Many of the financial regulatory reforms announced in Edinburgh on Friday by Jeremy Hunt, Chancellor of the Exchequer, had a familiar ring to them. Banks, investment firms and anyone selling products to or into the UK market will need to engage with the detail of what was published.
“The Edinburgh Reforms 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,” Hunt told an industry audience in the Scottish capital on December 9.
“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,” he said.
In all, Hunt outlined 21 areas where the UK intends to go its own way.
Scope for industry to shape “Brexit freedom” reforms
Industry has been quick to welcome many of the “Brexit freedom” announcements, although the European Union is also reviewing — or in the case of artificial intelligence has already completed — similar reforms.
Ring-fencing was only ever a UK solution to the 2008 financial crisis and so could have been reviewed at any time. The same can be said of the Senior Managers and Certification Regime (SMCR).
Ring fencing, packaged retail and insurance-based investment products (PRIIPs), changes to the Building Societies Act, and wholesale markets reforms have been scheduled on the Regulatory Initiatives Grid since at least May. The HM Treasury consultations published last week, however, suggest there is still considerable scope for industry to influence the final shape of each of these regimes.
The consultation on the Consumer Credit Act 1974, likewise, suggests that the government’s final thinking on the future shape of the UK’s retail lending regime is far from set. The questions in the call for evidence on short-selling indicate that HM Treasury’s thinking on is at a very early stage.
Both the PRIIPs and Consumer Credit Act consultations show that the government is alive to the opportunities of selling products in the age of smart phones.
International competitiveness secondary objective
Alongside the consultations and call for evidence documents published last week, Hunt also set out how he expects both the Bank of England’s Prudential Regulation Committee and the Financial Conduct Authority (FCA) to use their new secondary objective for international competitiveness.
“The government, through the Financial Services and Markets Bill, will ensure financial services regulation will be tailored to UK markets in order to bolster the competitiveness of the UK as a global financial centre and deliver better outcomes for consumers and businesses,” Hunt said in both letters.
The government expects the FCA and the Prudential Regulation Authority (PRA) to support the swift implementation of the outcome of the future of regulation review by designing UK-specific financial rules. It will also expect both regulators to encourage international trade through concluding deference arrangements, ensuring the UK is an attractive destination for international financial firms, and supporting the development and use of new technology including crypto, artificial intelligence and machine learning.
Edinburgh Reforms package
The reforms fit broadly into three buckets, said Albert Weatherill, counsel in the financial services group at law firm Norton Rose Fulbright in London. The first, including Consumer Credit Act reform, showed the government utilising the possibilities created by Brexit to bring about greater harmonisation.
“It is a bit of a reset on how we deal with the structure of our regulatory framework,” Weatherill said on the firm’s Regulation Tomorrow podcast.
The second “bucket”, including the forthcoming review of the SMCR and short-selling and ring-fencing, concerns attempts to make proportionate changes to regulation to relieve some of the regulatory burden on firms.
“I think this bucket is tied quite closely to the growth agenda,” he said.
The third “bucket” is fintech, including a promised consultation on a central bank digital currency and trails for a new class of wholesale market venue.
Consumer Credit Act
“The reform of the Consumer Credit Act will mark the biggest shake-up in consumer credit in generations,” said Myron Jobson, senior personal finance analyst, at online investment platform Interactive Investor.
“Attitudes to credit have changed since the act was introduced half a century ago … It is important that language around credit is made clearer. The reason many borrowers get into difficulty is because they don’t fully understand the consequences of what they’re taking on,” Jobson said.
There is some genuine progressive thinking on evidence among the 30 questions in the consultation on Consumer Credit Act reform. Question two asks how lending rules can be revised to assist the UK government’s ambition to be the leading green financial centre. Views are being canvassed on how better to spur loans for electric vehicles and green mortgages.
Question 26 asks how protections for borrowers with mental health conditions can be built into lending rules. Questions 27 and 28, meanwhile, seek views on how lending rules can be made more compatible with the Sharia concept of Islamic finance, which bans interest.
Alongside these there are questions which consumer groups have already flagged as potentially problematic. Question 10 asks whether certain consumer protection, including section 75 of the Consumer Credit Act, should be retained. Questions six, 18 and 20 ask whether unenforceability rules should be expanded and if — and to what level — sanctions should be applied to firms found to have breached such rules.
