In this episode of “The Standard Formula” podcast, host Robert Chaplin is joined by investment management partner Greg Norman to discuss the Edinburgh Reforms, which serve as the UK’s most significant divergence to date from EU financial services regulation. Although the Reforms focus on Brexit freedoms, many of the proposals are aimed at regulation that originates domestically and are intended to secure the UK’s status as a leading financial center.
Following the recently introduced Solvency UK for insurers, the British government has announced the Edinburgh Reforms, which propose various amendments to the UK’s financial services sector. The Reforms these are the most significant divergences from the EU’s financial services regulations and are intended to secure the UK's status as a leading financial center.
In this episode of “The Standard Formula” podcast, Skadden partners Robert Chaplin and Greg Norman discuss the proposed amendments and their implications for regulatory change. Rather than viewing this extensive list of reformations as similar to the “Big Bang” of the 1980s — the last dramatic transformational financial reforms in the UK — both Robert and Greg consider the Edinburgh Reforms to be a thoughtful change.
Many of the proposals found in the Reforms are aimed at domestic regulations, such as consumer credit, the bank ring-fencing regime and the senior managers and certification regime. Additionally, The Reforms are targeted at EU legislation considered to be rigid and burdensome to firms.
Tune in to hear about the implications of the new Edinburgh Reforms and what it means for the state of the UK moving forward.
- The Edinburgh Reforms are the largest regulatory reforms since the 1980s. When the UK left the EU, the large body of EU legislation that applied directly in the U.K. was transferred onto the UK statute book. The Reforms, which aim to target EU legislation considered too prescriptive in nature, are the most significant divergence to date from EU financial services regulation.
- The Reforms propose a more flexible system. If implemented, the proposed amendments will allow the UK government to construct a new regulatory regime. Ideally, this will combine the best of retained laws and international best practices to best serve the UK economy.
- The Reforms are expected to change domestic legislation. An objective of the Reforms is to facilitate the international competitiveness of the UK economy, which includes promoting inward investment; supporting innovation and new developments such as crypto, AI and machine learning; and ensuring the UK is attractive to internationally active financial services firms and activities.
From Skadden, The Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.
Rob Chaplin (00:18):
Welcome to the second episode of our Standard Formula Podcast. Today we're going to be talking about the Edinburgh reforms and asking whether they're revolutionary or thoughtful change. I'm Rob Chaplin, one of the FIG partners at Skadden who focuses on insurance. With me to discuss the reforms is my fellow partner, Greg Norman, who focuses on investment funds. Following the recently introduced Solvency UK for insurers, which we covered in the first episode of our podcast, the UK government has announced the Edinburgh reforms, a further series of reforms aimed at the UK financial services sector. The reforms intend to secure the UK's status as a leading financial center and are the most significant divergence to date from EU financial services regulation.
Importantly, although the government's announcement focuses on Brexit freedoms, many of the reforms are aimed at areas of regulation that originate domestically. For example, consumer credit, the bank ring-fencing regime, and the senior managers and certification regime referred to as the SMCR. The reforms supplement, the Future Regulatory Framework Review referred to as the FRF Review and its implementation through the Financial Services and Markets Bill.
Although the reforms represent the most extensive package of regulatory change since the UK left the EU, our view is that the changes don't represent a Big Bang 2.0 which is an illusion to the genuinely transformational and iconic UK financial services reform in the 1980s. Instead, we view the reforms as representing thoughtful change. Many of the proposals are targeted at EU legislation considered by the government to be too rigid or prescriptive in nature, resulting in disproportionate burdens on firms. It should nonetheless be noted that the UK regulatory framework is more prescriptive in many areas relative to the EU. The new FCA consumer duty also represents a greater focus in the UK on consumer protection more so than the EU position. So Greg, could you provide some background, please to the legislative reform program?
Greg Norman (02:37):
Thank you, Rob. Of course. So when the UK left the EU, the large body of EU legislation that applied directly in the UK at the point of exit was transferred onto the UK statute book by the European Union Withdrawal Act. The government intends to repeal and fold this retained EU law into regulation under the Financial Services and Markets Act, which will be delivered in two tranches. Work is already underway on the first tranche, which is focused on delivering the outcomes arising out of the wholesale markets, the listing, securitization and the Solvency II reviews.
The second tranche is focused on areas the government believes will bring the biggest potential for UK growth. This includes continued work on MiFID, Solvency II, PRIIPs, short selling, payment services, insurance distribution, capital requirements, and the long term investment funds regulation. Even though the announcement covers a wide spectrum of areas, the proposals are at varying stages of maturity, ranging from the creation of task forces, specific commitments and announcing certain reviews to cause for evidence and consultations.
Rob Chaplin (03:41):
So Greg, are you able to explain how the regulation of firms offering a package retail or insurance based investment product to retail investors in the UK will be affected by the proposed reforms?
Greg Norman (03:54):
Of course, the PRIIPs regulation has caused a lot of headaches, so the government has decided to repeal the UK PRIIPs regulation. The particular headaches issuers have struggled with is scope and also the highly prescriptive format requirements for the key information document. It should be noted that distribution to retail investors in the EU will still be subject to EU PRIIPs, so UK issuers may still have to consider it. And as also mentioned, firms will also need to consider the consumer duty, which could require firms to provide similar levels of information, albeit in a less prescriptive package.
