The Bank of England’s statement on the review of rules

1: Bank statement on the review of rules

1.1: Introduction

1. As a regulator, the Bank makes rules to advance its statutory objectives. In the context of financial market infrastructure (FMI) regulation, the Bank has a primary objective to protect and enhance the stability of the UK financial system (the Financial Stability Objective).^{footnote [1]} Furthermore, in exercising its FMI functions in a way that advances the Financial Stability Objective the Bank must, as a secondary objective, facilitate innovation of FMI services (the Secondary Innovation Objective). These objectives guide the Bank’s rulemaking and supervisory activities in respect of recognised central counterparties (CCPs), recognised central securities depositories (CSDs), overseas CCPs, third country CSDs,^{footnote [2]} Critical Third Parties (CTPs),^{footnote [3]} and recognised clearing houses which are not recognised CCPs (RCHs).^{footnote [4]} Together, these firm types are referred to as ‘FMIs’ in this document. References to the Bank in this statement of policy are in relation to its role as an FMI regulator.

2. Before introducing or amending rules, the Bank analyses the expected costs and benefits of a policy intervention.^{footnote [5]} When proposing the introduction or amendment of a rule or a set of rules, the Bank considers whether the expected benefits are likely to outweigh the costs. The Bank consults on such proposals and considers stakeholder feedback, including on its cost benefit analysis (CBA), before publishing its final ‘rule review’ or evaluation. ^{footnote [6]} This statement of policy (SoP) sets out the Bank’s approach to rule review, which it considers to be an important tool to ensure its regulatory framework is flexible and adaptable and remains fit for purpose. The rule review framework is an important part of the package of accountability measures brought into the Financial Services and Markets Act 2000 (FSMA) by the Financial Services and Markets Act 2023 (FSMA 2023).

3. The Bank may decide to review rules for several reasons. These include when:

• the rules have not adequately addressed the risk for which they were designed, or new information emerges to inform the calibration of the rules compared to the risk they address (supporting the Bank’s primary Financial Stability Objective);
• the rules have given rise to unintended consequences (such as unexpected impacts affecting the Bank’s Secondary Innovation Objective);
• FMIs are arbitraging or avoiding the rules in unanticipated ways;
• the structure of the economy or financial system has evolved (including through use of new technology);
• relevant international standards affecting the rule have changed; or
• the nature of the issue addressed by the rules has evolved.

4. HM Treasury (HMT) may also direct the Bank to review rules, including through formal recommendations under section 300K of FSMA. The methodology outlined in this SoP covers the rule review framework that the Bank expects to use for reviews both instigated by the Bank itself or where directed by HMT.

5. The process of rule review enables the Bank to update its assessment of the impact of its rules on its objectives, stakeholders, such as FMIs and market participants, and on the wider economy. With the benefit of evidence about implementation, reviews enable the Bank to understand impacts with greater accuracy as compared to the expected impacts set out in the CBA when the rule was introduced. Through this review process, the outputs from rule reviews can also inform future CBA. In this way, rule review complements the Bank’s approach to CBA and increases the Bank’s effectiveness in delivering its objectives.

6. The remainder of this statement is structured as follows:

• Section 1.2 describes the Bank’s framework for undertaking rule reviews;
• Section 1.3 explains how stakeholders can engage with the Bank on rule reviews, and how the Bank will consider their representations;
• Section 1.4 sets out how the Bank communicates its rule review work to the public; and
• Section 1.5 explains how the Bank intends to co-ordinate with other public bodies on rule reviews covering areas of shared responsibility.

1.2: Framework for rule review

Scope

7. The amendments brought into FSMA by FSMA 2023 represented a significant milestone for the Bank of England’s regulatory regime for FMIs.^{footnote [7]} In the context of CCP and CSD regulation, as well as providing the Bank with rulemaking powers to deliver the Bank’s objectives, it also introduced accountability measures, including requirements for rule review.

8. The Bank is required by sections 300I and 300J of FSMA to keep its rules under review and to prepare and publish a SoP relating to its review of rules. This obligation applies specifically to several rulemaking powers outlined in Part 18 of FSMA. This statement on the review of rules is published to meet that requirement and includes the rule review framework (‘framework’).

