Response to the Consultation on the Financial Regulation Review’s Proposals for Reform by HM Treasury

In November 2021 Her Majesty’s Treasury of the United Kingdom launched a consultation on the ‘Proposals for Reform’ under its Financial Regulation Framework Review, which aims to shape the regulatory framework for financial services following the UK’s departure from the European Union. The Government has stated its intention to maintain a coherent, agile and internationally respected approach to regulation that is right for the UK. The proposals include changes to the regulators’ statutory objectives and enhanced mechanisms for accountability, scrutiny and oversight of the regulators by Parliament, HM Treasury and stakeholders.

This paper consists of a submission to the inquiry written on behalf of the Grantham Research Institute on Climate Change and the Environment and submitted on 9 February 2022.

Main messages

• The global financial sector must play a central part in climate change action by aligning financial flows with the goals of the Paris Agreement.
• The UK financial sector plays a major role both domestically and internationally so should seek to be a global leader on sustainable finance, including regulation. The Chancellor of the Exchequer has set out the ambition to harness the UK’s comparative advantage in finance to contribute to this goal and gain wider economic benefits by developing the first ‘net-zero financial centre’.
• Climate risk and the commitment to net-zero emissions of greenhouse gases and wider environmental goals must be integrated fully into the management of financial stability. Promoting a smooth transition in finance is critical for ensuring the stability and integrity of the UK’s financial system and the firms within it, and thus to the achievement of the respective primary objectives of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). 
• Making changes to the financial system and in financial flows to enable a credible transition to net-zero emissions also fits with wider government priorities such as levelling up, as it could provide co-benefits to communities around the country, such as higher living standards and improved health outcomes.
• Financial institutions can play a critical role in accelerating the pace of transition by including environmental factors in their tools. Climate resilience and adaptation are important aspects of this transition and will require more investment, as highlighted by the Third UK Climate Change Risk Assessment. While the 2019 Green Finance Strategy mentions physical risks and resilience as important factors for financial stability and future growth in the financial sector, these factors are regrettably not present in the Financial Services Future Regulatory Framework Review.
• Although a principle requiring the regulators to have regard for net-zero would be a positive step, preferably the Government would create a new, statutory, secondary objective for each regulator with the same provisions, as a more powerful step to embed responsibility for the transition in their operations. In addition, the objective should require regard for impacts on climate change resilience as well as on biodiversity.
• By contrast, it is not clear that the Government should proceed with its proposal to create new statutory objectives for the PRA and FCA to facilitate growth and competitiveness of the UK economy, including of the financial services sector, owing to risks around the interpretation of such an objective.