury (HMT) has already started to improve coordination among regulators within the existing framework.[3] This is, however, rightly seen as only a first step.

HMT’s consultation marking phase-II of its financial-services future regulatory-framework (FRF) review has outlined the framework that HMT believes will have “the agility and flexibility needed to respond quickly and effectively to emerging challenges and to help UK firms seize new business opportunities in a rapidly changing global economy.”[4] We support the broad thrust of its proposals for regulators with enhanced powers, subject to effective scrutiny and accountability, to deliver democratically determined objectives. However, on its own, even this enhanced framework will not be proof against the trials of the next 20 years. How its components compel and incentivise its participants to act will be equally critical to its success. They are neither nice-to-haves nor minor details.

We summarise our recommendations for updating the regulatory framework under five main headings.

  1. Ambition and strategy

Banking and payments are the financial infrastructure of the UK. From current accounts and lending to the most sophisticated tools of modern financial risk management, the sector supports the economic lives of almost every individual, household and business. The UK is also one of the handful of jurisdictions that can lay claim to being a key part of the global financial infrastructure. The sector employs over half a million people (two thirds of whom work outside London) and accounts for 6.9 per cent of economic output. It is also a major export strength: the UK had a surplus in financial-services trade with the rest of the world of £51 billion in 2018. And banks alone contributed nearly £40 billion in revenue to the Exchequer in 2018/19. All these factors make the UK’s regulatory framework critically important. Therefore:

  1. A single model for regulation

The enhanced FSMA model proposed by HMT is the right one and should apply consistently across the regulation of banking and finance, not just to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Therefore:

  1. A more coherent approach to regulation

The banking and finance sector has evolved, and new entrants and new technologies have brought benefits for competition and consumers. At the same time, the UK’s regulatory framework has become fragmented, evolving in such a way that it is now structured around both firms and activities. The prevailing skew toward prescriptive rules drives inconsistent regulatory approaches and a growing number of instances where the principle of proportionality is not consistently applied. Firms undertaking the same activity can face different levels of regulation, and firms can face the same cost of regulation despite posing different levels of risk. Therefore:

  1. Roles and principles

We support the clear allocation of roles between Parliament, HMT and regulators, as set out in the FRF consultation. Legislation will be needed to turn onshored EU requirements into regulatory rules, and while this will be a major exercise, it can simplify and streamline regulation to the benefit of the UK’s competitiveness. Therefore:

  1. Scrutiny and accountability

As regulators take on more powers, they need to be subject to additional scrutiny and accountability. These will improve the quality of regulatory decision making and enhance the UK’s attractiveness as a destination for banking and finance firms. Therefore:

How can Government policy and the UK regulators facilitate the emergence of FinTech and new competition; develop new areas of growth for the financial services sector; and promote the UK as the best place to incubate new financial technologies and firms?

The UK is one of the world’s leading centres of technological excellence, and new technology firms are entering the financial sector every day, disrupting traditional business models and delivering new services and benefits to consumers. The Government should maintain this advantage by undertaking an annual audit of the UK’s fintech competitiveness, benchmarked against countries like Portugal, Sweden and Germany. This audit should consider factors such as start-ups’ access to capital, ease of setting up an office, taxation and other elements of fiscal policy, as well as access to a skilled labour force. This could then lead to specific policy recommendations, such as doing more to increase equity financing to help firms scale up and ensuring our skills and immigration regime enable us to nurture and attract the best talent. We welcome the independent fintech strategic review, which is examining many of these issues[6].

The UK has made great strides with initiatives such as Open Banking toward improving data sharing, an important factor in promoting competition. The UK should keep the effectiveness of its data-sharing initiatives under review in order to remain a world leader. The Government and regulators should ensure the views of existing and fintech firms alike are fully reflected when formulating these and related policy interventions. As a general comment, which we elaborate below in respect of finding the right balance between lighter-touch regulation and prudential safeguards, there is a risk that smaller and mid-sized firms, many of them promising fintechs, are treated too much like their systemic, larger rivals and are unable to fulfil their true potential. The regulatory framework should seek to be more proportionate to size and risk, lowering the barriers to challengers and increasing capacity in the economy for growth.

Through what legislative mechanism should new financial regulations be made?