9. This SoP sets out the broad framework the Bank expects to apply when conducting rule reviews, whether initiated by the Bank itself or directed by HMT. While the statutory obligation under FSMA applies more narrowly to the Bank’s rules, the Bank also applies the broader rule review framework, where appropriate, to associated policy materials such as supervisory statements, statements of policy, and reporting templates.

10. The requirements in FSMA to undertake rule reviews and to publish a SoP in relation to the preparation of rule review do not apply to other powers exercised by the Bank, such as the Bank’s powers in relation to recognised payments systems (RPSOs) and service providers under Part 5 of the Banking Act 2009. However, where appropriate, the Bank may draw on the approach described in this document for any other rule reviews that it conducts, including those relating to the Bank’s powers in relation to RPSOs and specified service providers.

The four steps of the Bank’s rule review framework

11. The framework consists of four key activities, as shown in Figure 1.

Figure 1: The Bank’s rule review framework

A: Monitoring

12. The Bank regularly checks for evidence that suggests that a rule, or a set of rules, may warrant review. The Bank undertakes this monitoring exercise to ensure that rules are advancing its objectives, being correctly interpreted and continue to be fit for their intended purpose.

13. As part of its monitoring process, the Bank draws on the following sources:

• direct feedback from stakeholders − this includes, but is not limited to, direct engagement with FMIs, FMI service users and market participants, industry associations, and other organisations as well as feedback received through the Bank’s dedicated email address for rule review;
• supervisory intelligence − supervisors may have insights gained by interacting with FMIs on how useful and practical a rule has been and how fully they think FMIs have enacted a rule;
• changes in market and economic conditions;
• material developments in international standards for the regulation of FMIs;
• evidence, insights and trends from applications for permissions, waivers or modifications of Bank rules;
• evidence from Parliamentary committees such as the House of Lords Financial Regulation Committee or the Treasury Select Committee;
• changes to regulatory responsibilities, including the introduction of new statutory objectives or expansion of the Bank’s regulatory remit;
• reports on specific FMIs and thematic reviews; and
• other relevant evidence, such as internal data analysis and research, including external academic research on policy impacts.

14. The Bank also complies with its legal obligations and takes into account other commitments made with respect to rule reviews. These may include requirements in legislation, directions from HMT, commitments made to international standard bodies, or other obligations.

15. Once the Bank identifies a rule (or a set of rules) that could potentially be reviewed, it assesses if there is sufficient evidence to justify a rule being considered for selection. The Bank examines if there is evidence that the underlying risks and/or underlying assumptions within the CBA have changed since the rule was implemented. For example, the Bank considers whether other jurisdictions changing their standards could point to a need to review corresponding Bank rules.

B: Selection of rules to review

16. From the set of rules the Bank has identified for potential review through its monitoring process, the Bank further considers those rules that meet any of the conditions outlined in the introduction. The Bank then prioritises reviews based on the following criteria: legal requirements, scale of impact, timing, contribution to meeting the Bank’s secondary innovation objective, implications for the effectiveness of Bank rulemaking, the evidence base, and other considerations.

Legal requirements

17. The Bank will review rules for which there are statutory requirements or other legal obligations to review. HMT has the power to require the Bank to review specific rules where the government considers that it is in the public interest, as noted above.

Scale of impact on the Bank’s statutory objectives

18. The Bank considers the magnitude of the impact of the rule on its statutory objectives. In particular, the Bank prioritises reviews where the Financial Stability Objective is most at risk (for instance through the impact on the financial or operational resilience of FMIs).

19. The Bank also considers the potential contribution of a review in advancing the Bank’s Secondary Innovation Objective to facilitate innovation in the provision of FMI services. This includes the degree to which a review might facilitate the development or adoption of new technologies, simplify the regulatory framework, improve clarity and understanding, improve efficiency, achieve greater proportionality or reduce unnecessary burdens on FMIs. The Bank gives greater weight to the review of rules where the contribution to innovation is not clear or where the rules may inhibit innovation, taking into account the need to continue to advance its primary Financial Stability Objective.

Timing

20. The Bank considers the time passed since the implementation of the rule. For some rules, the full impact may only be observable several years after implementation, when there is enough evidence on how the rule is functioning in practice. For other rules, it may be possible to observe evidence soon after implementation that they are not functioning as intended, are unclear, or are leading to unintended consequences. While the appropriate timing varies on a case-by-case basis, the Bank would not expect to review a rule until sufficient time has elapsed since implementation to properly assess its impact.

