After the Chancellor of the Exchequer Jeremy Hunt unveiled the ‘Edinburgh Reforms’ for UK financial services, we hear from industry experts on the need for reforms and the challenges the government face.
What are the Edinburgh Reforms?
The Edinburgh Reforms refer to over 30 regulatory reforms aiming to unlock investment and accelerate growth in towns and cities across the UK.
Chancellor Hunt spoke at an industry roundtable in Edinburgh, at which he announced a detailed timeline establishing the government’s approach to rescind and replace elements of retained law set by the European Union (EU). A government release stated that “hundreds of pages of burdensome EU retained laws” that govern financial services could be changed.
By making significant changes to banking rules, the government hopes to establish a smarter regulatory framework for the UK. The plan is for the new framework to be “agile, less costly and more responsive to emerging trends” than the previous ‘EU-centric’ laws.
The regulatory reforms cover structural pension reforms; sustainability commitments; consumer protection; wholesale market changes; plans to improve tax rules for ‘Real Estate Investment Trusts’ from April 2023 and more.
The technology and innovation package sees cryptoassets included in an expanded Investment Manager Exemption, alongside plans to set up a Financial Market Infrastructure Sandbox in 2023. The government has also confirmed that it plans to launch a consultation for a UK retail CBDC soon.
Repealing the EU’s Solvency II
The EU’s Solvency II directive set out regulatory requirements for insurance firms and groups. The directive covers financial resources, governance and accountability, risk assessment and management, supervision, reporting, public disclosure and more. The Edinburgh Reforms specifically look to replace these laws.
Mr Hunt spoke on the reforms, citing Brexit as the driving factor for enabling the changes. He said: “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.
“And we will go further. Delivering reform of burdensome EU laws that choke off growth in other industries such as digital technology and life sciences.”
One of Hunt’s aims is to ‘unlock’ over £100billion of private investment for productive assets. The Chancellor is “committed to securing the UK’s status as one of the most open, dynamic and competitive financial services hubs in the world”.
The Edinburgh Reforms are being framed as a way to accelerate the growth of the economy in the UK. It also leans on the idea that Brexit offers the freedom to mould laws and regulations specifically for the UK’s economy.
Finally, taking advantage of Brexit?
Khalid Talukder, co-founder of FX liquidity provider DKK Partners, explains the current economic climate requires change.
Talukder said: “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.”
Janine Hirt, CEO of the not-for-profit fintech industry body Innovate Finance, mirrored this view. She explained: “[The reforms] should further enhance the UK as a positive investment environment with increasing growth capital for fintechs, as a leading centre for digital assets and as a regulatory regime that supports innovation.
“In terms of supporting innovation, we welcome continued commitment to making the UK a leading centre for digital assets. It is great to see that the Chancellor’s remit letter to the FCA today includes a specific reference to embracing the use of new technology in financial services, including crypto technologies and AI.
“Fintechs play a significant role in bringing new services and enhanced experiences to customers. They widen access to finance and financial management. We are therefore delighted to see the launch of a consultation on reform of the 1974 Consumer Credit Act. It should provide the basis for new consumer protection rules that support innovation and deliver much better outcomes for consumers.”
Damaging regulatory standards?
While many think that now is the perfect time for positive change, some disagree. A number of industry experts warn that the wrong changes could compound financial issues already caused by Brexit, as well as weaken regulatory standards and put the country at risk of another financial crisis.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, explained how Brexit has already hurt financial institutions. Lund-Yates said: “London’s financial reputation has been severely held back since Brexit, right at a time when the ‘powers that be’ have tried to encourage investment and growth in a big way. Sadly, the allure simply isn’t there. Many of the UK’s brightest companies have been snapped up by overseas investors. Now, London losing its top share-dealing status.
“It’s clear the government is going for growth, but the extent of the package needs to be vast if it’s to have any meaningful impact for the UK at a time when the country struggles with a slowing economy and cost-of-living crisis.”
Lund-Yates also warned that reforms need to carefully balance the relaxation of rules and maintaining standards. She continued: “Regulatory changes could relax rules that demand major banks to keep investment and retail banking separate. It’s crucial the government strikes the right balance between stoking the engines of growth in what has become a tepid environment, and not slashing standards too far in the name of that aim.”
Technology and innovation hold the key to success
Dr Henry Balani, head of industry and regulatory affairs at KYC automation company Encompass Corporation, suggests reforms should focus on supporting innovation.
“Whilst upholding the highest regulatory standards is crucial to tackling financial crime, it is important that this does not hinder productivity, and this is where innovation remains key.
“To succeed now, and in the future, many businesses will need to overhaul internal infrastructures.
“This means equipping themselves with state-of-the-art cloud technology powered by automation.”
Chris Ford, head of government relations for EMEA at blockchain firm R3, also commented on the government’s technology strategy. He explained: “If the UK is to remain a global hub for financial services, then technology must be at the heart of our strategy. The government is right to recognise that embracing blockchain-based instruments such as central bank digital currencies can play a central role in achieving this goal.
“Its support for the FMI sandbox will also accelerate the coming of exciting financial innovations. For example, the potential issuance of digital gilts could help to set the UK apart amidst competition from Europe and elsewhere.”