The Edinburgh Reforms: Big Bang 2.0?

On 9 December 2022, Chancellor of the Exchequer, Jeremy Hunt, outlined the Government’s Financial Services Package designed to drive growth and competitiveness in the UK financial services sector (the Edinburgh Reforms). The Package, consisting of 30 measures, was signalled in the Autumn Statement and is intended to complement the Financial Services and Markets Bill 2023-23 (see our briefing here). The Bill provides the Government and UK with significant powers to overhaul regulatory policy and rules in post-Brexit UK. The Bill successfully completed its remaining stages in the Commons and is expected to receive Royal Assent by Spring 2023.

The Edinburgh Reforms are intended to deliver the next chapter of the Government’s vision for UK financial services, set out at Mansion House 2021, and are divided into four categories: a competitive marketplace promoting effective use of capital; sustainable finance; technology and innovation; and consumers and business. In some areas, such as sustainable finance, the Government's "vision" appears remarkably "lite" on actions and we can expect further detail down the line. It is perhaps not time yet to finalise Brexit 2.0 type implementation projects. However, these papers outline the regulatory agenda for the UK and set the scene for years to come. Firms should take time to review the material, and those operating in both UK and EU will need to consider any likely challenges and possible divergences.

A competitive marketplace promoting effective use of capital

Smarter regulatory framework

The Future Regulatory Framework (FRF) Review was set up to determine how the financial services regulatory framework should adapt to the UK’s new position outside of the EU. The outcomes of the FRF Review are now being delivered through the Financial Services and Markets Bill 2022-23. The Bill also repeals retained EU law, enabling the Government to replace it with legislation designed specifically for UK markets law and to establish a comprehensive FSMA model of regulation. The Chancellor's speech and the Government's Policy Statement on building a smarter financial services framework set out further details in this regard.

• Approach to prioritisation: The Government has identified 43 “core” files of retained EU financial services law (these are set out in Annex I to the Policy Statement) and it intends to carry out the repeal of this legislation by dividing it into a series of tranches. The Government states that the process of reviewing and replacement of EU law may take several years.
• Approach to reforms: Retained EU law will be repealed without replacement or with replacement legislation that aligns with the FSMA model. Regulatory requirements currently set out in retained EU law will be dealt with in one of three ways: where requirements are no longer needed, the legislation will be repealed without replacement; where the substance of regulatory requirements remains appropriate with no demonstrable need for policy change, those requirements will either be restated in legislation, or they will be repealed so that the regulators can replace them with regulator rules; and replacing with provisions consistent with the FSMA model, while also delivering targeted policy change.
• Implementation of tranches: The Government outlines it proposed approach to splitting files into tranches and states that work is already underway to review, repeal, reform and replace the first tranche of retained EU law files. These consist of: the Wholesale Markets Review (amending UK MiFID framework); Lord Hill’s Listing Review (following which the Government will commence the repeal of the Prospectus Regulation); the Securitisation Review, which identified several opportunities to improve areas in the Securitisation Regulation; and the review into the Solvency II Directive. The Government is proposing to adopt a "twin-track" approach to Tranche 2 of the programme, whereby it will bring forward those areas with the biggest potential benefits to deliver improvements to UK economic growth. It also intends to begin work on some files where benefits can be delivered more quickly. It notes that other files, like MiFID, are likely to take time to fully transition into the FSMA model given their size. Tranche 2 files include the following: the remaining elements of the Wholesale Markets Review; the Packaged Retail and Insurance-Based Investment Products; the Short Selling Regulation; the Taxonomy Regulation; the Payment Services Directive; the Capital Requirements Regulation and Directive; and the consumer information rules in the Payment Accounts Regulations 2015. The Government expects to make significant progress on Tranches 1 and 2 by the end of 2023.
• Illustrative secondary legislation: The Government has published the following three statutory instruments to show its approach to the use of its powers under the Financial Services and Markets Bill 2022-23: the Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023; the Securitisation Regulations 2023; and the Electronic Money and Payment Services (Amendment) Regulations 2023. These concern the reform of the Prospectus Regulation and Securitisation Regulation. A draft statutory instrument containing measures to ensure that the FCA has the necessary powers to make rules to replace retained EU law has also been published. Policy notes accompanying the draft statutory instruments have also been published.