Implications for the effectiveness of Bank rulemaking

21. The Bank considers the extent to which a review has potential for filling an evidence gap, which could improve the effectiveness of the Bank’s rulemaking process. Relevant factors include:

• the extent to which reviews could support the development of international standards;
• interactions and interdependence between rules;
• the degree to which there are gaps or unaddressed risks in its rulebook;
• the degree of uncertainty at the point of implementation;
• evidence of unanticipated effects;
• evidence of regulatory arbitrage when FMIs adjust their activities in a way that reduces the impact of regulation without a corresponding reduction in the underlying risk;
• the degree to which it can inform the quality of the Bank’s future CBAs. For example, analyses from reviews of rules in novel areas can provide the Bank with better evidence on the expected impacts of similar but new rules; and
• the degree to which a review can inform the Bank on the possibility of simplification of rules.

Evidence base

22. The Bank prioritises reviews where there is a good evidence base to support the possibility that the costs outweigh the benefits of the rule under consideration. This may be evidenced by whether the rule is functioning effectively in practice, including whether it continues to meet its intended objectives and is being interpreted and applied as expected. Evidence-based feedback can come from a variety of sources, including practitioners, supervisors and market intelligence. The evidence base enables the Bank to assess the extent to which a review may make a meaningful difference. It would consider, among other factors, feedback from Bank-regulated FMIs about the costs of implementing and complying with the rule.

Other considerations

23. In addition to the points above, the Bank considers other factors, such as:

• the balance of rule reviews undertaken across policy areas in recent periods;
• how to make efficient use of Bank resources – the Bank only conducts reviews where the expected benefit is likely to outweigh the expected costs of conducting them and co-ordinates with government, other regulators and relevant international stakeholders to make use of synergies;
• overall policy priorities – the Bank will seek to find an appropriate balance between reviewing existing rules and addressing new and emerging risks and opportunities; and
• overall resource burden on FMIs of regulatory change.^{footnote [8]}

C: Choice of methods

24. When a rule has been selected for review, the Bank will select the method(s) to use. A review method is the process through which the Bank collects and analyses information to assess the impact of the rule and to answer review questions. The Bank considers a wide range of review methods.

25. The framework distinguishes between:

• Qualitative methods that do not rely heavily on analysis of data. Such methods include desk-based reviews, case-studies, thematic reviews and include gathering evidence through surveys or interviews; and
• Quantitative methods that rely mainly on analysis of quantitative data. Such methods could include a range of statistical methods, should the data allow for it.^{footnote [9]}

26. Reviews will mostly involve the use of qualitative and mixed methods, with a focus on approaches such as surveys, desk-based reviews and thematic reviews. These methods are particularly well-suited to understanding regulatory outcomes of a qualitative nature, such as those that relate to perceptions, behaviours, and implementation challenges. For example, the Bank may use surveys and interviews to assess whether changes to rules have led to meaningful behavioural shifts. These approaches allow for insights into how rules are interpreted and enacted in practice.

27. The Bank may also use qualitative methods when there is a need to rapidly assess whether the current regulatory framework captures emerging risks, such as those arising from technological innovation or market structure changes, especially where quantitative data may be limited or unavailable.

28. The Bank would be more likely to use quantitative methods when the impact of amending the rule could reasonably be estimated in numerical terms. To determine this, the Bank has regard to the:

• Existence and quality of the data inputs required for estimation.
• Suitability and robustness of the methodological approaches and models available.
• Reliability of counterfactual analysis.
• The degree of certainty on market participants’ responses to any proposed intervention.
• Usefulness of any resulting estimate, including the feasibility of representing the estimate as a monetary value for comparison against other costs and benefits; and
• Credibility of any resulting estimate, including the need to avoid presenting an estimation that appears more accurate than is possible given the accuracy of the inputs from which it is derived (ie spurious accuracy or false precision).

29. As such, it is more likely that the Bank would use quantitative methods for rules that give rise to outcomes that are measurable in numerical values (such as margin or capital requirements). While the Bank expects that the majority of rule reviews will be qualitative in nature, it recognises the value of incorporating quantitative analysis where appropriate.

