In his Autumn Statement, Jeremy Hunt, the Chancellor of the Exchequer, set out a bold collection of reforms for the Financial Services sector – some new and some already in the making – paving the way for growth and a busy start to 2023!
In our view, the reforms can be grouped into three aims;
(1) Creating a regulatory framework that is more suited to the UK, which is now possible because of Brexit
(2) Positioning the UK as the world’s premier financial center, especially with respect to attracting investments through sustainable finance, innovation and technology
(3) Redressing the balance between consumer and business interests to promote competition in the UK market
At first glance, the list seems long and even daunting. However, on closer scrutiny it becomes clear that the propositions are not completely unfamiliar or unrelated. In this article we have analysed some of the key themes, their impact for the industry and how they support the larger objectives of growth and competitiveness.
We cover each of the 3 reform aims in turn:
1. Creating a regulatory framework that is more suited to the UK
Following the Future of Regulatory Framework (FRF) Review, the government has laid out an ambitious implementation plan for repealing retained EU law in financial services and replacing it with a new and smarter regulatory framework tailored to the UK.
Work is already underway and the momentum continues with further Consultations on the PRIIPS , the Payment Account Regulations, and the Short Selling Regulation. Some of the EU regulations (e.g., the ELTIF) will be repealed without replacement which will also help remove unnecessary clutter from the rule book.
This is a significant task and will have implications for the industry, the regulators and the way the industry is regulated.
Impact on the industry: All’s well that ends well
Looking first at the impact on the industry, the main takeaway here is that there is a clear aim to realign the UK Financial Services regulatory framework to the FSMA1 model, unencumbered by the direct application of EU regulations. And that’s a big positive in our opinion.
In the long run the industry is likely to benefit from the changes as the FSMA model of regulation will give the regulators significant flexibility, enabling them to be much more proactive and agile and thus foster a UK Financial Services landscape that is an attractive investment destination for the world.
But this realignment cannot simply be achieved by repealing EU law. It requires fundamental changes to the legislative framework, and as such will prove to be a resource-intensive exercise for the government and the regulators, and will involve significant policy, regulatory and legal resource as well as Parliamentary time over several years. Most importantly, the industry will also need time to adapt to the new framework and rules.
Impact on regulators: With greater power comes greater responsibility
The proposed changes to the regulatory framework are expected to be introduced through the FSM Bill[1] which also includes changes to the regulators’ statutory objectives, i.e. greater focus on growth and international competitiveness as indicated in the government’s letter to the FCA and the PRA. It introduces enhanced mechanisms for accountability, scrutiny, and oversight of the regulators by Parliament and HM Treasury. The Bill is also expected to strengthen the regulators’ engagement with stakeholders, which are proportionate to and appropriate for the regulators’ expanded responsibilities.
The enhanced accountability to the government for the expanded responsibilities may seem like a catch -22 situation for the UK regulators, as some would argue. How effective this will be is also disputed and comes at the risk of opening the door to a race to the bottom, especially if there is a continued push to politicise the roles of the CEOs of the PRA and FCA. Such a race, were it triggered, would undo decades of credibility the UK regulatory authorities have built up – and could even act to counter the FCA and PRA’s primary objective of to promote market stability, safety and soundness of firms and consumer protection.
Spotlight on the SMCR regime: Changing with the tides
We believe the Senior Manager and Certification Regime needs a special mention as the Chancellor announced that there will be a Call for Evidence to look at the legislative framework of the regime, as well as a review of the regulatory framework by the FCA and the PRA.
With new regulations like the Consumer Duty heavily relying on the regime and new sectors like Financial Market Infrastructures (FMIs) proposed to come in its scope in the near future, it would appear timely to review the framework for relevance and suitability in the current market conditions.
The proposed Call for Evidence (expected in early 2023) will also help flesh out a lot of the implementation challenges firms are likely to face around governance and monitoring on the new Consumer duty rules due for implementation by July 2023. This will be especially important to considering the FCA’s aim of focusing more on outcomes-based regulation going forward.
2. Positioning the UK as the world’s premier financial center
The second reform aim of the Edinburgh reforms is focused on promoting the UK as the world’s premier financial center. In this regard, several initiatives were covered in the statement, reflecting some that are already underway and some that are new.
Wholesale Markets reform gets a shot in the arm
The HMT’s Wholesale Markets review kicked off in 2021, but the consultation response in March 2022 seemed to leave things hanging in the air. This is now being addressed. Several pieces were highlighted, however, the most interesting was probably the commitment to have a regulatory regime in place by 2024 to support a consolidated tape for market data. MiFID II already attempted to encourage the adoption of a consolidated tape, but none has so far emerged over the past 5 years or so. Both the EU and the UK have looked at the MiFID II provisions to further encourage the establishment thereof in their MiFID II reviews.
