Chancellor Jeremy Hunt has set out plans to repeal and reform a number of financial services regulations as he seeks to “unlock investment” and “turbocharge” growth across the UK.
The package of more than 30 reforms, known as the Edinburgh Reforms, was unveiled at an industry roundtable in Edinburgh and marks the next chapter of the government’s vision for UK financial services, set out at Mansion House in 2021.
Chancellor Jeremy Hunt said: “We are committed to securing the UK’s status as one of the most open, dynamic and competitive financial service hubs in the world. 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.”
The reforms are wide-ranging and include plans to consult on a new central bank digital currency, improve the tax rules for Real Estate Investment Trusts, repeal the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) and consult on a new direction for retail disclosure as well as overhaul the UK’s regulation of prospectuses.
The proposals to revoke PRIIPs regulation in favour of a fairer framework was widely welcomed by the financial services industry.
Anne Fairweather, head of government affairs and public policy at Hargreaves Lansdown, said: “The proposed review of PRIIPs and retail disclosures is welcome. The Treasury is looking to take a more proportional approach which should be linked to the FCA’s new consumer duty. The future regime should challenge firms to improve clients’ decision making and drive better outcomes rather than swamping them with paper.
“Retail investors are significant shareholders in UK listed companies yet consistently get frozen out when companies raise more capital or when new companies list. Changes to the prospectus regime should focus on levelling the playing field for retail investors and remove unnecessary hurdles from their participation in these investment opportunities.”
Steven Cameron, pensions director at Aegon, said: “It’s very welcome to see HM Treasury agreeing with the industry that EU derived PRIIPs disclosures are not fit for purpose. We agree that it should be for the FCA to determine an appropriate disclosure regime, tailored to help UK retail investors understand and pick between retail investment funds.
“The FCA already sets out many detailed disclosure requirements for other products such as pensions. In addition, from next July, the new Consumer Duty will require firms to focus on delivering good outcomes to retail customers, with the ‘consumer understanding’ outcome covering all forms of communication. While the Treasury consultation surprisingly doesn’t mention the new Consumer Duty, the FCA will no doubt wish to design the replacement for PRIIPs disclosures in a manner consistent with this.”
Richard Stone, chief executive of the Association of Investment Companies, echoed the sentiment: “We applaud the abolition of PRIIPs and will be arguing for a disclosure regime which helps investors make better investment decisions and puts investment companies and open-ended funds on a level playing field. The FCA should act swiftly to sweep away the confusing mishmash of disclosures and put in place a fair and transparent framework.”
Simon Harrington, Head of Public Affairs at PIMFA added: “It is imperative that any disclosure framework is, in future, able to ensure that the end customer is provided with the right information, and in the right way, in order to better understand the, at times, complex decisions they are making.
“The framework, as it currently exists, does not do this and in places, seems directly in conflict with the Financial Conduct Authority’s broader aims of delivering higher standards of communication under the Consumer Duty. This is a welcome move both for retail consumers and the providers of services to them.”
Restoring the City of London’s appeal
The government reforms will also examine UK rules that were introduced following the 2008 financial crisis, including a review of the Senior Managers and Certification Regime which was designed to enable firms and regulators to hold senior individuals to account and a reform of the ring-fencing rules that requires major banks to keep investment and retail banking separate.
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said the extent of Hunt’s package will need to be vast to restore the City’s appeal.
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. It’s clear the government is going for growth, but the extent of today’s package will need to be vast, if it’s to have any meaningful impact for brand UK at a time when the country struggles with a slowing economy and cost-of-living crisis.”
Commenting on the reform of ringfencing rules, Lund-Yates said: “Forcing smaller, retail-focused outfits to legally separate their riskier investment banking businesses from their retail divisions is an onerous task that caps outputs. A glass ceiling to growth is created by the fact small, domestic banks need to compete for a small pool of permitted assets, alongside the capital from much larger competitors. Ultimately this becomes a profit problem.
“Taking this rule off the cards for retail-focussed lenders is, on paper, a quick way to increase everyday lending and would help ensure more money’s pumping round the economy, which could see some metres shaved off the depths of the UK’s recession. Not needing quite so many eagle-eyes on adhering to this regulation could also be a cost and risk benefit for a number of banks. There is of course an argument to say 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.”
Pension rules
Pension rules also come under Hunt’s remit, with the Chancellor set to lay regulation to remove performance fees from the defined contribution charge cap early next year enabling scheme members to invest in a wider range of assets as well as launch a consultation on a Value for Money framework, designed to aid consolidation in DC schemes.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said increased consolidation brings scale and huge opportunities in terms of the costs, performance and support schemes can offer to members.
Morrissey said: “Increased scale can also open the doors to increased investment opportunities with larger schemes able to negotiate better fees and invest in a wider range of assets such as infrastructure. This shift can be fuelled by the government’s plans to introduce regulations early in the new year to enable well designed performance fees to be removed from the DC charge cap. However, it is important that client outcomes remain the focal point, so while costs and investment performance are important, so too are the decisions people make along the way. This should factor into the value for money assessments but risks being cast aside because it’s ‘too hard to measure’.
“The charge cap was brought in to ensure people got good value from their pension scheme but cost is not the only way of determining value and this legislation will open the doors to DC savers to invest more widely and potentially boost returns. However, the key to success of this reform will be striking the balance of delivering opportunities people want to invest in at a sensible cost.”
