This blog is the first in what is intended to be a short series, discussing the UK’s possible approach to regulatory reform after Brexit and COVID-19. In this first blog, we set out the UK’s likely direction of travel and some of the trade-offs it will have to consider as part of its approach. Subsequent blogs will explore some of options the UK may decide to take when it comes to prudential and conduct regulation respectively.


The UK’s financial services regulatory system is poised to change. The UK’s departure from the EU, and the UK Government’s desire to “take back control” of the UK’s regulatory framework, will give the UK the freedom to diverge from future EU financial services regulation and to revisit and revise its implementation of existing directives and regulations. In addition, a sharp economic contraction triggered by COVID-19 and the resulting lockdown have put a renewed focus on generating economic growth and employment opportunities in order for the UK to recover and exceed its lost economic output.

In these circumstances, the UK Government may try to use financial regulation to support its wider policy objectives related to its regional “levelling up” agenda, and a desire to see more green and infrastructure related investments. It could also be attracted to revisiting major pieces of the UK’s financial services regulatory system in order to try and enhance the competitiveness of its financial services sector and to boost the country’s economic growth.

Indeed, it seems this process is already underway. In June, the Chancellor of the Exchequer gave a statement in which he started to map out a path for where the UK would diverge from EU regulation. The UK Government has also proposed a White Paper on the Future of Financial Services (as a prelude to the Financial Services Bill announced in the Queen’s Speech) and begun to consider other changes through its Future Regulatory Framework Review. Regulators have also begun to outline opportunities for change, with the Financial Conduct Authority (FCA) having committed to undertake a review of its regulatory handbook once the Brexit process has been completed.

Given this, what regulations are the UK Government, and its financial regulators, most likely to reform, revise or revisit, in order to boost the UK’s growth and competitiveness?

Is the UK inclined to adopt lower standards?

Some commentators [1] argue that UK policymakers have a preference for fewer and less stringent regulations than their European counterparts, and that once the UK has regained its regulatory autonomy it is likely to use this to embark on a programme of significant deregulation which will lead to it having a radically less burdensome regulatory system when compared to the EU.

The reality is more complex. In a number of areas, the UK has in fact chosen to adopt more stringent regulations than it is required to by EU law, or in comparison to other European countries’ domestic regulation.

The UK’s Retail Distribution Review (RDR) introduced an outright ban on financial advisers receiving commission or financial inducements, as well as tough new qualification standards for financial advisers themselves. Most European countries have commission‑based advice sectors and less restrictive rules on product distribution than those in the RDR.

Following the Vickers Commission’s review of banking, the UK implemented a “ring fence” between retail and investment banking activities, requiring separate legal entities for retail and investment banks and a clear division between the activities and funding sources for each of these. No EU member state requires such a complete and substantive split.

The UK has a strict accountability regime for senior managers in the form of the Senior Managers & Certification Regime (SM&CR). While countries such as Ireland and the Netherlands both have accountability regimes, most major European economies do not, and this is another area where the UK has gone beyond what is currently required by the EU rulebook.

The UK also has what is often considered to be the most well developed conduct regulation of any EU state, with a focus on fair pricing and vulnerable consumers that is often absent in other countries.

All of this paints a rather more complicated picture than the one in which the UK is determined to adopt lower standards. Instead, the UK may well look to strengthen its standard of regulation, where it has hitherto been unable to do so because it has been constrained by maximum harmonising EU Regulations, even as it seeks to reform or deregulate in other areas. In this case, “deregulation” need not mean adopting lower or less rigorous standards, but instead could be an opportunity to enable firms to meet the same high standards in a less burdensome way. In other words, deregulation of process and reducing “red tape”, rather than a lowering of standards.

The art of the possible

This said, many of the aforementioned regulations were adopted in the aftermath of the global financial crisis when the political and popular consensus was for much stronger regulation, and there would be no formal constraints stopping UK policy makers revisiting these regulations in future.

In fact, if we look back only 15 years we can see how quickly the way in which politicians talk about financial regulation can change. In 2005, then UK Prime Minister, Tony Blair gave a speech on “Risk and the State”, in which he said there was pressure on government and regulatory bodies to “to act to eliminate risk in a way that is out of all proportion to the potential damage”. He then went on to single out the Financial Services Authority (FSA), the UK’s financial services regulator at the time, for criticism, saying that “something is seriously awry when…the Financial Services Authority that was established to provide clear guidelines and rules for the financial services sector and to protect the consumer against the fraudulent, is seen as hugely inhibiting of efficient business by perfectly respectable companies that have never defrauded anyone.”

This criticism triggered a disconcerted response from the then FSA Chairman, Sir Callum McCarthy, who wrote a letter to the Prime Minister defending the FSA’s approach and outlining the various ways it had acted to minimise the regulatory burden on firms. Specifically, Sir Callum pointed to the FSA’s use of cost-benefit analysis to justify any regulatory requirements, and its use of “risk-based” regulation which meant that supposedly low risk activities or firms received less regulatory scrutiny. This was all part of what Sir Callum said made the FSA a “world-leading regulator”, and chimed with the mood in HM Treasury, which at the time spoke approvingly of the UK’s “light touch” approach to regulation.

