Will the Edinburgh Reforms make a difference?

On 9 December, the Chancellor announced a package of over 30 reforms to the UK’s financial regulations, an attempt to achieve the biggest boost to the City since Margaret Thatcher’s 1986 "Big Bang" de-regulatory reforms. Just don’t call it "Big Bang 2.0"… the Government have sought to distance themselves from the previous Chancellor, Kwasi Kwarteng’s rhetoric, and, in fairness, that of the current Prime Minister, Rishi Sunak, who seems to have coined the term. The re-brand suggests a more cautious approach and, with a nod to the levelling up agenda, one that seeks to emphasise the nationwide nature of UK financial services. The Chief Secretary to the Treasury, and the former long-serving City Minister, John Glen was quoted in the FT: “I would also like to take this opportunity today to put to bed once and for all the idea that this is deregulation for deregulation’s sake. And I say unequivocally there is no race to the bottom.”

The immediate reaction has been mixed. Some media commentary suggests that the reforms are at once a damp squib and a dangerous destruction of essential safeguards. The market reaction arguably mirrors this: bank shares are trading at a lower price, despite the sense that the reforms might improve bank profitability. This could suggest that investors believe that banks might return to riskier, pre-2008 practices.

In truth, the reforms are incremental, but they cover a wide spectrum of areas. The proposals are so varied that their impacts are likely to be felt differently across different parts of the market – there is something there for almost everyone. But there are some general points to be said. 

• The reforms certainly aim to introduce more risk into the system with a hope of freeing up financial resources for investment. The question is whether the balance is struck decisively towards more risk and potentially more growth or not? It will not be possible to judge many of the items, and the Edinburgh Reforms as a whole, until the completion of various planned reviews and consultations.
• Although both supporters and critics of "the Brexit dividend" have framed the reforms in terms of broad cuts to regulations, this was never likely to be the case because the financial ecosystem has adapted to working under those conditions and would not welcome more disruption and compliance costs. There are some big-ticket items, but the proposals are mostly incremental. Nonetheless, given the compound nature of the changes, the effects may still be significant. It is also notable that some of the more contentious parts of the reforms – the changes to the bank ring-fence and the Senior Managers and Certification Regime (SMCR) – could have been done without Brexit. If anything, Brexit has provoked the Government to undertake a fundamental review of the role and competitiveness of the City given the challenge to the City’s pre-eminence in European financial services that resulted from the Brexit decision. In addition, the Government is trumpeting its ability to be nimble in regulation, as opposed to the slower, clunkier EU legislative process. That said, the debate over the Financial Services and Markets Bill has raised questions about accountability in regulation and where the balance of power should reside between the Government, Parliament and the regulatory bodies. 
• Some of the reforms are certain and based on longer-term analysis. For instance, delivering Lord Hill’s recommendations on the listing rules or bringing crypto and ESG data providers into the regulatory regime. Others are more speculative, sometimes in response to requests from the industry and their effects will be dependent on further consultation: for example, scrapping the much-maligned PRIIPs Regulation (on which the UK and the EU are already divergent) and introducing a proposed consultation on the SMCR. It is not possible at this stage to say whether the outcomes will be significant or miniscule. But it could set up areas of conflict between the Government’s wishes and the regulators’, who were heavily involved in the design of many of the UK and EU rules that are in the firing line. We have seen a precursor of this tension in the tug-of-war of the recently announced Solvency II reforms for insurers.
• While some of the changes are clearly directed to increasing the competitiveness of UK financial services, other parts seem designed to increase the attractiveness of the UK to global, and particularly US firms, that previously viewed the UK as a hub to access markets across the EU. However, the changes are caveated in places given the tension with the question of EU regulatory equivalence. For example, the proposed new secondary objective for the FCA to facilitate the international competitiveness of the financial services sector is subject to “aligning with relevant international standards”. In addition, it is unclear if some of the reforms will come in time to be helpful. For instance, assuming the SEC does not extend its no-action letter in relation to unbundled research payments (which ends on 3 July 2023), proposals to allow firms to re-bundle payment for research with trade execution costs may well not come in time to address the intractable conflict with US regulations that do not allow research unbundling, as per the EU’s rules. The review of SMCR is said to be for the benefit of firms that wish to have staff operate across borders (read as: to and from countries that have not replicated the individual accountability regime) but at this stage it still seems quite unlikely that this key plank of UK regulation will be swept away entirely or substantially watered down. After all, SMCR was designed to toughen the predecessor approved persons regime but has arguably not led to a substantial uplift in enforcement cases.
• While there are tax reviews of relevance to investment activity, given the country’s constrained fiscal condition, it is not likely that there will be significant tax changes such as zero-rating VAT for investment funds. That is unfortunate because a more competitive tax regime would perhaps make the UK a genuine alternative to Luxembourg and other investment hubs. More generally, it is notable that while senior EU politicians declared Kwarteng’s "Big Bang" to be a declaration of war, at the time of writing the EU response has been muted.

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