FFS0066

Written evidence submitted by Barclays

Barclays is a transatlantic consumer and wholesale bank with global reach, offering products and services across personal, corporate and investment banking, credit cards and wealth management, with a strong presence in our two home markets of the UK and the US. With over 325 years of history and expertise in banking, Barclays operates in over 40 countries and employs approximately 85,000 people. Barclays moves, lends, invests and protects money for customers and clients worldwide.

Executive Summary

Barclays is supportive of Government’s proposals to refresh the UK’s regulatory framework:

Competitiveness should be viewed from the perspective of the UK’s attractiveness as a place to invest as well as ensuring a UK regime that supports the international competitiveness of UK domiciled firms.
A new approach to regulation should be incorporated into FSMA, based on the principle of ‘same activity, same risks, same regulation’.
The Government should set a financial services strategy, every 5-10 years, to provide the sector and regulators with a road map and vision for public policy and regulatory actions.
The Government should seek to prioritise formalising regulatory and supervisory cooperation in trade negotiations relating to financial services.
In order to facilitate the emergence of FinTech, the Government should increase access to data, improve clarity within data regulation and encourage the use of sandboxes and innovation hubs.
A Joint House of Commons and House of Lords Committee or financial services-specific sub-committee would increase Parliament’s capacity to scrutinise regulatory policy.
Regulators should be subject to a statutory objective that recognises the wider policy scope of the UK’s regulatory standing internationally and as a place to base a business.

Consultation Questions

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

Much has been made of the Government’s desire to see the UK continue to thrive as a global financial centre and to be internationally competitive. It is important that when defining competitiveness, equal weight is given to competitiveness from the perspective of London’s attractiveness as a place to do business for international firms, as well as ensuring the UK regime supports the international competitiveness of UK domiciled firms. Ensuring this clear distinction when assessing competitiveness will help to ensure that the UK remains an attractive, open and global financial centre.

The HM Treasury (HMT) consultation on the second phase of the FRF sets out a proposed framework for the UK’s financial services and regulatory approach. We are broadly supportive of the strategy suggested by HMT and we recognise the advantages of using the existing structure of the Financial Services and Markets Act (FSMA). We believe, however, that further improvements could be made to the regulatory framework:

FSMA should be reformed to move to regulation on an activity-based framework instead of entity-based. The rapid digitisation of the economy has resulted in significant evolution in the financial sector, to the extent that new models have developed that operate outside the regulatory perimeter. As new entrants and new technologies enter the sector, the regulatory framework should be applied consistently across all market participants with uniform consumer protections. As FSMA’s current approach does not capture all relevant business models, the framework is unable currently to adequately address all the risks to the financial sector. An activity-specific approach, based on the principle of ‘same activity, same risks, same regulation’, would ensure a more consistent regulatory approach with the same outcomes and standards for consumers. We include further detail relating to activity-based regulation and the regulatory perimeter in question 14.

A medium term Government strategy is required to set an overarching vision for financial services with a roadmap for public and regulatory policy development. This is important for future discussions on the UK’s evolving third country regime, future trade deals, for the standing of the UK financial services sector in the international regulatory environment, competitiveness, and to ensure a domestic financial services regime focused on the societal outcomes desired by Government and Parliament.

The Government could usefully set out a strategy for the financial sector with a 5-10 year timeline, with clear public policy priorities and objectives for the future of financial services. It would also have the added benefit of providing a more holistic basis for parliamentary scrutiny of regulatory policy development, with clear demarcations of cross-cutting principles; the ability to make an assessment of the cumulative impact of regulatory development; and better scrutiny of regulatory coordination across institutions.

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

While financial services are rarely included within trade agreements, government may wish to prioritise the following objectives in cross-border trade relating to financial services:

Deepen regulatory and supervisory alignment in financial services, finding ways to harmonise rules and approaches and to remove unnecessary inefficiencies, particularly for cross border firms.

Strike cross-sectoral agreements on cybersecurity, free-flow-of-data (limiting data localisation or adding principles on Artificial Intelligence) and free-flow-of-talent.

Where it is possible and desirable to formalise market access provisions, particularly those that already exist, this must be done on a stable basis in order to provide certainty to market participants that provisions will not be withdrawn or changed at short notice.

Deepening regulatory coordination and supervisory cooperation has significant potential to remove inefficiencies arising from cross-border financial services trade. The UK should seek to be a world-leader in creating financial dialogues with like-minded jurisdictions to develop trust and cooperation across regulators. Including a formal mechanism for private-sector input into these dialogues would set a new benchmark for cross-border dialogues and would ensure continued technical input from the industry.

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?

