The FS reform agenda gathers pace
December 2022
In October I wrote an article on Where next for financial services regulation in the UK?. It's fair to say that a lot has happened since then. We have a new Prime Minister and Chancellor. There has been an unprecedented level of volatility in core UK financial markets and some high profile failures in crypto. Unfortunately the cost of living crisis continues to bite on consumers and the economic outlook is even gloomier, albeit with initial signs inflationary pressures may have begun to reduce. The Government’s commitment to a significant overhaul of the UK’s regulatory framework remains consistent though and now, through the Edinburgh reforms, we have a huge amount of detail on these plans. So looking ahead to 2023 where are we now and how have things developed since October?
Competitiveness remains a priority
In my previous article I explored some of the issues I thought the government and regulators would need to grapple with when taking forward their plans for reform. First, that there would be a debate on regulatory independence in light of the intervention power (which would have allowed the government to overrule the regulators). This was certainly the case, in fact to the extent that the government has now dropped the proposal. The focus on ensuring the regulators support the competitiveness of the financial services sector has, however, certainly not gone away. The government has asked the regulators to focus on supporting trade in financial services, the UK’s attractiveness as a location for international firms and as a hub for innovation. HMT is also increasingly focused on the regulator's operational effectiveness, particularly in areas such as authorisations.
Second, I suggested that while there was a strong case for making improvements to the regulatory framework to make it more proportionate and suitable for the UK market, there was likely to be limited support across the industry for a regulatory bonfire which undermined the UK’s reputation globally. The Edinburgh reforms certainly represent a very extensive package of changes, including a number of re-announcements on the wholesale markets review (WMR) and Solvency II reform and a number of the areas I (and others) suggested might be included. These include a number of measures to reform the ring-fencing regime (including removing banks with limited trading activities from it), completely overhauling PRIIPs and reviewing the financial advice regime. The government’s announcements go much further though, and include a commitment to review the senior managers and certification regime, the short selling regulation, the securitisation regime and reform the consumer credit and building societies acts, among other things.
So are we looking at a radical deregulatory drive? We will of course have to wait for further details and the outcome of many different consultations, but at this stage I would say no. While the number of announcements (or in many cases re-announcements) are very significant and almost all parts of the financial sector will be impacted, the majority look closer to evolutions than revolutions. It should also be noted that in November the PRA published its landmark Basel 3.1 consultation, with a set of proposals which are both very robust and closer to the Basel committee requirements than the EU’s. The FCA is also introducing the consumer duty, which will very much raise the bar on retail conduct. So the reality is perhaps a bit more nuanced than the deregulatory narrative might suggest.
Playing to the UK's strengths?
The need for the regulatory framework to keep pace with market and technological developments remains a priority, and the Edinburgh announcements reveal the areas the government is prioritising in this context. A taskforce will be established to examine how settlements of trades can be done more quickly and a new form of wholesale market, which would operate on an intermittent trading basis to support those companies whose shares may have limited liquidity, will be created. As expected a consultation on a retail central bank digital currency will be out soon. HMT and the BoE will also proceed with the Financial Market Infrastructure (FMIs) sandbox, allowing FMIs to deploy technology such as distributed ledger technology. There is a commitment to a new green financial strategy in 2023 and to bring ESG ratings providers into scope of regulation. HMT has not however taken the opportunity to consult on a broader regulatory framework for crypto, such as the Markets in Cryptoassets (MiCA) regime in the EU, or to focus on topics such as open finance. It may well be that there is more to come in these areas, but the government’s focus seems to be on ensuring the regulatory framework supports the vision of the UK as an efficient, tech-enabled capital markets hub, playing a leading role in supporting the transition to net zero. This is quite a compelling vision, and builds on many of the UK’s existing strengths. But delivering it will of course depend on a range of factors, including but not limited to regulation.
The capacity challenge
The amount of resources in the regulatory system is of course limited. There is only so much the industry, regulators, HMT and Parliament can do at once. Taken together the future regulatory framework (FRF) and Edinburgh reforms add to an already very busy regulatory agenda. Under the FRF onshored EU regulations will be transferred from legislation into the regulators’ rulebooks. Through this process the regulators will make a number of the changes announced in the Edinburgh reforms. This will be an enormous undertaking and so it is right that the government and regulators have decided to prioritise reform of those pieces of regulation which they believe will have the greatest economic impact. The first tranche of reform will focus on implementing the WMR, Solvency II reform, the listings review and reform of the securitisation regulation. The second tranche will focus on completing WMR and Solvency II reforms but will also focus on nine other areas of regulation. HMT has committed to making significant progress on tranche one and two in 2023. It is of course understandable that the government wants to make swift progress on regulatory reform, but delivery of this programme will clearly be a huge undertaking for the regulators and industry. A large dose of pragmatism will be needed to ensure the workload does not overly impact other regulatory priorities for the sector, such as supervisory engagement and reducing the backlog of authorisation requests.
A focus on reform
The term Big Bang 2.0 to describe the government’s regulatory reform agenda seems to have been dropped, with the term Edinburgh reforms better articulating the largely iterative and UK-wide nature of the announcements. The current reform agenda was never likely to have the transformative effect of the original Big Bang in 1986, but it still has the potential to give the UK’s financial services sector a significant boost. Removing burdens to encourage investment and activity to be located in the UK, in a safe and suitable way, is to be welcomed. Technology has been transforming capital markets for decades but DLT, tokenisation and other innovations have the potential to power another wave of efficiencies. The government is right to identify green finance as a huge opportunity for the UK. The regulators and the regulatory framework have a key role to play in supporting this agenda, but delivery of it will require investment, access to skills and importantly now a period of political and regulatory certainty. The financial services sector enters 2023 with a busy year ahead, again.
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