Early December 2022 brought a flurry of activity, laying the groundwork for some extensive changes to financial services regulation in 2023 and beyond. Parliamentary activity on the Financial Services and Markets Bill (the Bill) has now stopped until the New Year, but it has completed the major hurdle of its passage through the Commons.
The Government hopes for Royal Assent in the Spring, and indications are that it will look to bring its various provisions into force as soon as possible – and indeed, consultations on some aspects of it are already underway. Then, on 9 December, the Chancellor, speaking at a round table event in Edinburgh, announced a package of changes, only some of which are directly related to the Bill, and most of which are the direct result of the UK's desire to emerge from Brexit and position itself as an internationally competitive market place in the medium to long term.
Update on the Bill
The Bill finished its passage through the House of Commons on 7 December, and has now had its first reading in the Lords. The rest of the Lords process will take place in the New Year, after which the Commons must agree any Lords amendments before the Bill can proceed to Royal Assent.
The Bill had been hotly debated in the Public Bill Committee in the Commons, but the version of the Bill that resulted and which was discussed at report stage did not contain as many changes as may have been expected. Notably, the Government decided not to proceed with what would have been a very controversial intervention power that would have threatened regulatory independence, and various committee members did not press proposed amendments relating to access to cash and financial inclusion – although the points were brought up again at report stage.
The committee stage had resulted in some key amendments, not least to include a definition of crypto-asset and a clarification that the existing regulatory powers that regulate financial promotion and regulated activities can be used to regulate crypto-asset related activities. For further information on the committee stage, see our separate article.
Ultimately, although topics such as the national fraud strategy, access to cash and banking services and regulatory immunity were again hotly debated. The report stage resulted in amendments to insert new clauses:
- Setting detailed reporting requirements for the regulators
- Disqualifying any person paid by a regulator, the Bank of England or Treasury from being appointed to a statutory advisory panel
- Requiring the names of respondents to consultations to be published, provided those respondent have consented
- Enabling the Treasury to make regulations on the rights and liabilities of participants in unauthorised co-ownership alternative investment funds similar to those for authorised schemes.
Key elements of the Edinburgh Reforms
The "Edinburgh Reforms" (Reforms) will build on some of the changes the Bill will bring, while also kickstarting some long-promised reforms. Some previously unexpected significant changes are also being proposed. All in all, there will be over 30 reforms, aimed at creating an agile and proportionate UK regulatory framework that will boost growth and deliver the visions that Government originally set out in the Mansion House speech in 2021.
Below, we have summarised some of the major planned reforms:
Replacement of retained EU laws
The Bill will provide the necessary regulatory powers for repeal, amendment and replacement of all the parts of EU laws retained within the UK system after Brexit. The ultimate aim, as has been debated as part of the Bill's progress through the House of Commons, is to put as many of these requirements, insofar as they need to be retained, under the remit of the operationally independent regulators, primarily of course the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The Government feels the The Financial Services and Markets Act (FSMA) model has worked well and is still fit for purpose, and that the regulators should deal with matters through their rules where possible, but of course within certain constraints.
For this purpose, a new competitiveness objective is to be added for both regulators (and they have now received letters noting this), and they will be reminded to "have regard" to all relevant elements set out in the Bill. The Bill will also give the regulators powers they currently lack – for example, giving FCA rulemaking powers in relation to payments regulation.
The Government recognises the enormity of the task – and there is no deadline to get it all done by the end of 2023 as is currently proposed for the non-financial services sector. The work will be done in tranches. The first tranche will focus on the outcomes from the Listing Review, the Wholesale Markets Review, the Securitisation Review and the Solvency II Review, and consultations and policy papers on all these initiatives are already in the public domain. The Government has also used draft statutory instruments to show how new powers in the Bill may be used – specifically to use the new "Designated Activities Regime" to create new rules on public offers and admissions to trading, and how the securitisation regulation can essentially be split, so that firm-facing requirements will be in regulatory rules, with relevant other parts in legislation. There is also immediate action to reduce some of the more onerous EU-driven reporting requirements in wholesale markets.
