In the Autumn Statement, the Chancellor highlighted the need to review retained EU law for the financial services sector, as one of five key growth areas. The Edinburgh Reforms build on this ambition, introducing a raft of new proposals and drawing on pre-existing regulatory plans over the last year. Focusing on deregulation, the changes take a step back from post-crisis reforms to create a regulatory landscape that is attractive to investors and supports growth across the UK.
Promoting the effective use of capital
This is perhaps the most complicated area of the Edinburgh Reforms and the one with the most moving parts – outlined in greater detail in the sections below. Changes include creating a smarter regulatory framework, updating banking regulation and ringfencing, steps to improve growth and competitiveness, reforming wholesale markets, and plans to promote investment.
A smarter regulatory framework
In its policy statement 'Building a smarter financial services framework for the UK’, released to coincide with the Chancellor’s Edinburgh Reforms announcement, the government outlined two tranches to complete this work, aiming to make significant progress on both by the end of 2023.
The proposed changes include:
- Reforming the prospectus and securitisation regimes, to implement the Hill review and bring forward planned amendments to the Securitisation Regulation
- Repealing the European Long Term Investment Fund (ELTIF) regulation as there are no ELTIFs in the UK and the Long Term Asset Fund (LTAF) achieves the same goal
- Creating a UK focused regime to regulate short selling
- Establishing a new regime for retail disclosures, to replace the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation
- Removing customer information requirements under the Payment Accounts Regulations
Banking regulation and ringfencing
Bringing forward pre-existing plans following the Skeoch review, the government will review the ring-fencing regime and assess how it can align to resolution planning. Simplifying banking regulations, the PRA will consult on a more judgement-based approach to provisioning for non-performing exposures. The government also plans to update the 1986 Building Societies Act, to allow building societies to raise wholesale funds for greater competitiveness against retail banks, and modernise corporate governance requirements.
Focusing on growth and competitiveness
The Edinburgh Reforms create new secondary objectives for the PRA and FCA, to focus on growth and international competitiveness. New remit letters include targeted recommendations for how the regulators will support economic policy.
As one of the more controversial announcements, the government will reform the Senior Managers and Certification Regime, to improve its effectiveness and proportionality. Launching a Call for Evidence in the first quarter of 2023, the government will focus on the legislative changes needed, while the PRA and FCA will assess the regulatory aspects.
Reforming wholesale markets
Following the Wholesale Market Review in 2021, the government plans to update the Markets in Financial Instruments Directive (MiFID) framework and has published new reporting requirements.
Additional changes include:
- Simplifying the rules for firms trading commodities derivatives as an ancillary activity (Q1 2023)
- Consolidating the tape for market data through a new regulatory regime from the FCA by 2024
- Commissioning an Investment Research Review to assess what makes the UK competitive and attractive for investors
- Creating an Accelerated Settlement Taskforce to explore the potential for settling trades faster to reduce counterparty risk and improve efficiency
Taking a multi-tooled approach to unlocking investment, the Edinburgh Reforms draw on pre-existing plans to reform Solvency II and corporate governance regulations, and action recommendations from the Secondary Capital Raising Review.
Further changes include:
- Consultations for the Local Government Pension Scheme (LGPS) covering asset pooling (early 2023), and investment opportunities in illiquid assets
- A DWP led consultation on a Value for Money framework, to improve governance and performance in pension schemes (supported by the FCA and Pensions Regulator)
- Changes to tax rules for Real Estate Investment Trusts (REITs)
- Reforms to VAT treatment of fund management for greater clarity
A focus on sustainable finance
Sustainable finance reforms aim to help the UK reach its net-zero target and establish its position as a leader in responsible investment. As such, the Edinburgh Reforms announce an updated Green Finance Strategy, due in early 2023. In a welcome move, the government is also turning its attention to ESG ratings providers and will consult on bringing them into the regulatory perimeter (Q1 2023), to ensure more consistent market data for investors. HM Treasury will also join the newly formed ESG Data and Ratings Code of Conduct Working Group as an observer.
Technology and innovation
Cryptoassets are a key focus under the Edinburgh Reforms, mostly highlighting existing initiatives. This includes bringing forward a consultation on a central bank digital currency to explore the use case and potential design, supported by a technical working paper. It will also improve stablecoin regulation through the FSM Bill, ensuring the UK has the power to regulate all investment-related cryptoasset activities. Finally, HMRC will finalise regulations to expand the Investment Manager Exemption, allowing UK-managed overseas funds to include cryptoassets in their portfolios.
Additional moves to improve innovation include:
- Establishing a Financial Market Infrastructure Sandbox in 2023 to test new infrastructure innovations
- Bringing forward plans for a new class of wholesale market venue to close the gap between public and private investment markets
Consumers and businesses
Turning its attention to consumers and businesses, the government has published a new consultation paper to reform consumer lending to reflect a more digital economy. It has also previously consulted on removing performance fees from the regulatory charge cap to encourage investment in UK innovation, and will move this into regulation in 2023. Plans to assess the boundary between financial advice and guidance will help improve consumer support.
Staying up to date
While many of the Edinburgh Reforms build on or highlight existing initiatives, there are a number of new announcements and consultations in the works.
To stay up to date, key dates for Q1 of 2023 include:
- SM&CR – Call for Evidence
- Ringfencing and Resolution Regimes – Call for Evidence
- Updated Green Finance Strategy
- ESG ratings providers - consultation
Contact Alex Ellerton for more information on the Edinburgh Reforms and what they mean for your business.