The Edinburgh Reforms

On 9 December 2022, in Edinburgh, the Chancellor of the Exchequer announced a set of reforms that are intended to drive growth and competitiveness in the financial services sector (the Edinburgh Reforms or the Reforms)¹.

This OnPoint provides a high-level overview of some of the key elements of the Reforms with particular reference to the asset management industry.

What do the Edinburgh reforms propose?

One of the aims of the Reforms is to build “a smarter financial services framework for the UK”. The UK Government had already set this in motion by establishing the Future Regulatory Framework (FRF) Review to determine how the financial services regulatory framework should adapt to the UK’s new position outside the European Union (EU), and how to ensure that that framework is fit for the future. As part of the Edinburgh Reforms the Government has also published a policy statement²setting out the implementation plan based on the Financial Services and Markets Act (FSMA) 2000 and the powers established in the Financial Services and Markets Bill (FSM Bill)³. One of the main elements of this is how to deal with retained EU law (REUL) in primary and secondary UK legislation which, going forward, should primarily be in the regulators’ rules. The Government proposes to deal with the many units of REUL (referred to as ‘files’) in tranches.

Work is already underway on Tranche 1 of REUL files, including:

the Wholesale Markets Review (WMR) which makes substantial amendments to parts of the Markets in Financial Instruments Directive (MiFID) framework, many of which are being implemented by the FSM Bill;
Lord Hill’s Listing Review, following which the Government will replace the Prospectus Regulation with an entirely new regime for admissions to trading and public offers;
the Securitisation Review, which identified several opportunities to improve the Securitisation Regulation; and
a review into the Solvency II Directive.

The files or subsets of files that will form Tranche 2 include (but are not limited to):

remaining implementation of the outcomes of the WMR, which identifies significant opportunities to reform the MiFID framework;
continue with Solvency II;
the Packaged Retail and Insurance-Based Investment Products (PRIIPS) Regulation;
the Short Selling Regulation;
the Taxonomy Regulation;
the Money Market Funds Regulation;
the Capital Requirements Regulation and Directive;
the Long-Term Investment Funds Regulation.

The Government expects to make significant progress on Tranches 1 and 2 by the end of 2023.

Annex 1 to the Policy Statement includes a full list of files that the Government will review and assess, including files which should be prioritised as part of Tranche 3.

In more detail….

Some more information on key themes:

1) Wholesale markets reforms - as noted above, the Government is taking forward MiFID framework reforms through the Wholesale Markets Review. Measures in the FSM Bill deliver key elements of this. To further support this agenda, the Government:

laid before parliament ‘The Markets in Financial Instruments (Investor Reporting) (Amendment) Regulations 2022’⁴, which will remove burdensome EU requirements related to reporting rules. This also builds on the reforms brought forward through The Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 in June 2021.
will bring forward secondary legislation in Q1 2023 to remove burdens for firms trading commodities derivatives as an ancillary activity, for example, manufacturers seeking to fix the future price of their purchases of raw materials.
is committing, alongside the FCA, to having a regulatory regime in place by 2024 for a consolidated tape for market data. This will bring together market data from multiple platforms into one continuous feed to improve market efficiency.
will launch an independent review of investment research and its contribution to UK capital markets’ competitiveness. The review is part of the Government’s wider commitment to enhance the UK’s ability to attract UK listings.
will establish a new industry-led Accelerated Settlement Taskforce⁵ to work to reduce settlement times from the current industry standard of two days.

2) PRIIPs and UK Retail Disclosure⁶ – in a move that will likely be welcomed by many market participants, the Government has launched a consultation on revoking the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation that forms part of REUL. The consultation seeks views on a new retail disclosure framework, as part of the FRF Review. The consultation closes at 11:59 pm on 3 March 2023.

3) Short Selling Regulation – the Government is seeking views on how it should reform the UK regulation of short selling. The consultation closes at 11:59pm on 4 March 2023.

4) Long Term Investment Fund Regulation – the Government plans to repeal EU legislation on the European Long-Term Investment Fund (ELTIF). It considers that the new UK Long-Term Asset Fund (LTAF) provides a better fund structure for the UK market. Meanwhile, in the EU, significant amendments are being made to the current ELTIF Regulation to improve its appeal as an EU fund vehicle. The ELTIF Regulation 2.0 and UK LTAF are not comparable regimes. There are no further details on this file.

5) Securitisation - the Government is also committed to bring forward reforms identified in HM Treasury's 2021 review of the Securitisation Regulation.

What else?

Other initiatives in the Edinburgh Reforms include:

1) Senior Managers & Certification Regime (SM&CR) - in Q1 2023 the Government will launch a Call for Evidence to look at the legislative framework of SM&CR to garner views on its effectiveness, scope and proportionality, and on potential improvements and reforms.

2) Sustainable finance – the Government will be publishing an updated Green Finance Strategy in early 2023 and will consult in Q1 2023 on bringing Environmental, Social, and Governance ratings providers into the regulatory perimeter.

3) Technology and Innovation - to ensure that the UK regulatory framework supports innovation, the Government is proposing to establish a safe regulatory environment for stablecoins – which may be used for payments – and ensure the Government has the necessary powers to bring a broader range of investment-related cryptoasset activities into UK regulation. It will:

consult on a UK retail central bank digital currency alongside the Bank of England;
publish a response to its consultation on expanding the Investment Manager Exemption to include cryptoassets;
implement a Financial Market Infrastructure Sandbox; and
work with the regulators and market participants to trial a new class of wholesale market venue which would operate on an intermittent trading basis.

4) Updating banking regulation and the ring-fencing regime – the Government will bring forward secondary legislation in 2023 to improve the functionality of the ring-fencing regime. In addition:

it will issue a public Call for Evidence in Q1 2023 to review the aligning the ring-fencing and resolution regimes.
the PRA intends to consult on removing rules for the capital deduction of certain non-performing exposures (NPEs) held by banks. This would allow the PRA to apply a judgement-led approach to address the adequacy of firms’ provisioning for NPEs, help to simplify the rulebook and avoid the unnecessary gold plating of prudential standards.
the Government will also legislate, when parliamentary time allows, to amend the Building Societies Act 1986 to give building societies greater flexibility to raise wholesale funds, enabling them to compete more effectively with retail banks while retaining their mutual model. As part of this, the Government will also modernise relevant corporate governance requirements in line with the Companies Act 2006.

5) Issuing new remit letters for the PRA and FCA – the Government is using the FSM Bill to introduce new secondary objectives for the FCA and PRA to provide for a greater focus on growth and international competitiveness while maintaining their existing primary objectives, including new remit letters setting targeted recommendations as to how the regulators should have regard to the Government’s economic policy.

6) VAT treatment of fund management - the Government has published a technical consultation, “VAT treatment of fund management: consultation”⁷, on proposals to codify existing policy to give legal clarity and certainty. The consultation closes at 11:59pm on 3 February 2023.

7) Consumers & Businesses – the Government says it will continue to work with regulators and industry to ensure the sector is delivering for people and businesses across the UK.

What next?

The Edinburgh Reforms have the potential significantly to change UK financial regulation. However, there are many open questions and, while we have some indicative dates, we are very much at the start of the process. What is clear is that we will increasingly see the UK move away from the EU regulatory framework.

Footnotes