Yesterday, 12 March 2025, may well go down in the history books as a significant day for financial services regulation. Getting nearly all the big concessions out of the way in one day, the following developments were announced:
- Abolition of the Payment Systems Regulator (PSR), with its functions being transferred to the Financial Conduct Authority (FCA)
- Abandonment of the FCA and PRA's proposal for new rules on diversity and inclusion
- Delay until end of June for further consideration of next steps concerning non-financial misconduct
- Retention of the existing exceptional circumstances test for publicising investigations into regulated firms
We've written a few times about the FCA's plans for "naming and shaming" firms, as well as its plans to regulate "non-financial" misconduct more widely. In addition, in 2023, it consulted jointly with the Prudential Regulation Authority about improving diversity and inclusion in regulated firms. None of these proposals were exactly greeted with great glee by the industry, and the House of Lords Financial Services Regulation Committee went so far as to tell the FCA to regulate better.
Against that backdrop, the government has also been very clear that it wants regulators to help its growth agenda. It wishes to see a more streamlined regulatory environment which manages the burdens on all businesses, with minimal overlap between regulators' responsibilities and seeks to reduce red tape as much as possible. Therefore, the government has announced that the PSR will be abolished and its remit transferred to the FCA, following a smooth transition.
The government will consult on the details of this proposal over the course of the summer, and will legislate as soon as possible. There will not be any immediate changes to the PSR's remit or ongoing work programme, and the PSR continues to have access to its statutory powers until legislation is passed by parliament to enact this announcement. However, in the interim period, the PSR and FCA will take steps to work closely together, building on the recent recruitment for a joint PSR/FCA payments executive director. This aims to help realise the benefits of a streamlined regulatory environment and make the transfer of any functions to the FCA as smooth as possible.
Further announcements are likely, as the Government says that it will "set out further steps to reduce red tape in the coming days."
The FCA has also written to the House of Commons Treasury Committee and House of Lords Financial Services Regulation Committee to say:
- Given the lack of consensus, the FCA will not proceed with its
proposal to publicise an investigation into a regulated firm
carrying out authorised activity when a public interest test is
met. It will stick with its existing exceptional circumstances test
to determine if it should publicise investigations into regulated
firms. The FCA will, however, be proceeding with other aspects of
its 'naming and shaming' proposals, in particular:
- Reactively confirming investigations which are officially announced by others;
- Public notifications which focus on the potentially unlawful activities of unregulated firms and regulated firms operating outside the regulatory perimeter, where doing so protects consumers or furthers the investigation; and
- Publishing greater detail of issues under investigation on an anonymous basis, perhaps via a regular bulletin such as Enforcement Watch.
Further engagement is expected with stakeholders before a final policy statement is published by the end of June together with an updated copy of the FCA's Enforcement Guide.
- In light of the broad range of feedback received, expected legislative developments and to avoid additional burdens on firms at this time, the FCA and PRA have no plans to take the work on diversity and inclusion further.
- It continues to prioritise its work to tackle non-financial misconduct, which it believes can help to improve outcomes for markets and consumers and reduce harm. However, it also says that it realises its approach must be proportionate and aligned with planned legislation, so it is taking some further time to get this right and will set out next steps by the end of June this year.
It is unclear whether the abolition of the PSR will have a significant positive impact for firms or the economy, although the government has said it has received complaints that firms find it difficult to deal with multiple regulators. However, firms will definitely welcome the clarification that they won't have to dedicate significant resources to carry out burdensome reporting concerning diversity and inclusion but can now focus on substantively creating positive cultures that facilitate diversity and inclusion as well as long-term sustainable growth. Regulated firms will no longer be susceptible to reputational damage at the whim of the FCA deciding to appoint investigators. When June 2025 comes, let's see if the FCA can deliver some well-considered next-steps on non-financial misconduct (which would need to be significantly different from what is currently proposed). So far, so good.
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