Laura WilesThe International Regulatory Strategy Group (IRSG) has published its response to the House of Lords Financial Services Regulatory Committee’s inquiry into the FCA and PRA’s secondary international competitiveness and growth objectives introduced by FSMA 2023.
Given its international focus, the IRSG offered its views on the inquiry’s question as to whether the requirement within the secondary growth and competitiveness objectives to align with international standards creates any constraints to fulfilling those objectives.
The IRSG said it was essential for the UK to align with international standards, which would support and enhance its ability to meet the secondary objectives. However, it warned that in doing so, the UK ought to avoid imposing additional or unnecessarily stringent obligations which might undermine competitiveness. It encouraged the regulators to adopt an approach based on the following components in order to ensure the UK regulatory environment remains internationally competitive while achieving the secondary objectives:
- Clarifying approaches to international standards
- The IRSG called for clear and timely communication from the regulations, highlighting that while the PRA has outlined its suggested approach in its December 2023 Approach to Policy, the FCA has not updated its webpage on international standards since July 2022.
- Balancing proactive regulation with global competitiveness
- The IRSG acknowledged that efforts in developing measures on D&I, enforcement, ringfencing and the Consumer Duty reflect important domestic priorities, but asked the regulators to assess whether they will place UK firms at a competitive disadvantage in global markets.
- While it appreciated proactivity in ensuring a robust financial system, it urged that additional supervisory measures are proportionate to the risk and systematic importance of firms, so supervisory intensity does not create unintended burdens on firms. In this regard, it welcomed the PRA’s Small Domestic Deposit Takers regime.
- Encouraging greater interoperability of standards across jurisdictions
- The IRSG used the alignment between the International Sustainability Standards Board (ISSB) and the European Sustainability Reporting Standards (ESRS) as a key example.
- Interpreting international standards as ‘minimum standards’
- The IRSG agreed with the PRA’s view that international standards support a globally resilient system and enable firms to compete on a level playing field. However, it stressed the importance of a robust cost benefit analysis in cases where regulators propose going beyond international minimums.
- Tailoring international standards to UK needs
- The IRSG noted that regulators can tailor international standards where global frameworks feature built-in optionality or national discretions. Where there is no consensus on the creation or timing of global standards, it called for the FCA and PRA to use their international influence to trigger a reconsideration of the approach in order to avoid a competitive disadvantage for UK firms
- Regulatory divergence between the UK and key competitor jurisdictions
- The IRSG drew attention to the divergence between the FCA’s prudential regime for asset managers, which applies a more onerous approach to regulatory capital than its EU counterpart, as an example of the importance of carefully assessing the competitiveness impact of regulatory approaches, even with broadly parallel frameworks.