Included within its proposals is the establishment of a new Regulatory Innovation Office (RIO) with the intention of improving accountability and promoting innovation in regulation across sectors. The intention is that the RIO will also “promote transparency on regulator performance”, including in respect of the new metrics recently introduced for the Financial Conduct Authority and Prudential Regulatory Authority to demonstrate progress towards their secondary objective on growth and competitiveness.

The initial concept of the RIO was introduced in a Labour press release in October last year, which was primarily focused on the medicines regulator (the MHRA) and so may have escaped the notice of the financial sector. The RIO will, amongst other things, “set and monitor targets for regulatory approval timelines, benchmarked against international comparators”; provide a “strategic steer” for regulatory priorities; and provide a greater role for the existing Regulatory Horizons Council (RHC), with new requirement for Government to respond to its reports within a set time period.

This proposal does, in part, attempt to answer the question “who regulates the regulators?”. It is a question that has become more important since Brexit, with much greater power in the hands of domestic regulators and with the governance arrangements in place at an EU level no longer applying. This is an issue that affects many sectors but has been particularly relevant to financial services, given its highly regulated nature and historic importance of EU legislation across this area. The issue of the accountability of regulators was a controversial one during the Parliamentary proceedings of the Financial Services and Markets Act 2023. In the House of Lords, significant time was spent debating how financial services regulators would be held accountable by Parliament.

We at Macfarlanes took a close interest in the debate and put forward our own proposal¹. We recommended the establishment of an expert body with deep expertise of the financial services sector. This body, the Office for Financial Regulatory Accountability (OFRA), would act as a supervisor of the financial services regulators. It would hold the regulators to account for their performance and  set a strategic direction for regulation.

On the face of it, there are similarities between the RIO and OFRA. Both would involve scrutinising the performance of regulators, particularly in the context of growth and competitiveness; increase transparency; and play a constructive role in encouraging regulatory innovation.

Where the proposals differ is that the RIO appears to be an organisation that will have a role for a range of regulators across many sectors. Indeed, when the RIO was launched it was not clear that its remit would cover financial services. Our argument for the creation of OFRA was that a body that had deep expertise in financial services was needed and, in particular, the wholesale markets. As wholesale markets are generally international in nature, we considered there is a critical need for long-term thinking about the UK’s international regulatory strategy. At present, the RHC’s expertise is heavily slanted towards life sciences and technology. We recommend that the RHC and the RIO should have greater access to financial services expertise, either through a RHC sub-committee, or a separate advisory body to the RHC with specific knowledge of wholesale markets regulation. 

Nonetheless, the RIO and a revamped RHC could provide a foundation for a body that would be able to perform the function we envisaged in respect of financial services regulators.

¹ For background on our original discussions on this topic, we refer to our report, published in April 2023, calling for the creation of a new independent expert body to be established which would both hold financial services regulators to account and set out recommendations for how the UK could succeed as a location for wholesale market activity, and our podcast on the matter How should UK financial services regulators be held to account?