Clifford Chance

On 9 May 2023, HM Treasury (HMT) published a 'Call for Proposals' on measuring success in relation to the new secondary growth and competitiveness objectives for the FCA and the PRA to be introduced under the Financial Services and Markets Bill 2022-23 (FSM Bill). While the introduction of the new secondary objectives has been welcomed by the insurance industry, concerns have been raised about how the UK regulators will be held accountable under the new regime.

During the passage of the FSM Bill, stakeholders and parliamentarians made it clear that public metrics are essential to support the review of regulatory performance. The government agrees that such metrics are an important part of the transparency that is crucial for effective scrutiny and accountability. The FSM Bill was therefore amended at the Committee stage to include new FSMA "accountability mechanisms" including a power for HMT to direct the regulators to publish information. Industry participants are now asked in the Call for Proposals to provide input on the information or metrics that the UK regulators should publish to demonstrate that they facilitate growth and international competitiveness in a meaningful manner.

FSMA accountability

The UK model of financial services regulation is underpinned by the framework set out in the Financial Services and Markets Act 2000 (FSMA). The FSMA model delegates the setting of regulatory standards to the PRA and the FCA, who are operationally independent regulators that work within an overall policy framework set by the government and Parliament. This model includes several accountability mechanisms designed to hold the regulators to account for the achievement of objectives set by Parliament.

An example is the requirement for the UK regulators to consult with the public on proposed rules. Through consultations, regulators are required to explain how proposals advance their objectives. Another example is the requirement of the FCA and the PRA to produce annual reports. Among other things, these annual reports must cover how the regulators have, in their opinion, advanced their objectives. HMT may direct the regulator to include additional matters in such reports.

In the Call for Proposals, HMT explains that in the years since FSMA was introduced in 2000, and following the 2007-09 global financial crisis, EU financial services regulation expanded into new areas and became significantly more detailed, which has affected the operation of the FSMA model. Specifically, it complicated the split of regulatory responsibilities established by FSMA and constrained the regulators’ ability to determine the most appropriate regulatory requirements for UK markets, since they were required to apply EU requirements and operate within the EU framework. In the UK, the restrictive EU regulatory approach was most evident in the application of certain aspects of Solvency II, including the risk margin and matching adjustment, since the UK insurance sector conducts substantial amounts of long-term business with guarantees, such as annuities.

Legislative reform

The Future Regulatory Framework (FRF) Review was set up in 2020 to determine how the financial services regulatory framework should adjust to the UK's new position outside the EU. As well as reforming Solvency II for the UK insurance market, other aspects examined included the introduction of new growth and competitiveness objectives for the FCA and PRA, a move many in the insurance sector have long been hoping for.

The call for a competitiveness objective followed the introduction of the UK's new insurance-linked securities regime in 2018. The regime had been designed with extensive industry engagement to compete against established ILS jurisdictions but largely failed to gain traction, arguably because of overly stringent oversight by the PRA which meant that ILS applications were not approved to the timescales needed. The PRA's approach also deterred applicants from launching vehicles designed for innovative transactions, such as collateralised reinsurance, which the UK regime was designed to accommodate.

The FRF Review proposed introducing a secondary competitiveness and growth objective for the PRA and FCA, which balances the need for the regulators to consider competitiveness whilst not having this undermine their existing, primary, statutory objectives. However, stakeholders argued that legislative changes to enable the UK's competitiveness were insufficient to achieve the desired results. Instead, meaningful changes could only be made by increasing regulatory accountability and review. The London Market Group (LMG), for instance, published a paper 'Metrics for success' in May 2022 in which the LMG argued that words are not enough and proposed several measures and metrics, such as reporting on new authorisation applications, which would allow effective implementation of the new objectives.

The FSM Bill, which will deliver the FRF Review reforms, includes several provisions aimed at strengthening regulatory accountability to, and scrutiny by, Parliament and the government, via HMT. These provisions will require the UK regulators to improve Parliamentary engagement, embed further considerations in their policy-and-rule-making process and consult new statutory panels (such as the PRA Practitioner Insurance sub-committee) as part of their cost-benefit analysis development.

New accountability mechanisms

In the FSM Bill, HMT introduces two new accountability mechanisms which are particularly relevant for the new secondary objectives, namely:

• A requirement for the regulators' annual reports to include an explanation of how, in their opinion, their objectives have been advanced, including the new secondary objectives (Clause 26 of the FSM Bill).
• A power for HM Treasury to direct the regulators to publish information where ministers consider it is reasonably necessary for the purpose of reviewing and scrutinising the discharge of the regulators' functions (Clause 37 of the FSM Bill).

Clause 26 does not have the same significance as Clause 37. To ensure its proportionate exercise, the power conferred by Clause 37 will include several protective measures. The power can only be exercised where HMT considers that the information is "reasonably necessary" for the purpose of reviewing and scrutinising the discharge of the regulator’s functions, where other available information is not sufficient to meet that purpose. The wording, therefore, gives HMT considerable discretion and could, for example, allow HMT to direct the regulator to publish information on how it has acted compatibly with and advanced its objectives or its wider operational effectiveness where existing material is not sufficient. In most cases, the government expects that where it is reasonably possible to gather and publish the information, the regulator will do so on its own and that this power will be exercised by HMT sparingly and with all other avenues of disclosure having been exhausted.

The UK regulators already publish several regular indicators on meeting their statutory objectives, such as indicators for operational service authorisations, which are published monthly. This includes, for instance, the percentage of change of control requests that are completed within 60 legal days of receipt of a 'complete' notification or new authorisations which are completed within 12 months of receipt of such update. However, the metrics are not reflective of the practice experienced by firms. This is due to the flexibility that the PRA and the FCA have on deeming an application 'complete' and which can have the effect of significantly extending the length of time involved in approving an application, especially where a case handler is not available at the outset.

Going forward, it might be more helpful for additional metrics to be discussed such as the average time it takes to assign a case handler and/or data on the number of applications which have been rejected. This could include summary trend data on reasons for rejections and case studies on common problems and would be useful to understand PRA decision-making, especially for ILS and new insurer applications.

Next steps

The Call for Proposals closes on 4 July 2023. HMT will then discuss the proposals with the PRA and the FCA. This will include the question of whether it would be more appropriate for the regulators to publish proposals, or whether the government or another body would be more appropriate.

The UK regulators may also choose to publish multiple measures proposed by respondents, either as part of their annual reports or as separate and more frequent publications. The government considers that a quarterly report is probably the right interval for this report, but it is open to proposals.

Industry participants are therefore invited to participate in the Call for Proposals to bring about a long-awaited change in UK regulatory culture.