The Financial Services Bill will keep the UK competitive on the global stage
Written by Gareth Davies MP, who was elected as Member of Parliament for Grantham and Stamford in 2019, and formerly served as director of a global asset management firm.
Today, the Financial services Bill will be debated at the Committee stage in parliament. Although there are many different provisions within the bill, for me, it serves key three purposes: enhancing our standards, strengthening our rules and increasing our openness.
After having enjoyed a long and happy career in asset management, this third aspect about openness with respect to retail investment funds is important to me. The bill seeks equivalence for retail funds, the practice of declaring another country’s regulation equivalent to one’s own, allowing them to do business and sell their funds in the UK.
Today over 8,000 retail investment funds sold in the UK come from and are domiciled in the EU, indeed 75 per cent of the total number of retail funds sold in the UK are SICAVs using a regulatory passport.
These funds bring greater competition and choice to UK investors so that they can seek out higher returns, lower fees and greater diversification. It is thus necessary that these funds continue to be sold in the UK to keep our market competitive for investors.
After the transition period and without the Financial Services Bill, maintaining equivalence and access to all these funds would prove extremely challenging. It would require us to grant equivalence for each UCITS fund on a case-by-case basis as we do for funds outside the EU.
This system already creates great delays and increases the operational costs to investment firms.
The bill deals with this problem in the immediate term by extending the Temporary Marketing Permissions regime to 2025, giving all EEA funds equivalence automatically till 2025 preventing any cliff-edge, and in the long-term - creates the Overseas Funds Regime, Britain’s new mechanism for declaring overseas funds equivalent. This regime allows the FCA to evaluate each country’s regulation so it can grant all their funds equivalence in bulk. As well as benefiting consumers, the Government estimates the regime will save GBP29 million from lower administrative costs.
But how exactly does the Overseas Fund Regime work? To declare a country’s funds equivalent, they must provide equal or greater protection to the consumer. This aspect of the Overseas Fund regime highlights the UK’s innovative ‘outcomes-based’ approach to equivalence.
The outcomes-based approach declares regulation equivalent if it achieves the same goals just as well, be it financial stability or consumer protection. It focuses on outputs not inputs.
The EU prefers a rules-based approach judging equivalence by whether it follows exactly the same granular demands and formulas.
This innovation creates key advantages for the UK.
Firstly it creates flexibility. Different countries have designed their regulations differently and they have evolved different practices, even though they focus on the same key goals such as financial stability and consumer protection. To make our country as competitive as possible we shouldn’t just be looking to the EU. The U.S. and Australia for example all have different ways of arriving at the same high quality standards.
The rules-based approach on the other hand is a granular, overly bureaucratic approach and unnecessary. It costs more and takes more time yet results in the same outcome at best. Andrew Bailey last year, then as the CEO of the FCA, pointed out that the outcomes-based approach allows countries to achieve the same outcome with a lower burden.
The Overseas Fund Regime and our outcome-based equivalence represents a generous, flexible and open position. However to sustain competition we also need foreign governments to provide equivalence to others and as such the Government must work to ensure that regulation does not become politicised.
Last year for example, the EU removed equivalence from stock exchanges in Switzerland. This was not related to the quality of Switzerland’s regulations, it was a punitive response to Swiss labour laws that happened to put Swiss citizens first. It also acted as a not-so-subtle message to the UK - the EU can use equivalence as a weapon.
Of course we believe in sovereignty - the fundamental principle of equivalence is that a government can unilaterally decide whether another nation’s regulation is equivalent. But when this principle is taken to an extreme, it can politicise regulation and undermine mutual understanding. Instead we must engender trust with others and encourage all to work constructively together and avoid unhelpful politicking.
I am proud to be supporting the Financial Services Bill today for it will ensure that our market is open, pragmatic and strong - that is surely an outcome we can all get behind.