While much of this language may look alien to today’s regulatory debates, there is no guarantee that the political pendulum will not start to swing back towards where it stood before the financial crisis, in which case more radically deregulatory options could become more likely.

An outcomes‑based approach

One major regulatory change that has already been signalled by senior UK regulators is a shift to a more outcomes‑based system of regulation.

In a speech of April 2019, Andrew Bailey, then FCA CEO, said he would favour a “same outcome, lower burden” approach to financial regulation once the UK had left the EU and called for the UK to adopt an “outcomes-based regulatory system” rather than one based on highly prescriptive rules.

This is a view that has also been echoed more recently by Interim FCA CEO, Chris Woolard, who in July 2020 said that the FCA had “an opportunity to look again at our rulebook, focusing less on tick box compliance and more on promoting outcomes that serve the public interest.”

In a speech of May 2019, the PRA’s CEO, Sam Woods, also addressed this issue. His speech focused on the “style” of regulation after Brexit, noting that the UK regime needed to have “proportionality” and be more dynamic and responsive.

These views from senior regulators suggest an upcoming focus on reducing burdensome rules and detailed requirements and instead focusing on the high level outcomes that regulators want firms to achieve. The FCA’s forthcoming handbook review and revisiting of its high level Principles for Businesses could both prove to be major opportunities for the FCA to implement this new approach.

While this may alleviate firms of some day-to-day compliance concerns, it is likely to place more power in the hands of the regulator and increase the importance of their supervisory judgements. A supervisor’s view of a firm and whether it is meeting the intended regulatory outcomes will come to hold more weight, and supervisors may in turn find it even more difficult than it is today to treat firms in the same peer group consistently. Furthermore, as “outcomes” come to supersede “process”, firms will be less able to rely upon a defence of having followed the right policies and procedures should misconduct or other regulatory breaches occur. Consequently, while firms may welcome a simplified approach to process and procedures, they may in fact find other aspects of this approach more intrusive and burdensome.

What factors will policy makers consider?

UK politicians and regulators will want to weigh a number of competing factors when they consider where and how they should diverge and deregulate.

The first of these will be the public perception of any regulatory reforms. Whilst the general public is unlikely to take much interest in the vast majority of financial services regulation, more contentious reforms are likely to be picked up by the media and consumer groups, and may trigger a public backlash. It stands to reason that deregulating retail conduct rules are likely to prove more politically contentious. Few politicians will want to risk headlines about them repealing protections which could be seen to allow financial services firms to exploit consumers, especially given that a level of public hostility towards the sector still lingers from the financial crisis. Consequently, politicians may find they have greater scope to reshape regulations governing wholesale financial markets, as these are less likely to generate the same level of general public interest.

The other major consideration will be the costs involved in making any regulatory changes. The more the UK changes its regulatory system, the greater the one-off adjustment costs for firms and the greater the ongoing cost of firms which operate across both the UK and EU from having to comply with two different regimes. This will have a much greater effect on firms with extensive cross-border operations, while those that are purely domestic will not face any additional ongoing costs.

In order to decide whether the aforementioned costs are worth it, politicians and regulators will be obliged to undertake a cost benefit analysis (as part of a regulatory impact assessment) before embarking on any sort of deregulation which would shift the UK away from the EU rulebook.

In a market such as retail banking, where most firms are serving domestic customers and there is limited cross-border activity, most of the costs of regulatory change will be one offs, as firms will not need to comply with a second set of rules. In these circumstances, the benefits of a bespoke UK related regime may outweigh these one‑off costs. However, in areas such as trading and investment banking, which are far more international and globally integrated, firms may actually face additional costs from having to comply with both UK and EU regulatory regimes, even if the bespoke UK regime is itself less burdensome; in this case a single set of more burdensome rules may be better than one set of more burdensome rules and an additional set of less burdensome ones.

This cost benefit analysis is further complicated by the various EU equivalence regimes the UK might reasonably expect to use to access EU markets. The UK is clear that future relationship with the EU must respect the sovereignty of both parties. However, if the UK decides to deregulate the rules for a particular financial market such that the European Commission finds that the UK’s regulations are no longer equivalent to its own, that would trigger a disruptive loss of market access and could impose a major cost to the firms in question. A loss of, or failure to obtain, equivalence in key markets would also be likely to generate significant negative public attention, making any reforms which would risk the UK’s regime becoming “non-equivalent” less politically attractive.

Most difficult will the case of markets where there is a significant yet limited amount of EU or cross-border activity. In these cases will the lower regulatory burden on purely domestic firms outweigh the additional costs that firms with EU business will face in having to comply with two regimes?

It is also worth noting that there is a tension between these two factors. Retail markets are likely to prove politically harder to deregulate, yet are also more likely to be domestic in nature. Reforms to wholesale markets may attract less political scrutiny, but are more likely to be international in nature. UK policymakers will face a major challenge in trying to balance these competing concerns in order to deliver a well regulated, stable and competitive UK financial system.

[1] Numerous sources advance this argument, with PRA CEO Sam Woods noting in a speech that he had heard concerns from EU officials “that having escaped the “shackles” of EU regulation we [the UK] would embark on a course of weakening financial regulation”