Legal development

Mansion House: Government updates on Edinburgh Reforms and on the UK financial regulatory landscape

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    On 10 July 2023, Jeremy Hunt delivered his first Mansion House speech as Chancellor of  the Exchequer, outlining measures in respect of capital markets and promoting growth-friendly regulation. The speech set out the Government's view of post-Brexit financial services regulatory framework in light of the passage of the Financial Services and Markets Act 2023 (see our briefing here).

    The speech is more than 6 months after the FChancellor set out a series of announcements on how the Government was planning to drive growth and competitiveness in the UK financial services sector (the Edinburgh Reforms) (see our briefing here). On the same day as Mr Hunt's Mansion House speech, the Government issued a series of documents providing an update on the measures outlined in December 2022. These documents contain significant information for those operating in financial services and will be important for horizon scanning purposes. 

    Smarter Regulation Framework: Delivery Plan

    What is this all about?

    This is the follow-up to the Government's December 2022 Policy Statement on the Smarter Regulation Framework and outlines the steps the Government will be taking to implement the plan. The Framework is the result of government consultations (one consultation in October 2020, followed by another consultation in November 2021 and then a response document) under the Future Regulatory Framework (FRF). 

    The FRF Review was announced in 2019 with the purpose of ensuring that the UK’s financial services regulatory framework is fit for the future to reflect the UK's position outside of the EU.

    Why the need for a Smarter Regulation Framework?

    FSMA 2000 and the model of regulation introduced by it are at the centre of the UK’s regulatory framework. Under the model, the setting of regulatory standards is supposed to be delegated to expert, independent regulators working within an overall policy framework framed by the Government and Parliament. Following weaknesses outlined as a result of the 2007-2008 crisis, the model was adapted to make changes to institutional design and allocation of responsibilities. 

    According to the Government, the operation of the FSMA model was hindered during the UK's membership of the EU, owing to the increase in EU competence for financial services regulation, thus moving the UK’s regulatory framework away from the model based on delegation of standard setting to regulators. 

    The onshoring of EU legislation via the European Union (Withdrawal) Act 2018 was considered by the Government as an interim solution and not the best long-term approach for UK regulation of financial services. Retained EU law was viewed as also complicating the current FSMA model, with many of direct regulatory provisions applicable to firms contained in the retained EU law, rather than in regulator rulebooks. Retained EU law is normally changed via primary legislation, undermining the FSMA model principles of an agile and flexible approach championed by the Government.

    How will the Smarter Regulation Framework be delivered?

    FSMA 2023 sets out a framework for repealing financial services retained EU law (REUL) related to financial services and enables the Government and regulators to replace it in line with the FSMA model (there is a separate process for non-financial services REUL, covered by the Retained EU Law (Revocation and Reform) Act 2023).

    The repeal of each piece of REUL for financial services is to take effect once the Government makes a SI bringing into force ("commencing") the repeal. Each piece of financial services REUL is now within a “transitional period,” lasting until the repeal of each piece is individually started by HM Treasury in a phased (involving tranches) and sequenced approach. At the end of the transitional period, the aim is for the UK to have created a new Smarter Regulatory Framework based on the FSMA model.

    The Government identified 43 “core files” in scope of the SRF programme, stating that separate EU files often prescribe overlapping/similar requirements.

    What's with Tranche 1 and Tranche 2?

    According to the Government,  work had already begun in respect of Tranche 1 (this includes aspects of UK MiFID as part of the Wholesale Markets Review). In respect of Tranche 2, the Government is planning a so-called twin track approach, whereby it would progress areas it felt could improve UK economic growth, noting that complex files such as UK MiFID were likely to span more than one tranche owing to their size. 

    Files/subsets of files forming part of Tranche 2 include: the implementation of the remaining aspects of the Wholesale Markets Review; the Packaged Retail and Insurance-Based Investment Products (PRIIPS) Regulation; the Short Selling Regulation; the Taxonomy Regulation; the Payment Services Directive and the E-Money Directive and the Capital Requirements Regulation and Directive. The Government  also stated that there were significant pieces of REUL remaining for future tranches where the Government/regulators may identify beneficial policy changes/ policy reviews, such as the remaining parts of the MiFiR and UK EMIR.

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

    How will regulatory requirements set out in REUL be dealt with?

    As stated above, the process for repeal is set out in FSMA 2023 and the process will broadly be dealt with in one of these ways:

    • Where REUL requirements are no longer needed, the legislation will be repealed without replacement.
    • Where the substance of regulatory requirements is deemed as fit for purpose and not requiring policy change, these requirements will either be restated in legislation, or they will be repealed so that the regulators can replace them with regulator rules. The regulators will generally set out firm facing requirements and the Government and Parliament will set out governing framework in legislation.
    • Replacement with provisions consistent with the FSMA model, while also delivering targeted policy change (if the reform relates to firm-facing requirements, the relevant regulator will generally lead, while the Government will generally deal with any relevant  reform to the statutory framework in that area)

    What else does the SRF delivery plan clarify?

