What you need to know about the Edinburgh Reforms

The post below was first published on our FSR and Corporate Crime notes blog:

The Chancellor of the Exchequer has announced a set of reforms which, in tandem with the Financial Services and Markets Bill, the government hopes will drive growth and competitiveness in the financial services sector. The Chancellor has made a written statement to Parliament on the measures proposed. This post summarises the proposed reforms which fall under the following categories:

• maintaining and building a competitive marketplace and promoting the effective use of capital;
• securing the UK’s leadership role in sustainable finance;
• ensuring the regulatory framework supports technology and innovation; and
• delivering for consumers and businesses.

Maintaining and building a competitive marketplace and promoting the effective use of capital

• Reforming the Ring-Fencing Regime for Bank: The government has published its response to the independent review of ring-fencing and proprietary trading. HM Treasury appointed an independent panel chaired by Keith Skeoch in February 2021 to undertake a statutory review of the ring-fencing regime and propriety trading. The independent review’s final report, published in March 2022, made a series of recommendations aimed at reducing the rigidity of the ring-fencing regime and addressing the unintended consequences identified by the panel.

The Chancellor has announced plans to consult on the reforms in mid-2023 with a view to bringing forward secondary legislation later in 2023. The proposed reforms incluincreasing the threshold for the ring-fencing regime from £25 billion to £35 billion retail deposits;

• • 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 European Economic Area; 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 ring-fenced banks.

The government also plans to issue a public call for evidence in Q1 2023 to explore options for aligning the ring-fencing and resolution regimes, which will include, but will not be limited to, the panel’s recommendation for the introduction of a new power for the authorities to remove banks from the ring-fencing regime that are judged to be resolvable.

• New PRA and FCA remit letters: The government is legislating through the Financial Services and Markets Bill (FSM Bill) to 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. With this in mind, the government has laid before Parliament new remit letters for the FCA and the PRA which set targeted recommendations for how the regulators should have regard to the government’s economic policy. The government has asked that the PRA and FCA have regard to supporting the government’s ambition to encourage economic growth in the interests of consumers and businesses as well as its objective to promote the international competitiveness of the UK.
• ‘Smarter regulatory framework’: The government has published a policy statement which sets out its approach to repealing and replacing retained EU law on financial services to deliver a comprehensive FSMA model of regulation tailored to the UK.

Background: The government had first consulted on the approach to adapting the UK’s regulatory framework in October 2020, followed by further consultation in November 2021. The FSM Bill, which implements many of the specific proposals for reform, was introduced in parliament in July 2022. The FSM Bill will repeal retained EU law (REUL) in financial services (which will only take effect once the government makes a SI bringing into force the repeal) and will provide a range of tools to enable the transition to the new FSMA model.

Implementation plan: The policy statement outlines the government’s plans for delivery of the implementation programme. This includes the principles that underpin how individual pieces of REUL should be prioritised and sequenced, the scope of the programme and how the government intends to engage with stakeholders. The government is planning for a phased approach, ordering policy areas into tranches. Work to review, repeal, reform and replace the first tranche of REUL files is already underway including work on the Wholesale Markets Review, Lord Hill’s Listing Review, the Securitisation Review and the review into the Solvency II Directive.

The government expects the following files to form Tranche 2:

• • remaining implementation of the outcomes of the Wholesale Markets Review;
  • continue with the review of Solvency II;
  • Packaged Retail and Insurance-Based Investment Products (PRIIPS) Regulation;
  • Short Selling Regulation;
  • Taxonomy Regulation;
  • Money Market Funds Regulation;
  • Payment Services Directive and the E-Money Directive;
  • Insurance Mediation and Distribution Directives;
  • Capital Requirements Regulation and Directive;
  • Long-Term Investment Funds Regulation; and
  • the consumer information rules in the Payment Accounts Regulation.

The government expects to make significant progress on Tranches 1 and 2 by the end of 2023. The government will review and assess the remaining files (see the full list at Annex 1 of the policy statement) and will consider the benefits of bringing any forward into Tranche 2, as well as deciding the order in which they should be prioritised within Tranche 3.

Illustrative draft SIs: The government has published the following illustrative draft Statutory Instruments (SIs) to give an indication of how the powers relating to REUL in the FSM Bill will be used, and how the relevant SIs may be structured. They do not constitute final policy and the accompanying explanatory policy notes should be referred to at the same time. The SIs cover the overhaul of the UK’s regulation of prospectuses, the reform of the Securitisation Regulation and payments regulation:

• • Draft Statutory Instrument – Admissions to Trading and Public Offer Regime
  • Public Offers and Admissions to Trading Regime – Illustrative Statutory Instrument Policy Note
  • Draft Statutory Instrument – Securitisation Regulation
  • Securities Regulation – Illustrative Statutory Instrument Policy Note
  • Draft Statutory Instrument – Payment Services and E-Money Regulations

