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

Posted in: Brexit, EU, FCA, UCITS
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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?

Posted in: Brexit, CRD, EU, FCA
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Grid Grind

Do you remember the good old days when FSA used to publish Policy Development Updates worthy of the name? It was something approaching a comprehensive list of forthcoming publications, providing a really useful, at a glance summary of what to expect over the next year. Yes, plans changed a bit from time to time, but it was seldom far off the mark. Since then, of course, we have had what FCA pretends is the same document, but it leaves out most of the information. Attempts to get them to restore the useful version have completely failed – far too much like hard work. But, even if they can’t be bothered to do it properly in their own name, they have finally had to relent when, combining with all other financial services regulators in town in the FS Regulatory Initiatives Forum, they have needed to produce a new Regulatory Initiatives Grid (RIG). Admittedly it is pretty well C19’d but it is a promising start.

Actually, it is a bit better than that. Published this month for the first time, the RIG provides a forecast – 12 months now, to be 24 months shortly – of all the planned regulatory initiatives due to emerge from HMT, BofE, PRA, FCA, PSR and CMA. To have all this drawn together in one succinct document is a valuable resource, which should be leapt on by trade bodies and financial services groups and anyone else that needs to track developments and stay on top of regulatory change. One of the most important aspects of this is its Brexit linkage, at a time when so much legislation and regulation needs to be novated to take account of independence.

Of course, for some there will be no need for this – they know everything in the public domain and all the rest as well. But for the rest of us, there is much in there that jogs the memory, updates the most recent recollection, confirms the expected or is just plain news.

Largely without over-ambitious diagrams or meaningless graphics, the RIG has clear sector listings. Therein we find the Duty of Care, the overlapping and interfering regulation that FCA tried so hard to kick aside but which inevitably caught the eye of the parliamentarians, who now can’t live without it. Deferred, presumed undead. There too is the Future Regulatory Framework Review, HMT’s little look at how we might regulate financial services in tomorrow’s world. Sometime next quarter we will see ‘formal engagement’ on that. Operational Resilience gets a predictable mention as does LIBOR Transition; both inevitable, neither exciting. Outsourcing gets another outing, this time with new technology in mind, while the Investment Consultants, due for Regulated Activity status shortly, get an indefinite reprieve – so, not as shortly as we thought. Then it hots up a bit. The Investment Firms Prudential Regime is picked up: ‘to be included in the upcoming Financial Services Bill’. Not a mention of any EU version thereof, but bound to reflect. There too is what looks like a retrospective reference to HMT’s consultation on the Overseas Funds Regime. It almost slipped away unnoticed, so the RIG may have rescued this one, albeit posthumously.

Although ostensibly dealing only with recognition of overseas funds for promotion to UK retail investors, the OFR (Overseas funds regime: a consultation – GOV.UK) is the UK’s principal exposition on what to do with equivalence. HMT clearly intends to rely heavily on FCA assessment. Just as Andrew Bailey, before moving onto to higher things, used to speak frequently of equivalence of outcome, so too does HMT. Wisely reserving ultimate authority over equivalence decisions to itself, HMT clearly intends that the UK should be able to play retaliatory politics whenever the EU gets up to its predictable tricks. This paper is all about the future FCA ‘recognition’ of funds for promotion to retail investors in this country, an area heavily affected by the Brexit removal of automatic recognition of all UCITS. Armed with equivalence and expecting most applications to relate to EU27 UCITS, FCA will find it quick and easy to tick the recognition box. But real success will look like extensive equivalence decisions for the wider world, opening reciprocal opportunities for the promotion of UK funds in fruitful regions.

Also among the Brexit opportunities is the future structure of authorised investment funds, expected to be covered in the Review of the UK Funds Regime, RIG-listed as sine die. Thanks to the dominance of UCITS, the sector is split simply into UCITS funds and non-UCITS funds (NURSs). While that, today, means those with an EU passport and those without, we are now at an inflection point. Barring some miracle, passports pass away at New Year and UCITS domiciled in this country cease to warrant the title. With that as an inevitable Brexit consequence, we have choices to make. Consider:

  • Accepting UCITS as the global standard for retail funds, retaining the restrictions in UK regulation and following the EU with dynamic alignment wherever it leads;
  • Using UCITS by borrowing the standard, piggy-backing on the EU while developing a superior brand that might put UK funds into the lead at home and away; or
  • Dropping UCITS as a regulatory concept, allowing a more flexible approach to authorised funds with a regulatory perimeter but free movement within, spanning the UCITS-NURS divide.

Convenient as the UCITS brand might be, whether for its inherent value or simply its established profile, there is a respectable argument for denouncing the concept of the regulator as brand manager. Of course we place no obstacles in the way of those wishing to adhere to the UCITS standard, committing themselves, if they wish, to dynamic alignment. But that assumes that a UCITS from a jurisdiction with no regulations reinforcing the brand can be fully trusted to adhere to the landmarks. Despite the notorious indifference of the Luxemburg regulator to enforcement of fund requirements, or even to serious investor protection, perception, based on the official position, may prove to be too strong for the survival of the brand without regulatory support. Such a step would be quite brave. This may become a rare example of the industry imploring the regulator to keep rules in place. And not just as is, but dynamically aligned.

So, if UCITS are to be retained in the UK, what scope should be available for NURSs? There is in this space something approaching congruence between the interests of the industry and the duties of the regulator. If UCITS can be improved on, as FCA has said in recent time, and the EU is uninterested in serious enhancement, firmly asserting the perfection of their handiwork, it feels like a tantalising opportunity to develop a UK brand. Just ensure that it addresses all known weaknesses and stays safe and suitable for retail investors, enshrine it in regulation and then allow it to compete with UCITS in a world of equivalence.

Posted in: AIFMD, Brexit, EU, FCA, UCITS
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