The second tranche will involve areas that have the biggest potential benefits for economic growth, and Treasury has identified no fewer than 43 "core" files (involving many more currently separate pieces of legislation), including insurance distribution, payment services and Packaged Retail Investment-based Insurance Products (PRIIPs). For each file, there will need to be a detailed exercise looking at what can be removed altogether, what can be replaced in FSMA style, and in what areas regulation is needed, but a targeted policy change introduced.
The Government hopes to have made progress on its priorities by the end of 2023.
As part of this initiative, Treasury published papers proposing changes to the PRIIPs regime and retail disclosure generally, and on the information requirements in the payment accounts regulations. PRIIPs has never been welcomed, as it brings with it prescriptive consumer information requirements that are at best unhelpful and at worst misleading. Treasury now wants to move the requirements to FCA rules which will focus on clear and useful information for investors that is proportionate to the risk they are taking. In a similar vein, it is consulting on which of the current customer information requirements in the payment accounts regulations are useful, and whether there is any benefit in requiring payment services providers to provide fee information documents and statements of fees. Treasury is asking for comments on these proposals by 17 February and 3 March 2023 respectively.
Consumer Credit Act reform
Treasury had announced its intention to reform what is left of the Consumer Credit Act 1974 (CCA) in June 2022. After FCA took over consumer credit regulation, it had carried out a review looking at which parts of what remains in the CCA and the various secondary legislation made under it were simply not required, and what could be replaced with appropriate provisions within FCA rules. This project stalled with the pandemic, and now needs to be reconsidered, not least to take into account the issues with retained EU law and the introduction of the consumer duty.
In principle, FCA had concluded that most information requirements could be replaced by FCA rules and that there were some other protections which should be retained in some form. The exercise now is to consider everything that remains in the CCA, against a backdrop of five key principles and the changes in the regulatory environment, to establish what works best for consumers and the market. The new consultation, which is open until 17 March 2023, asks several specific questions, including how the information requirements could be recast and potentially made not so prescriptive, and which key protections (including s75 and the unfair relationship provisions) are replicated, or have their effects replicated, elsewhere.
Note that this consultation refers in passing to the upcoming regulation of 'buy now pay later' products and services, on which the Government has promised consultation in 2023.
Easing of the ring-fencing regime
The Government responded on the recommendations made by the independent panel on ring-fencing and proprietary trading, saying that it will consult in mid-2023 on several reforms which will, not least take banking groups that do not have major investment banking operations outside the scope of the regime, remove blanket geographical restrictions on activities outside the EEA and consider whether ring-fenced banks could be permitted to carry out any additional activities.
What next for the Senior Managers and Certificate Regime?
Perhaps the least expected element of the reforms announced a review into reform of the Senior Managers and Certification Regime (SMCR) in early 2023. The regime has been in place for banks since 2016, but for FCA solo-regulated firms only since the end of 2019. It has been increasingly criticised, first for the exacting standards the regulators expect, which has set a very high bar for approval and is leading to difficulties in institutions finding new senior management, and second for the lengthy delays in the regulators dealing with applications, which leads to uncertainty and disruption in businesses needing to implement changes in personnel.
In his ministerial statement following the announcement, the Chancellor said a government "call for evidence" would be an information-gathering exercise to get views on the regime's scope, proportionality and effectiveness and to seek views on potential improvements and reforms, while the PRA and FCA would review the regulatory framework.
Other elements of the reforms will include continued support for long term asset funds and the creation of a UK Central Bank digital currency, together with agreed changes that will give greater flexibility to building societies in the way they operate and raise funds. And, while the ability to support green finance initiatives runs through all planned reforms, there is a separate commitment to publishing a new green finance strategy early next year and consultation on bringing ESG ratings providers within the regulatory perimeter.
It is clear that the Government does not now intend to let up on its reform programme, and has already set out its stall in relation to many key initiatives we can expect in early 2023. Add this to the papers and consultations not referred to in the Chancellor's speech, but which Treasury committed to action as the Bill went through the Commons, and we can see a busy time approaching for consultations and policies, with some changes likely to start taking effect before the end of next year.