30. Data helps the Bank to employ quantitative reviews. The Bank recognises the costs to firms from existing data and reporting frameworks. When making and reviewing rules, the Bank seeks to make as much use as possible of existing data that are available. Where the Bank does not consider its existing data to be sufficient, and it assesses that the rule review requires additional data, for which the likely benefits of additional data collection outweigh the likely costs of the request, the Bank may request more data from firms.

D: Execution and decision on follow-up actions

31. Following the selection of a rule for review, the identification of the appropriate rule review method and the gathering of data, the Bank will conduct the review of the rule. Following the review the Bank decides whether to propose any changes to the rule in question.

32. In conducting the review, the Bank considers stakeholder feedback that relates to or is relevant to the review. Moreover, it typically seeks to draw on subject-matter experts to support with the assessment. In suitable cases, the Bank may seek stakeholder feedback on potential changes, for example through a discussion paper or expert groups with market practitioners to gain insights and better understand market impacts.

33. The Bank considers how to communicate the outcomes of the review. This includes any legal requirements concerning the publication of the outcomes and appropriate stakeholder engagement with rule reviews. Any proposed changes to the Bank’s rules arising from a rule review would be subject to public consultation in the usual way.

1.3: Stakeholder engagement on rule review

34. The Bank is committed to engaging with a broad range of stakeholders to seek input on rule reviews as noted in the introduction. These perspectives are essential to ensuring that rule reviews are proportionate, effective, and aligned with the Bank’s statutory objectives.

35. There are existing channels that stakeholders can use to engage with the Bank in order to make representations on the review of rules:

• stakeholders can respond to public consultations and discussion papers on specific topics;
• Bank-regulated FMIs can engage through their supervisors;
• FMIs can engage with the Bank through bilateral meetings, industry roundtables and/or trade-bodies representing their interests.

36. The Bank has created a new channel for stakeholders to make representations to the Bank on rule reviews. We have a dedicated rule review section which includes a dedicated rule review email address for stakeholders to provide continuous feedback on the existing Bank rulebook. The Bank monitors this and uses the feedback it receives to inform rule reviews.

37. The Bank will consider stakeholder representations at the stage of the rule review framework most appropriate to the nature of the representation. For example, feedback providing indications that suggest a rule may warrant a review will feed into the monitoring step of the framework. Where the feedback relates to or is relevant to the review of a specific rule or a set of rules, it will be considered by the Bank when conducting reviews. This ensures that the Bank gives due consideration to representations made by its stakeholders including those made by its statutory panel.

1.4: Communication on rule review

38. The Bank is committed to being transparent about the review work it undertakes. It may choose to publish the outcomes of some of its reviews on a case-by-case basis. To that end, the Bank uses a range of publication types. These include consultation papers and policy statements, which can include analyses of existing rules. It can also include the Annual Report and other public statements.

39. The rule review section contains information on the Bank’s approach which is easily accessible to its stakeholders. It provides a single point of access to relevant information relating to the Bank’s rule review activities. The Bank uses it to disseminate this information to its stakeholders. The webpage includes information on:

• outcomes of past reviews of rules;
• ongoing reviews that help stakeholders better understand the review work that the Bank is undertaking at any given point in time; and
• upcoming reviews that require major engagement with Bank stakeholders.

40. In addition, the Bank will describe how the stakeholder feedback it received has fed into its rule review work in its FMI Annual Report.

1.5: Co-ordination with other public bodies

41. The Bank contributes to and supports rule reviews conducted by international bodies, such as the Committee on Payments and Market Infrastructures, the International Organisation of Securities Commissions, and the Financial Stability Board. These bodies develop international standards and guidance for CCPs, CSDs, and other FMIs, and the Bank actively engages in their evaluation work where appropriate.

42. Some Bank rules are in areas of shared responsibility with other regulators. These include the Prudential Regulation Authority, which is the prudential regulator for deposit-taking institutions and insurers in the UK, and the Financial Conduct Authority, which regulates the conduct of firms that participate in financial markets, including other entities that interact with FMIs and setting the standards for trading venues. Where the Bank proposes to review a rule in an area of shared responsibility, or where the Bank is directed to do so by the Treasury, the Bank will work with the relevant regulators to agree the best way to carry out the review. Areas of joint responsibility between the PRA, FCA and Bank include rules relating to critical third parties, trade repository reporting requirements and the clearing obligation. Co-operation with other regulators may result in joint publications, such as discussion or consultation papers.