We broadly support HMT’s proposals in the FRF consultation to maintain, albeit with important modifications, the model of financial-services regulation introduced by FSMA. Under these proposals, expert, operationally independent regulators would be largely responsible for setting rules and standards within a legislative framework set by Parliament. Regulators are the right parties to be responsible for detailed rule making given their expertise and knowledge gained from supervising firms. They can also respond quickly to market developments and update requirements.

However, FSMA only applies to two of the regulators: the PRA and the FCA. To ensure a coherent and consistent regulatory framework for the whole sector, the FSMA model should be extended to the BoE when carrying out its other regulatory functions (i.e. in relation to bank resolution under Part 1 of the Banking Act 2009,[7] payment systems under Part 5 of the Banking Act 2009[8] and recognised clearing houses under part 2 of the Financial Services Act 2012[9]) and the PSR.

With the regulators set to be handed further powers, the framework must build in mechanisms to ensure high quality in their decision-making. In particular, effective use of CBAs and PIRs is important in ensuring the appropriate and proportionate use of regulators’ powers. In addition, CBAs should extend to all forms of intervention, analyse a full spectrum of options, assess both the incremental and cumulative impact of regulatory change and bring in international experience and independent scrutiny.

The quality of regulators’ decision- and rule-making would also benefit from improvements to the way in which they measure their performance. The National Audit Office (NAO) recognised this when it observed that, “Performance measurement is important in helping regulatory organisations to make sure that they are achieving their objectives and making the best possible use of their resources. It is also important for accountability, since regulators are accountable for their activities to Parliament, to government departments, and ultimately to the public who depend on them.” [10] However, when it subsequently looked at the work of regulators including the FCA, it found that they “are not sufficiently specific and targeted in setting out what overall outcomes they want to achieve for consumers, and therefore what information they need to evaluate and report on their overall performance robustly.”[11]

The measurement and reporting of regulators’ performance could be improved in a number of ways. In particular, they should coordinate more closely in the way they measure performance, align the way they interpret their roles and duties, predefine indicators of success that map to predefined consumer outcomes and undertake regular formal self-assessments based on a centralised template.

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

Under HMT’s proposals, Parliament will not replicate the highly technical role played by the European Parliament as a co-legislator of detailed regulation. However, it has a key role to play in setting the legislative framework in which regulators will design and implement regulatory standards and in scrutinising their delivery of regulation within that framework.

Parliament’s primary role already includes considering policy issues. In practice, it could do more to help promote and align wider public and societal objectives, such as tackling climate change, with financial-services policy. Parliament could also play a greater role in examining the appropriate responses to emerging debates and evolving trends, such as the growing role of Big Tech firms, and international developments with potentially significant ramifications for the UK, such as the planned adoption by some jurisdictions of digital currencies. Such issues are inherently political, often involving trade-offs that regulators—with narrower mandates centred on competition, customer protection, market integrity and financial stability—are ill placed to balance. Only democratic bodies can define and mediate these trade-offs, so Parliament has a critical role to play in setting the mandates that will steer how regulators should approach these important issues.

How should new UK financial regulations be scrutinised?

If regulators are to take on more powers, as the FRF consultation envisages, they will need to be subject to additional scrutiny and accountability. These will improve the quality of regulatory decision-making and enhance the UKs attractiveness as a destination for banking and finance firms.

Parliamentary scrutiny

Parliament already conducts a degree of scrutiny of regulatory activity through its periodic sessions with senior regulators, but, as the FRF consultation suggests, this should be intensified and reframed much more explicitly around regulators’ execution of the mandates that Parliament sets and their navigation of the key trade-offs defined above. At present, the Treasury Committee hears from a number of regulators, including the BoE and the FCA, during the course of a Parliamentary session as part of its regular scrutiny of their work. A section of these evidence sessions, or separate, additional sessions, should be reserved for considering how the regulators have discharged their mandates, with a particular focus on how they have had regard to the public-policy issues set out by Parliament in activity-specific policy framework legislation.

