The landmark Financial Services and Markets Act 2023 gave the UK Financial Conduct Authority (FCA) new powers. To balance this, the legislation also brought in measures to increase the FCA's accountability, including a requirement on the regulator to keep its rules under review and to explain how such reviews are conducted.

Accordingly, the FCA issued a draft rule-review framework for consultation last year. This January, it published the final version of the rule-review framework, largely reflecting the draft.

How will the FCA review its rules?

As the framework explains, the FCA is unlikely to review individual rules. Instead, it will usually review packages of rules; for example, rules made under the same policy statement.

The framework sets out three different kinds of review, in ascending order of materiality: evidence assessment, post implementation and impact evaluation.

Evidence assessment

This can be triggered by regular monitoring the FCA already carries out, by stakeholder input and by any evidence suggesting a rule is not working as intended or has become redundant.

To conduct evidence assessments, the FCA will primarily use data it already collects, as well as evidence proactively provided by stakeholders. It will consider whether the intended outcome of a package of rules is likely to be met and usually circulate the conclusion internally.

Post-implementation reviews

The next step up in the framework involves post-implementation reviews. They can follow an evidence assessment that indicates the need for a more in-depth study but can also be carried out independent of an evidence assessment and be planned in advance.

While the FCA will use existing data where possible for these exercises, the framework explains that it may also request stakeholder engagement. The aim of the reviews is to judge whether the rules under scrutiny were implemented as intended and the desired outcomes have been met. Usually the reviews will be published.

Impact evaluation

This is the most intensive of the three types of rule review. Impact evaluations will usually be planned in advance, at the policy development and implementation stage, to ensure relevant data is collected. This means stakeholder engagement beyond existing reporting is likely to be required.

The FCA may plan an evaluation when, for instance, a rule was designed to address significant harms or if it was uncertain about the outcomes on implementation. An evaluation can also be triggered by instability in financial markets.

According to the framework, evaluations will typically be conducted three to five years after implementation, peer reviewed by external experts and almost always published so they are subject to further scrutiny.

What happens after a review?

If a review shows that rules are working as intended, no further action will be required.

If not, the FCA will consider how best to respond. This could be with a more intensive review, additional guidance like Dear CEO letters, or by varying or revoking rules.

Where the solution to a problem raised in a review is a significant intervention in itself, the FCA will follow its usual process in formulating and implementing the new policy.

Osborne Clarke comment

There is an interesting emphasis in the framework on feedback by stakeholders. It mentions a "feedback tool" enabling firms and others to notify the FCA where they think a rule is not working. And top of the FCA's list of "data sources for key metrics" is stakeholder feedback, whether gathered through the tool, roundtables, focus groups or the FCA's engagement with trade bodies and consumer groups.

While the framework suggests a new approach to monitoring the FCA Handbook's effectiveness, it remains to be seen how often the FCA will conduct these reviews, how much engagement it will require from firms to complete them and how much change they will really give rise to. The FCA will be keeping the framework itself under review, so its methods could evolve over time.

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