Future regulatory framework: The Edinburgh Reforms
The government has released a package of reforms to financial services regulation. Dubbed the “Edinburgh Reforms”, the measures build on the government’s vision for an open, sustainable, and technologically-advanced financial services sector.
There are 30 announcements which relate to reforms at various stages of development. Together with the Financial Services and Markets Bill, they will set the UK regulatory agenda not only for 2023 but for many years to come.
We highlight some of the key points to note below. In a webinar on Thursday 15 December 2022 we considered the impact of the reforms in more detail. In the meantime, please get in touch if you would like to discuss.
Plan for the “lift and shift” of regulatory obligations
The Financial Services and Markets Bill hands very broad powers to the government and the regulators to shape future regulatory policy and rework the rules the UK has inherited from the EU. This includes repealing EU-derived laws and replacing them with regulator-set rules. A policy statement now provides more detail on what this “lift and shift” process will look like. Linklaters is one of the members of an industry engagement group set up by HM Treasury to provide insight and advice to the government on issues across the programme.
The government explains that it will deliver the programme by splitting retained EU law into “tranches”. The first tranche covers recent reviews into wholesale markets, listing rules, securitisation rules and Solvency II. The second tranche will include rules on PRIIPs, payments, short selling and capital requirements. The government expects to move “swiftly” through the implementation programme and make significant progress on both tranche 1 and 2 by the end of 2023. Any in-flight policy change will be “targeted”.
The government has also shared examples of statutory instruments to illustrate how it could use powers given to it under the Financial Services and Markets Bill. These relate to reform of the Prospectus Regulation and Securitisation Regulation. Another example SI envisages the FCA receiving rule-making powers over e-money and payment institutions.
Reforming the ring-fencing regime
In its response to the Skeoch review, the government proposes secondary legislation “to quickly improve the functionality of the existing regime”. It intends to consult on the reforms in mid-2023 with a view to bringing forward secondary legislation later in the year. In general, we expect the proposals to be welcomed by the market. These include:
- A proposal to take banking groups without major investment banking operations out of the regime. Whilst this will no doubt be welcomed by the UK challenger bank market, it will be important to see the detail on how this exclusion will apply.
- Separately, the government intends to consult on increasing the £25bn core deposit threshold above which the regime applies to £35bn. We expect this would be welcomed by the UK challenger bank market but also by certain international investment banking groups with retail banking businesses that sit beneath the current threshold.
- The government is proposing to allow ring-fenced banks to do more activities, including hedging additional risks (including, for specified products, mortality risk and inflation risk), having greater flexibility to restructure loans through debt to equity swaps and, in very specific cases, taking equity stakes in partnered technology companies. It is also proposing to remove the blanket restriction on ring-fenced banks operating subsidiaries outside the EEA.
Replacing PRIIPs rules
The government plans to revoke the UK regime for packaged retail and insurance-based investment products, known as PRIIPs, and replace it with an alternative retail disclosure framework. The government’s consultation notes that the current rules are unnecessarily prescriptive and can present information in unhelpful or misleading ways. Under the new regime, the FCA will determine the format and presentation requirements for disclosure. The government believes that broad-based comparability between different types of products is not appropriate.
The PRIIPs and UK Retail Disclosure consultation closes on 3 March 2023. Read our summary of the consultation.
Designing a new UK short selling regime
In a call for evidence, the government starts the process for reimagining the UK version of the Short Selling Regulation. The government says that short selling plays an important role in the efficient functioning of financial markets and asks whether the regulatory burden under the SSR is proportionate. Feedback is also invited on whether the public disclosure requirements are working as intended and whether processes around the market maker exemption could be streamlined. This call for evidence focuses on the short selling regime for shares, with the government indicating that it will consider reforms to other provisions of the Short Selling Regulation (i.e. the regime for short sales of UK sovereign debt and uncovered UK sovereign credit default swaps) at a later date.
The call for evidence on the Short Selling Regulation review closes on 5 March 2023. Read our summary of the call for evidence.