We do not have strong views on the precise committee structure through which this greater Parliamentary scrutiny is to be achieved. An enhanced Treasury Committee, a new sub-committee for financial services or a joint House of Commons/House of Lords financial-services committee (perhaps modelled on the Joint Committee on Statutory Instruments) are all viable models. Whichever is chosen, the additional scrutiny that Parliament undertakes in the regulatory framework will require new capability and capacity. In particular, any new committee arrangements will need resources comparable to those in available in other legislatures with such roles. Staff providing additional expertise should be drawn from a wide range of sources, including the banking and finance sector. It may be prudent to divide these additional skills and expertise into different areas (e.g. regulatory, inquiries and legislative review). To achieve this, greater transparency will be required, and budgets and financing will need to be made available.

Regulatory review

As noted when the Government consulted on options for reforming regulatory and competition appeals in June 2013,The right of firms to appeal regulatory and competition decisions is central to ensuring robust decision-making and holding regulators to account in the interests of justice. Where firms are materially affected by regulatory decisions, they should have an effective right of challenge if they consider that the regulator has made a mistake or has not acted reasonably.[12]

As noted briefly in the FRF consultation, the principal way in which firms can currently challenge decisions by regulators is through a formal judicial review. However, there are a number of features of judicial review that mean it is regarded in practice as neither a viable nor desirable solution for firms to pursue. The risk of jeopardising the supervisory relationship with a regulator by challenging its decision is a particular barrier for firms, with a perception that this would have negative repercussions. This appears to be a key concern in other jurisdictions where firms and regulators have a supervisory relationship, but such a disincentive does not appear to arise where the regulator does not interact as closely with individual firms (e.g. in the sectors overseen in the UK by economic regulators). As a result, judicial review has been used very infrequently in recent years.

A more effective review mechanism could be a useful tool for both firms and regulators. It could support the responsiveness of the UK’s regulatory framework, further calibrating rules to support stated policy objectives and doing so in a timely manner to ensure regulators’ rulebooks are as effective as possible. Indeed, as the Government considers the international competitiveness of the UK’s financial-services sector, an effective regulatory-review mechanism would enhance the UK’s attractiveness as a destination for firms.

How should financial services regulators be funded?

We support the general principle that regulators are funded by fees from the firms they regulate. We nonetheless observe that the total annual funding requirements of the FCA, the PRA and the PSR have increased by 11.5 per cent over the four years since 2016/17 to nearly £900 million per year. These are sums not available to firms to invest in meeting the needs of their customers. Moreover, fees fall proportionately across the general population of firms (in the case of the FCA, for example, according to their annual income or number of mortgages), rather than falling more heavily on those whose conduct requires greater supervision or results in enforcement action. We therefore believe there is merit in reviewing the overall cost of regulation, in particular compared to that in other major financial centres, to ensure it does not act as a disincentive for firms to do business in and from the UK.

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

Activity-specific regulatory principles

Financial-services regulation sits within a wider set of public policy priorities that include economic growth, competitiveness, competition, financial inclusion, intergenerational equity and decarbonisation. Recognising this, the FRF consultation proposes to go beyond the general regulatory principles set for the regulators in FSMA to introduce activity-specific regulatory principles “to enable government and Parliament to direct the regulators to have regard to specific broader public policy issues that may be relevant to the particular financial services activity being regulated.” These are an appropriate consequence of the allocation of roles between public bodies envisaged in the future framework. As the regulators take on additional roles and responsibilities, it is right that the Government and Parliament specify policy priorities for how these responsibilities are exercised.

Key to the success off the activity-specific frameworks is a clear expectation that the regulators openly and transparently consider the public-policy issues set for them and explain how they have balanced competing priorities. FSMA already requires the FCA and the PRA, before making any rules, to publish a draft accompanied by an explanation of their reasons for believing that making them is compatible with their regulatory principles. The Government should include a similar provision in any legislation for activity-specific regulatory principles. Explaining publicly why a regulator believes its proposals are compatible with the principles and how it has balanced any tensions between them will be vital for transparency and accountability.

Competitiveness as a regulatory principle

The FRF consultation notes the debate on whether regulators should have an objective to support the competitiveness of the UK’s financial-services sector. HMT proposes that activity-specific regulatory principles could be the right place for competitiveness to be addressed.

The commitment in the Chancellor’s November 2020 statement to ensuring the UK is “the most open, the most competitive and the most innovative place to do financial services anywhere in the world” was welcome. We believe this calls for global competitiveness to be recognised by regulators across the board and not just in respect of specific activities.

