The Edinburgh Reforms – What next for UK Financial Services?

The global pandemic of Covid-19 has clearly overshadowed the UK’s full departure from the EU and for the most part the “so what” factor in relation to Brexit has been and remains a reality. The impact of Brexit until now has likely been felt by most as nothing more than a ripple, except for some issues like those at border/passport control areas and a lot of work for legal and compliance departments to make various pieces of legislation and regulation UK centric.

That was until 9th December 2022, when the Chancellor of the Exchequer, Jeremy Hunt, announced some 30 proposed reforms designed to “seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses”.

Mr Hunt went on to say “And we will go further – delivering reform of burdensome EU laws that choke off growth in other industries such as digital technology and life sciences, leaving the EU gives us a golden opportunity to reshape our regulatory regime and unleash the full potential of our formidable financial sector”

“We are committed to securing the UK’s status as one of the most open, dynamic and competitive financial services hubs in the world”.

The reforms could also see a new role for the regulator too, with Mr Hunt also saying that the Financial Conduct Authority (FCA), will be given a “secondary objective” to deliver growth and competitiveness, alongside ensuring stability and security for businesses and consumers.

In what has been collectively termed the “Edinburgh Reforms”, these 30 reforms are being hailed as the biggest shake up and reform the UK has seen since Brexit itself.

However, not everything that the Reforms propose will be new, or unexpected, as the following analysis of some of the key topics reveals:

Creating a Smarter Regulatory Framework – Governmental work has already been undertaken in the guise of The Future Regulatory Framework (FRF) Review, which will be delivered through the Financial Services and Markets Bill (FSM Bill), which is currently making its way through Parliament.  The FRF will shape how the UK’s regulatory framework operates outside of the EU and remains fit for purpose going into the future.

So why the need for the review? At its highest level, two key reasons exist:

  1. The current framework of regulation was introduced by the Financial Services and Markets Act (FSMA) 2000, and later updated to address the regulatory failings which were highlighted as contributory factors to the 2008 global financial crisis. Therefore, at best our existing framework was last updated 14 years ago, and at worst, introduced 22 years ago.
  2. As the UK left the EU, the legislation relevant to the UK was transferred onto the UK statute book by the European Union (Withdrawal) Act 2018, or “retained EU law (REUL)” as it is known. This has resulted in the UK retaining primary and secondary legislation, which, under FSMA, should be matters handled under the UK regulatory bodies’ rules (Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)). As they sit currently under REUL, any amendments to these pieces of legislation are a burdensome process for Parliament, rather than the less burdensome act it should be for the Regulators.

Deconstructing the current REUL and inserting it into Regulatory rule books will be a significant task and the Government proposes to break this down into two tranches. Some of the work in the first tranche is already underway, such as the Wholesale Markets Review, the Listing Review, Securitisation Review and the Solvency II Directive review.

The second tranche of work will focus on areas such as the reform of MiFID II, Solvency II, the Insurance Distribution Directive  and the consumer information rules in the Payment Accounts Regulations 2015. Other topics expected to receive attention as part of Tranche 2 are:

  • Plans to repeal PRIIPs
  • Short Selling
  • Prospectus Regime Reform
  • Plans to repeal ELTIFs.

As mentioned previously, another change to be seen as a result of the smarter regulatory framework is the additional role of the Regulators in supporting the Government’s objective of medium to long-term economic growth in the interests of consumers and businesses, particularly in relation to:

  • Facilitating investment in productive assets, i.e. venture and growth capital
  • The Government’s ESG priorities, sustainable finance and supply of long-term investment to support UK economic growth
  • Securing better outcomes for all consumers, including through improved competition
  • Fostering a well-functioning housing market that contributes to a wider economic growth, including helping first time buyers access the market

Some of the above are already underway by means of the introduction of FCA’s Consumer Duty.

The Regulators will also see further requirements placed upon them, with an objective to support the Government in promoting the UK’s international competitiveness.

There are some significant and resource intensive topics to be handled here, and the Regulators’ resources are not infinite. How they will cope with these assigned duties and tasks remains to be seen, but the Government has stated that it “expects to make significant progress on both tranches by the end of 2023”.

All Change for Banking Regulation – as a possible indication that the banking sector has made significant satisfactory progress since the financial crisis of 2008, the Edinburgh Reforms plan to make the follow updates:

Ring-Fencing Regime – Following the independent Skeoch review on Ring Fencing and Proprietary Trading, the Government intends to issue a public Call for Evidence in Q1 2023, based on a proposed alignment between the ring fencing and resolution regimes.

Non-Performing Exposures – One of the Reforms will see the PRA consulting on removing the rules for capital deduction of certain non-performing exposures (NPEs) held by banks. Consequently, the PRA would be able to apply a judgement-based approach to:

  • address the adequacy of firms’ NPE provisions
  • simplify the UK rulebook
  • avoid unnecessary gold plating of prudential standards

Amendments to the Building Societies Act (BSA) 1986 – One of the reforms focusses attentions on the requirement to update the BSA, and it is understood that the Building Societies Association has been working with the Treasury for some time to introduce secondary legislation that will partially update the BSA, which it is reported has not been fully revised for 25 years.