On the same day, the FCA published a document on its approach to the FRF in light of the Government's Policy Statement. It notes that the Financial Services and Markets Bill 2022-23 contains legislation to deliver the outcomes of the FRF Review, and so it is waiting for the Bill to receive Royal Assent and adds that it may adjust its implementation plans based on the legislative provisions as enacted.

Ring-fencing Regime for banks

The Government published its response to the March 2022 final report of the independent review of ring-fencing and proprietary trading and has confirmed its intention to consult in mid-2023 on a series of near-term reforms (with a view to bringing forward secondary legislation later that year):

• raising the current £25 billion threshold of retail deposits for coming within scope of the rules to £35 billon;
• taking banking groups without major investment banking operations out of the regime;
• updating the definition of Relevant Financial Institution;
• removing blanket geographical restrictions on ring-fenced banks operating subsidiaries or servicing clients outside the EEA; and
• reviewing and updating 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 a ring-fenced bank.

The Government has also announced plans for a public call for evidence, in the first quarter of 2023, to review the practicalities of aligning the ring-fencing and resolution regimes.

Wholesale Markets Review: MIFID

• Reporting: The Government has published the Markets in Financial Instruments (Investor Reporting) (Amendment) Regulations 2022 (SI 2022/1297). The Regulations remove the requirement for firms providing portfolio management services to inform retail clients whenever the overall value of their portfolio depreciates by 10%. The Regulations also state that investment firms must provide information in electronic format to all clients or potential clients, (except where the retail client/potential retail client has been informed of and has exercised their right to receive the information on paper). The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 (SI 2021/774) relaxed certain reporting requirements in respect of professional clients.
• Commodities: The Government will bring forward secondary legislation in Q1 2023 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 plans to work with the FCA on having a regulatory regime in place by 2024 to support a consolidated tape for market data.
• Investment research: The Government will launch an independent review of investment research and its contribution to UK capital markets competitiveness.

Call for evidence on Short Selling Regulation

The Government intends to repeal the Short Selling Regulation, and the call for evidence is the first step towards replacing retained EU law with a regulatory framework specifically tailored to the UK. The Government will consider which aspects of the regime that should remain in legislation and which should be delegated to the FCA to set in its rules.

Areas consulted on include whether:

• the uncovered short selling restrictions under the SSR are appropriate;
• the FCA should specifically monitor short selling to help support market integrity and market confidence;
• there are specific position reporting requirements/arrangements that could be changed to alleviate the cost and burdens of reporting;
• there are any benefits or risks associated with amending the current reporting threshold and whether there is support for reverting the threshold to 0.2%;
• the requirement to publicly disclose net short positions under the SSR should still exist and the likely impact to firms/the market if public disclosure requirements were to be removed;
• the current market maker exemption regime in the SSR functions efficiently; and
• there any alternative arrangements to short selling bans that could be put in place (including arrangements from other jurisdictions).

The call for evidence closes on 5 March 2023, and the regime concerning the short selling regime for UK sovereign debt and UK sovereign credit default swaps sovereign debt will be considered at a later date.

Consultation on PRIIPs and UK Retail Disclosure

The Government is consulting on the repeal of PRIIPs Regulation and is seeking views on a proposed alternative framework for retail disclosure as part of the implementation of the FRF. The closing date for comments is 3 March 2023.

Views are sought on whether:

• retail disclosure should aim to ensure that an investor is empowered to make well-informed decisions related to the product that they are purchasing, rather than focusing on comparability
• disclosure requirements should be flexible, with prescriptive requirements for format and structure only when deemed necessary by the FCA;
• PRIIPs-related retail disclosure elements in legislation should not be maintained;
• there are any wider obstacles that prevent or discourage firms from offering investment products from different jurisdictions to UK retail investors, and what actions the Government should take on this issue;
• a less prescriptive disclosure regime would facilitate innovative disclosure formats going forward; an
• there are other priorities for retail disclosure reform that the Government and the FCA should consider in future and whether there are other challenges or trends in retail disclosure that regulators and policymakers should consider.