    The Government hopes to create supplemental framework in legislation using powers under FSMA 2023. It hopes to follow a set of principles that it considers already align with FSMA so that primary and secondary legislation fulfil five essential functions:

    • Setting the regulatory perimeter i.e legislation must define the activities that are within the perimeter and prohibit the carrying out of those activities except under specified conditions.
    • Enabling the regulators to make rules i.e. legislation must define the powers that regulators have to regulate activities and persons within the regulatory perimeter (this is already provided for in FSMA 2000).
    • Determining wider public policy matters relevant to regulators' actions i.e. legislation must define the aims the regulators should seek to achieve in making their rules and the factors to be considered.
    • Providing appropriate supervision, investigatory, and enforcement powers to the regulators.
    • Setting procedures that must be followed by the regulators in carrying out their duties so that they operate in an accountable, consistent, and transparent manner.

    Which areas will the Government be issuing secondary legislation?

    The Government will be publishing the following SIs on the following areas:

    • Designated activities regime: As noted in our other briefing, FSMA 2023 introduces a designated activities regime to sit alongside the existing regulated activities regime. The Government plans to create a single SI to regulate all designated activities. The Government hopes that the SI will consolidate supervisory, investigatory and enforcement powers in one place.
    • Have regards: FSMA 2023 gives HM Treasury the power to set specific “have regards” that the regulators must consider when making rules in particular areas of regulation.  The Government plans to introduce a single SI in relation to the additional public policy matters which the regulators must "have regard" to when they make rules in certain areas.
    • Modification and disapplication of rules: The Government plans to create an SI in relation to the use of its new modification and disapplication power under section 138BA  of FSMA 2000 (as introduced by FSMA 2023). The power is intended to make it easier for the regulators to adjust their rules to different business models and practices. In respect of PRA rules, the Government comments that one area this could be used is in respect of the various business models used by large and complex PRA-authorised firms.
    • Miscellaneous provisions SI: This will contain any miscellaneous provisions deemed necessary to preserve from REUL. It is intended to cover activities where no clear place in existing primary or secondary legislation could currently accommodate such provisions. The Government plans to only use this SI where there is no more appropriate option in existing legislation.

    Any word from the regulators in respect of repeal of REUL?

    Yes, the FCA has published a webpage in light of the planned repeal and replacement of REUL  with FCA rules under FSMA 2023. The page references key documents to be issued in respect of REUL (e.g planned consultations on PRIIPs and MIFID), next steps and the FCA’s approach for managing this work. 

    The FCA’s approach to replacing repealed REUL provisions will be underpinned by core principles seeking to support overarching aims for the FCA Handbook. Principles include consolidating requirements as far as possible so that, over time, the FCA Handbook becomes the “one stop shop” for firm-facing regulatory requirements. The PRA also published a consultation paper on its approach to reviewing rules following the publication of an earlier discussion paper.

    Edinburgh Reforms: Government responses to papers

    So what else was released?

    The Government published its responses to papers issued in December 2022 in areas such as  short selling, consumer credit, retail disclosure, and payment account regulations.

    What is planned for the UK short selling regime?

    The SRF delivery plan sets out next stages in respect of the UK Short Selling Regulation (UK SSR). The Government's response to its December 2022 call for evidence confirms plans to:

    • give FCA the power to make regulations to prohibit uncovered short selling;
    • increase the disclosure threshold from 0.1% to 0.2% of total issued share capital and plans to enable the FCA to make rules;
    • implement an aggregated net positions disclosure model and replace the current regime based on individual net short position (FCA to be responsible for publishing aggregated net short positions);
    • review ways for streamlining the current market maker regime to lower administrative burdens for firms (FCA is expected to consult on these rules); and 
    • act on concerns about the current regime involving list of shares exempt from SSR where the principal trading venue is an overseas country. 

    The Government has also issued a consultation on UK SSR provisions concerning credit default swaps and sovereign debt in which it proposes to scrap requirements currently placed on investors when taking out short positions in sovereign debt or sovereign CDS, as well as the related reporting requirements.

    What about UK PRIIPs?

    UK PRIIPs is said to form part of Tranche 2 REUL in the Smarter Delivery Framework delivery plan and the Government set out plans in respect of next steps. The Government also published a response to its December 2022 consultation on retail disclosure.

    In the response, the Government confirms its plans to repeal firm-facing retail disclosure requirements currently in the UK PRIIPs Regulation and for the FCA to introduce a new UK retail disclosure regime adapted to the UK market.  The Government also confirms that it is considering wider issues facing retail investment and disclosure.

