Authors

Charlotte Hill

Partner

Read More

Daniel Hirschfield

Senior Knowledge Lawyer

Read More

Clare Reynolds

Senior Counsel

Read More

Katie Fry-Paul

Associate

Read More
Authors

Charlotte Hill

Partner

Read More

Daniel Hirschfield

Senior Knowledge Lawyer

Read More

Clare Reynolds

Senior Counsel

Read More

Katie Fry-Paul

Associate

Read More

15 December 2022

The Edinburgh Reforms – financial services matters

Edinburgh may bring to mind the famous annual festival of performing arts but it is also one of the UK's foremost financial services hubs, having been a significant centre of financial services for over three centuries – the Bank of Scotland was founded there back in 1695 (just one year after the Bank of England) and the Royal Bank of Scotland in 1727. Its prominence was emphasised further on 9 December 2022 when the Chancellor of the Exchequer, Jeremy Hunt, launched a large package of reforms to the regulation of financial services in the UK at an industry roundtable in Edinburgh (the Edinburgh Reforms).

The Edinburgh Reforms, dubbed by some as 'Big Bang 2.0', build on the Financial Services and Markets Bill 2022/23 (FSM Bill) and are part of the government's focus on five growth sectors, financial services being one of them. The government wants to help "turbocharge" growth in financial services across the UK, a sector that already contributes £216 billion a year to the UK economy.  

The 31 measures announced are organised around the following four objectives:

  • Supporting a competitive marketplace that promotes effective use of capital.
  • Ensuring the UK is a world leader in sustainable finance.
  • Enabling the financial services sector to be at the forefront of technology and innovation.
  • Delivering for consumers and businesses

We have highlighted some of the key reforms.

A competitive marketplace promoting effective use of capital 

The 5 "Rs" - reviewing, repealing, reforming and replacing retained EU law

Following the government's Future Regulatory Framework Review, the government confirmed that it planned to deliver a comprehensive model of regulation centred around the Financial Services and Markets Act 2000, which is tailored to the UK.

In its policy paper published on 9 December 2022, "Building a smarter financial services framework for the UK", the government explains its approach to repealing and replacing retained EU law on financial services.  

The government's implementation programme is informed by three principles:

  • updates to rules should reflect the specific characteristics of the UK market and its position outside of the EU
  • changes should be sequenced logically and support an accessible and streamlined framework
  • the speed of change should be manageable for government, the regulators and the industry.

It is dividing its implementation programme into tranches with each area of retained EU law identified being referred to as a 'file'; a full list of files – 43 in total - appears as Annex 1 to the paper.  

Tranche 1 consists of delivering the outcomes of the Wholesale Markets Review, Lord Hill's Listing Review, the Securitisation Review and the Solvency II Directive Review – work that is already in progress. Tranche 2 will adopt a 'twin-track' focus, considering those areas best placed to deliver improvements to UK economic growth alongside other areas where the benefits can be seen more swiftly eg repealing areas of regulation which are no longer relevant to the UK industry. 

The files within Tranche 2 include MiFID, PRIIPs, the Taxonomy Regulation, the Payment Services Directive and the E-Money Directive, Insurance Mediation and Distribution Directive and the Capital Requirements Regulation and Directive. The government aims to make significant progress on Tranches 1 and 2 by the end of 2023. It will also assess and review other files in Annex 1 to determine whether these should be added to Tranche 2 or considered in Tranche 3.

The government has stressed the importance of its programme being both evidenced based and informed by the perspective of all relevant stakeholders and has established an industry engagement group to assist it with delivering the programme. 

The paper closes with three examples of statutory instruments, each of which demonstrates the government's approach to repealing retained EU law.  The SIs relate to the reform of the Prospectus Regulation, the repeal and restatement of some of the Securitisation Regulation, and giving the FCA powers in respect of payments regulation.

Regulators asked to focus on growth and international competitiveness

The government has sent remit letters to the FCA and PRA recommending that they have regard to the government's objectives of:

  • medium to long-term economic growth in the interests of consumers and businesses, and
  • promoting the international competitiveness of the UK, which includes the government's support of new technology in financial services such as crypto technologies, artificial intelligence and machine learning. These recommendations complement the new secondary objectives that the FSM Bill will give the regulators (to promote growth and international competitiveness).
Revoking the PRIIPs Regulation and building an alternative disclosure framework
 

Good disclosures play a key component in the retail investment market, helping consumers engage with capital markets and purchase investments that are aligned with their investment goals, risk appetite, and long-term aims. The current rules on disclosures for retail investments derive from the PRIIPs Regulation, which has been widely criticised because of the misleading information that it requires to be provided to investors and the burden it places on firms. 

