The government’s priority should now be to deliver the extensive package of reforms in the Financial Services and Markets Bill, as well as reforms on which broad consensus has been secured in the following areas:
- Basel 3.1
- Solvency II review
- Wholesale Markets Review (addressing MiFID2)
- Lord Hill review on reform of Capital Markets
- Kalifa review on FinTech
- The Productive Finance Working Group
- Securitisation Regulation
- Pensions charge cap reform
- Taxation of UK funds review
- The Prospectus Regime
- The Independent Review of Ring-Fencing.
These reforms must be delivered in a well-considered way, in partnership with the industry, and as swiftly and smoothly as capacity allows. These changes will improve the UK’s regulatory framework for financial services over the medium to long term, positioning the UK to compete strongly in the rapidly evolving global market.
The government, industry and regulators have also invested a great deal of work over recent years in a holistic and strategic review of the entire UK regulatory framework, under the heading of the ‘Future Regulatory Framework’ (FRF). This project seeks to combine both existing UK and retained EU regulation into a coherent, streamlined regulatory framework that will reduce complexity and business compliance costs. It is also taking the opportunity to reform and improve some elements of UK and retained EU regulation to support this goal. A sequenced approach should be taken to FRF, to maintain market stability and the integrity of infrastructure.
It is important to recognise that better regulation is as much about addressing aspects of UK regulation as regulation retained from EU law. There are some examples where UK implementation of EU law went beyond what was required (‘gold plating’) and, in some cases, now exceed regulatory requirements in other jurisdictions. But there are also areas of regulation which were 'home grown' - do not relate to EU legislation - which should be reviewed as they are negatively impacting UK competitiveness. For example: Regulation of the Financial Services Compensation Scheme (FSCS), Value for Money Assessment, and the Consumer Duty.
Recommendations:
a) The government should implement the extensive reforms listed above to remove frictions in the regulatory environment – as swiftly as capacity for smooth implementation will allow.
b) The government should continue to lead work with industry to complete implementation of the FRF at pace. This should be done in a way that delivers the clarity, certainty and stability that international businesses and investors seek when deciding which financial centre to use. There should be no artificial deadline set with regard to retained EU financial services law via a sunset clause. A phased approach should be taken, over a planned timeline that industry and regulators have capacity to implement, and to give market participants time to understand and adapt to the changes.
c) The government should work with industry and regulators to identify regulation where the benefits of reform would meaningfully exceed the costs and wider impacts, and develop effective solutions that enable
the UK market to compete internationally and meet the needs of UK business and individual customers. For example:
i. UK implementation of MiFID rules defining generic guidance versus individual regulated financial advice: Reform is needed to enable the industry to offer practical solutions to help UK customers who cannot afford financial advice, but need more than generic guidance. The government should work with industry, regulators and stakeholders to understand the complex trade-offs and develop the right regulatory reform solutions.
ii. As the UK moves to implement the final Basel 3.1 standards, it is crucial to consider the UK’s role as an international financial hub, and the global connectedness of the banking system. Domestic impacts on growth should be considered by maintaining the existing SME and infrastructure supporting factors in the framework, as well as temporarily applying 65% risk weight to unrated corporates in relation to the output floor. There is also opportunity to review the existing framework to ensure it is appropriately calibrated, and to remove duplicative, overlapping or overly conservative requirements that had acted as safeguards while the framework was being phased in.
iii. The UK Securitisation Regulation: The UK should take the opportunity to introduce targeted adjustments to both the securitisation regulatory and prudential frameworks - to better reflect the robustness of the core securitisation product available today - and to ensure it can play an important role in financing the real economy and the net zero transition.
iv. Ring-fencing: The government must take immediate steps, as outlined in the independent review of ring-fencing, to reduce materially the operational and financial inefficiencies which are created by this unique structural intervention in banking.
d) Regulatory change must be designed, drafted and implemented robustly to deliver the desired outcomes and avoid unintended consequences. There is a limit to how much capacity the industry, regulators and government have to do this, and do it well. Therefore, an holistic approach must be taken to regulatory reform, to ensure that reforms that will have the greatest net benefit are prioritised, and that sufficient time is given to ensure effective implementation. Government should therefore consider if there are reforms in progress from which capacity should be diverted, to focus on reforms that would deliver greater net benefit. For example, pausing or extending the timeline for implementation of the new Consumer Duty.