Financial regulatory reform rolls on despite Westminster turmoil

As Westminster shenanigans over leadership persists, Parliament is due to work on several important pieces of financial reform, Paul Montague-Smith, senior counsel – public affairs at MRM, writes.

When can something truly be and not be at the same time? In politics of course. The contest for the leadership of the Labour Party is well and truly underway, despite one not having formally started.

While Wes Streeting says he has enough MPs to start a challenge, he also says he wants to wait for Andy Burnham to be elected to Parliament so there can be a proper contest. Given it’s clear Burnham would easily win a head-to-head between the two of them, you’d be forgiven for thinking that Streeting must be hoping Reform will throw a big spanner in Burnham’s push for the premiership.

The argument on which direction the party needs to take has also hotted up with the intervention of Labour’s most successful Prime Minister, Tony Blair. Blair thinks the party is directionless, does not understand the strategic challenges facing the country, has failed to live up to its rhetoric on growth as its central mission and that changing leader without having a proper plan is doomed to failure.

In the meantime, Keir Starmer continues to try and focus on delivering his agenda. The opening of the new session of Parliament includes plans for 34 pieces of legislation covering: nationalisation; closer ties with Europe; social housing; leasehold reform; education and voting; police and courts reform; energy and nuclear; asylum and immigration; national security and a range of others.

Importantly, it also includes yet another Financial Services and Markets Bill. The legislation aims to simplify regulation and support lending to spur growth, reform the Financial Ombudsman Service (FOS) and make consumer redress quicker and easier, while also helping the growth of credit unions. The Consumer Credit Act is also to be reformed, with as much as possible being rolled into the FCA rulebook. The Treasury will also take a power to protect access to banking services, given the rise of digital banking and closure of local branches.

On the FOS, industry will welcome the plans to prevent it acting as a quasi-regulator and require it to reflect FCA rules in their historical context, as well as the plans to ensure the FCA can better respond to any future mass redress events that may emerge (which hopefully will be less likely anyway following other overdue reforms to the claims management industry).

The bill will implement another round of regulatory musical chairs by abolishing the Payments System Regulator and rolling its functions into the FCA. When making its rules, the FCA will no longer need to consider each of the ‘have regards to’ requirements currently in legislation. Instead, it will need to consider them only in its overarching strategy.

In practice the change will give the FCA a freer rein in its day-to-day operations. The Senior Managers Regime will also be reformed to reduce costs and regulatory burdens on firms, while preserving individual accountability. The FCA will also no longer have to annually report on a range of issues, such as how it has complied with its duty to promote competition.

One area likely to generate debate is the reform of the ring-fencing regime for banks. The ring fence was introduced after the 2008 global financial crisis to separate the retail and investment banking operations within banks, supposedly protecting depositors and governments from any reckless investment banking practices that could threaten financial stability and leave a big bailout bill for taxpayers.

While the ring fence has been solid to date, the government argues that its rigidity limits its ability to evolve with prudential standards, market practice and firms’ business models. It’s therefore seeking to reduce the detailed requirements in primary legislation and enable some flexibility in how it operates.

The bill also gives the Government power to more easily amend legislation covering cryptoassets so that it can respond to developments more quickly when tackling criminal activity, and changes aspects of how exemptions and permissions for Appointed Representatives and Principals work.

The bill has been introduced first to the House of Lords, so anyone who wants to engage in the process to shape its outcome will need to move fast, as it is generally only in the Lords where amendments to government legislation are made. The bill’s Second Reading, at which its general principles are debated, is scheduled for 8 June.

Separately, the Pensions Commission has published its interim report on the state of retirement saving, which confirmed that some 15 million people are currently undersaving for their life after work. Some 45% of working-age adults are not saving into a pension at all, despite nearly half of them being in work. So along with the big issues around adequacy, it’s clear there are also major barriers to starting to save that need to be overcome.

With the House of Lords Financial Services Regulation Committee having also launched an inquiry into the regulation of the consumer insurance market, politics and policy as it relates to the financial services sector certainly isn’t slowing down any time soon.