It's now just over six months since the Chancellor announced a package of measures to take forward the Government's picture of an "open, sustainable and technologically advanced" financial services sector, and which would build on the reforms proposed in the Financial Services and Markets Bill (FSM Bill). So where are we now? We have a Bill that isn't yet law, and many discussion and consultation papers waiting on responses and/or for regulators to have the powers they need to deliver the planned changes. Emma Radmore looks at what's happened since the reforms were announced.
FSM Bill: Royal Assent before the Summer Recess?
The FSM Bill has just (at the time of writing) finished its passage through House of Lords, and was due (on 26 June) back to the Commons. As a reminder, the Bill was introduced into Parliament just before the summer recess 2022, and completed its passage through the House of Commons before Christmas. Since then, momentum seems to have slowed. The "Committee" stage of line by line debate in the Lords started at the end of January and lasted for ten sessions, spread over two months. Over two months later, the Report stage started. The Report stage is a chance for the full House to engage in line by line debate of a Bill, but is normally expected to last less time than the Committee stage. It seemed that, given the many significant issues that were the subject of considerable disagreement in Committee, and the many amendments that were withdrawn by their proposer, but with a promise to bring them back at Report stage, there would be a huge challenge to get an agreed version of the FSM Bill through its Lords process and then agreed by the Commons before the Houses rise for summer. A far cry from the initial hope that it would receive Royal Assent by spring. But momentum appears to have picked up again. The Report stage progressed with less debate than expected, which enabled the Lords process to complete by mid-June. The question now is whether the Commons will wave through the amendments agreed in the Lords, or whether there will ne further debate. Until the FSM Bill becomes law, many of the Edinburgh Reforms can't progress to law either.
So, what is going on? In the rest of this article, we pick out some key areas for the financially regulated community kickstarted by the Edinburgh Reforms, with a focus on changes for the retail markets. Other significant initiatives outside the scope of this article include wholesale financial market reform, and reform of primary and secondary fundraising regulation.
Replacing retained EU laws
The Government has clearly put significant thought into the migration away from retained EU laws, and the good news for the financial services sector was that its laws were carved out of the controversial "sunset provision" in the Retained EU Law (Revocation and Reform) Bill, so there was comfort from an early stage that laws would not be repealed with no appropriate replacement in force. To coincide with the announcement of the Edinburgh Reforms, Treasury published its detailed plans, setting out the various ways in which it sees the transition working for different market sectors and pieces of legislation. All relies on the FSM Bill going through, and much relies on the PRA and FCA getting increased regulatory powers, and their new proposed objective of competitiveness. Key action for the retail markets will come with what Treasury has identified as the second tranche of work, which includes 43 "core" files, sorted by topic, including those on insurance distribution and payment services. Work within the tranche will involve assessing the complete package of rules to decide:
- Whether any provisions can be removed entirely
- What provisions can be replaced in a way that is more consistent with the style and approach of FSMA (which may include transferring provisions currently in legislation into FCA Rules), and
- Where regulation is needed, but a targeted policy change would be appropriate,
Among the more fundamental changes anticipated are the potential to overhaul some of the information requirements relating to payment services and payment accounts.
Consultation on the various proposals is closed, and Treasury initially said it hoped to have made progress on its priorities by the end of 2023. It has not yet provided feedback and, for now, everything seems stalled.
Planned reform of what remains of the Consumer Credit Act 1974 (CCA) was announced even before the FSM Bill was put before Parliament. Indeed, FCA had looked at the CCA and the remaining regulations made under it with a view to assessing, in a similar way to the Brexit review project, which parts are no longer necessary and which could be transferred into FCA Rules. If had concluded that, in principle, most of the information requirements could be housed in FCA rules, and that there were still protections that had not already been transferred out of the CCA that should remain in some form. But the project stalled with the pandemic, and now needs to be reconsidered, not least in light of the imminent Consumer Duty.
Treasury's consultation sought views specifically on:
- Definitions and scope, including whether the business lending perimeter should be reconsidered and whether the "small agreements" section is still valuable;
- Where to house the information requirements and whether to retain the strict prescribed wordings and formats and whether to bring consumer hire agreement requirements into line with regulated credit agreements;
- Whether key benefits like the CCA unfair relationship provisions are still necessary given the principles of the FSMA regime and the Financial Ombudsman Service, and, for those that are necessary, what are the risks and benefits of moving them to FCA rules, and
- How and by whom various sanctions for breach should be applied.
Treasury says it is analysing the feedback on this consultation, which closed in March.
