The Edinburgh Reforms: the next chapter for UK financial services regulation

Edinburgh Reforms - The next chapter for UK financial services

A proactive and wide-ranging series of measures, the Edinburgh Reforms seek to balance stability with innovation and boost the competitiveness of the UK post-Brexit. The aim is to build an "agile, proportionate and homegrown" rule book to shape the future of financial services regulation specifically designed for the UK. In announcing the measures, Chancellor Jeremy Hunt said "leaving the EU gives us a golden opportunity to reshape our regulatory regime and unleash the full potential of our formidable financial sector".

The details of the measures being taken forward by the government have been categorised to meet the following key aims for the UK:

• A competitive marketplace promoting effective use of capital.
• A world leader in sustainable finance.
• A sector at the forefront of technology and innovation.
• Delivering for consumers and businesses.

Edinburgh Reforms - A competitive marketplace promoting effective use of capital

A key aim is to ensure that the UK's financial markets remain an open and attractive place to do business delivering for industry and consumers alike.  Key measures under this limb include the following:

Building a smarter regulatory framework for the UK

The government published a policy statement ‘Building a smarter financial services framework for the UK’.  This builds on the Future Regulatory Framework (FRF) Review to determine how the UK financial services regulatory framework should adapt post-Brexit. The outcome of the FRF is now being delivered through the Financial Services and Markets Bill (FSM Bill) and will, amongst other measures, repeal retained EU law (REUL) and replace it with a new framework tailored for the UK.  

The policy statement sets out the plan to take forward the implementation of a comprehensive FSMA model of regulation. The government will deliver the programme by splitting REUL into "tranches".  Tranche 1 is underway with the outcomes arising from the Wholesale Markets Review, the Listing Review, Securitisation review and the Review into the Solvency II Directive. Tranche 2 will relate to the areas listed at 5.8 of the policy statement including reform of MiFID II, continuing with the Solvency II reforms, MMF Regulation reform, IDD reform, CRD IV reforms and reform of the consumer information rules in the Payment Accounts Regulations 2015. The government states that it "expects to make significant progress on tranches 1 and 2 by the end of 2023":

Part of the approach of "embracing the new opportunities presented by the UK's position outside of the EU" includes the following, some of which will be included in Tranche 2:

• Plans to repeal PRIIPs – a consultation on a proposed alternative framework for retail disclosure in the UK following the repeal of PRIIPs.  The new framework for retail disclosure aims to work more effectively with the UK’s capital markets and foster more informed retail investor participation. 
• Short selling – the government have published the Short Selling Regulation Review: Call for Evidence which is looking at the UK's regime for regulating short selling, with the aim of putting in place a regulatory regime tailored to the UK. The Call for Evidence seeks views on the current functioning of the regulation, and how it might be better tailored to UK markets. The Call for Evidence closes on 4 March 2023.
• Prospectus regime reform – the government has published an example draft statutory instrument (SI) to demonstrate how the government can use powers within the FSM Bill to reform the prospectus regime. The UK intends to implement the recommendations from Lord Hill's UK Listing Review helping to widen participation in the ownership of public companies, simplify the capital raising process for companies on UK markets and make the UK a more attractive destination for initial public offerings.
• Securitisation reform - the government intends to bring forward relevant reforms identified in HM Treasury’s 2021 review of the Securitisation Regulation.  It has also published a draft SI to demonstrate how the government can use powers within the FSM Bill to reform the securitisation regime. 
• Payments regulation reform – the Information Requirements in the Payment Account Regulations (PARs) Consultation examines proposals to remove unnecessary customer information requirements related to bank accounts imposed by the EU in the Payment Accounts Regulations.  This aims to reduce unnecessary regulations on banks, freeing them up to better meet the need of UK customers. The consultation closes on 17 February 2023.  The government has also published a draft SI to demonstrate how it can use powers within the FSM Bill to make rules to replace REUL for payments.
• Plans to repeal ELTIFs – as no European Long Term Investment Funds (ELTIFs) have been established in the UK, the regulations for ELTIFs will be repealed without replacement.  The newly established Long Term Asset Fund (LTAF) in the UK provides a fund structure designed to the needs of the UK fund market and this is reflecting in a number of firms having begun to seek FCA authorisation for LTAFs.

