‘Mansion House Reforms’ build on the ‘Edinburgh Reforms’

In December 2022, the UK Government set out a collection of announcements to take forward its ambition for the UK to be the world's most innovative and competitive global financial centre — labelled the 'Edinburgh Reforms' — see article here. The Financial Services and Markets Bill has now gained Royal Assent (and become an Act — (FSMA 2023), which enables the Government to progress many of the initiatives in the 'Edinburgh Reforms' package, and prompted a raft of documents to be published by HM Treasury (HMT). In the Chancellor's Mansion House speech, he set out the next package of reforms including major reforms to pensions. This article summarises these new reforms and tracks progress and next steps on the Edinburgh reforms.

Pensions Reforms
Regulatory Framework
Senior Managers and Certification Regime (SMCR)
Banking
Retail Markets
Wholesale Markets
Sustainable Finance
Digital Finance and Innovation

The Chancellor's Mansion House speech set out a series of new initiatives on pensions reforms to increase pension savings, drive more investment into UK business and ultimately grow the UK economy. The reforms are ambitious and wide-ranging and all types of pension schemes are impacted. The reforms include:

1. Plans (PDF 406 KB) for Defined Contribution (DC) pension schemes to invest (on a voluntary basis) 5% of their default funds in unlisted equities by 2030;
2. Creating a new regulatory regime for Defined Benefit (DB) superfunds to support employers and trustees with a more effective and efficient way of managing DB liabilities;
3. Seeking views on changes to the potential scope and usage of the Pension Protection Fund¹ to support smaller DB pension;
4. Changes to improve engagement, value for money and better meet the information needs of customers; and
5. Seeking to further increase the rate of consolidation of smaller Local Government Pension Schemes (LGPS).

The proposals are supported by a raft of consultations, calls for evidence and responses to consultation documentation² which firms will need to fully digest in order to understand, in aggregate, how the proposed reforms will reshape the pension landscape.

As the Chancellor outlined in his speech, FSMA 2023 allows the Government to repeal retained EU Law (REUL) relating to financial services and for it to be replaced through the regulators' rulebooks, creating a new 'smarter regulatory framework' (SRF). Each piece of REUL is now in a “transitional period,” which will last until the repeal of each piece is individually commenced by HMT in a phased and sequenced manner. The delivery plan sets out this sequence.

FSMA 2023 introduces new secondary objectives for the FCA and PRA to facilitate international competitiveness and economic growth, and the focus of the Chancellor's speech was long term reforms to the UK competitiveness. Supporting this, the City of London Corporation and HMT jointly published their second annual report of key performance indicators on the UK's competitiveness. The report also summarises the Government's work to further boost the UK's standing as a global financial centre and highlights potential further reforms, identified by industry.

In March as part of a review of SMCR, HMT launched a Call for Evidence and, in parallel, the FCA and the PRA published a joint Discussion Paper — see our summary of both documents here.

The Government's Call for Evidence on aligning the ring-fencing and resolution regimes closed on 7 May. The Call for Evidence asked for input on potential impacts on financial stability, firms, UK competitiveness and growth, and competition. The Government is now working with the BoE and PRA (through the Ring-Fencing Taskforce) to analyse the responses and develop an initial policy position on the long-term future of the ring-fencing regime.

In its December 2022 response (PDF 251 KB) to the 2021 consultation on reforms to the Building Societies Act, HMT committed to:

• Legislating to exclude funding from specific BoE Liquidity Insurance Facilities, senior non-preferred debt instruments raised to meet MREL requirements, repurchase agreements of high-quality liquid assets, and deposits from SME's with a turnover of up to £6.5 million from the funding limit for building societies — in order to provide greater flexibility for building societies under financial stress, bring the 1986 Act more in line with companies, and continue to support the mutual model.
• Revisiting the treatment of funding obtained through the intermediated savings platforms in the medium term — to allow Government and regulators to develop a clearer sense of the market and its impact on building societies.

