Draft Financial Services and Markets Act 2000 (Disapplication or Modification of Financial Regulator Rules in Individual Cases) Regulations 2024

Adam Afriyie Excerpts

Monday 15th April 2024 General Committees

[The Economic Secretary to the Treasury (Bim Afolami)]

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Disapplication or Modification of Financial Regulator Rules in Individual Cases) Regulations 2024.

The regulations form part of the Government’s programme to deliver a smarter regulatory framework for financial services, using an approach to regulation that is tailored to the needs of the United Kingdom. Under this programme, the Government are delivering a regulatory framework that is logical, consistent and conducive to economic growth—rather like the Government as a whole—while preserving the robust regulatory standards that are the cornerstone of the attractiveness of UK markets.

The ability of a regulator to flex the application of its rules for individual firms is a useful regulatory tool that can enable a regulator to take into account a firm’s specific circumstances to ensure that rules are applied in ways that achieve the best regulatory outcome. That flexibility is not new; it has long been a feature of the UK’s regulatory regime and is supported by our regulators and the financial services industry as a whole.

Since it was introduced over 20 years ago, the Financial Services and Markets Act 2000, known as FSMA, has included such a tool. However, as part of our work to adapt our regulatory regime for the UK’s new position outside the European Union, the existing tool for flexing the application of rules was reviewed, and it was concluded that, while useful, it was not as effective as it could be.

The existing tool is provided by section 138A of FSMA, which provides that the Prudential Regulation Authority and the Financial Conduct Authority can disapply or modify a rule made under FSMA if a firm has requested it or if the regulator has the consent of the firm. However, section 138A contains a test that must be met before a regulator can do that. The regulator must be satisfied that the rules in question

“would be unduly burdensome or would not achieve the purpose for which the rules were made”.

That requirement in section 138A does not always allow for rules to be flexed, even where appropriate disapplication or modification of such rules would provide a better regulatory outcome.

The Government addressed that issue by introducing a new tool for regulators to flex their rules in a wider range of circumstances, which was legislated for through the Financial Services and Markets Act 2023 and is now set out in section 138BA of FSMA. Under section 138BA, the Treasury may specify regulatory rules that the relevant regulator can then permit a firm to disapply or indeed modify in some way. Section 138BA retains the approach by which a regulator can permit a firm to disapply or modify rules only if the firm requests it or the firm consents.

[Adam Afriyie (Windsor) (Con)]

On a point of clarity, I chair the all-party parliamentary group on financial technology, and I am conscious that many firms have been very firmly nudged to request the removal of licences, particularly around payments and onboarding of new customers. Just to be clear, are these regulations needed retrospectively to cover a lot of those voluntary submissions of licences, or is this purely a tidying-up exercise for the future?

[Bim Afolami]

I thank my hon. Friend for that point, and I will respond to him in two ways. First, this is typically about looking prospectively forward, so it is not envisaged that this power will be used retrospectively. However, I will write to him if the position is in any way more nuanced than I have just described. Secondly—I was going to come to this point later in my speech, but I may as well answer it now—it is very important that firms have appropriate dispute resolution mechanisms. Those are set out to make sure that no firm, under any circumstances, will be forced—or nudged—to do anything that it does not think is in its interest.

The regulations do two key things. First, they enable the PRA to permit a firm to disapply or modify any PRA rule. After careful consideration, the Government have concluded that the PRA should have the ability to permit a firm to disapply or modify any rule under section 138BA. That is because flexibility in the application of these rules is particularly important for banks, large investment firms and insurers that are regulated by the PRA. These complex institutions, with highly specialised business models, often require a highly tailored approach to ensure that they are appropriately regulated.

Secondly, the regulations apply certain procedural safeguards to PRA decisions under section 138BA, and this may address my hon. Friend’s point to some extent. When the PRA refuses a firm’s application or imposes conditions on a firm’s permission to disapply or modify rules, the PRA must issue a notice explaining its decision. When a permission to disapply or modify rules is given, the decision notice that the PRA publishes must be clear so that it is public knowledge that a particular firm is subject to tailored regulatory requirements. If an affected firm is aggrieved or somehow disagrees with a PRA decision, the firm may appeal by referring the decision to the upper tribunal, which is part of His Majesty’s Courts and Tribunals Service responsible for hearing appeals against decisions made by various public sector bodies, including the PRA.

In closing, these regulations make use of an important regulatory tool approved by Parliament in FSMA 2023. They provide the PRA with the flexibility needed to ensure that the application of prudential rules to banks, investment firms and insurers can be flexed only where appropriate to ensure that regulation of these large and complex firms is effective. They also ensure that the PRA is appropriately accountable and transparent. I hope the Committee will join me in supporting the regulations, and I commend them to the House.