Updating banking regulation and the ring-fencing regime

• Ring-fencing regime – In 2023, the government will bring forward secondary legislation to improve the functionality of the ring-fencing regime in response to the Skeoch independent review on Ring-fencing and Proprietary Trading. In reviewing the practicalities of aligning the ring-fencing and resolution regimes, the government will issue a public Call for Evidence in the first quarter of 2023.
• Non-performing exposures - The PRA intends to consult on removing rules for the capital deduction of certain non-performing exposures (NPEs) held by banks. This would allow the PRA to apply a judgement-led approach to address the adequacy of firms’ provisioning for NPEs, help to simplify the UK rulebook and avoid the unnecessary gold plating of prudential standards.
• Building Societies Act 1986 - The government will also legislate, "when parliamentary time allows", to amend the Building Societies Act 1986 to give building societies in the UK greater flexibility to raise wholesale funds, enabling them to grow and compete on a more level playing field with retail banks, while retaining their mutual model. As part of this, the government will also modernise relevant corporate governance requirements in line with the Companies Act 2006.  The government published its response to its Call for Evidence launched in December 2021.

 Ensuring a regulatory focus on growth and competitiveness

• New secondary objectives of growth and competitiveness for FCA and PRA - The FSM Bill will introduce new secondary objectives for the FCA and PRA to provide for a greater focus on growth and international competitiveness while maintaining their existing primary objectives. New remit letters for the FCA and the PRA have been published which will set targeted recommendations for how the regulators should have regard to the government’s economic policy.
• SMCR Review – The government and regulators will commence a review of the Senior Managers & Certification Regime (SMCR) in Q1 2023.  The government will launch a Call for Evidence to garner views on the regime’s effectiveness, scope and proportionality and to seek views on potential improvements and reforms. The FCA and PRA will also review the regulatory framework.

Wholesale markets reforms

The government is taking forward reforms to the Markets in Financial Instruments Directive (MiFID) framework through the Wholesale Markets Review. Measures in the FSM Bill deliver key elements of this. To further support this agenda, the government:

• MiFID II reporting rules - The Markets in Financial Instruments (Investor Reporting) (Amendment) Regulations 2022 published today aim to remove EU requirements related to reporting rules and will come into force on 7 June 2023. This builds on the reforms brought forward through The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 laid in June 2021.
• Commodities derivatives – in Q1 2023 secondary legislation will be brought forward to remove burdens for firms trading commodities derivatives as an ancillary activity, for example, when manufacturers seek to fix the future price of their purchases of specific raw materials.
• Consolidated tape – the government and FCA are committing to having a regulatory regime in place by 2024 to support a consolidated tape for market data. This will bring together market data from multiple platforms into one continuous feed to improve market efficiency, aims to lower costs for firms and investors, and make UK markets more attractive and competitive.
• Investment Research Review – an independent review of investment research and its contribution to UK capital markets competitiveness will be launched.
• Accelerated Settlement Taskforce – the UK will establish a new industry-led Accelerated Settlement Taskforce to explore the potential of faster settlement of financial trades in the UK. Reducing settlement times from the current industry standard of two days could reduce counterparty risk and increase operational efficiency. The taskforce will bring together industry stakeholders to recommend an approach that works for the UK.