As a new initiative, the Government has commissioned an independent report on the future of payments. The “Future of Payments review” will consider how payments are likely to be made in the future and make recommendations on the steps needed to deliver world-leading retail payments and boost UK fintech competitiveness. The review will consider developments in the wider payments landscape, such as the Joint Regulatory Oversight Committee's³ report on the future of Open Banking and developments in the UK payments industry's New Payments Architecture (NPA), and how to build on them. A Call for Input has been issued to inform the review, with a report and recommendations to the Government expected by autumn 2023.

HMT has confirmed (PDF 218 KB) its intention to proceed with proposals to repeal much of the Consumer Credit Act (CCA) and recast it in the FCA rulebook. Specific aspects that may warrant legislative provisions will be taken into account during the policy development process. This reform is intended to address concerns that the CCA was highly prescriptive and increasingly cumbersome and inflexible, confusing consumers and adding unnecessary costs to businesses when implementing its requirements. As expected, HMT reports broad stakeholder support for the reforms. The Government will now develop the policy further through stakeholder engagement in 2023, and further consultation is planned for 2024. Reform is expected to take a number of years due to the need for primary legislation, detailed FCA rules, and reasonable transitional periods for firms.

As part of the programme to repeal and replace EU law —the Smarter Regulatory Framework — HMT has:

• Confirmed (PDF 145 KB) its intention to revoke aspects of the Payment Account Regulations (PARs) 2015 which implemented the EU's Payment Accounts Directive. The PARs set out requirements intended to improve the comparability of fees connected with payment accounts. However, the Government believes many of these are either too prescriptive or less necessary in a UK context and therefore do not allow customers to readily compare current accounts. Detailed firm-facing requirements on customer information requirements will now become the responsibility of the FCA, rather than prescribed in legislation. The changes take effect on 1 January 2024. No FCA rule changes are expected as a result of this transfer of responsibility.
• Confirmed (PDF 163 KB) its intention to revoke all EU PRIIPs disclosure requirements from legislation and for the FCA to deliver a new retail disclosure regime & rules which are tailored and proportionate to the UK market (including UK UCITS). The new regime will be guided by the principles of proportionality, clarity and choice. In a change from the consultation, analysis has indicated that the FCA will require additional tailored powers in order that any new regime can be applied to certain unauthorised firms and overseas funds. Any new rules will be subject to a transition period to give firms sufficient time to adapt to the new regime. Following the repeal of the PRIIPs Regulation (and related secondary legislation), a draft statutory instrument will be published by 2024. Further detail on reform timescales will be published in due course.
  

An independent review of investment research in the UK has concluded and set out seven recommendations, all of which were accepted by the Chancellor. Significantly, the recommendations suggest that the MiFID II unbundling rules should be reversed by allowing asset managers to combine research with execution charges. The FCA has said that it will carefully consider the report, and that its recommendations will inform the content of any consultation proposals. It will potentially make relevant rules in the first the first half of 2024. At the same time, the FCA has stated that it would consider "swift actions" to support firms impacted by changes to regulation in other jurisdictions.

The Digitisation Taskforce was established in July 2022 with the aim of driving forward the full digitisation of the UK shareholding framework by eliminating the use of paper share certificates and in general seeking to improve the UK's intermediated system of share ownership. The Digitisation Taskforce has published an interim report setting out a number of potential recommendations and questions for industry to consider over the next six months before publishing its final report. These recommendations include legislation to stop the issuance of new paper share certificates and require the dematerialisation of all share certificates, and recommendations to improve the communication between issuers and ultimate beneficial owners through intermediaries.

Respondents to HMT's call for evidence on the Short Selling Regulation (SSR) largely did not see the need for a fundamental reform of the current regime, but rather support modifications to the existing framework where required to improve the effectiveness and efficiency of the regime. Under FSMA 2023, HMT will give the FCA power to set the rules (in light of the feedback from the Call for Evidence). However, HMT will make two key changes. The current public disclosure regime based on individual net short positions will be replaced with an aggregated net short position disclosure regime, and the current disclosure threshold for net short position reporting to the FCA will be increased from 0.1% to 0.2%. HMT is also consulting on whether it should delete the aspects of the SSR related to sovereign debt and credit default swaps (this was not covered in the original Call for Evidence).