Consumer credit reform
The government is putting forward wholesale reform of the Consumer Credit Act which would see the remaining provisions of the CCA move into the FCA’s rulebook. This consultation considers areas where FCA rule-making powers might need to be expanded as well as tabling other features of the regime, including scope, definitions, information requirements and rights and protections. The government also asks whether the FCA’s new Consumer Duty might help protect consumers if they were to lose some rights under the CCA. A second consultation will follow with more detailed policy proposals and any subsequent reform would likely require primary legislation.
The consultation on reforming the Consumer Credit Act 1974 closes on 17 March 2023. Read our summary of the consultation.
SMCR to be reviewed
The government has announced it will start a review into reforming the Senior Managers and Certification Regime in Q1 2023. This will begin with a government-led call for evidence on the legislative framework of the SMCR. The aim will be to collate feedback on the effectiveness, scope and proportionality of the regime as well as views on potential improvements and reforms. Meanwhile, the FCA and PRA will open their own reviews into the regulatory aspects of the framework. Read our financial insights blog for more.
Accelerated Settlement Taskforce
The government is setting up an industry taskforce to examine the case for trades to be settled more quickly in the UK, such as moving to a “T+1” standard settlement period. The taskforce will publish its initial findings by December 2023, with a full report and recommendations made by December 2024.
The government has confirmed its plan to release an updated Green Finance Strategy in early 2023 and to consult in Q1 2023 on bringing ESG ratings providers into the regulatory perimeter.
FCA commentary on future regulatory framework
The FCA has created a new webpage on its approach to the future regulatory framework. The webpage links to a table which sets out the FCA's existing and future approach across different policy workstreams.
Other papers published on 9 December 2022 include:
- A consultation (closing 17 February 2023) on removing customer information requirements relating to payment accounts
- A response to a consultation on changes to the Building Societies Act 1986
- A consultation (closing 3 February 2023) on reform to the VAT treatment of fund management
- A response to the consultation on expanding the investment management exemption under the fund tax regime to include cryptoassets
- New remit letters for the PRA and FCA with clear, targeted recommendations on growth and international competitiveness. Both regulators are set to receive a new secondary objective under the Financial Services and Markets Bill to promote the international competitiveness and growth of the UK economy, particularly its financial services sector.
Other measures which the government has either announced or confirmed include proposals to:
- Overhaul the UK’s regulation of prospectuses
- Reform the UK Securitisation Regulation
- Repeal the European Long-Term Investment Fund (ELTIF) rules
- Implement more reforms from the Wholesale Markets Review, including bringing forward secondary legislation to make changes to reporting rules, with further secondary legislation to follow in Q1 2023 to remove burdens for firms trading commodities derivatives as an ancillary activity
- Launch an independent review into investment research and its contribution to the effectiveness of UK capital markets
- Have a regulatory regime for a UK consolidated tape for market data in place by 2024
- Consult on issuing new guidance on local government pension scheme asset pooling
- Increase the pace of consolidation in defined contribution pension schemes
- Improving the tax rules for Real Estate Investment Trusts (REITs) from April 2023
- Deliver the outcomes of a review into secondary capital raisings
- Consult on a UK retail central bank digital currency alongside the Bank of England in the coming weeks
- Implement a financial market infrastructure sandbox in 2023
- Work with the regulators and market participants to trial a new class of wholesale market venue which would operate on an intermittent trading basis
- Lay regulations in early 2023 to remove well-designed performance fees from the pensions regulatory charge cap
- Work with the FCA to examine the boundary between regulated financial advice and financial guidance.
The Edinburgh reforms represent the latest round of policy work as the government continues to shape the UK's regulatory framework outside the EU.
The Financial Services and Markets Bill provides the Treasury with power to deliver the outcomes of a review into how the financial services regulatory framework should adapt following Brexit. This review included a consultation paper which proposed a blueprint for returning to a "FSMA model" of regulation and a second consultation paper which proposed more detail on what this would look like in practice.
The government and regulators have also progressed several other policy workstreams in recent years. Explore our webpage on the future regulatory framework for a status update on these and links to further resources.