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Edinburgh Reforms: UK government announces widespread transformation for financial sector

National Audit Office launches review of FCA's effectiveness
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The Chancellor of Exchequer Jeremy Hunt has announced The Edinburgh Reforms, a set of developments to catalyse competition and growth in the UK FS sector, that includes moves on a CBDC and the move to Net Zero.

In the move towards Net Zero, the UK has prioritised sustainable investment and highlighted the need for private financing to reach targets. As part of the reforms, the UK government is planning to update the Green Finance Strategy next year and possibly bringing ESG ratings under the jurisdiction of regulatory authorities.

Through the Financial Services and Markets Bill, stablecoins will be able to be used as means of payment, and will bring cryptoassets further into the regulatory space. The announcement also included confirmation that in 2023 the Financial Market Infrastructure Sandbox will be put into practice and the Bank of England will be considering the development of a digital pound.

Underlining financial services as one of the UK five key growth sectors, the Chancellor announced over 30 reforms to make the UK financial industry more open, sustainable, and technologically advanced.

The Chancellor highlights that: “The Edinburgh Reforms seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses.”

Among the rules is “ring-fencing”, a regulation that requires major banks to keep investment and retail banking separate. This rule was brought in during 2019 and, according to the Bank of England, was designed to “increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers.” This is expected to be reformed.

Additionally, the government will be laying out new regulation early in 2023 to remove performance fees on pension regulatory charge caps and work further with the Financial Conduct Authority (FCA) on financial advice and guidance.

Dr. Angela Gallo, Senior lecturer in finance at Bayes Business School, stated: “Together with the removal of the bank bonuses and the discussion on call-in power, this political decision seems to have little to do with fixing the financial system or ensuring financial stability. “These were the main arguments behind many of these reforms in the aftermath of the financial crisis, but this seems to have more to do with a wish to deregulate. Increasingly, the initiatives of the government seem to ultimately target the role of central banks and regulators. While ring-fencing was a costly measure, the system has already adapted to it. De-regulation, unless carried out with a clear objective, can be dangerous.”

Dr. Francesc Rodriguez Tous, lecturer in banking at Bayes Business School, commented: “Part of the importance of banks in the economy is the provision of basic banking services, mostly current accounts but also lending. A key reason why governments around the world spent billions rescuing banks amid the 2008 Global Financial Crisis was to avoid the disruption of these services. Ring-fencing attempts to partially isolate the basic banking services from turbulent global financial markets.

“It means banks can still engage in investment banking as long as their retail banking operations are ring-fenced. It is therefore puzzling that this is one of the reforms targeted by the government, given that its repeal will most likely lead to less money flowing into the UK economy in the short term. Moreover, there is no widespread clamour for its repeal from the banking industry itself. We don’t know what will happen when repealed, but what we do know is that its introduction has led to more investment in mortgages as well as lower rates in the UK.”

Commenting on the reforms, Jonathan Herbst, global head of financial services regulation at Norton Rose Fulbright, states: “The direction of travel will definitely be welcome. There is no doubt the measures move the needle in some areas and it will be interesting to see how reforms relating to ring-fencing, the SMCR, PRIIPs, and research play out. However, it is important for people not to overplay this – there is no sense of any move back to a pre-financial crisis world.

“Most of the UK regulatory regime reflects either international commitments or policy developed over many years to reflect the lessons of experience. There are some interesting proposals but, in terms of the bigger picture, there is no talk here of fundamentally changing the MiFID settlement or the rest of the post financial crisis package of measures. There is little call in the City for this and most of the current law reflects international commitments.”

Responding to the Chancellor’s statement, David Postings, chief executive of UK Finance, comments: “The banking and finance industry is the engine of our economy, delivering jobs and investment up and down the country. The comprehensive package of reforms the Chancellor has announced today, coupled with the landmark Financial Services and Markets Bill, form a major step in ensuring the sector remains strong and internationally competitive. We will continue to work with the government in supporting the economy through the current challenges and in creating growth for the future.”

Khalid Talukder, co-founder of DKK Partners, adds: “With Britain facing economic turmoil and huge financial challenges, the time is right for the Chancellor to unleash the country’s potential through sweeping, but sensible regulatory reforms. The financial services industry plays a crucial role in job creation and powering the economy and driving growth. The UK must seize this opportunity and get onto the front foot and make use of first mover advantage.”

This move by the UK government solidifies its vision for the future of the UK’s financial industry and economy by cementing their position in the international regulatory space.

 

Source: Finextra

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