As part of the programme to repeal and replace EU law — the Smarter Regulatory Framework — HMT has published a number of draft Statutory Instruments (SIs):

• Many of the rules that govern Data Reporting Service Providers (DRSPs) are set out in the Data Reporting Services Regulations 2017 (DRSRs), which transposed parts of MiFID II into UK law when the UK was part of the EU. The draft SI which replaces this retained EU law will facilitate the emergence of a consolidated tape in the UK by removing provisions that have previously made running a consolidated tape commercially unattractive, including providing data for free after 15 minutes. It will also give the FCA power to run a tender process to select a consolidated tape provider (CTP) per asset class. It should be considered alongside the FCA's recent consultation on a consolidated tape for bonds.
• The draft SI on the Public Office and Admissions to Trading Regulations will reform the Prospectus Regime (which derives from the EU Prospectus Regulation) and delivers key reforms recommended by Lord Hill's Listing Review. The aims of the reform include facilitating wider participation in the ownership of public companies, improving the efficiency of public capital-raising by simplifying regulation and removing the duplications and improving the quality of the information in prospectuses. Concurrently, the FCA is seeking views on the rules it should make for the new regime through a series of engagement papers. It will consult formally in 2024.
• HMT reviewed the onshored EU Securitisation Regulation (Sec Reg) in 2021 and identified a number of reforms that are being implemented by final draft SI. The main changes include designating a number of activities — acting as an originator, sponsor, original lender, or Securitisation Special Purpose Entity (SSPE), selling a securitisation position to a retail client located in the UK — under the new designated activities regime (DAR), and providing the FCA with rule-making powers. The FCA and PRA are expected to publish consultation papers in Q3 2023 on draft rules to replace most firm-facing requirements in the Sec Reg with changes where appropriate. 

In March, the Government published its 2023 UK Green Finance Strategy (see detailed article here), driven by five key objectives: UK financial services growth and competitiveness; investment in the green economy; financial stability; incorporation of nature and adaptation; and alignment of global financial flows with climate and nature objectives. Key regulatory developments for financial services include:

• Development of a UK Green Taxonomy: the draft UK Taxonomy will be published for consultation in autumn 2023. It will define which economic activities can be labelled as 'green' and will support the quality of standards, labels and disclosures used in green finance activity. Once finalised, taxonomy-aligned disclosures will be voluntary for at least two years.
• Adoption of IFRS S1 and S2: the International Sustainability Standards Board (ISSB) finalised its first two disclosure standards in June 2023, and the FCA intends to consult in Q4 2023 on how to incorporate them into its listing or transparency rules. Analysis of the standards and guidance on how firms can prepare to apply them can be found here.
• Transition plans: the UK Transition Plan Taskforce (TPT) will publish its final disclosure framework and implementation guidance in autumn 2023, with sector-specific guidance to follow. The Government then intends to consult on transition planning requirements for the UK's largest companies. The BoE recently published its own climate transition plan — the first of its kind from a central bank — reflecting some of the challenges that other financial institutions may face and setting a standard to follow.
• ESG data and ratings: in March 2023, HMT launched a consultation on a potential new regulatory regime for ESG ratings providers. The European Commission published its own consultation in June. Our analysis of the two proposals can be found here and here.

HMT is consulting on its proposed approach for a Digital Securities Sandbox (DSS), which will be the first FMI sandbox delivered under the powers granted under FSMA 2023. The DSS will enable firms to set up and operate FMIs, performing the activities of a central securities depository and operating a trading venue, under a legislative and regulatory framework that has been temporarily modified to accommodate digital asset technology. These activities will be performed in relation to existing security classes (which could either be digitally native issuances or digital representations of existing securities). Overall, the proposals align very closely to the EU's DLTR pilot regime. Responses are due by 21 August.