The UK government has set out a collection of announcements to take forward its ambition for the UK to be the world's most innovative and competitive global financial centre — labelled `The Edinburgh Reforms'. Although the number and scope of announcements is large, many of the items have been under discussion and consultation for the last few years so will not come as a surprise to industry participants. Indeed, the Financial Services & Markets Bill, under negotiation in Parliament, proposes the legislative framework for many of these announcements.
As a whole, the announcement represents efforts to improve the efficiency and effectiveness of existing regulation by tailoring it to UK markets, as well as updating it to reflect new technologies and broader emerging policy themes such as the transition to net zero.
Firms may already have begun to consider some of the proposed initiatives in their regulatory change plans and business models — these initiatives will give rise to a sustained stream of regulatory developments and there is considerable opportunity for the industry to engage and shape future policy direction through working groups, taskforces, consultations and other fora. We will assess potential impacts on firms in the next issue of the KPMG Regulatory Barometer.
New remit letters to the PRA and FCA (required at least once in each Parliament) show the government's continuing emphasis on the need for regulators to keep in mind growth and international competitiveness when delivering their work. This is in line with the likely introduction of new secondary objectives through the Financial Services and Markets Bill (FSMB).
The government has also published the plan for repealing and reforming 43 `core files' of retained EU law (REUL). Financial Services will be excluded from the wider Retained EU Law (Revocation and Reform) Bill which aims to repeal REUL by end of 2023. Instead, under the repeal provisions proposed in the FSMB, the government will repeal FS REUL in a way that is `thoughtfully planned and sequenced to minimise unnecessary disruption while taking the opportunity to maximise the potential for the greatest economic impact.' Work will be split into Tranches with significant progress on Tranches 1 and 2 planned by the end of 2023.
Tranche 1 includes delivering the outcomes arising from the Wholesale Markets Review, Lord Hill's Listing Review, and the review of the Solvency II Directive.
Tranche 2 includes reviewing, repealing and reforming the Money Market Funds Regulation, the Insurance Mediation and Distribution Directives, and the Capital Requirements Regulation and Directive.
The government and regulators will commence a review of the SMCR in Q1 2023. The government will launch a Call for Evidence to look at the legislative framework of the regime, and the FCA and PRA will review the regulatory framework. Given that the regime has now been in place for banks and insurers since 2016 and was rolled out to the wider financial services sector in 2018, the review seems timely. Critics may be keen to point out the lack of enforcement action against individuals under the regime and the administrative burden of regulatory approval of SMs. Supporters may note that perceived limitations of the SMCR should not be conflated with recent delays caused by supervisory resourcing and will argue that the regime has led to improvements in governance, risk management and accountability.
The proposed reforms for banks are intended to support domestic competitiveness and remove barriers to growth for smaller firms:
- Ring-fencing — the government has published its response to the March 2022 independent review on ring-fencing and proprietary trading. It will now consult on a series of mid-term reforms in mid-2023, with the intention of bringing forward secondary legislation later in the year to improve the functionality of the ring-fencing regime. The reforms would:
- Take banking groups without major investment banking operations out of the regime.
- Update the definition of Relevant Financial Institution.
- Remove blanket geographical restrictions on ring-fenced banks operating subsidiaries or servicing clients outside the European Economic Area.
- Review and update the list of activities which ring-fenced banks are restricted from carrying out, to assess whether certain activities could in future be undertaken safely by ring-fenced banks in order to improve the supply of financial services to consumers and businesses.
- There will also be a public Call for Evidence in the first quarter of 2023 to review the practicalities of aligning the ring-fencing and resolution regimes.
- Non-performing exposures (NPEs) — the PRA intends to consult on removing rules for the capital deduction of certain NPEs held by banks. This would enable 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.
- Amendments to the Building Societies Act 1986 — the government has published the responses to its earlier Call for Evidence and will now legislate to give building societies greater flexibility to raise wholesale funds, while retaining their mutual model. This will also entail modernisation of relevant corporate governance requirements in line with the Companies Act 2006.
The package of measures relating to retail markets is designed principally to provide additional protection for retail consumers by updating existing regulatory requirements to make them more effective, efficient and tailored to the current UK market.