An historic strength of the UK is that it is has been open to cross-border business. As one of the world’s leading financial centres, the UK has a deep ecosystem of professional services which are respected globally. As such, the UK should leverage this expertise and pursue global opportunities for financial services competition. Within that, it is right that the UK examines the current Overseas Framework, as it is doing in the HMT Call for Evidence. We support the general principle, as stated in the Call for Evidence, of maintaining an open and globally integrated financial system, enabling international business to ‘reach in’ to the UK through reduced barriers and frictions where practicable.

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

The financial services sector is intrinsically international and operates in a global marketplace for talent. Maintaining the UK’s competitiveness will require UK firms to be able to continue to attract and retain the best talent, particularly where specialist knowledge is required, and the freedom to relocate staff from other offices for training and work experience purposes.

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?

Government has a key role to play in ensuring that there is an appropriate policy and regulatory environment that best facilitates the emergence and growth of FinTech, ensuring that the UK is positioned as a leading place to incubate new technologies and firms. There are a number of ways in which this objective can be achieved:

Improving and increasing access to data is one of the clearest areas for growth in the UK economy, which would result in notable increases in competition for FinTech companies. Innovations such as PSD2 and Open Banking have demonstrated how placing consumers and businesses in control of their data (in a properly structured and protected framework) can drive broad ranging benefits for consumers. Extending the data-sharing principles of the Open Banking framework to other sectors of the economy will aid growth and innovation in FinTech. In addition, policymakers should look to develop a horizontal, cross-sectoral data sharing framework for personal and non-personal data. The Government’s proposed Smart Data framework provides a first step towards greater data sharing in the UK.

In order for financial technologies and FinTech to flourish, firms equally need greater clarity concerning how data regulation applies to new technologies. Data protection frameworks with elements of ambiguity act as a deterrent for firms to innovate and use new technologies such as artificial intelligence (AI) and distributed ledger technologies (DLT). For example, one of the key characteristics of blockchain technology is that records are immutable, i.e. data in a blockchain cannot be altered. In the context of Article 17 of GDPR (the right of erasure/right to be forgotten), it is unclear how firms can comply with requirements to delete personal data if it were to be stored on chain.

Sandboxes and innovation hubs offer the ability for firms to test new technologies. The current financial services regulatory frameworks were not designed with these technologies, such as AI and DLT, in mind, and therefore they do not provide the clarity firms require. Sandboxes and Innovation Hubs, such as the FCA’s sandbox and the Global Financial Innovation Network (GFIN), have proved useful tools to assist policymakers and industry in identifying how regulation should appropriately apply to the use of new technologies in the financial service sector. Given the cross-sectoral nature of innovation, which is not limited to financial services, policymakers should work with other sectors to create a cross-sectoral innovation sandbox.

A key tenet of ensuring that consumers and businesses are willing and able to take advantage of new and emerging technologies is that they properly understand the risks and opportunities associated with them. We welcomes the work that policymakers have undertaken to further consumer and business levels of financial and digital education. However, with new technologies and business models (and therefore potential risks) emerging on a regular basis, it is imperative that the educational support provided likewise continues to adapt and improve. We support, therefore, efforts to prioritise improving the UK’s level of financial education and literacy in the digital context (this would include, for example, fraud and data awareness). While this may need to be public sector led, it is essential that this is a collective effort, including the private sector.

Through what legislative mechanism should new financial regulations be made?

We support the proposals set out in the Future Regulatory Framework.

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

The proposals set out in the FRF will result in an increase in the scope of rulemaking that was, previously, subject to parliamentary oversight in the EU. The UK Parliament has, therefore, an important role to play in scrutinising the extent to which regulatory rules align to the broad legislative framework laid down by Parliament.

Parliamentary scrutiny of financial services, including regulators, has been discharged historically through the select committee system and the Treasury Select Committee in particular. A strength of the select committee approach is the broad scope and wide remit of departmental committees which allows for both regularised scrutiny as well as inquiries in response to emerging and contemporary issues. Scrutiny of detailed financial services regulation, however, represents a different challenge, potentially requiring sufficient resource to scrutinise a higher volume of issues to a greater level of detail. Parliament will, therefore, need to decide how scrutiny can be most effectively achieved.

A potential solution to increase the resource and expertise within Parliament would be to create a Joint House of Commons and House of Lords Committee or to form a financial services regulatory policy-specific sub-committee of the Treasury Committee. A Joint Committee would potentially increase expertise and experience of the membership and provide extra resource to enable the Committee to address a wide variety of policy matters. Its remit should also be differently and narrowly drawn to focus on regulatory scrutiny so as not to conflict with the work of other, established committees. This approach would closely mirror the committee system for financial services that is used in the US, with both Senate and House Banking Committees scrutinising financial regulation.

How should new UK financial regulations be scrutinised?

It seems highly important that scrutiny of financial services regulations takes place against a clear vision and/ or ambition for the sector – both internationally and domestically, that is articulated by Government and legislated for by Parliament. Our recommendation for a medium-long term strategy for financial services would provide a framework against which Parliament can scrutinise the cause and effect of new regulations and the extent to which they are aligned with the Government and Parliament’s intent.