Unlocking investment to drive growth across the whole UK economy

The government sets out measures that it states will "unleash the sector to drive investment and growth".  This includes plans to reform Solvency II which it states will unlock more than £100bn for UK insurers to invest in long-term productive assets.  HM Treasury is working with BEIS to deliver the recommendations made to government as part of the Secondary Capital Raising Review and more broadly on reforms to corporate governance, to further enhance the attractiveness of UK markets.  Further measures announced include the following:

• VAT treatment of fund management – a consultation setting out proposals for legislative reform intended to codify existing policy to give clarity and legal certainty. The consultation closes on 3 February 2023.
• Local Government Pension Scheme – a consultation on new guidance in early 2023 around asset pooling in England and Wales.
• A new Value for Money Framework – led by the DWP alongside the FCA and Pensions Regulation, a consultation setting required metrics and standards in key areas such as investment performance, cost and charges and quality of service that all schemes must meet.
• New tax rules for REITs – with effect from April 2023, new rules will remove the requirement for a REIT to own at least three properties where they hold a single commercial property worth at least £20 million.

Edinburgh Reforms - A world leader in sustainable finance

The UK wants to ensure it is the "world’s premier financial centre for sustainable finance". In early 2023 the following steps will be taken to support this aim:

• Updated Green Finance Strategy – to be published in early 2023.
• ESG ratings providers to be brought into the regulatory perimeter – there will be a consultation in Q1 2023 on bringing ESG ratings providers into the regulatory perimeter.  HM Treasury will also join the industry-led ESG Data and Ratings Code of Conduct Working Group recently convened by the FCA as an observer.

Edinburgh Reforms - A sector at the forefront of technology and innovation

The regulatory framework of the UK for financial services needs to adapt to keep pace with fast moving and innovative technologies.  To meet this aim the following steps will be taken:

• Financial Market Infrastructure Sandbox – the FSM Bill contains measures to implement a financial market infrastructure sandbox in 2023 to enable firms to test new technology and innovations such as distributed ledger technology (DLT).
• A new class of wholesale market venue – this will be a global first for the UK and will operate on an intermittent trading basis acting as a bridge between public and private markets.  There is no set timeframe for this but the government says it will work with regulators and market participants to bring this forward.
• Establishing a regulatory regime for cryptoassets  – the FSM Bill will bring a broader range of investment-related cryptoasset activities into the regulatory perimeter. We understand this to be a broader set of crypto activities beyond stablecoins further to recent debate on the FSM Bill.
• Investment Manager Exemption to include cryptoassets – the publication of the consultation response on expanding the Investment Manager Exemption to include cryptoassets which will facilitate their inclusion in the portfolios of overseas funds managed in the UK. This change will be made through HMRC regulations this year.
• UK CBDC – the publication of a consultation "in the coming weeks" to explore the case for a central bank digital currency – a sovereign digital pound- and a potential design. The Bank of England will also release a Technology Working Paper setting out cutting-edge technology considerations informing the potential build of a digital pound.

Edinburgh Reforms - Delivering for consumers and businesses

A further set of measures are intended to ensure that the UK financial services sector is delivering for people and businesses across the UK. The following steps are being taken to support this:

• Reform of the Consumer Credit Act 1974 – a consultation to modernise the regulation of consumer lending, reform will update consumer protections and ensure they work well in a modern and increasingly digital economy. The consultation is open until 17 March 2023.
• Regulated financial advice and guidance – the government will work with the FCA to examine the boundary between regulated financial advice and financial guidance with the objective of improving access to helpful support, information and advice, while maintaining strong protections for consumers.

Edinburgh Reforms - Next steps

Today’s publication of the Edinburgh Reforms represents the UK government’s ambition to invite investment into the UK. It is a proactive set of reforms following the necessarily reactive Autumn Statement post-Truss. The devil might well be in the detail as a lot of the measures are to be announced over the coming months into the new year. The government has said it is not in the business of “deregulation for deregulation’s sake” and it has purposefully moved away from the connotations of that with the abandonment of language around a “Big Bang”. It remains to be seen whether the measures will boost the competitiveness of UK markets whilst striking the right balance between stability and innovation. 

Authored by Rachel Kent and Melanie Johnson.