FCA on building the future regulatory environment: ‘change will come’

The CEO of the UK’s Financial Conduct Authority, Nikhil Rathi, has tackled the unenviable challenge of building a future regulatory environment in his City Week 2021 address.

In a year – almost two years – dogged by a global pandemic, Rathi focussed on more perpetual changes, those of Brexit, UK market openness, sustainability and cross-border partnerships.  

Post-Brexit regulation – fewer barriers to UK market, but still few listings

At the close of 2019, the FCA’s Nausicaa Delfas noted that “It has been 10 years since the financial crisis and the subsequent reforms we put in place, and now is the right time to review our approach to regulation. And Brexit provides added impetus to look at things again.”

Rathi seems to echo this sentiment, adding that “leaving the EU has given us the freedom to tailor our rules to better suit UK markets”. Following the UK’s departure from the EU, the FCA has moved to remove “unnecessary” barriers to entering UK markets, while maintaining “high, internationally consistent and outcome-driven standards”.

In this new, post-Brexit era, the FCA is revisiting existing regulatory obligations, such as best execution reporting under MiFID, as well as the broader MiFID regime, including market structure reforms, improved access to market data and the operation of the transparency regime.

Despite new freedoms and the removal of barriers to UK markets, the FCA has noted a 48% drop in companies listed within the UK, since 2008. In response to these findings, the FCA is consulting on conditions by which it will cease the suspension of listings by Special Purpose Acquisition Companies (SPAC) – in order to align more closely with international markets. Moreover it is bringing forward a consultation exploring other potential barriers to companies listing, in a bid to “increase opportunities for investors without compromising on safeguards”.

The UK is open to business, but the FCA still has standards (especially for crypto)

Under the Temporary Permissions Regime (TPR), there are 1,450 EEA firms currently accessing UK markets. As the FCA explores a more permanent arrangement, it notes that it will be conducting a “rigorous review” of all firms, to ensure they meet “high standards”.

Since the end of the transition period, the FCA has taken action to restrict the business activities of 13 firms and is taking steps to remove 120 firms from its “regulatory perimeter”. This is especially true for cryptoasset firms, of which the FCA has identified many that are failing to meet money laundering regulations, and 111 that are operating without registration.

The FCA walks a tightrope here, on the one hand it must encourage an open, flourishing market, on the other, it cannot let industry standards slip.

International partnerships, and extending the ESG disclosure rules

In the wake of the UK’s departure from the EU, Rathi highlights that “our partnerships with one another” have never been so important. This is especially true of emerging issues, such as sustainable finance, crypto and ESG factors.

It is with this in mind that the FCA is negotiating for a cross-border financial services agreement with Switzerland (UK financial exports to Switzerland amounts to £2.2 billion in 2020). It is hoped that such an agreement will unlock both trade and investment in a partnership that will still respect one another’s autonomy. As well as this, the FCA is working with Singapore on innovation and technology, and with India on a Comprehensive Strategic Partnership.

ESG and sustainability – new hires, extended regulations and emerging disclosure standards

With regard to sustainable finance, the FCA highlights that it has newly appointed its first Director of ESG, Sacha Sadan, and is pioneering in its efforts to introduce climate-related financial disclosure requirements.

Rathi took the opportunity in his speech to City Week, to announce that the FCA will be extending such disclosure requirements to cover issuers of standard listed equity shares (around 150 more issuers, accounting for £1 trillion in market capitalisation).

Moreover, Rathi added that the FCA is working towards much-needed reporting standards for ESG for the future regulatory environment, as part of the International Organization of Securities Commissions (IOSCO) Sustainable Finance Taskforce.

CUBE comment

The FCA has confronted the post-Brexit landscape with admirable optimism, looking to focus on the opportunities rather than the challenges. Rathi’s latest speech is broadly in line with this rhetoric, but I can’t help but feel that the FCA is putting on a brave face.

While Rathi is keen to talk about the FCA’s new-found “freedom” and “flexibility” following Brexit, his comment “although we have advocated for mutual equivalence with the EU, this has not generally been forthcoming” pertains to unspoken challenges. Indeed, the FCA seems to be relying chiefly on its temporary transitional power to circumnavigate “conflicts”, especially between the EU and UK’s share and derivative trading obligations.

The “issues” may be “managed”, but without mutual equivalence there is only so far that a temporary regime can go to patch cross-border regulatory gaps. As Rathi points out, “the absence of mutual equivalence creates market inefficiency and reduces choice and competition.”

In time, the absence of equivalence will inevitably become unsustainable… what the future regulatory environment will look like after such a time is anyone’s guess. Rathi notes that “cooperation [with our EU counterparts] is generally working well”. Hopefully, it is working well enough to eventually form a regulatory regime that works for all.

On a more positive note – Rathi sets out the FCA’s expectations that, within 5 years’ time, “sustainable finance will be mainstream globally” and “leaving the EU will have transformed the way we develop regulation in the UK” (though he does not say whether it will be for the better).

I’ll end on remark’s made in Rathi’s opening statement:

“Change cannot always be predicted, what is predictable is that change will come. And quickly.”