Dr Matthew Connell provides an update on changes to the UK’s financial services regulations post-Brexit
In December 2022, the UK government introduced its package of ‘Edinburgh Reforms’, which it said would “turbocharge growth and deliver a smarter and homegrown regulatory framework for the UK – that is both agile and proportionate”.
The argument is that the EU’s primacy in setting out financial services legislation left UK regulators simply as supervisors, not rulemakers.
As HM Treasury said: “This constrained the regulators’ ability to determine the most appropriate regulatory requirements for UK markets.” Returning the power to make rules to UK regulators will allow the UK “to seize the opportunities of EU exit and secure the UK’s position as a global financial hub”.
There is certainly merit to this argument – rules established at the EU level often mean committees of politicians were drafting detailed, prescriptive rules that, for example, required advisers to take on responsibilities to monitor their clients for money laundering even though the risks were very small. There was relatively little consumer research or piloting of new rules, which meant that many measures developed at EU level were a shot in the dark.
As a result, the government has been able to remove some of the worst mistakes of EU financial regulation of the last 20 years, including an overhaul of the Packaged Retail and Insurance-Based Investment Products regulation, which instituted a system of disclosure for investors that was introduced with very little consumer testing, and produced documents that are hard to read and comprehend.
It also made changes to the Markets in Financial Instruments Directive (MiFID) regulations to scrap the ‘10% drop’ rule. The PFS has campaigned for this rule to be scrapped, as it requires firms to inform investors when the value of their portfolio falls by more than 10% – encouraging clients to focus on falling markets at a time when most may well be best advised to ride out the volatility.
For many working in financial services, this more pragmatic approach may be welcome, given the disruption caused by some more intrusive reforms in the past, but pragmatic reforms are not likely to radically change the experience of investors
On the fund management side, the government has produced proposals for creating investment vehicles – long-term asset funds – which are designed to increase investment in illiquid assets by creating longer redemption periods (of at least 90 days) than exist for normal mutual funds. This is designed to create an investment vehicle that has high standards of governance and consumer protection without creating systemic risks that might come if investors were able to withdraw their investment without notice.
The Treasury has also created proposals for a new tax regime for qualifying asset holding companies in certain fund structures.
The Chancellor has sought to reinforce the message of growth and trade in a letter to the FCA’s CEO, Nikhil Rathi, stressing:
- “The importance of the government’s agenda to encourage trade… and to promote inward investment into the UK.”
- “The government’s commitment to ensuring that the UK is attractive to internationally active financial services firms and activity.”
- “The government’s support of innovation and new developments in financial markets and active embracing of the use of new technology in financial services, such as crypto technologies, artificial intelligence and machine learning.”
There are, however, two features of the review that may cause scepticism about a tsunami of growth being unleashed by the reforms.
First, these are reforms being carried out by a new government that is already in the second half of its electoral term. As a result, the reforms have largely been hoovered up from a range of ongoing reforms and tweaks to the system, rather than being a radical package based on a fundamentally new approach to markets and regulation.
For many working in financial services, this more pragmatic approach may be welcome, given the disruption caused by some more intrusive reforms in the past, but pragmatic reforms are not likely to radically change the experience of investors.
Second, the idea that EU regulations were holding back UK growth means that the reforms tend to reflect the sprawl of EU financial regulation, as the government repeals or replaces unwise decisions here and there, while the majority of EU rules, including rules on compulsory professional indemnity insurance, which have held back the growth of the financial advice profession for several decades, will remain for the foreseeable future.
One legal firm commenting on the package of reforms in the asset management sector complained that “the UK government appears to have had a failure of ambition that may see the sunlit uplands of a truly competitive UK funds industry remain tantalisingly out of reach for future generations”.
History will tell whether these reforms are a pragmatic leg-up for the investment sector, or a big missed opportunity for economic growth.
Dr Matthew Connell is director of policy and public affairs