The Building Societies Association said, “We heartily welcome this announcement which marks excellent progress in delivering legislation that is fit for purpose, enabling building societies which are a key part of today’s financial services sector to better serve their members and provide competition in financial services.”

Consumer Credit Act (CCA) 1974 – On 16th June 2022, the government announced its intention to reform the CCA (some would say not before time), and this intention was followed up as one of The Edinburgh Reforms, following which HMT published a consultation focusing on matters such as:

  • the strategic direction of reform
  • the accessibility of credit and financial inclusion
  • how the consumer credit regulatory environment could be changed to ensure optimal performance of regulation surrounding
    • customer communications,
    • consumer protections and
    • sanctions for firms that do not adhere to regulatory standards.

Senior Managers and Certification Regime (SMCR) – Additionally, as part of the Reforms, the Chancellor stated that the Government will be undertaking a review into the SMCR in Q1 2023.

SMCR was first introduced as part of the response to the financial crisis of 2008, and the effectiveness of the regime has largely gone untested since. It is fair to say that since the introduction of SMCR there has been a change in culture within firms, mainly for the better, but there has been a consistently low number of enforcement actions taken against individuals covered under the regime, and questions need to be asked such as:

  1. Does the low level of enforcement actions demonstrate that SMCR has been successful in ensuring that only the right people are placed into the most senior positions in firms and that the personal liability factor has been a successful deterrent from sub-standard senior management behaviour?
  2. Has the SMCR not been used to its full potential by the Regulators?

In a similar way that the new secondary objectives of the Regulators is to support the Government’s objectives in economic growth, protecting the interests of the consumer and businesses, and promoting the international competitiveness of the UK, a fully effective SMCR will help the Regulators to achieve and maintain a reputation as credible governing bodies of the UK financial services sector. The UK Regulators must do and be seen to be doing the right thing, and to be holding those responsible for failures and for jeopardising the interests of the consumer to account for their actions, or lack thereof.

Technology and Innovation – Every area of industry needs to keep abreast of developing technology and to move and adapt accordingly, and the financial services sector is no different.

The Reforms have detailed measures that the Government will be taking to ensure that the sector remains at the cutting edge of technology, thus continuing to promote the UK’s competitiveness in the world market. The Reforms will focus on areas such as:

Financial Markets Infrastructure Sandbox – as part of the FSM Bill, measures to implement a sandbox in 2023 to enable firms to test new technology and innovation such as distributed ledger technology have been announced

Establishing a cryptoasset regulatory regime – the FSM Bill will encompass a wider range of crypto related activities under the regulatory umbrella

Central Bank Digital Currency (CBDC) – a consultation will be published to explore the possibility of a CBDC

Conclusion – The foregoing really is just the tip of the iceberg, a high-level review of just some of the topics being addressed under the Edinburgh Reforms. The Reforms are bold, and arguably necessary if the Government is to stay ahead of the game in respect of it’s plans and ambitions for the UK, which from one stand point it needs to be if it is to prove that Brexit was a pain worthwhile for the long-term greater good.

As with everything, the proof of the pudding will be in the eating. Will the Reforms create the playing field that the Government wants in reality; how far away from the EU and the REUL will the Reforms take us; and, post Reforms, what image will the rest of the world have of the UK? Will the Government’s objectives in relation to competitiveness, technology and innovation for example be realised?

The answers to these questions remain to be seen and for firms trading in the UK only, the impact of the Reforms whilst significant, will at least be contained to within the UK.

However, no matter where the UK is left on the international stage or how many of the Government’s objectives are met, one thing that Compliance Officers of firms who hold a UK and EU presence need to be doing now, is starting to plan for a dual regulatory approach. If, once implemented, the Edinburgh Reforms take the UK some way away from the EU’s position, then firms will see themselves needing two or possibly three sets of policies, procedures, risk assessments and staff training, to cover the UK regime, the EU regime and the areas where common regulatory and legislative practice exists.uk-and-eu-regimes_website

How can Complyport help?

If this article has raised any questions about the “Edinburgh Reforms” and how these 30 reforms on regulatory framework will impact your business, or you think your firm may require assistance, please contact Jan Hagen via email at jan.hagen@complyport.co.uk to book a free consultation.

About Complyport

Complyport is on the FCA’s Skilled Panel list and is a market leading consulting firm supporting the UK financial services industry for over 20 years.

We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice.

  • Operational resilience & Cybersecurity advice
  • CASS advice and protections of client assets
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  • Financial Promotions management software solutions
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  • Financial Crime and Forensics
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Contact our Head of Regulatory Business Solutions, Jan Hagen via email at: jan.hagen@complyport.co.uk to book a free consultation.

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