Consultation on information requirements in the Payment Account Regulations

• The Payment Accounts Regulations transposed the EU Payments Accounts Directive in 2015. The Government is looking into whether to remove certain customer information requirements related to bank accounts under the PARs and is seeking views on (among other things): positive and negative impacts of the requirements for payment service providers to provide consumers with Fee Information Documents and/or Statement of Fees; and whether the presentational requirements under Schedules 1 and 2 of the PARs are necessary. Responses must be submitted by 17 February 2023.

Remit letters for the Prudential Regulation Committee and FCA

The Government published letters sent from the Chancellor to the FCA and the Prudential Regulation Committee, the committee that exercises its functions as the PRA. These letters set out how regulators can have regard to aspects of the Government's economic policy. The Financial Services and Markets Bill 2022-23 introduces a new secondary objective for the FCA and the PRA to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy (including in particular the financial services sector) and its growth in the medium to long term. The letters state that the regulators should note: the Government's wish to have the outcomes of the Future Regulatory Framework Review implemented; and the Government's support for innovation and new developments in financial markets and the use of technology in financial services.

SMCR

The Chancellor confirms that the Government and regulators will separately commence a review of the Senior Managers & Certification Regime 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. The Government's call for evidence will aim to elicit views on the regime's effectiveness, scope and proportionality, and to seek views on potential improvements and reforms.

ELTIFs: It's Bye Bye as the Government confirms plans to repeal the regulations for the European Long Term Investment Fund, to reflect the fact that no ELTIFs have been established in the UK and that the newly established Long Term Asset Fund (LTAF) regime provides a fund structure better aligned to the UK market.

Sustainable finance

The Government is aiming to ensure that the financial system plays a major role in the delivery of the UK’s net-zero target and confirms it will:

• publish an updated Green Finance Strategy early 2023; and
• issue 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. These services are increasingly a component of investment decisions, and the Government wants to ensure improved transparency and good market conduct.

Technology and innovation

Reforms in this area build on the UK’s desire to harness the benefits of emerging technologies.

• Accelerated settlement: The Government has set up a taskforce on accelerated settlement and published a policy paper containing terms of reference. The Government notes that the settlement period has shortened in recent decades, in line with the capabilities of modern technology and that the most common standard at present is "T+2" (this requires most trades to be settled two days after trade date, with some exceptions). It notes that there is some discussion as to whether a further shortening to "same-day" settlement is possible or desirable in the future (potentially with the aid of new innovations such as distributed ledger technology). Objectives of the taskforce include the following: exploring the case for moving to an accelerated settlement cycle, such as "T+1", in the UK, and outlining how this could be implemented; evaluating current settlement performance across the UK sector and assessing potential improvements and reforms; and providing recommendations, including how any changes should be implemented by industry, regulators and government. The Chair of the taskforce is to provide an interim public report on the taskforce’s initial findings by December 2023, with a full report with recommendations by December 2024.
• CBDC: The Government is to consult on a UK retail central bank digital currency alongside the Bank of England in the near future.
• Sandbox: The Government will implement a Financial Market Infrastructure Sandbox in 2023. The Financial Services and Markets Bill 2022-23 contains details on a regulatory sandbox for market infrastructure.
• Wholesale market venue: The Government states that it is working with the regulators and market participants to "trial a new class of wholesale market venue which would operate on an intermittent trading basis". Further details have not been provided in this regard, so we will have to wait to see how this pans out.

Delivering for consumers and businesses

The Government has published a consultation on reforming the Consumer Credit Act 1974. The deadline for responses is 17 March 2023. The Government confirms that it will work with the FCA to look into the boundary between regulated financial advice and financial guidance.