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Slaughter and May

| 3 minutes read

UK Financial Regulation: Part 2

The government has published the second instalment of its proposals for adapting the UK’s regulatory framework for financial services, referred to as the Future Regulatory Framework (FRF) Review.  Its key objective is to achieve an agile and coherent approach to UK regulation, with appropriate democratic policy input to support a stable, innovative and world leading financial services sector.  

Phase II of the Review has presented a few particularly eye-catching, albeit high level, proposals:

The future of onshored law 

The government has signaled its intention for the financial services regulators to take responsibility for setting many of the direct regulatory requirements which are currently found in retained EU law. This will involve a long, drawn-out process of revoking retained EU law in a manner that maintains continuity (at least initially) and replacing it with regulatory rules. It is unclear at this stage how these EU-derived requirements are to be interpreted in their new, rulebook setting.  Divergence from EU law by stealth might be one conceivable outcome if the PRA and/or FCA ‘interpret’ those requirements in ways that deviate from their previously understood meanings in EU law. 

Other practicalities to be considered include what to do about references to onshored EU regulations in contracts and whether interpretation provisions in contracts are sufficient to capture the new PRA/FCA rules replacing onshored EU regulations.

The regulators will ultimately be able to exercise their powers in a way that ensures that firm-facing rules are properly tailored for the UK markets, and can be more efficiently updated in the future (thus meeting the overall “agility” objective).

Activity-specific policy framework legislation

A new ‘Designated Activities Regime’, or DAR, will be created to enable the regulation of certain activities outside the FSMA authorisation process. Short selling and margin rules that apply to certain types of derivatives transactions will be within the initial scope of the regime, along with other as yet unspecified retained EU law activities that are not FSMA regulated.  

But DAR won’t be restricted to retained EU law and will in time evolve in line with future developments, for example, new types of activity, or where the risks associated with a particular activity change in a way that merits bringing it within the scope of regulation. 

The regime is likely to alter the supervision and enforcement landscape experienced by large numbers of otherwise unregulated corporates, affecting the way they engage with the FCA and organise their own compliance programmes.

Among some of the ground rules still to be ironed out: will firms that fall within the DAR's scope but that are otherwise not authorised need to be registered? And what will be the consequences for a breach of the DAR requirements (could it affect the enforceability of contracts)?

Regulators' statutory objectives 

The plans include new statutory secondary objectives for the PRA/FCA requiring them to consider the implications for growth and international competitiveness of their rules and report on their performance against these objectives on an annual basis (thus supporting the vision for a world-leading FS sector).

One wonders how this addition might translate into policymaking and regulation. The government received many representations on this aspect of the proposals but is confident that it can be done in a way that does not detract from the regulators’ existing objectives of ensuring that UK firms remain safe and sound, that the UK’s markets function well, and that consumers and users of financial services receive an appropriate degree of protection

The new objective will not, the proposals emphasise, equate to lower-standard regulation. In practice, the PRA and FCA will be required to take into consideration how their rulemaking might impact the competitive position of the UK in a global financial markets context, subject to aligning their policymaking with international standards.


The enhanced responsibility for UK regulators goes hand in hand with a number of proposals for enhanced mechanisms for accountability, scrutiny and oversight of the regulators by HM Treasury, Parliament, and stakeholders.

Among other things, the proposals make the case for ensuring that the regulators consider the potential impact of their rule-making and general supervisory approach on deference arrangements and compliance with trade agreements to which the UK is subject. Underlying this is a recognition that different combinations of rules and supervisory practices can achieve equivalent outcomes to the corresponding UK framework.

The Phase II proposals will no doubt continue to evolve, as HM Treasury, the regulators and stakeholders hammer out the details of the new framework. Meanwhile other reviews are being undertaken on specific aspects of the post-Brexit regulatory regime, such as work on the UK financial services overseas framework and the ongoing Solvency II review. We are expecting an interesting 2022.

The FRF Review provides a once-in-a-generation opportunity to ensure that, having left the EU, the government maintains a coherent, agile, and internationally-respected approach to financial services regulation that is right for the UK.


financial regulation