We note the European supervisory authorities have competitiveness as a general regulatory principle. Specifically, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority are each required to take due account of the impact of their activities “on the Union’s global competitiveness.”[13] Other countries have gone further and given regulators statutory objectives to promote economic growth. For example, the Australian Securities and Investments Commission “must strive to maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy.”[14] Similar objectives can be found in the frameworks of Hong Kong, Singapore and the United States.

Post-Brexit, the competitiveness of the banking and finance sector is more vital than ever to the economic growth and prosperity of the UK. As onshored EU legislation is consolidated into regulatory rules, it is vital that regulators consider global competitiveness in their approach. This process should focus on simplification and rationalisation, not gold-plating. The principles set for regulators give important context and direction to their approach to this process.

We see merit in HMT’s proposed approach of including competitiveness within relevant activity-specific regulatory principles. But this risks a piecemeal situation in which regulators are asked to consider competitiveness in respect of some activities but not others. The financial-services sector as a whole is hugely valuable to the UK, as described above. Maintaining its contribution will require a continued focus on global competitiveness from the Government and regulators. HMT should therefore embed global competitiveness in the general regulatory principles set for the regulators to which the FSMA model applies and is extended. A requirement to have regard to the likely effect of rules on the relative standing of the UK as a place for internationally active firms to be based or to carry on activities, modelled on provisions in the Financial Services Bill currently before Parliament,[15] is a reasonable basis for consideration.

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

The operational independence of the UK’s financial-services regulators has been central to the success of the FSMA model for many years, and the Department for Business, Innovation and Skills’ 2011 Principles for Economic Regulation recognised the importance of the Government ensuring it does not interfere with day-to-day regulatory decision-making.[16] The predictability and credibility that regulatory independence fosters are vital to upholding customers’ interests as well as to investment and innovation. We therefore welcome HMT’s ongoing commitment to regulatory independence in the FRF consultation.

The FRF consultation proposes a new “arrangement whereby the regulators consult HM Treasury more systematically on proposed rule changes at an early stage in the policy-making process and before proposals are published for public consultation.” We understand that this frequently happens in an informal way under the current arrangements, and we see merit in formalising this process. However, it does create a risk of politicisation and a challenge to the independence of regulators.

On this occasion, we believe the risks can be mitigated through enhanced transparency arrangements. For example, when a regulator publishes a consultation, it should set out what it proposed to HMT, the comments it received in response and how it reacted. Regulators and HMT should also publish correspondence in situations where a regulator decides not to pursue a rule change following consultation with HMT. There will, of course, be specific circumstances where full transparency is not suitable, but these should be the exception, and the expectation should be transparent publication.

We would underline that the principle that regulators should be independent does not preclude their activities being conducted in a transparent fashion, their consulting a wide range of stakeholders or their being subjected to proper scrutiny. Indeed, openness on the regulators’ part is likely to inspire greater confidence in their decisions, solidifying their credibility in the eyes of Parliament, customers and firms alike.

How can the balance between lighter touch regulation and prudential safeguards be best secured?

Proportionality of regulation, including prudential safeguards, should be at the heart of the regulatory framework. Domestic customers and the UK’s international competitiveness alike would benefit greatly from a more proportionate regulatory system.

The existing general regulatory principles in FSMA include proportionality:the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.”[17] This follows from the identification of proportionality as one of the five principles that the Better Regulation Task Force devised in 1997.[18]

Delivering on the commitment made by the Chancellor in his November 2020 statement to ensure the UK is “the most open, the most competitive and the most innovative place to do financial services anywhere in the world” requires proportionality to be at the heart of the regulatory framework. In particular, the framework should promote proportionality of regulation in line with systemic importance.

The current framework does not always achieve this aim. For example, mid-tier banks find themselves caught in the worst of all worlds: big enough to be included in new taxation, prudential and conduct initiatives but not big enough to be able to absorb them without an impact on their ability to innovate, compete and grow. Many such initiatives neither reduce systemic risk nor bring benefits to the customers of such banks.

The international competitiveness of the UK’s banking and finance sector would also be enhanced by more proportionate regulation, with the impact on competition, innovation and customer service considered in the round.