Rob Chaplin (04:26):
And what's about short selling, securitization and the wholesale markets review?
Greg Norman (04:31):
Well, the short selling regulation regulates the short selling of shares listed on a UK market. The government has published a call for evidence focusing on the restrictions on uncovered short selling. It asks whether the mandatory covering requirements, the public disclosure requirements, and the FCA position reporting requirements are fit for purpose, bearing in mind broader objectives of market integrity and international competitiveness.
Securitization is regulated in the UK primarily through the securitization regulation, which is aimed to encourage securitization activity after a general decline following the global financial crisis. The government has published a draft statutory instrument illustrating how it will reform the regulation with changes primarily relating to due diligence requirements for institutional investors.
The government plans to build on the wholesale market's review. It has laid out another draft statutory instrument aiming to reduce the compliance burden of providing information on investment services provided to retail investors on a durable medium. The statutory instrument also removes a requirement for investment firms providing portfolio management or entering into contingent liability transactions to minority investors where the portfolio or value of the instruments depreciates by 10%.
These are quite modest changes on the periphery, but should be understood against earlier proposals to reduce the strictures of MiFID too. Further legislation is expected to reduce compliance burdens for firms trading commodity derivatives as an ancillary activity. The government has also proposed some liberalization of the payment accounts regulation and eventually folding it into the FISMA framework. And Rob, could you explain how these legislative reforms are to be implemented?
Rob Chaplin (06:11):
With pleasure, Greg. Although it's faced parliamentary resistance and may yet be amended, the government intends that the repeal of EU legislation will be conducted by the Retained EU Law (Revocation and Reform) Bill, which will automatically repeal any remaining retained law other than financial services law at the end of 2023. And the FSMB, which will repeal financial services retained law and replace it with a comprehensive new model framework that's customized to the specific profile of the UK's financial services industry. Under the FSMB, each repeal will take effect only once the government makes an instrument bringing the repeal into force. In doing so, the government may either repeal and not replace, or repeal but restate either in statute or via regulatory rules. In this way, the government will be able to construct a new regulatory regime that combines the best of retained law and international best practice with regulatory innovation designed to reflect and best serve the UK economy.
A key feature of the reforms is the devolution of responsibility in favor of the two main UK financial services regulators: the Prudential Regulation Authority and the Financial Conduct Authority. This more flexible system will be comprised of primary legislation, secondary legislation and rules made by the PRA and FCA. This approach may be seen as a return to the status in the UK prior to the dramatic expansion of EU financial services law. The government will be able to set specific have regards that the regulators must consider when making specific rules. There'll also be a power for the government to require the PRA and the FCA to make rules or review their rules in a specific area. Greg, are you able to describe how the reforms are expected to change domestic legislation?
Greg Norman (08:09):
Absolutely. The reforms will introduce a secondary objective for the FCA and the PRA intended to facilitate the international competitiveness of the UK economy. These include swiftly implementing the outcomes of the FRF Review, promoting inward investment, supporting innovation and new developments such as crypto, AI, and machine learning, and ensuring the UK is attractive to internationally active financial services firms and activities. Following the independent review on the bank ring-fencing and proprietary trading regime, the government will consult on changes to the ring-fencing regime by mid 2023, which will update the list of activities which ring-fenced banks are restricted from carrying out. These reforms will also take banking groups without major investment banking operations out of the ring-fencing regime altogether and raise the deposit taking threshold.
The government is also considering the independent review's recommendation to align the ring-fencing and resolution regimes where banks that are deemed to be resolvable can be removed from the ring-fencing regime. Although the Consumer Credit Act or CCA has mostly been transferred into the Consumer Credit sourcebook or CONC, there's still some overlap such that firms operating in the consumer credit space must consider both. Recognizing the complexity of this and the fact that consumer credit has significantly involved, the government is consulting on how to recast the CCA fully into the CONC. This is a welcome announcement given the myriad of complicated rules that consumer credit lenders must consider.
There's also an intention to codify current practices regarding VAT treatment of fund management services into UK law, covering existing UK exemptions and another exemption arising out of EU law. This will provide a clearer legislative basis for decisions made by fund managers and HMRC. The government and regulators will also commence the review of the SMCR and will look to launch a call for evidence to look at the effectiveness, scope, and proportionality of the SMCR. And finally, Rob, could you describe some of the other initiatives that the government has announced recently?
Rob Chaplin (10:14):
Yes. These initiatives include a consultation exploring a sovereign digital pound. This is in addition to the statutory amendments to establish a framework to regulate digital assets and stablecoins. The government is committed to having a regulatory regime in place by 2024, which will support a UK consolidated tape for market data. This mirrors developments in the EU. An independent review will examine the investment research landscape in the UK and its contribution to UK capital markets' competitiveness. And a task force will explore the potential benefits of moving to a T+1 industry standard for settlement, with its first report due by the end of 2024. The government won't rush the Edinburgh reforms, but there's a clear political incentive to deliver key wins ahead of the next general election. As such, we expect to see some of the most significant changes during 2024 before the election, while others will stretch beyond that timeline. That takes us to the end of this episode of The Standard Formula Podcast. We hope you found this episode useful, and we look forward to you joining us next time.
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