Regulation Update: The Current Status of the Edinburgh Reforms

The Financial Services and Markets Bill received royal assent on 29th June 2023. This act is critical to the delivery of the government’s post-Brexit vision for economic growth, and the creation of an open, sustainable, and technologically advanced financial services sector.

Importantly the Bill enables the delivery of the long-anticipated Edinburgh Reforms. As we approach the anniversary of the Chancellor’s announcement of this package of measures, let’s recap on what the reforms mean for our clients in the financial services sector.

What are the Edinburgh Reforms?

Also known as Big Bang 2.0, the Edinburgh Reforms are a set of sweeping regulatory changes for the UK’s financial services industry.

The package of reforms advances a set of 30 sector-wide policy initiatives as the UK moves away from EU retained law, and transitions to the UK Future Regulatory Framework, or Smarter Regulatory Framework (SRF).

The aim of the reforms is to build an “agile, proportionate and homegrown” rule book to shape the future of financial services regulation specifically designed for the UK. In announcing the measures in December 2022, Chancellor Jeremy Hunt said: “leaving the EU gives us a golden opportunity to reshape our regulatory regime and unleash the full potential of our formidable financial sector”. Key objectives include:

• Delivering a competitive marketplace promoting effective use of capital.
• Becoming a world leader in sustainable finance.
• Ensuring the sector is at the forefront of technology and innovation.
• Delivering better outcomes for consumers and businesses.

What happens next?

According to the Government, work has already begun in respect of Tranche 1 of the reforms.  This includes aspects of the UK Markets in Financial Instruments Directive (UK MiFID) as part of a broader Wholesale Markets Review, the securitisation review, and the Solvency II review.  Tranche 2 will include further implementation of the Wholesale Markets Review as well as reforms of Packaged Retail and Insurance-Based Investment Products (PRIIPs), short-selling, taxonomy, the Payment Services Directive, the E-Money Directive, and the Capital Markets Directive. 

A closer look at some of the changes we can expect.

We’ve cherry-picked and briefly summarised a handful of the reforms we can expect in the coming months:

• Market Data – the bringing together of market data from multiple platforms to improve market efficiency, reduce cost, and make UK wholesale markets more competitive.
• Short-Selling – giving the FCA the power to make regulations that prohibit uncovered short-selling and increase the disclosure threshold. Also streamlining the current regime to reduce the administrative burden.
• Financial Markets Infrastructure sandbox – enabling firms to test and adopt new technology and innovations.
• Ring-fencing – Reforming the current, which requires the largest UK banks to separate core retail banking services from their investment and international banking activities.
• Prospectus – Overhauling the UK’s prospectus regime and delivering the outcomes of the Secondary Capital Raising Review.
• PRIIPs – The government has published a consultation on a proposed alternative framework for retail disclosure in the UK, paying particular attention to products in scope, accuracy of disclosure, and the importance of balancing flexibility with comparability.
• Consumer Credit – modernisation of the Consumer Credit Act 1974 to make it fit for purpose, less prescriptive, and more outcomes-focused.
• Payments – enhanced powers to the PSR and the FCA in relation to their respective areas of retained EU payments legislation, including the extension of existing powers in relation to client money and safeguarding assets, the control of information, and the appointment of auditors.  In addition, the government has issued a policy statement on payment services regulation and has consulted on changes to the Payment Accounts Regulations (PARs).
• Securitisation – The repeal of the Securitisation Regulation to allow the FCA and the PRA to make new rules on securitisation.
• Sustainable Finance – updating the 2019 Green Finance Strategy to address the four key themes of capturing the opportunity, mobilising finance for energy security, climate, and environmental objectives, greening the financial system, and leading internationally. The government is also considering bringing environmental, social and governance (ESG) ratings providers within the regulatory perimeter to improve investment decisioning.
• Insurance – reform and repeal of Solvency II to enable the UK insurance sector to be innovative and internationally competitive, protect policyholders, and support insurers in investing in long-term productive assets.
• Senior Managers & Certification Regime– a review of SM&CR in respect of its effectiveness, scope, and possible enhancements

What can financial services firms expect?

The Government has announced that it expects to make good progress on both tranches by the end of this year. However, it is important to note that there is no fixed date for the revocation of retained EU law on financial services to be completed. Firms can therefore expect that this process will take a number of years and should have in place process for monitoring reform developments, responding to relevant consultations, and implementing changes.

Similarly, as the UK financial services regulatory regime evolves away from the EU law, firms with operations in both the UK and EU will need to conduct an in-depth review of the differences in legislation, and what they mean in practice, in order to remain compliant in both jurisdictions.

If you would like more information about the Edinburgh Reforms and how they might affect your business, or advice on the rapidly-changing financial services regulatory environment, contact a member of the Leverets’ team today.