The FRF consultation recognises the need for a more proportionate regulatory approach to capital markets and the inclusion of provisions in the Financial Services Bill to introduce a new proportionate regime for non-systemic investment firms. HMT should take the opportunity to embed proportionality as a keystone of the new regulatory framework as a whole by ensuring it features prominently among the general regulatory principles set for the regulators to which the FSMA model applies and is extended, as well being translated into activity-specific regulatory principles. In respect of the former, we observe that the Office of Communications (Ofcom) must keep the carrying-out of its functions under review to ensure it does not impose or maintain unnecessary burdens. In reviewing its functions, Ofcom must consider the extent to which it would be appropriate to remove or reduce regulatory burdens it has imposed.[19] We see no reason why banking and finance regulators should not be subject to this stricter duty rather than that in FSMA (and shared by the PSR by virtue of the Financial Services and Banking Reform Act 2013).

Proportionality should be included as a key test for the additional forms of accountability and scrutiny that the FRF consultation proposes for regulators.

How should consumer interests be taken into account when considering potential regulatory changes?

Under the current framework, in advancing its consumer-protection objective of “securing an appropriate degree of protection for consumers” under section 1C of FSMA, the FCA must have regard to eight factors “in considering what degree of protection for consumers may be appropriate.” These include “the differing degrees of experience and expertise that different consumers may have,” “the general principle that consumers should take responsibility for their decisions” and “the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question.[20]

Section 3B(1)(d) of FSMA requires the PRA and the FCA to have regard to “the general principle that consumers should take responsibility for their decisions” in discharging their general functions.

The tension between and need to balance these considerations was recognised by Andrew Bailey in his first public speech as Chief Executive of the FCA:

How to balance the duty of care towards consumers, the duty of responsibility of consumers for their decisions, the role of firms and the role of the regulator, is an inherently difficult question to which there will be many potential answers. It lies at the heart of the FCA’s mission. So far, I would say it has not been adequately answered. [21]

Consumers themselves recognise this balance of responsibilities. Previous research commissioned by the FCA Practitioner Panel “found a surprising degree of willingness among consumer respondents to accept responsibility in principle for their actions. In other words not to ‘blame and claim’ if things went wrong with their decisions.” It also found that, “Consumers accept that acting responsibly should mean trying to understand what you are buying (reading the product information and the T&Cs), researching the options available and seeking out help where needed.” [22]

Regulators’ FSMA duties reflect a balance in common law. In the consumer context, Lady Hale, then a Court of Appeal judge, confirmed in Office of Fair Trading v Abbey National & Others the principle of the customer making an informed choice:

As a very general proposition, consumer law in this country aims to give the consumer an informed choice rather than to protect the consumer from making an unwise choice. We buy all sorts of products which a sensible person might not buy and some of which are not good value for the money. We do so with our eyes open because we want the product in question more than we want the money.[23]

Rather than diminishing consumer responsibility for decision making, regulators should empower consumers to make well-informed decisions. The common-law duties provide a balanced set of rights and a means of delivering redress (which is free of charge to the consumer where provided by the FOS).

The FCA has previously recognised—correctly in our view—that “behavioural biases” may cause people to misjudge important facts and regulation may as a result be required. [24] This must be weighed against the negative effects of market interventions that reduce or disincentivise consumers from taking responsibility for their decisions. Markets work better when providers of products and services respond to consumer-driven pressures rather than regulatory intervention.

Parliament clearly intended regulators to have specific regard to the principle that consumers should take responsibility for their decisions. That is why is it is found in the objectives of the FCA and the general principles of both the FCA and the PRA. Therefore, the regulatory framework should reinforce the vital importance of regulators affording due weight to this principle.

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

We do not believe the UK should seek to replicate the EU’s model for drafting and scrutinising financial-services regulation. The wide discretion given to operationally independent regulators under FSMA, which the FRF consultation envisages maintaining, contrasts favourably with the way rules are made in the EU, where a large body of technical rules is set out in primary legislation. While the latter style is well suited to the EU’s objective of minimising discrepancies in regulation between the member states that constitute its single market, we agree with HMT that the FSMA model maximises “the use of expertise in the design of regulatory standards and ensure[s] those standards can be flexed and efficiently updated to address changing conditions and emerging risks.”

