On 9th December 2022, the Chancellor of the Exchequer, Jeremy Hunt, made a Statement on a series of proposed reforms (‘The Edinburgh Reforms’) to the regulation of the UK financial services sector. These build on the work of the Future Regulatory Framework Review launched back in 2019, and the Financial Services and Markets Bill (“FSM”) which is expected to receive royal assent in Spring 2023.
The objective behind all these related initiatives is to drive economic growth by boosting the competitiveness of the financial services sector. In practice, this should mean a more industry-friendly approach compared to that which has prevailed since the financial crisis of 2008, but will that truly be the case? Now that the dust has settled on the related announcements, we take a closer look at what these mean in practice for regulated firms.
A political context
After the political turmoil of Autumn ‘22, the Sunak/Hunt administration is clearly keen to accelerate the process of reform before a likely 2024 General Election. Some measures take forward the work already in play during Sunak’s own Chancellorship which ended in July’22. Many bear the impression of junior officials having been sent on a mission round the dark corners of the Treasury, Bank of England/PRA and the FCA to drum up new recruits to the cause of reform.
- What is the new FCA remit letter?
The Remit letter is an important document supporting the Edinburgh reforms. In it, HM Treasury makes several recommendations to the FCA about how it should carry out its new secondary objectives introduced in the FSM Bill to “support medium to long-term economic growth in the interests of consumers and businesses and promoting the international competitiveness of the UK”.
- A smarter regulatory framework
Also noteworthy is HM Treasury’s Policy Statement released in December’22: Building a smarter financial services framework for the UK. This puts flesh on its previously announced approach to repealing retained EU law on financial services, replacing it with a comprehensive framework based on the original FSMA model and tailored to the UK's needs. It announces an ambitious timetable including a phase 1, which completes processes already underway, such as the Wholesale Markets Review, and a phase 2 (to be completed by the end of 2023) including a revised Short Selling Regulation and the Long-Term Investment Funds Regulation.
Is there anything completely new in the Edinburgh reforms?
Yes, some of the most interesting announcements include fresh reviews of particular areas of regulation. We have put a checklist together below, that has been chosen to indicate priority areas but does not attempt to be comprehensive. Where these reviews will end up is inevitably somewhat a matter of speculation at this stage.
1. Senior Managers and Certification Regime (SM&CR)
A review of SM&CR will be launched by the government in Q1 2023. This is presented as an information gathering exercise on the regime’s effectiveness, scope and proportionality and to seek views on potential improvements. Given the centrality of SM&CR to FCA’s “improving culture” agenda, it is hard to see it favouring major changes. Perhaps the best that the industry can hope for is a watering down of the “Duty of Responsibility” concept. This falls heavily on the shoulders of senior managers, particularly in large firms. Alongside this might be a simpler set prescriptive requirements applying to Enhanced firms. However, there may be less change for Core firms in terms of their day-to-day application of the rules.
2. Short Selling Regulation
HM Treasury has initiated a Call for Evidence on how the UK might reform the regulation of short selling. This is restricted to the short selling of shares and will not explore the equivalent regimes for UK sovereign debt and UK sovereign credit default swaps at this stage. It is tempting to anticipate a complete repeal of the current regime given the widely accepted role that short selling plays in the efficient functioning of markets and the weak academic case for regulating it. Perhaps more realistically, we should look for a raising of the current 0.1% threshold for disclosure (0.2% at the start of the pandemic), and/or some relaxation on the locate arrangements in place of “naked” short selling. The Call for Evidence closes on 5 March 2023.
3. Investment research
Also completely new is the initiation of an independent review of investment research and its contribution to the UK's capital markets competitiveness. This will include a review of the MiFID II rules on paying for research services, as well as taking into account the revisions to both UK and EU rules introduced earlier this year. Given these recent changes and recognition that the regime for larger companies’ research has been largely successful, it is not easy to see where reform might go. This might feature an increase in the threshold exemption for smaller companies from the current £200 million, or perhaps a relaxation of the prescriptive arrangements around Research Payment Accounts (“RPA”).
4. Investor reporting (10% depreciation)
The Government has laid a Statutory Instrument, finally repealing this requirement on firms to inform retail clients when the overall value of their portfolios fall by 10% in a reporting period. This rule was suspended during the last big decline in financial markets seen as the start of the pandemic.
What else should I be looking out for?
- UK consolidated tape
The government has committed to introduce a regulatory framework that will support the introduction of a UK consolidated tape for market data by the end of 2024. A measure that was unsuccessfully introduced under MiFID II, this will be an important mechanism for improving market transparency and should be of significant value in monitoring best execution.
- Repeal of PRIIP Regulation
Already flagged for some time, the government is consulting on the repeal of UK PRIIPs legislation, long criticised for its prescriptive requirements on the presentation of unhelpful or at worst misleading information, and its replacement by a bespoke UK retail disclosure regime.
- Green Finance
An updated Green Finance Strategy will be published in early 2023.
- Reform of the Securitisation Regulation
The government has published a draft Statutory Instrument bringing forward reforms identified in HM Treasury’s 2021 review of the Securitisation Regulation.
The government has been keen to dub these measures the Edinburgh Reforms, rather than the “Big Bang 2.0” favoured by some sections of the media and right-wing observers. In so doing, they are perhaps harking back to the liberal values of the Scottish enlightenment, as well as reinforcing the “levelling-up” agenda. The proposals are thus presented as “a smarter regulatory framework for the UK”, not a wholesale ripping up of the rulebook.
Nonetheless, they are extensive enough to have pushed back the timetable of the Regulatory Initiatives Grid. Normally published by the Financial Services Regulatory Initiatives Forum every 6 months, this was originally due in November but will now appear in early 2023.
Clearly, there are a lot of announcements in the pipeline in coming months and these will be closely scrutinised for the details of any reforms. It remains to be seen what impact, collectively, the measures will have in boosting the competitiveness of UK markets and whether they will strike the right balance between maintaining high standards and fostering constructive innovation.
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