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?

We welcome the Chancellor’s Statement and commitment to retaining the UK as an open, attractive international financial centre. It sends a strong message to the rest of the world that the UK will be a stable, open, predictable and transparent negotiating partner for other countries on financial services.

The UK’s withdrawal from the EU presents an opportunity for the UK to set a third country regime that is world class. At its core, this should operate on a same outcomes basis, rather than identical rules, be broad in scope, provide sufficient certainty on which cross border firms can base their business and operations and not be subject to sudden, unilateral withdrawal.

How should financial services regulators be funded?

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

We believe that statutory objectives should recognise the wider policy scope of the UK’s regulatory standing internationally and as a place to base a business. There should be objectives or principles that encourage the regulators to take account of the competitiveness of internationally active UK domiciled firms, their ability to compete with international firms based in other jurisdictions, and the ability of UK firms to compete with non-bank competitors or overseas firms reaching into the UK who are not, always, subject to the same regulatory standards.

The Regulatory Initiatives Forum offers a potential solution to provide increased transparency in how regulators adhere to statutory objectives. The body that was created to provide the coordination for the Regulatory Initiatives Grid could have its remit expanded to ensure, proactively, that there is clarity regarding how regulators have interpreted their statutory objectives when forming regulatory initiatives. The body could, additionally, identify areas of possible overlap in regulatory initiatives, and where such overlap is identified, examine whether the overlap is justified in the relative approaches of the different regulators. In this way, a review process would encourage greater alignment and help to reduce conflicting agendas in regulatory initiatives across the UK’s financial services regulators. Regulated firms would therefore be able to proceed with a clear understanding of the collective regulatory objectives, reducing the need to balance the risk of adhering to one regulator’s imperative while possibly being at risk from intervention by another.

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

As set out in the FRF, the independence of regulators will continue to be maintained and that is an important feature of the UK regulatory framework. However, as discussed previously, scrutiny and oversight will be important in ensuring regulatory rules are made in a way that is consistent with broader public policy objectives.

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

We support a regulatory regime with high standards reflective of globally agreed and consistent norms. A robust regulatory regime based on high standards, but which is dynamic, proportionate, and competitive with other global financial centres, is essential to ensuring international competitiveness, the prosperity of the industry and protecting taxpayers.

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

Consumer interests should be at the forefront when considering regulatory change. Industries and sectors work best when they are serving the needs of their customers, so it is important that firms’ strategies have consumers’ interests at their heart, and that the regulatory framework ensures consumers’ interests are appropriately protected.

It is also important to recognise that – as in many other sectors – technology is having a profound impact on the financial services sector, in particular the retail banking market: it is transforming how services are accessed and provided; has enabled new types of firms to enter the market and operate with new and disruptive business models; and it is enabling traditional firms to provide services to their customers in new and innovative ways. While on the whole, such changes have been beneficial for customers, they also potentially introduce new risks - risks the current regulatory framework is not necessarily designed to address.

Firstly, new players are entering the market operating under specific, single-activity licenses as e.g., Electronic Money Institutions (EMIs) or authorised payments institutions (APIs). These firms provide products and services that consumers often see and consider as equivalent to or substitutes for, those provided by banks. For example, customers are increasingly using E-money accounts as current accounts. However, as the providers of these products are regulated differently to banks, their products do not provide the same standards of protection to their customers. For example, their products are not covered by the Financial Services Compensation Scheme (FSCS). Where firms undertake broadly similar activity, creating similar risks, they should be subject to the same regulation.

Secondly, fraudsters are also increasingly leveraging online digital platforms (e.g., social media, online marketplaces, and dating websites) to manipulate consumers into willingly sending money as part of an Authorised Push Payment (APP) scam. Through the Contingent Reimbursement Model (CRM) Code, the retail banking sector has voluntarily taken significant action to ensure that scam victims are reimbursed where they take appropriate self-protection measures. However, further action is required to ensure consumers are appropriately protected. Firstly, to ensure all customers in the UK are protected by the CRM Code regardless of who they bank with, Government should legislate to make the Code mandatory for all banks and payment service providers. Secondly, Government should secure a sustainable long-term funding source for reimbursement of victims in ‘no-blame’ APP scam scenarios. Finally, recognising that the financial services sector can only do so much to prevent scams occurring in other sectors in the first place, it is critical that Government takes action to increase the responsibility of key firms and sectors across the ecosystem to prevent scams at their source.

Given this quickly evolving landscape, and the potential for new and different potential risks to emerge, policymakers should undertake a comprehensive review of the current approach to financial services regulation, to assess where the current regulatory framework should be updated to reflect the increasingly digital financial ecosystem, and to ensure that innovation is encouraged but any risks to customers are effectively mitigated.

February 2021