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:
We have highlighted some of the key reforms.
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:
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.
The government has sent remit letters to the FCA and PRA recommending that they have regard to the government's objectives of:
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.
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.
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.
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.
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:
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:
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.
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:
If you have any questions about the Edinburgh Reforms and how they may affect your business, please contact our experts.