FCA publishes a draft Rule Review Framework

What's new?

On 14 July 2023, the FCA published a new webpage outlining its draft Rule Review Framework. The FCA is seeking feedback from industry about its Framework by 15 September 2023.

The draft Framework was created in the wake of the recently enacted Financial Services and Markets Act 2023 (FSMA 2023), which overhauls many of the FCA's and PRA's regulatory competencies and obliges both bodies to keep their rules under review generally.

Under its new Framework, the FCA outlines:

• Scope of the Framework;

• Policy-making Cycle;

• FCA's approach to reviewing new and existing rules;

• FCA's methodology;

• Three different types of reviews; and

• FCA's immediate priorities

We look at each of these topics in turn below.

What is Rule Review Framework?

Scope

• The new Framework would apply to all rules found in the Handbook as well as any guidance, waivers, modifications and related materials.

Policy-making Cycle

• The FCA scans the horizon for potential harms, such as markets working poorly or not providing clear benefits to users.

• It then diagnoses potential cause, extent and development of such harms as part of its knowledge-gathering exercise.

• When the FCA understands the problem, it considers appropriate measures to remedy it.

• Next, the FCA reviews the effectiveness of its remedies and assesses any further changes.

Approach to reviewing New Rules

• For rules introduced under the Framework, the FCA would first determine whether it wants to actively monitor the rule.

• If so, the FCA would set its intended objectives and outcomes at the policy development stage together with key metrics and intermediate steps.

• Once the rule is in force, the FCA would collect and monitor data to assess whether the rule is on track to meet its objectives.

• If the data suggests the rule is not working as intended, the FCA would examine its next steps, including quick fixes or conducting an evidence assessment with follow-up measures.

Approach to reviewing Existing Rules

• The FCA would review existing rules in the Handbook if there is evidence the rule is not working as intended or where it wants to know its overall effect on the market.

• If there is evidence the rule is not working as intended, the FCA might commission an evidence assessment.

• Depending on the outcome of its evidence assessment, the FCA would then pick the best response option.

Methodology

• The FCA would align its metrics for rules with its organisational strategic outcomes as set out in its Strategy and Business Plan.

• It would also collect data from a multitude of sources, including stakeholder feedback, FCA surveys and supervisory work.

• A costs and benefits analysis (CBA) would then be applied to assess whether rules have changed the market compared to the previously recorded baseline.

What are the different types of reviews?

• Evidence assessment would be undertaken where data from monitoring or stakeholder feedback indicates rules are not working as intended, and the FCA wants to know why.

• Post-implementation reviews would be commissioned if there is evidence the rules are not working as intended, and the FCA expects that significant data analysis and stakeholder engagement will be required to solve the issue. As part of its review, the FCA would consider unintended consequences, firms' compliance, implementation issues and the wider market context.

• Impact evaluations are conducted when the FCA wants to quantify and analyse the impact of its intervention on the market. The FCA envisions doing one such evaluation per year.

FCA's immediate priorities

The Framework comes at a time when the FCA is expected to introduce a host of new rules across the entire financial services landscape. For example, it will be doing significant work on creating the UK Smarter Financial Services Framework.

Following the enactment of FSMA 2023, it will now be the responsibility of the FCA to create firm-facing requirements in places where retained EU law previously applied. Public Offers and Admissions to Trading Regime (replacing the Prospectus Regulation), UK Retail Disclosure Regime (replacing PRIIPs) and the Securitisation Regulation are among the areas that will soon require FCA attention to fill the vacuum.

On the other hand, the FCA notes that its new outcome-focused Consumer Duty means there will be fewer prescriptive rules in areas where it applies. Likewise, despite significant workload associated with retained EU law, the FCA maintains its commitment to conduct at least one impact evaluation per year.