Accountability of regulators Regulator engagement with HM Treasury, external stakeholders, and Parliament Regulators’ relationship with HM Treasury Mechanism to require the regulators to notify HM Treasury of actions affecting deference decisions
Deference, as it is applied to financial services, is a process endorsed by the Group of Twenty (G20) where jurisdictions defer to each other when it is justified by the quality of their respective regulatory, supervisory and enforcement regimes. 8 Deference provides for preferential treatment for market participants conducting cross border activity; however, the form of preferential treatment varies across deference provisions. For example, some provisions allow overseas firms to export financial services into the UK, and others remove duplicative requirements on cross-border business. Within the UK’s system, equivalence, which is an autonomous form of deference, is assessed on an outcomes basis, and (where applicable) in compliance with internationally agreed standards. These assessments generally focus on whether the overseas jurisdiction’s regulatory, supervisory and enforcement framework provides an equivalent outcome to the corresponding UK legal framework.
	Deference serves to facilitate cross border financial services activity by permitting market access and reducing regulatory frictions/costs to firms. Deference is, therefore, an important policy tool for promoting the UK as a global financial centre. The government is responsible for managing, granting, and (where relevant) agreeing deference arrangements with overseas jurisdictions. This includes nearly all of the EU equivalence decisions for overseas jurisdictions that were incorporated into UK law at the end of the implementation period. 9 The government also intends to agree deference arrangements as part of Mutual Recognition Agreements with our overseas partners. In fulfilling this function, the government will monitor these arrangements and keep them under review such that it would be aware if the relevant regulatory and supervisory frameworks are no longer equivalent.
	As noted earlier, once the UK moves to a comprehensive FSMA model of regulation, the UK’s financial services regulators will set the direct regulatory requirements which apply to firms in their rulebooks. This will have a bearing on HM Treasury’s responsibilities in managing the UK’s deference framework. For example, if new firm facing rules made by the regulators mean that overseas jurisdictions may no longer be regarded as equivalent on an outcomes basis, HM Treasury may launch a review of the relevant existing deference decision and ultimately revoke that decision.
	Sections 144C(3) and (4) of FSMA 2000 require the PRA to consider and consult HM Treasury on the impact on relevant equivalence decisions when making rules relating to the Capital Requirements Regulation (CRR) or CRR Basel standards. Sections 143G (3) and (4) of FSMA 2000, contain a similar requirement for the FCA when making rules relating to the prudential regulation of investment firms regulated by the FCA. However, beyond considering the impact on deference when making rules in these areas, there is no statutory requirement for the regulators to consider the impact of their rule changes on the remainder of HM Treasury’s deference framework nor to consult HM Treasury on these impacts. The provisions of this mechanism are intended to improve the quality of information available to regulators when exercising their regulatory powers.
	The Act places a statutory requirement on the PRA and the FCA to consider, when setting rules or supervisory policies and practices, the effect of their proposed action on notified deference decisions (HM Treasury will notify certain deference decisions to the PRA and the FCA as relevant to this requirement). Only actions where there is a duty to carry out a public consultation will trigger this requirement. If, following that consideration, the PRA or the FCA consider that there is a material risk that their actions are incompatible with a notified deference decision, then the PRA or the FCA must consult HM Treasury prior to their public consultation.
	This mechanism will also apply to the Bank of England in relation to its regulation of CCPs and CSDs. This will ensure consistency with the changes taken forward in the Act regarding the Bank of England’s regulation of FMI following the FRF Review.