While there have been targeted amendments to the UK PRIIPs rules to address some of the most challenging aspects of the regime, the government is now consulting on repealing PRIIPs and replacing it with an alternative retail disclosure framework better suited to the needs of investors. Retail disclosure requirements will be removed from legislation and subject to the FCA's rulemaking powers. The FCA will become responsible for retail disclosure and given the powers to integrate UCITS and PRIIPs disclosure rules into a joined-up UK retail disclosure framework. In parallel with the consultation paper, the FCA has published a discussion paper (DP22/6) as part of its preparation for making and implementing a new disclosure regime. The FCA recognises the need for its disclosure framework to reflect an increase in digital distribution and seeks input on the delivery, presentation and content of retail disclosure.

Responses to the consultation paper should be made by 3 March 2023; feedback on the discussion paper must be made by 7 March 2023. 

Capital deduction of certain non-performing exposures

The government welcomes the PRA's upcoming consultation on removing rules for the capital deduction of certain non-performing exposures held by banks noting that this would allow the PRA to adopt a judgement-led approach to address the adequacy of firms’ provisioning for non-performing exposures and would help to simplify the PRA rulebook. 

Reviewing the Senior Managers & Certification Regime

The Senior Managers & Certification Regime (SMCR) was introduced for banking firms in 2016 and insurers in 2018. It was applied to most solo regulated firms in 2019 and to benchmark administrators in 2020 and it is being extended to a range of financial market infrastructures through provisions in the FSM Bill.  

The government has confirmed that it will be undertaking a review of SMCR in Q1 2023. It will launch a Call for Evidence on the legislation underpinning the regime. This will be an opportunity for the government to obtain information from stakeholders on the effectiveness, scope and proportionality of the SMCR and to garner views on possible enhancements. In parallel, the FCA and PRA will review the regulatory framework.

Investment Research Review

As part of the government's commitment to enhance the UK's ability to attract companies to list and grow, it will be establishing an independent review of investment research and its contribution to UK capital markets competitiveness. 

A world leader in sustainable finance

The government is putting significant energy into ensuring the financial system is at the centre of delivering the UK's Net Zero commitment and reinforcing the UK's status as a "premium financial centre for sustainable finance" in the world.

To this end, it has announced that it will:

  • Release an updated Green Finance Strategy in 2023.
  • Consult in Q1 2023 on extending the regulatory perimeter to ESG providers.
 
Financial services at the forefront of technology and innovation 

The government is committed to ensuring the UK regulatory framework is one that fosters innovation and leadership in what is a rapidly evolving sector and to promoting the adoption of trailblazing technologies.

The package of reforms announced in this area include:

  • A consultation by the government and the Bank of England on a UK retail central bank digital currency.
  • The implementation of a Financial Market Infrastructure Sandbox in 2023.
  • Working with the regulators and market participants, trialling a new class of wholesale market venue that would operate on an intermittent trading basis.

These measures support the FSM Bill, which will bring stablecoins within regulation when used as a form of payment and enable the government to regulate a wider range of investment-related cryptoasset activities.

Delivering for consumers & businesses

The government recognises that the financial services is critical to the real economy. To ensure that the sector delivers for people and business, it has:

  • Published a consultation paper on the modernisation of consumer credit legislation, which flows from its announcement in June that it intends to reform the Consumer Credit Act 1974. The consultation paper asks for feedback on a range of topics including the principles that should inform the reform, removing obstacles that may prevent lenders offering financing for renewable energy solutions (taking into account the UK's Net Zero commitment), introducing new definitions, whether the business lending scope of the regime should be changed, information requirements, rights and protections, sanctions, financial inclusion and considering adaptations to the regime to ensure it is compatible with Islamic finance. Comments should be made by 17 March 2023.
  • Committed to work with the FCA to look at the distinction between regulated financial advice and financial guidance. The FCA announced in September that it would be undertaking a "holistic review of the boundary between advice and guidance", which was highlighted again more recently in an FCA speech on key priorities for the financial advice industry.  
 

Help is at hand

If you have any questions about the Edinburgh Reforms and how they may affect your business, please contact our experts.

 
Call To Action Arrow Image

Latest insights in your inbox

Subscribe to newsletters on topics relevant to you.

Subscribe
Subscribe

Related Insights

Modern glass skyscraper
Financial services regulatory

Financial services matters - January 2023

13 January 2023

by Charlotte Hill and Daniel Hirschfield

Click here to find out more
Modern glass skyscraper
Financial services regulatory

Financial services regulatory update - December 2022

1 December 2022

by Daniel Hirschfield and Charlotte Hill

Click here to find out more
Safety Deposit boxes storage in a Bank vault
Financial services regulatory

Financial services regulatory update - November 2022

2 November 2022

by Charlotte Hill and Daniel Hirschfield

Click here to find out more