• • FCA Rulemaking Power for Payments – Illustrative Statutory Instrument Policy Note
• ELTIF: The government has announced the repeal of EU legislation on the European Long-Term Investment Fund (ELTIF), reflecting that the new UK Long-Term Asset Fund (LTAF) provides a better fund structure for the UK market.
• PRIIPs: The government is consulting on the repeal of the PRIIPs Regulation and seeking view on a new direction for retail disclosure. In line with the new FSMA model, the FCA will be responsible for setting detailed disclosure rules. The framework set out in the consultation will empower the FCA to deliver a regime that promotes informed retail investor participation in UK markets. Responses are requested by 3 March 2023.
• Short Selling Regulation (SSR): The government is launching a Call for Evidence on reforming the SSR. This Call for Evidence represents the first step towards replacing REUL in this area with a regulatory framework specifically tailored to the UK. The government is seeking evidence to help it understand the views of market participants towards the practice of short selling and whether and how the practice should best be regulated. This review of the SSR intends to ensure that the UK’s approach to regulating the short selling of shares admitted to trading reflects the specificities of UK markets. This call for evidence does not explore other provisions in the SSR including the short selling regime for UK sovereign debt and UK sovereign credit default swaps, which the government will consider later. The government is also seeking to understand further where firms find that the requirements under the SSR interact with requirements under other regulations, such as the Market Abuse Regulation (MAR), the Central Securities Depositories Regulation (CSDR), Securities Financing Transactions Regulation (SFTR) and the Markets in Financial Instruments framework (MiFID). Responses are requested by 5 March 2023.
• Wholesale Markets Review/MiFID:
  • Reporting: The Markets in Financial Instruments (Investor Reporting) (Amendment) Regulations 2022 has been laid before Parliament. The SI will come into force on 7 June 2023 and will remove burdensome EU requirements related to reporting rules. The Regulations also build on the reforms brought forward through The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 laid in June 2021.
  • Commodities: The government will bring forward secondary legislation in Q1 2023 to remove burdens for firms trading commodities derivatives as an ancillary activity (e.g when manufacturers seek to fix the future price of their purchases of specific raw materials).
  • UK consolidated tape: The government is committing to putting in place a regime for a UK consolidated tape by 2024.
• Reforms to the Senior Managers & Certification Regime (SMCR): The government and regulators will review 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. The Call for Evidence aims to gather views on the regime’s effectiveness, scope and proportionality, and to seek views on potential improvements and reforms.
• Other reforms

The Chancellor also referred to the following measures and ongoing work:

• • a consultation on new guidance on Local Government Pension Scheme asset pooling;
  • increasing the pace of consolidation in Defined Contribution pension schemes;
  • improving the tax rules for Real Estate Investment Trusts (from April 2023);
  • changes to the Building Societies Act 1986 (government response and next steps here);
  • consulting on removing burdensome customer information requirements set out in the Payment Accounts Regulations 2015 (responses are requested by 17 February 2023);
  • welcoming the PRA consultation on removing rules for the capital deduction of certain non-performing exposures held by banks;
  • establishing an Accelerated Settlement Taskforce to explore the potential of faster settlement of financial trades in the UK;
  • committing to establish the Investment Research Review, an independent review of investment research and its contribution to UK capital markets competitiveness which forms part of the government’s wider commitment to enhance the UK’s ability to attract companies to list and grow;
  • delivering the outcomes of the Secondary Capital Raising Review; and
  • a consultation on reform to the VAT treatment of fund management (responses are requested by 3 February 2023).

Sustainable finance

The government is committed to aligning the financial services sector with Net Zero and to support the sector to unlock private financing. The Chancellor has referred to the following plans:

• Green Finance Strategy: An updated Green Finance Strategy will be published in early 2023.
• ESG rating providers: The government plans to consult 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

The government is keen to support innovation and leadership in emerging areas of finance and the Chancellor refers to upcoming plans as well as work which are already underway.

• Financial Market Infrastructure (FMI) Sandbox: The Chancellor refers to the government’s plans to set up a FMI Sandbox in 2023, the framework for which is set out in the FSM Bill.
• New wholesale market venue: The government plans to work with the regulators and market participants to bring forward a new class of wholesale market venue, which would operate on an intermittent trading basis. The government believes that this type of venue would be a ‘global first’ and would act as a bridge between public and private markets.
• Stablecoins and broader cryptoasset activities: The Chancellor refers to the FSM Bill which will provide the necessary powers to bring stablecoins used as payment, as well as a broader range of investment-related cryptoasset activities, into UK regulation.
• Expanding the Investment Manager Exemption: The government has published a response to its consultation on expanding the Investment Manager Exemption to include cryptoassets. Changes via HMRC regulations are expected this year.
• UK Central Bank Digital Currency (CBDC): The government plans to release the UK CBDC consultation, together with the Bank of England, in the coming weeks. The Bank of England will also release a Technology Working Paper setting out the technology considerations surrounding building a digital pound.

Delivering for consumers and businesses

The government has stated its commitment to:

• Consult on Consumer Credit Act Reform: The government has published its consultation on reforming the Consumer Credit Act 1974 (CCA). The government announced its intention to reform the CCA in June 2022 with the aim of moving the majority of the CCA from statute to FCA rules. The government envisages that the change will take a number of years and this consultation is the first step of that reform. Responses are invited by 17 March 2023
• Remove well-designed performance fees from the pensions regulatory charge cap: The government has consulted on reforms to remove performance fees from the pensions regulatory charge cap and plans to lay regulations in early 2023.
• Work with the FCA to examine the boundary between regulated financial advice and financial guidance: The FCA is currently consulting on proposals for a new core investment advice regime which aims to allow firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on investing into stocks and shares ISAs.

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