The disclosure rules for packaged retail investments have been controversial since their inception. Industry has long pointed out that some requirements are potentially misleading for investors. Reform has been promised virtually since the UK voted to leave the EU, despite an FCA review in 2018 concluding that it was fund managers’ unreliable mathematics, rather than the rules, that were leading to the potentially misleading disclosures.
That said, industry has welcomed the consultation paper.
This was a lobbying win for the investment industry, said Richard Stone, chief executive of the Association of Investment Companies (AIC) in London.
“We applaud the abolition of PRIIPs and will be arguing for a disclosure regime which helps investors make better investment decisions and puts investment companies and open-ended funds on a level playing field. The FCA should act swiftly to sweep away the confusing mishmash of disclosures and put in place a fair and transparent framework,” Stone said in a statement.
HM Treasury is proposing to scrap the PRIIPs regime in its entirety and instead require the FCA to create a new disclosure regime which will cover both packaged products and Undertakings for the Collective Investment in Transferable Securities (UCITS) products.
The 10 consultation questions also seek views on digital disclosure formats and obstacles preventing overseas firms from offering investment products to UK investors.
A review of the SMCR would be launched in Q1 of 2023, Hunt said.
The PRA’s December 2020 review of the regime concluded that the SMCR was working effectively. The lack of enforcement against senior individuals when firms are found to have breached rules or caused harm continues to rankle with lawmakers, however.
Furthermore, as reported, the PRA is unable to say how many individuals have been reported to it by firms for misconduct as it does not force firms to report this data centrally.
Banking lobby group UK Finance conducted its own review of the regime in 2019. The review, carried out by law firm Ashurst, made eight recommendations for improving the regime including a lighter touch for senior managers at non-core firms and a redrawing of individuals classified as certified.
The extent to which the government intends to revise the regime is unclear. Any changes, or removing it entirely, will present difficulties for the FCA; the Consumer Duty, set for introduction in July, is anchored by the SMCR.
Without the SMCR at its foundation the FCA will lose an essential accountability mechanism at the heart of the new regime. The Consumer Duty itself is used to underpin the government’s thinking in both the Consumer Credit Act and PRIIPs consultations, further complicating matters.
The SMCR review was unlikely to bring wholesale changes, said Sidika Ulker, financial regulatory counsel at law firm Ashurst in London.
“It appears it should allow for some proportionality, and — the industry would hope — more certainty. I believe the review will generally show that the regime has, at a macro level at least, brought good outcomes, so I doubt we will see material change,” he said.
There is a need for caution before changes are introduced to the regime, said Ben Blackett-Ord, executive chair at regulatory consultancy Bovill in London.
“Having a system that is effective at policing, and then punishing, senior individuals is key to the credibility of the regulatory system overall, and therefore our future competitiveness as a global financial centre. The SMCR still has a long way to go to prove its worth, and a review is timely if the regime is to serve its proper purpose of bringing senior people to account,” Blackett-Ord said.
The 26 questions in the call for evidence on short selling canvass opinion on whether the UK should retain the existing EU regime or scrap rules regarding short-selling altogether.
The EU short-selling regulation was used extensively by some member state regulators during the early months of the COVID-19 pandemic. Italy, Spain, France, Belgium, Austria and Greece all imposed short-selling bans, and the European Securities and Markets Authority (ESMA) also lowered the threshold for firms to notify it of their short-selling positions from 0.2 to 0.1.
ESMA reviewed the effectiveness of its short-selling rules in 2021 and published final recommendations for changes in April.
Questions 21-23 of the call for evidence ask whether the FCA should retain the ability to ban short selling and, if not, what alternatives might be deployed instead.
The government has published its response to the Skeoch review. It said it would consult on the review’s recommended changes to the ring-fencing regime by mid-2023. The government also said it intends to raise the threshold at which the ring-fencing regime kicks in to
£35 billion of retail assets. It is currently set at £25 billion.
A call for evidence on aligning the ring-fencing regime with the bank resolution regime and possibly scrapping the former entirely was promised “later in this parliament”.
The package of reforms as a whole was welcome, Ulker said.
“This is a well-timed and wide-ranging reform proposal. It is surprising that it has taken the Treasury six years to deliver on low-hanging benefits in the post-Brexit era. Proposals in the digital area deliver good signalling but we are still lagging behind Europe. It is an incredibly important step for the UK to reassert itself as a global financial services hub,” Ulker said.
This article was originally produced by Thomson Reuters Accelus Regulatory Intelligence on 12 December 2022