The first conversations I had about a post-Brexit handbook were back in 2017, some 18 months after the referendum on the UK’s membership of the EU. So, at some level, we’ve been waiting quite a while for the FCA’s announcement of its post-Brexit handbook review.
There are some decent reasons for this wait, notably that, with the passage of the Financial Services and Markets Act 2023, the remit of post-Brexit UK regulation can finally be taken forward with certainty. But along the way some opportunities have been missed, and it’s hard to believe more couldn’t have been done sooner.
Those original discussions were in the context of a prospective move towards machine-readable regulation and the knowledge that GABRIEL, the regulatory reporting system, was due to be replaced. The latter has since been replaced by RegData but we’re still waiting for the former.
Possibly one of the deterrents to embarking on this work earlier is recognition of the scale of the task. In some ways I hope this is the reason, as one of the main factors contributing to the failure of the several previous attempts to reform the Handbook was the FSA/FCA Board and Executive Committee underestimating how big a long-term challenge it would be.
Therefore, the first question for the leadership of the FCA and PRA should be whether they are up for it? Are they in this for the long haul? The work involved is immensely important but will take considerable resource over several years, extending beyond the tenure of the current Executive and Board members. There will be few quick wins and no opportunity, credibly, to declare overall success.
So, beyond incorporating the regulators’ new responsibilities, here are five questions – with, as ever, significant interdependencies – that the Handbook review will need to grapple with along the way:
1. How much is this about deregulation?
Few would argue that we have areas that are confusing and inefficient overlap from various layers of regulation over the last 20 years. But deciding what can safely be got rid of is much harder. For anyone doubting this, it’s worth reading this blog by Lyndon Nelson, “Deregulation and a game of Jenga”.
2. Will the new Handbook be machine-readable?
If the answer is yes, the underlying challenge will be one part technical, one part operational and one part policy. Taking these in turn: the technology exists but some choices would need to be made about which way to go; the operational requires close coordination with the PRA and alignment with the Transforming Data Collection program; and the policy question needs multiple decisions on the purpose and consequences of different generations of regulation (eg when do “customer” and “client” mean the same thing and when do they mean something different?). If the answer to the “machine-readable” question is no, it will probably mean the UK falling behind the EU, US, and others, and having to play expensive catch-up down the line.
3. Principles or rules?
The conventional mantra is to move towards “more principles-based” regulation, but in practice this tends to be unpopular with firm compliance functions, plus it works much better in some areas than others. It’s also worth remembering that any ambition to create a truly internationally level playing field or a machine-readable rulebook tends towards more granular, rules-based regulation.
4. How much discretion does the UK really have?
Although we have left the EU, there’s no getting away from the fact that EU and US legislation heavily influences the regulatory agenda, and it will be hard for the UK to set its own course. Beyond this, there are also the international bodies – Basel, IOSCO, FSB – setting standards that UK regulation will need to meet. And finally, internationally active firms won’t be keen on having to comply with an additional, different, UK set of regulations.
5. What are the implications for supervision, enforcement and reporting?
At times, too often, FCA Policy has paid little attention to the operational consequences of its initiatives. In the FCA’s new structure, with policy and supervision functions combined, this should be less of a risk but there is so much in play that supervision and enforcement will need to be much more heavily engaged in this review than is usual. Reporting, meanwhile, will lurk in the background and typically isn’t well understood by senior executives. But it matters deeply to firms – for reasons of both cost and potential disruption – and getting it wrong would cause the FCA and PRA huge problems.
The views expressed are the author’s own.
Gavin Stewart is an independent commentator on financial regulation; former regulator; novelist; ex-international rower and sports administrator. He has 27 years’ experience working for financial services’ regulators (Bank of England, FSA & FCA), holding a wide variety of roles including as a Bank of England Supervisor, FSA Head of Strategy, Planning & Performance, and FCA Chief Risk Officer.