How can the UK financial services sector take advantage of the UK’s new trading environment with the rest of the world?

The UK is a major exporter of financial services, both through cross border trade and via commercial establishment of authorised subsidiaries and branches of UK-parented firms outside the UK. The UK has a surplus in cross-border financial-services trade with the rest of the world of more than £50 billion[25]. It exports a multiple of this through sales via its commercial presence abroad. 

Exiting the EU does not in itself materially change the UK’s trading framework with the rest of the world for financial services. Where the UK enjoyed bound rights of establishment or cross-border access in non-EU markets by virtue of WTO commitments or in EU FTAs these have been reconfirmed in rolled-over FTAs and via the UK’s WTO membership. These guaranteed rights are in any case very limited for cross-border trade, where binding commitments at both the WTO level and in FTAs are typically very limited. The UK had wide latitude as an EU member to set the import regime for branches and cross-border sales into the UK, and it obviously retains that latitude. This is an important theme of the current UK review of its import framework.  

However, there are a range of ways in which greater freedom to set domestic financial services regulation in the UK will provide new trade opportunities, chiefly by reviewing the way that UK regulation treats cross-border exposures and overseas entities in UK-based groups. The UK will also be free to pursue new forms of cooperation with other jurisdictions that create new rights, or better operational treatment for UK-based firms based on recognition of the UK’s high domestic standards. As the UK reviews its approaches outside of the EU, it will be important to weigh possible choices against the ways they can support the international activity of UK-based firms.

What should the Government’s financial services priorities be when it negotiates trade agreements with third countries?

The primary role of Trade Agreements in financial services is to confirm and ‘bind’ as much as possible the market access and non-discriminatory treatment available to UK firms and to lock in high standards of transparency, proportionality and cooperation in regulation. The highly regulated nature of financial services and the desire of financial services regulators to protect their prerogatives mean that there will always be some limits on what can be bound in a trade agreement. However, the UK’s priorities should be to:

If the role of FTAs in financial services will largely be to bind access and best practice in regulation, there is an equally important role for regulatory diplomacy in improving these underlying conditions even in the absence of FTA commitments. This is especially the case in areas such as cross-border market access where UK partners (and the UK itself) will often be reluctant to bind access for reasons of regulatory sensitivity. 

For example, targeted regulatory dialogues with key trading partners should focus on ways in which supply from the UK, or treatment of UK firms established in an export market, can be supported, including by addressing duplicative or incompatible regulatory approaches. The UK’s Global Financial Partnerships, Economic and Financial Dialogues and Fintech Bridges are all good examples of this strategy. A key role of FTAs will be to lock in aspects of this treatment where appropriate.

In its regulatory diplomacy the UK should be willing to make use of frameworks such as ‘equivalence’ or ‘deference’ by which the UK and partners recognise the robustness and alignment of their individual regulatory approaches and use this recognition as the basis for defined market access rights or forms of regulatory relief for wholesale financial services. These can be useful tools for deepening supply and distribution chains in wholesale financial services.  While the UK should ultimately remain fully autonomous as a rule-setter for its financial services sector, it should be pragmatic about the costs and benefits of voluntarily aligning with EU (or other key markets’) rules, where this supports useful recognition or ease of operation for exporting firms. Such judgements should be made on a case-by-case basis. The UK’s own use of recognition as the basis of import rights should be seen as a way of increasing the choice and competition available in the UK market.     

The UK should also be a strong champion of ‘upstream’ convergence in financial regulation best practice. It will do this chiefly through the setting of international standards through the Bank for International Settlements, the Financial Stability Board, the International Organization of Securities Commissions, the United Nations (including the Framework Convention on Climate Change Conference of the Parties), the OECD (including in important areas such as tax and the governance of AI) and the G20. The UK should encourage key trading partners to capture these key standards in their regulation in a consistent way.

Should the UK open its financial services markets to external competition from countries outside of Europe, or should the UK maintain the current regulatory barriers that apply to third countries?

The UK should champion non-discriminatory liberalisation of financial services in its own regime, in the same way that it would in the EU and globally. This is defined not as deregulation but as the capacity of foreign financial-services firms to supply on the same conditions as local ones. As noted above, its strategy for free-trade agreements (FTAs) should be based on expanding the binding commitments partners have made to provide this treatment.

