The Conservative leadership run-off has not been short of striking policy pledges, but one of the most significant is Liz Truss’ promise to repeal or reform all retained EU law (REUL) by the end of 2023. Rishi Sunak has said he’ll review all REUL in his first 100 days in office and identify which laws to scrap.
Both options would dramatically accelerate current policy – the Government has committed to repealing out-dated EU laws but not by a particular date. Reviewing all REUL is no mean undertaking to any timescale: 2,400 EU laws have been kept on the statute book. In effect the candidates have promised another round of ‘onshoring’ – the frenetic process of making EU laws work in a UK-only context that consumed Whitehall from 2017-2020 once the decision was made to retain virtually all EU laws for the sake of business continuity. Departments currently have very limited powers to amend REUL – although legislation is expected soon – so couldn’t begin repealing REUL right away anyway.
One of the areas where this pledge, if implemented, would have the most impact is financial services: at 374 pieces of legislation, the Treasury has the third highest number of REUL of any department. It is also the first to have published a comprehensive plan to repeal and replace them – the ‘Future Regulatory Framework for financial services’ (FRF), which provides a useful lens through which to analyse the feasibility and likely impact of the candidates’ promises.
Background
EU regulation in financial services was largely superimposed on the UK framework (via a category of EU law known as ‘Regulations’, which apply without the need for member state implementation) in a vast suite of legislative acts adopted by the European Parliament in the aftermath of the 2008-9 financial crisis. It is a truly vast body of law, with just one act – MiFID II – estimated to run to well over one million individual provisions, which has undermined the coherence of the UK financial services rulebook.
HMT therefore proposes to repeal financial services REUL in a staggered fashion and to simultaneously replace it with rules from the Financial Conduct Authority (the FCA) or Prudential Regulation Authority (the PRA, which sits in the Bank of England), which will be broadly similar in content but drafted in a UK law format. This will restore the structure established by the Financial Services and Markets Act 2000, whereby Parliament sets the overall approach and institutional architecture, HMT determines which financial activities should be regulated and the regulators (the FCA and PRA) set the direct regulatory provisions that apply to firms.
Assuming the Financial Services and Markets Bill, which will implement the FRF, receives Royal Assent in early or mid-2023, HMT and the regulators will begin consulting on and transferring REUL next year, likely replacing different major EU laws (know as ‘files’) sequentially, in a process expected to take up to a decade.
Importantly, financial services is an area where there is significant scope for divergence from EU rules as the EU-UK trade agreement includes very limited coverage of financial services. This reflects the EU’s preference for granting access to EU financial markets on a file-by-file basis in a supposedly technical process known as ‘equivalence’. That virtually no such decisions have been made in favour of the UK (despite the UK having identical laws) underscores that it is a highly political process and the prospect of meaningful equivalence remains slim. Overall, this means that the EU has no direct way of keeping the UK in its financial services regulatory orbit. Therefore, done right, divergence from EU rules is both possible and sensible – HMT has a free hand if it wants to make dramatic (or more limited) reforms.
Too much power to the regulators?
Industry doesn’t speak with one voice on deregulation – the UK’s financial services sector is large and diverse. Bigger firms with cross-border business models, who have already spent large sums on compliance with EU laws, have different interests to start ups or UK-focused firms.
Whilst particular industry objectives and priorities are likely to become clearer on a file-by-file basis, there have been few calls from trade bodies for a bonfire of REUL. In responding to HMT consultations on the FRF, trade and civil society bodies have instead focused on the need to create a framework where the regulators are properly accountable to Parliament, HMT and the industry they regulate. They have highlighted the current difficulty of challenging unnecessary rules or heavy-handed actions by the regulators and fail to see how giving them more power would rectify this.
HMT has proposed various measures in the bill to make the regulators more accountable to stakeholders, Parliament and HMT itself, but these fall well short of what bodies such as UK Finance have suggested. The unspoken fear is that the regulators – risk-averse and advancing a set of narrow objectives – will use their increased powers to gold-plate and supplement legacy EU requirements.
Whilst HMT has rejected calls for a new body to examine complaints against the regulators, it has proposed taking new powers to require the regulators to consider specified public policy factors when rewriting REUL and to require them to review rules where they aren’t working. That Treasury ministers are also concerned about losing control of the FRF was made clear by a recent public spat with Andrew Bailey, Governor of the Bank of England, about HMT taking a power to ‘call in’ and rewrite rules that aren’t functioning as intended. The current Chancellor, Nadhim Zahawi, has promised to consider this in more detail before making a final decision.
The FRF in a hurry
Some commentators – such as City lawyer Barney Reynolds – have called for the FRF to comprehensively rewrite REUL to eliminate the EU tradition of highly prescriptive rulemaking in favour of fewer, better drafted requirements that can be supplemented by judge-made common law. Without a significant increase in resources for HMT and the regulators, accelerating the repeal of EU law and doing all files simultaneously might lead to the unintended outcome of a financial services rulebook that looks different to its predecessor, but reads very much the same.
Dramatically speeding up the rewriting of REUL across all sectors is possible, but – as during the run-up to the various Brexit deadlines – doing so would consume much of Government’s time and energy and force a de-prioritisation of other legislation. The Government would have to switch off obligations to publicly consult on all rules replacing REUL, speeding the process up but reducing industry’s ability to scrutinise them.
Whilst setting an end date for this process would incentivise departments and regulators to prioritise the work, repealing REUL to a quick deadline would also limit the scope for anything more than limited policy changes. Our future prime minister should reflect on whether this is a workable or desirable method to apply across thousands of regulations, or if in fact the urge for an eye-catching deadline will be counterproductive and squander the opportunity for better regulation from a thorough and principled substantive review.
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