    In response to feedback received, the Government confirms it will ensure that the FCA considers concerns raised in relation to:

    • products in scope of the new UK disclosure regime;
    • accuracy of disclosure information; and
    • balancing flexibility with comparability.

    In relation to other aspects of the future regime, the Government also confirms that it will:

    • provide further detail in relation to the  FCA's powers over certain unauthorised firms (obligations that these firms are subject to will disappear when UK PRIIPs is repealed) and overseas funds (to address concerns about maintaining a level playing field for UK funds and appropriate information for UK retail customers); and
    • consider feedback provided on MIFID costs and charges disclosures.

    The Government intends to publish a draft by 2024 so that the FCA is able to introduce the new retail disclosure regime. The FCA's webpage on repeal and replacement of rules also indicates plans in relation to UK PRIIPs.

    What about Consumer Credit?

    The Government published (see our briefing here) a response to its December 2022 consultation summarising feedback it received in relation to aspects of the existing UK consumer credit regime (see our briefing here). The consultation sought views on strategic direction, in particular, whether and how key provisions (e.g. sanctions, scope, information requirements) remain fit for purpose. The response summarises feedback received and the Government confirms it will publish a second stage consultation in 2024.

    What about investment research?

    As part of the Edinburgh Reforms, it was announced that an independent review of financial services investment research and its contribution to UK capital markets competitiveness would be launched. Terms of reference and a call for evidence followed. The Investment Research Review has published a report, making a series of recommendations to the Government, the FCA and industry (the Kent report). The recommendations in the Kent report contain some significant proposals for investment service firms operating in the UK, the three key recommendations being:  introducing a research platform to help generate research; allowing additional optionality for paying for investment research; and allowing greater access to investment research for retail investors (see our briefing here). The FCA released a statement confirming it would review the report and its recommendations and confirmed that it plans to make any relevant rules in H1 2024.

    Anything on FMI sandboxes?

    The Government published a consultation paper on the first financial market infrastructure (FMI) sandbox delivered under powers conferred by the Financial Services and Markets Act 2023, the Digital Securities Sandbox (DSS). This follows a 2022 HM Treasury call for evidence on the application of DLT to FMIs, which suggested that aspects of UK legislation may impede the use of DLT in FMIs. The DSS will allow industry to set up FMIs using digital asset technology performing the activities of a central securities depository and operating a trading venue under a legislative and regulatory framework adjusted to accommodate digital asset technology.

    What about payments?

    The Government issued an illustrative SI in respect of its approach to payments regulation as well a policy note in December 2022. It published an updated version  of the illustrative SI in July 2023 (Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 (SI 2023/790)).  The SI makes targeted changes to give enhanced powers to the PSR and the FCA in relation to their respective areas of retained EU payments legislation  during the transition period. In particular, the Regulations extend aspects of the FCA’s existing powers in FSMA to make rules in relation to client money and safeguarding assets, the control of information, and the appointment of auditors.

    The Government also published a review and call for evidence on the Payment Services Regulations in January 2023. This has been followed by a Policy Statement on certain aspects of the regulation of payment services (notably account closures and its interaction with freedom of expression).

    In relation to the Payments Accounts Directive, the Government also published its response to its December 2022 consultation on the Payment Accounts Regulations (PARs). PARs transposed the EU Payments Accounts Directive in 2015, and the response confirms the repeal of Part 2 and Schedules 1 and 2 of the PARs, as well as plans to give responsibility for detailed firm-facing requirements on customer information requirements to the FCA.

    What about the Wholesale Markets Review?

    As stated in our other briefing, Schedule 2 to FSMA 2023 contain transitional measures that will take effect shortly. In respect of UK MiFID, this includes changes effecting the Wholesale Markets Review (see our briefing here), such as removal of the share trading obligation and the pre-trade transparency regime.

    The FCA plans to issue the following in Q4 2023: a consultation paper on commodities derivatives; and a consultation paper on transparency reforms.

    The Government also published for comment the draft SI, Data Reporting Services Regulations 2023, as well as a Policy Note. This SI amends firm-facing requirements contained in retained EU law related to Data Reporting Service Providers (e.g. in Data Reporting Services Regulations 2017, UK MiFIR and Commission Delegated Regulation (EU) 2017/565). The instrument will restate provisions setting the regulatory perimeter and give the FCA powers not covered by the rulemaking powers over DRSPs introduced by FSMA 2023 (e.g. the authorisation process for DRSPs). It also introduces a power for the FCA to run a tender process to select the UK’s consolidated tape provider(s). The FCA has already published a consultation paper in relation to the consolidated tape. 




    Co-author: Bisola Williams

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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