Good to see the Investment Association talking publicly (FT 27th July) about developing a new improved version of UCITS for funds domiciled in the UK. We at OWL have been promoting the concept for many months and hope to see such a regime in place as early as possible after the transition period ends. And we have made the point before that such a regime can and should run in parallel with a continuing UK UCITS regime, which has such strong global brand-recognition

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Opening the World

As the man who has been brave enough to accept the role of FCA Chief Executive, Nikhil Rathi will occupy the hotseat at the most interesting and testing of times. It would not be too great an exaggeration to say that the future of this country’s financial services industry lies largely in his hands. Let us hope that he is broad shouldered and thick skinned. But the key question is which way should he turn.

Some will argue that his objective should be to construct a regime as similar as possible to the status quo ante. A few might even go so far as to promote general and indefinite dynamic alignment, following wherever the EU cares to lead. Others will be less keen to keep a hold of nurse and be ready to strike out into the wider world, to engage the growth economies of Asia and elsewhere.

Importantly, while ensuring the FCA retains its non-political credentials, our new man at the helm will have to resuscitate his Treasury connections to be at the very heart of the legislative redesign. Work is urgently needed to rationalise the regulatory perimeter, the legal boundary that controls where the regulator must and must not tread. But more importantly yet, global market access needs radical rethinking – an area where the UK can and should lead the world.

As government documents go, one of the least conspicuous in the class of 2020 is HM Treasury’s consultation on the Overseas Funds Regime. Published in March, the document is widely seen as deservedly ignored, dealing as it does with the obscure subject of which overseas funds should be allowed to promote themselves to British consumers. After all, provided sensible decisions are made, who cares? First, consumers should care, because they should expect to be permitted to see what is on offer from across the globe. Our own funds industry may be world-class but there are others who offer some excellent investment products too. Secondly, the UK funds industry should care a whole lot – after all this is direct competition for them, just at a time when they are losing broad access to EU markets.

But the point, of course, is reciprocity. HMT’s approach to equivalence is masterful, primarily based on a substantive FCA assessment of each overseas regime, but with HMT retaining control of the ultimate, country by country, fund class by fund class decision, so facilitating political negotiation where required. Such equivalence will, no doubt, be offered widely to those with effective consumer protection, including those nations of the EU where supervision and enforcement are properly exerted. All this takes the existing equivalence concept and both deploys it widely around the world and reflects it back onto its now-sceptical inventors.

Important as investment funds may be – very much more so than generally appreciated – they comprise only one part of the spectrum of financial services. What is needed, most urgently now, is a coherent approach to access for all financial services, not just for funds, not just between the UK and the EU, but covering every sector right around the world.

If equivalence can be deployed beyond Europe, so surely can financial services passports. Just as HMT proposes for funds, this should be evaluated and provided on a sector by sector basis, enabling banking passporting to be determined separately from insurance passporting and separately again from investment management passporting. If this has worked adequately across the EU for a couple of decades, why not with other countries with equivalent regulatory regimes? And with reciprocity too. Why would this work? Precisely because, where hitherto we have been obliged to accept passported access to the UK by all EU jurisdictions, whether or not we have confidence in the effectiveness of their consumer protection efforts, passporting based on true equivalence of outcome will be determined by the extent of the protection the home jurisdiction provides, according to our own evaluation, to UK consumers.

Not only should such an approach result in valuable and extensive market access for UK financial services across the globe, but it should also provide a powerful incentive to other nations to adopt sound and effectively supervised regulation and consumer protection. In marked contrast to the EU’s protectionist approach, UK leadership of financial services worldwide could be founded on structuring and offering equivalence assessments and passporting. Admitting to fathering regulation a few decades ago, we can advocate proportionate standards around a world in which we promote free trade to all ready to heed the call.


Howard Flight and Oliver Lodge

July 2020

Lord Flight is a former Conservative Member of Parliament 1997-2005 and Shadow Treasury Minister 1999-2004.

Oliver Lodge is Director of OWL Regulatory Consulting, the adviser to the investment industry on matters of regulation. OWL Regulatory Consulting


Originally published by Thomson Reuters © Thomson Reuters

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Prudential Politics



As we lurk in the twilight zone of the undead, half in the EU and half out of it, we start to see signs of what UK regulation will look like when we are resurrected. The appointment of a new Chief Executive at this tipping point is bound to have significant influence over the re-orientation of the FCA, as it loses its puppet strings and its ability to blame EU legislative deficiencies for consumers’ sufferings and for the heavy weight of the regulatory burden on the industry.

As yet, the extent to which UK regulators will continue to follow the EU up hill and down dale remains among the known unknowns. It is not difficult to recognise the simple convenience of using EU initiatives to drive regulatory change at home while glued to comfortable equivalence. But, with the obligation to follow suit removed, that approach will no longer be the regulator’s safe harbour that it once was. Each aspect of EU tracking will have to be justified, both at the time of adoption and retrospectively when trouble strikes.

Exhibit A is FCA’s recent Discussion Paper on the new prudential regime for investment firms ( ). This time the FCA has a host of opportunities to justify continued alignment. Not only has the UK played a leading part in the development of the EU’s new regime over the past few years, but the regime itself has the useful characteristic of unwinding what has never really been granted full recognition as probably the most egregious example ever of gold-plating, committed by the EU itself, of the Basle Accord. When one-size-fits-all means hitting investment firms with banking capital requirements, as the EU achieved in the CRD, the scale of the problem is plain. Decades later the problem is being addressed. Could it just be that discriminating against the investment sector has lost its appeal now that we have moved on?

So, it’s not difficult for FCA to go with the EU flow this time. But even as it does so, the regulator hints at its own reservations over the adequacy of aspects of the new regime, most notably the single month of operation that is funded by the proposed liquidity requirement. Will the consumer lobby stiffen the regulator’s resolve by demanding higher standards? Might even industry players press for enhancements that one day may reduce collateral damage that they become exposed to? Maybe. Just maybe. Perhaps at least the trade debtors, whether sporting an un-coronavirus haircut or not, might get excluded.

And there are no prizes for having predicted that FCA would be keen on the K-factor. Although due to be disapplied to defenceless SNIs, after years of focus on capital for self-preservation, the K-factor is the mechanism by which regulation turns its attention to the capital required to address the risk of damage to others. Experience over the years has shown that reparations can make significant dents in even substantial P&L account.

But, as ever, the hand to watch is the one not doing the trick.  HMT’s diminutive twelve-page Policy Statement, on the self-same topic and published the self-same day (Prudential_policy_draft_policy_statement_V4.pdf ), purports to tell us how government will facilitate the regulator’s efforts. Primary legislation will of course be needed to undo on-shored capital requirement regulations, but that is not quite where it ends. Among the overarching principles that HMT intends to follow, when legislating for the way in which prudential standards are to be determined, are support for the ‘government’s wider objectives on growth, competition and competitiveness’ and ‘enabling the UK to maintain a strong future partnership with the EU and other major economies’. If that does not set the alarm bells ringing, read on. A new accountability framework will create additional requirements on the regulators when making rules ‘to ensure that the wider objectives of the government and Parliament are taken into account.’ This and related measures will have the advantage that, in the process of designing and implementing the specific requirements that apply to firms, there is ‘appropriate democratic policy input’. How small is the leap from that to a much more politicised regime?

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