Managed carefully and well, liberalisation of trade in financial services deepens the capacity of an economy to provide such services to its companies and households. Allowing foreign financial services firms to establish in a domestic market alongside local ones, or to sell services cross-border, can bring new competition, choice and capital to domestic markets.  These benefits can make an important wider contribution to economic growth and development by deepening the capacity of the economy to fund and support economic activity and by lowering the cost of these services. Opening ones markets to external competition also exposes the domestic industry to new technical, technological and managerial expertise, new products and firms with experience of complying with global standards. These spill over quickly into the domestic market.

The UK is already a very open market for the establishment of foreign financial services firms. Foreign banks and other financial services suppliers can establish and operate in the UK on the same basis as domestic ones. The primary regulatory barrier to access to the UK market is the basic obligation to operate through a UK-regulated entity established in the UK for the provision of most retail financial services. From the perspective of consumer protection this is a conventional and legitimate requirement, and not one that should be seen as an unreasonable barrier to trade. 

For cross-border trade, the UK already operates one of the most liberal regimes in the world for wholesale financial services. Specified activities are permitted to be carried out without the need to be authorised in the UK in defined circumstances. The UK ‘overseas person’s exclusion’ (“OPE”) regime identifies two circumstances in which an overseas person may contract cross-border with a UK person without having to be authorised in the UK:

These rights apply in a range of services, including arrangements to buy, sell or subscribe to securities, advising on investments, operating trading facilities and trading as an agent or principal. The UK OPE regime is based on the principle that authorised intermediaries or actors in the UK should be relied on to have the financial sophistication to contract with non-UK persons. This framework allows a range of global choice to authorised and sophisticated financial service users.     

The UK should always be willing to be a unilateral reformer with respect to trade in financial services. It should consistently and pragmatically review its own regulatory regime for obstacles to both the import and the export of financial services. These could include unnecessary requirements on UK-based firms related to their exposures outside the UK, gaps in the UK’s own use of equivalence (or other recognition tools), or approaches in areas such as stress-testing and resolution that diverge materially from those of trading partners in a way that complicates rather than streamlines obligations for large UK firms operating in more than one market.

What skills and immigration policy will the UK financial services sector need once the UK has left the European Union?

A 2016 review by PWC estimated that around 6 per cent of the UK financial services workforce are non-British EU nationals, and a further 10-12 per cent of employees in the sector at that point were from the rest of the world. As a host to international financial services firms, often overseeing investment in every part of the world, the UK sector will always have a measure of demand for individuals with international experience, linguistic skills and familiarity with overseas export or investment markets. The sector strongly supports a migration policy that enables firms to bring experienced professionals to the UK for temporary postings and provides a pathway to residency for skilled individuals of any background who want to make a financial services career in the UK.   

It is also crucially important that the UK develops and maintains a strong domestic financial services workforce. Here there is a clear obligation on the sector itself to work with government, secondary and higher education institutions and further education providers to develop a skills landscape that can provide the bedrock of the financial services sector. Rapid technological change coupled with changing working patterns in the sector and rising expectations among graduates for stimulating, purposeful work have created a new imperative for in-work training and strong cultures of advancement  that UK financial services firms recognise and are committed to addressing. This challenge was captured well by the 2020 report of the UK Financial Services Skills Taskforce[26].    

What progress has the Government and regulators made in facilitating key financial services equivalence agreements with third countries; and would an alternative mechanism serve the interests of the UK market better?

Equivalence determinations are autonomous and generally not based on agreements, although they may be made in a reciprocal way, or conditioned on reciprocity in some circumstances, especially by the EU. 

The UK can facilitate the equivalence determinations of other jurisdictions with respect to the UK by regulating in a transparent, robust and consistent way based on international standards. It can provide them with any requested information on the UK’s regulatory regime or regulatory intentions and the UK has provided a huge volume of such information to EU authorities as part of the work of ensuring that the EU adopts equivalence determinations for the UK under its existing frameworks. It is a matter of public record that the EU has in a number of key cases opted to withhold such judgements for a range of reasons. It has in some cases cited uncertainty on the future direction of UK regulation, although this is the case to some extent with any third country subject to such a determination. The shortcomings of the EU’s third country regimes (in particular, the equivalence decisions that many stipulate) has been well documented.[27] In short, these regimes do not provide a sound basis for cross-border business into the EU.