Changes to ring-fencing
In March, Treasury published a call for evidence looking at the practicalities of aligning the ring-fencing and resolution regimes for banks, following a review which found that the benefits of ring-fencing would reduce as a bank resolution regime became more embedded. Treasury was asking for views on what benefits the ring-fencing regime offers which the regulatory framework does not otherwise provide and how the regimes could align better without either causing valuable protections to be lose or unnecessary burden to banks. However, the Edinburgh reforms also promised a consultation on a fundamental change that would see banking groups without major investment banking operations taken outside the regime, updates to the activities which currently restrict what ring-fenced banks can do and easing current restrictions that apply to ring-fenced banks operating subsidiaries or having clients outside the European Economic Area. That consultation is still awaited.
There was a fair amount of consternation at the indication that the Government would reform the Senior Managers and Certification Regime (SMCR). At the end of March, Treasury published a call for evidence, and the PRA and FCA published a joint discussion paper, both of which seek views on whether the regime has delivered what it intended, with a view to assessing whether any improvements or changes are needed and whether the model is appropriate for the UK's international competitiveness. There had been many complaints about the time the regulators were taking to deal with applications, especially for the most senior positions within banks, which not only caused the firm significant difficulties trying to manage changes of personnel but which also deterred good candidates from applying. Treasury sought comments on whether the regime is delivering against its original aims and whether those aims remain the right ones, as well as whether the UK could learn from other countries' experiences, and how its regime impacts on international competitiveness. PRA and FCA, meanwhile, asked for views on the effectiveness of specific requirements and whether the regulatory approach to approval and enforcement is right. Questions include those on whether the Senior Manager Functions and prescribed responsibilities are appropriate, the effectiveness of the Certification Regime, the usefulness of regulatory references and whether the Conduct Rules are effective in promoting good conduct across all levels of firms.
The response period on these publications has only recently closed, so it is likely to be some time before there is feedback.
Financial advice and guidance
For some years, FCA has worked to create a meaningful boundary between regulated investment advice and unregulated guidance. It has undertaken several initiatives, both of its own accord and as part of its implementation of EU requirements. The Edinburgh Reforms commit to work with FCA on examining the boundary. The aim is to provide access to helpful support, information and advice while continuing to provide strong protection for consumers.
FCA's most recent action was a consultation in late 2022, published before the Edinburgh Reforms were announced, and proposing a new "core investment advice" regime. It wants to make it easier and cheaper for firms to provide streamlined advice on mainstream investments. However, it acknowledges the fundamental importance of the holistic review of the boundary between advice and guidance, and understands that many respondents to its consultation want to see the output of that review before committing to the simplified, yet regulated, regime FCA has proposed.
In a speech given in March, FCA said it had been actively considering the scope of the review, and understands the importance of getting it right. It will carry out the review with a view to ensuring it delivers what consumers want and need. It is looking at the products that will be covered, and has confirmed it will include General Investment Accounts, ISAs and pension wrappers, but will not include Defined Benefit transfer advice, even below the threshold that requires consumers to take advice, on the basis of its standpoint that a firm must start by assuming such a transfer will not be suitable. For similar reasons it will exclude also other pensions that have safeguarded benefits such as a Guaranteed Minimum Pension or Guaranteed Annuity Rate.
On timing, the regulators have not committed to a timescale, and needs to consider how to organise engagement with industry over and above how it normally interacts with it, while also offering opportunities for more formal input.
A UK Central Bank Digital Currency
Finally, Treasury and the Bank of England published, in February, a consultation on the potential creation of a digital pound. The consultation stressed that no firm decision has yet been taken on whether a digital pound would be created – the decision is likely to be made in a couple of years, and, if the decision is to go ahead the new CBDC will be likely to be introduced towards the end of the decade.
The proposal is that the digital pound would be issued by the Bank of England, be valued on a par with cash and be interchangeable with cash. The Bank would use a core ledger to provide the minimum necessary functionality and then leave it to the private sector to design services to enable customers to use the currency. From a consumer point of view, the currency would be held in digital wallets, and would broadly use the same technology as contactless payments. It is envisaged that consumers and businesses could use the currency for online and in-store payments. Initially, there would also probably be a limit on the amounts of digital currency that any person could hold.
Consultation on this closed on 7 June. It is of course separate to, but often discussed with, the broader proposals around the regulation of activities related to volatile, non-backed crypto-currencies.
What happens next?
Next, we wait! The reforms are ambitious and wide ranging, and were always going to take time. The Government and regulators have already initiated discussions and consultations in the key areas discussed in this article, and others. But many of them cannot progress until the FSM Bill becomes law and provides the necessary regulatory powers and enabling provisions. Others can progress, but regulators will need to prioritise and work to achievable deadlines – and although there is increasing impatience to see change, it is critical that some of these structural changes, designed to bring benefits to the UK, regulated firms and their customers, deliver just that.
This article was written for, and originally published in, Compliance Monitor.