While not originally part of the Wholesale Markets review, but clearly part of the same agenda, it is worth talking about the proposed Accelerated Settlements Taskforce. With the UK announcing it would not implement its version of the CSDR, it now seems to aim to further differentiate itself from the EU with the announcement of a taskforce to recommend an approach that works for the UK. It would mirror the US transition to T+1, although on a delayed timescale. The move is interesting in that CSDR may constrain the EU in moving quickly to T+1, providing a genuine alternative with a focus on reducing settlement cost vs the CSDR approach of reducing settlement risk. An interim report is expected by December 2023 with a final report and recommendations by end of 2024.
Sustainable finance remains a hot topic
On sustainable Finance, the proposals center around an updated Green Finance Strategy expected in early 2023 and a consolation in early 2023 to bring ESG ratings providers into the regulatory perimeter. The latter has been clearly needed given the low correlation often seen in this space and the consequent challenges this poses firms (see our article on ESG Data management challenges). The former is expected to build upon various flagship publications the UK has issued over the years, such as its Net Zero strategy and its Energy Security Strategy. The challenge will be ensuring that the update effectively builds on these to reduce confusion and increase clarity – something that such publications often however fail to do. With the UK Green taxonomy delayed at the time of writing and three fifths of it not planned until at least a year later, there is a risk that this adds to the complexity and confusion. Having said that, it does also provide the opportunity for the UK Green taxonomy to learn from the EU’s experience with its taxonomy – which has had its issues.
Technological innovation is being fostered and promoted
It is positive to see the UK committing to continue its engagement with the various DLT related proposals, including a long-awaited consultation on a sovereign digital pound (CBDC) design and legislating on establishing a safe regulatory environment for stable coins. However, both have been on the regulatory horizon for a while.
More noteworthy was the detailing of the long-mooted FMI sandbox, with details that this will now be implemented via the FSM Bill in 2023. With this being a key area for innovation over the past years, it is a logical step to setup an FMI sandbox especially given the continuing rollercoaster of digital asset trading. Providing the industry with the ability to test out such new offerings in a more controlled environment at the earliest is something we would certainly encourage.
Finally, we wanted to mention the talk in the speech about ‘to bring forward’ a new class of wholesale market trading venue. This announcement is vague and hence impact uncertain, but worth highlighting as an example of innovative thinking that the UK is trying to put forward to become a competitive destination. This venue, to be operated on an ‘intermittent basis’ is being touted as a ‘world first’. We’ll have to await further details to really be able to look at its true merits.
3. Redressing the balance between consumer and business interests
True to the maxim ‘charity begins at home’, the rest of the proposals focus on fostering a conducive market for consumers and businesses alike, to drive competition and growth within the UK domestic markets.
Announcements on reforming the Consumer Credit Act and measures to remove well-designed performance fees from the pensions regulatory charge drive home the point for better outcomes for both firms and consumers.
Similarly, broadening access to financial advice for mainstream investments, the FCA consultation published last month, which draws on the objective of improving access to helpful support, information and advice, while maintaining strong protections for consumers also found a mention in the Chancellor’s speech. This paper indicates loosening of tightly roped regulations ever so slightly to allow for organic collaboration between customers and businesses for mutual benefit.
Suggested amendments to the Building Societies Act 1986 to be able to raise wholesale funds and compete on a more level playing field with Retail Banks is another step in the direction of offering more choice to the consumer and promoting competition in the retail market along with the potential possibility of big tech entry and expansion in retail financial services.
Specifically for firms…
In the expected response to the independent review report aimed at reducing the rigidity of the Ring-Fencing regime, the government announced its intention to consult in mid-2023 on a series of near-term reforms including a review of the deposit threshold (with plans to increase the threshold from £25 billion to £35 billion for Ring-fencing to apply) and alignment with the resolution regime as it offers a more comprehensive solution to addressing the problems of ‘too big to fail’. This could potentially mean a lucrative two for one offer for businesses!
And finally, removing the rules for capital deduction for certain Non-Performing Exposures (NPEs) held by banks is another example of moving towards a more flexible approach to address provisioning of NPEs in the interest of simplicity, made possible due to the regulatory freedoms outside the EU.
Concluding
It feels like there are a lot of presents to unpack from the Chancellor’s speech this season. All these measures resonate with the government’s vision for an open, sustainable, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens.
Overall, we welcome the direction of travel and can see how these would lead to their stated aim. However, it won’t be for a while for the industry to truly realise the potential benefits of these initiatives. In the meantime, one can only hope that they were not on the ‘naughty list’…!
Authors: David Coolegem and Ellora Roy
With contributions from: Victoria Ng, James Jiang, Deepshikha Mittal, Vivek Santhosh and Nancy Verra
[1] Financial Services and Markets Bill