Some important recent developments include: 

Equivalence can describe a range of policy approaches delivering a range of different outcomes. They are generally designed to:

In both cases, the UK has recognised that the quality, robustness and intent of regulation in a third country is sufficient to allow the UK to ‘defer’ to this foreign authority and relax its own regulatory requirements in a defined way.

Equivalence can thus be seen as a mechanism for extending the regulatory perimeter of the UK in a narrow and defined way for a defined purpose to entities located outside the UK. Where this is done in order to provide a form of calibrated and risk-weighted regulatory relief for a UK-based firm with international exposures, there is no real alternative to recognition of this kind.

In terms of cross-border market access, there are a number of alternative approaches that can be taken to achieve similar outcomes:

All of these approaches are different from equivalence-based models in that they do not involve any attempt to regulate a foreign provider indirectly through recognition of their home regulatory framework.


February 2021



[1] https://www.gov.uk/government/speeches/mansion-house-dinner-speech-2019-philip-hammond.

[2] https://www.legislation.gov.uk/ukpga/2000/8/contents.

[3] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871673/FRF_Phase_I_-_Response_Doc_FINAL.pdf.

[4] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/927316/141020_Final_Phase_II_Condoc_For_Publication_for_print.pdf.

[5] https://hansard.parliament.uk/commons/2020-11-09/debates/D5E911A9-1270-457F-9F6A-57AE5C272FBA/FutureOfFinancialServices.

[6] https://www.gov.uk/government/publications/independent-fintech-strategic-review-terms-of-reference.

[7] https://www.legislation.gov.uk/ukpga/2009/1/part/1.

[8] https://www.legislation.gov.uk/ukpga/2009/1/part/5.

[9] https://www.legislation.gov.uk/ukpga/2012/21/part/2.

[10] https://www.nao.org.uk/wp-content/uploads/2016/11/Performance-measurement-by-regulators.pdf.

[11] https://www.nao.org.uk/report/regulating-to-protect-consumers-utilities-communications-and-financial-services-markets/.

[12] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/229758/bis-13-876-regulatory-and-competition-appeals-revised.pdf.

[13] Recital 13 at each of https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010R1093&from=EN, https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010R1095&from=EN and https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010R1094&from=EN.

[14] https://www.legislation.gov.au/Details/C2018C00438.

[15] New section 143G inserted into FSMA by paragraph 1 of Part 1 of Schedule 2 and new section 144C inserted into FSMA by paragraph 1 of Part 1 of Schedule 3. See https://publications.parliament.uk/pa/bills/cbill/58-01/0225/200225.pdf.

[16] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/31623/11-795-principles-for-economic-regulation.pdf.

[17] Section 3B(1)(b), FSMA.

[18] https://webarchive.nationalarchives.gov.uk/20100407173247/http://archive.cabinetoffice.gov.uk/brc/upload/assets/www.brc.gov.uk/principlesleaflet.pdf.

[19] Section 6(1) and (2), Communications Act 2003. See https://www.legislation.gov.uk/ukpga/2003/21/section/6.

[20] https://www.legislation.gov.uk/ukpga/2000/8/section/1C.

[21] https://www.fca.org.uk/news/speeches/chief-executive-speaks-apm-about-recent-work-and-future-challenges.

[22] https://www.fca-pp.org.uk/sites/default/files/fca_practitioner_panel_consumer_responsibility_report_september_2013.pdf.

[23] http://www.bailii.org/uk/cases/UKSC/2009/6.html.

[24] https://www.fca.org.uk/publication/occasional-papers/occasional-paper-1.pdf.

[25] https://www.thecityuk.com/assets/2020/Reports/8716847a2f/Key-facts-about-the-UK-as-an-international-financial-centre-2020.pdf

[26] The report can be accessed at: https://www.thecityuk.com/assets/2020/Reports/43e976fdcd/Financial-Services-Skills-Taskforce-final-report.pdf

[27] See also https://www.irsg.co.uk/assets/Uploads/CD5719CityofLondonGlobal-Regulatory-CoherencefRonline2.pdf. See our soon-to-be-published report on international trade in financial services.