- A review of the PRIIPs Regulation was previously proposed but the government has now initiated a consultation on plans to revoke it whilst also seeking views on an alternative framework for retail disclosure. The reform will be widely welcomed as the existing requirements are unduly burdensome and too narrowly focused on inflexible, prescriptive regulatory disclosure rather than meeting the information needs of retail customers. In parallel, the FCA has launched a discussion paper on the future disclosure framework. The new framework will likely mirror the approach adopted for the Consumer Duty which places a greater emphasis on the outcomes being generated for retail customers.
- The government is consulting on the consumer information requirements under the Payment Account Directive 2015. In a similar vein to the PRIIPs regulation, the proposed reforms are designed to address criticisms that existing requirements are too prescriptive or unnecessary in the UK context and therefore do not allow customers to readily compare current accounts.
- The reform statement also highlights the current consultation which aims to modernise the Consumer Credit Act (1974) to afford a greater degree of protection for consumers and improve outcomes. The consultation is ambitious in nature and is initially seeking views on the strategic direction of reform.
Alongside the above consultations, the government also announced its future intentions to consult on or implement changes on the following topics:
- New guidance to Local Government Pension Schemes on asset pooling by requiring them to ensure they are considering investment opportunities in illiquid assets.
- A new Value for Money framework for pensions, which will set standards in key areas such as investment performance, cost and charges and quality of service. This is designed to improve the pace of pension consolidation out of poorly governed and underperforming schemes.
- The repeal of EU legislation on the European Long-Term Investment Fund (ELTIF) to recognise that the new UK Long-Term Asset Fund (LTAF) provides a better fund structure for the UK market. To note, there are currently no UK ELTIFs so there will not be any backward-looking impact on firms.
- Amendments to the tax rules for Real Estate Investment Trusts (REITs) to remove some of the restrictions as well as ensuring that rules operate in line with their original intention.
- Codifying current UK policy for the VAT treatment of fund management into UK law.
The government also reiterates its intention to work with the FCA as it (re)examines the longstanding issue of the appropriateness of the boundary between advice and guidance with the aim (again) of seeking to improve access to helpful support, information and advice —while maintaining strong protections for consumers.
The announcement shows the continuing government focus on strengthening UK capital markets. New initiatives are:
- Establishing an Accelerated Settlement Taskforce — this will consider a UK approach to reducing settlement times to T+1. The US market is likely to move to T+1 settlement in 2024.
- An independent review of investment research which is likely to review the impact of the MiFID II research unbundling rules. The European Commission is proposing to further relax these rules in the EU.
- Launching a Call for Evidence on reforming the Short Selling Regulation.
- Working with the regulators and market participants to trial a new class of wholesale market venue which would operate on an intermittent trading basis. This is likely to support the secondary trading in private company shares and help facilitate their transition to public companies.
Beyond these announcements there are a series of other items which have been widely discussed and consulted upon:
- From the Wholesale Markets Review:
- A commitment to have a regulatory regime in place by 2024 to support a consolidated tape for market data.
- Secondary legislation in Q1 2023 to remove burdens for firms trading commodities derivatives as an ancillary activity.
- Publication of draft Statutory Instruments to implement the outcomes of prior consultations on the reform of the prospectus and securitisation regimes, and the Secondary Capital Raising Review.
The government has announced its intention to publish an updated Green Finance Strategy early in 2023. No further detail has been provided, but this is expected to contain an update on the UK Green Taxonomy.
In Q1 2023 the government will also consult on bringing ESG ratings providers into the regulatory perimeter — a move which the FCA has previously called for and has pre-empted with the creation of its voluntary ESG Data and Ratings Code of Conduct Working Group.
- Establish an FMI Sandbox in 2023 (to test and adopt new developments such as Distributed Ledger Technology) — legislation supporting this is in the Financial Services and Market Bill (FSMB).
- Legislate to bring payment stablecoins within the regulatory perimeter (also ensuring that this perimeter could be adapted to include investment-related cryptoassets at a later date).
- Publish a consultation exploring the case for a Central Bank Digital Currency —with an accompanying Technology Working Paper from the BoE.
The government has also published its formal response to the consultation on expanding the Investment Management Exemption to include cryptoassets which will facilitate their inclusion in the portfolios of overseas funds managed in the UK.
However, most notable, was the lack of reference to a consultation on regulating unbacked cryptoassets — something which had previously been expected before the end of 2022.