Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Earl of Lindsay Excerpts

Wednesday 6th June 2018 Lords Chamber

[The Earl of Lindsay (Con)]

My Lords, as a member of the committee I am delighted to follow our chairman, the noble Baroness, Lady Falkner. In doing so, I echo her thanks to our excellent clerk and to our then policy analyst, who sadly is no longer with us. I should also take this opportunity to commend the noble Baroness as our chairman. She has been very effective at chairing us as members and indeed the many witnesses with whom we have engaged over the course of preparing this report.

I want to highlight two important issues raised in the report, both of which were anticipated by the noble Baroness in her speech. They are challenges, but equally they should be seen as opportunities. The first relates to what the final Brexit deal needs to achieve in respect of the future regulation of the financial services sector in the United Kingdom. The challenge as I see it is as follows. Without exception, all the witnesses we heard from, along with the submissions we received, agreed on the continuing need post Brexit for the United Kingdom to have a robust and internationally trusted regulatory framework to promote financial stability and underpin confidence in our financial services sector. Equally, all agreed that the processes of our departure from the EU and the nature of the post-Brexit regulatory arrangements must not compromise the UK’s continued participation with international standards and the globalised financial system that this country has been so instrumental in shaping. Fragmentation should be avoided as it is likely to undermine financial stability and increase costs.

Our witnesses and the evidence also agreed that the UK and the EU should seek a post-Brexit outcome that allows mutual market access in financial services between the UK and the EU 27, underpinned by broad and deep supervisory co-operation between the UK and the EU. At the same time—here lies the challenge—none of our witnesses and none of the evidence submitted could envisage that a post-Brexit outcome based on the EU’s current equivalence framework would be reliable or realistic, as the noble Baroness said. None wanted an outcome that sees the UK as no more than a passive rule-taker, given that aspects of future EU financial regulation may not be appropriate to the needs of either the United Kingdom or the global client base—including customers in the EU 27 served by the UK financial services sector.

Furthermore, our witnesses saw the merit of the United Kingdom having the ability to tailor and evolve the regulatory framework post Brexit as an important opportunity. They saw it as enabling, where appropriate, the UK to improve the design or detail of former EU regulations so that they are more efficient and effective and better aligned with UK circumstances and international standards, better adhere to the UK’s well-developed principles of better regulation and, importantly, are fit for the future in anticipating the regulatory requirements of the fast-developing fintech industry and other areas of innovation.

The challenge is squaring the post-Brexit circle between the United Kingdom’s ability to evolve its own regulatory framework at its own discretion and the parallel need to maintain mutual recognition, trust and market access with the EU. To a number of our witnesses, the challenge can be resolved if the Brexit negotiations are clear-headed and arrive at an arrangement that would serve both UK and EU interests. We summarised this opportunity in the last paragraph of the summary at the start of our report:

“Furthermore, international standards could provide a bridge between the UK and the EU in defining a future relationship based on shared outcomes, rather than the literal interpretation of rulebooks. We believe that a future relationship can be secured that is to the benefit of both the UK and EU, provided that a mutual commitment to effective regulation and supervision is maintained”.


The opportunity to achieve such an eminently satisfactory and desirable relationship should obviously be the objective of the UK Government and our Brexit negotiators. Common sense suggests that it should also be an objective of the EU negotiators. The continuing importance of London and the UK financial services sector to customers and clients across the EU 27 suggests that they should have as much of an incentive to achieve that outcome as us.

Likewise, the second issue I want to raise is both a challenge and an opportunity: whether the United Kingdom has in place the right regulatory architecture and processes, the right checks and balances and the right accountability and parliamentary oversight for financial regulation post Brexit. This question falls not just to the Government and regulators—although they are key in leading the discussion and consideration —but to Parliament, the industry and its stakeholders. Underlying this issue is the need, as we have heard, for the UK to transpose the EU’s body of law relating to financial regulation into UK law. Careful and intelligent judgment is needed on how that transposition is best achieved between primary legislation, secondary legislation, regulators’ rulebooks and binding guidance. As we say in our report:

“The Government will need to adopt a nuanced approach towards the translation of EU regulation into domestic law”.


Flowing from this transposition is the devolution of significant powers from the EU to our domestic regulators, namely the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority. Pre-Brexit, those powers have been defined and overseen by the EC, various EU bodies, a relatively well-resourced European Parliament and a very strong committee structure. Should additional and better-resourced parliamentary oversight be developed in the UK post Brexit to avoid what our report refers to as,

“an unintended deficit in democratic scrutiny and accountability”?

The committee believes the answer to that question is yes and it makes three recommendations in the report to this end. In doing so, it anticipates not only the significant increase in the powers of UK regulators but the need for future changes to financial regulation in the UK to be subject to the appropriate scrutiny. The committee acknowledges that the much greater flexibility that the UK will have post Brexit to revise and reform financial regulation, regulators’ rulebooks and so forth, including regulatory enforcement, is an opportunity that none the less needs the appropriate checks and balances.

The committee was not alone in recognising this need. It was also the conclusion of a recent report from the IRSG—the International Regulatory Strategy Group, which the noble Baroness mentioned—produced with Linklaters in December 2017, just as our committee was finishing its report. At the launch of its report, The Architecture for Regulating Finance after Brexit, the IRSG stated that,

“Brexit will require the UK to update its regulatory structure for financial services, creating new checks and balances to ensure the system remains proportionate, coherent and fit for purpose”.

It is an interesting report. It sets out five principles for an effective regulatory framework and makes some useful recommendations for consideration. These recommendations cover powers, resources, responsibilities, scrutiny and oversight of UK regulators; the legislative and regulatory process; consultation and review mechanisms; and, importantly, it includes proposed checks and balances that should apply where regulatory change in the UK would produce material divergence from the EU 27.

The challenge that both our committee and the IRSG report recognise is that while the current regulatory landscape may have served the UK effectively in a pre-Brexit world, it will need to be reformed to be fit for purpose in a post-Brexit world. However, as the IRSG states in the foreword to its report:

“There is … an opportunity for targeted reform following the UK’s withdrawal from the EU in order to maintain and enhance the UK’s position as an international financial centre underpinned by a trusted and globally leading regulatory system, that delivers the best possible outcomes for customers and clients”.


Updating the United Kingdom’s regulatory landscape in anticipation of Brexit is an opportunity that the Government, regulators, Parliament, the industry and others must be thinking about now. Any necessary reforms ought to be put in place for when they are needed, not thereafter.