Edinburgh reform plants seeds for the UK’s new regulatory path

Introduction and context

In the European financial world, Brexit certainly caused a stir. However in the practical day-to-day, few things have significantly changed. Yes, some firms moved offices into continental EU and shifted some activities, but interestingly, the regulatory framework between the EU and UK remained tight-knit, largely because the UK introduced in one last package the remaining EU regulations before their exit.

Since then, barring a few announcements on PRIIPS, MIFID, and solvency – and despite all the challenges created by the Transition protocols (TPR) – the UK has made few deviations from the EU original texts. With the Edinburgh Reform, the UK promises changes akin to the EU Capital Market Union(CMU) with a UK-centric perspective. Accordingly, we can say that with the 2022 end-of-year publication of this massive financial services reform touching close to 200 regulatory pieces, the UK now starts to appropriate and build its own financial regulatory regime. From our continental EU perspective, it could be mark the start of significant divergence from what we currently know, hence requiring adaptations.

This Reform is a long-term project with gradual changes spanning a few years, but it’s opportune to discuss it today to avoid “boiling frog syndrome,” where gradual changes could suddenly catch up to you and your business.

Let’s address the different elements of change in the table below (courtesy of our colleagues at the Deloitte European Centre for Regulatory Strategy):

If the table above sets priorities along three headers, we suggest considering them in three phases: outlined or enacted changes, changes soon to come and long-term evolution.

Among the first phase of outlined or enacted changes (which are not yet necessarily in force but well advanced or planned), the most important is the evolution of the role of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), the two twin-peak authorities in the UK, whose mandates are being adapted toward:

• Promotion of effective competition in the interests of consumers,
• Securing an appropriate degree of protection for consumers,
• Protecting and enhancing the integrity of the UK financial system, and
• Specific to the PRA, linking objectives to the stability and integrity of the banking, financial and insurance frameworks.

These amended mandates, combined with “building a smarter financial service framework,” should imply that the UK’s regulatory attitude might tilt toward more business-friendly behavior to support the UK markets and economy. The PRIIPS regime review and the proposal to adapt UK MIFID regulation (on research and inducements) already evidenced this.

These combined changes empower the FCA and PRA to set the tone of play for the UK market.

The second phase with changes soon to come includes policy statements and consultations that will be released in the near term and will have potential business impact and opportunities within a reasonable time horizon.

Among these, the following aspects would be the ones deemed to prioritise from an EU perspective:

• Investor reporting streams and settlement streamlining (read going to T+1)
• Payment and E-money regulation that will have a particular impact on the crypto/digital asset environment, as competition with continental EU and its DLT/MICA regulations will kick in soon.

Lastly, the third phase of long-term evolution is composed of ESG and green finance streams. This starts with UK ESG strategy updates in the recent launch of their Sustainability Disclosure Requirements (SDR), which mimics the EU Sustainability Finance Disclosure Regulations (SFDR), or the initiative on ESG ratings. Finally, in this third phase, we can insert some adaptations to market organization and investor/client communication; the evolution will not only address investment, but also other banking activities.

Interestingly, in contrast to the EU, the digital agenda is not in the forefront of the Edinburgh Reform.
 

Next steps

Despite many publications and directional information available, there are not yet final, applicable rules. Depending on how far authorities plan to go and how broad their changes will be, it is crystal clear that the Reform’s provisions will accompany recent moves (like the consumer duty) or will contribute to a broader review of relationships with both UK and non-UK domiciled entities. Entities that have a physical UK presence through branches or subsidiaries or offer services or products in the UK need to anticipate potential impacts.

Over the next few years, further steps will materialize through consultative documents, policy statements or legislative votes that will shape the final contours of the new regulatory environment.
 

Why is the Reform important for your organization?

Today, we think that the envisaged Edinburgh Reform will first impact UK-based service providers. However, given the broad scope of these regulatory changes, and the cross-border nature of activities in many Luxembourg entities (banks, Manco/AIFM, insurance, asset managers, etc.), changes ahead will impact products or services offered and, at the very least, amend the conditions of working with and in the UK.

Although early in the process, it is worth starting to anticipate potential operational changes to cope with, for example dual reporting, new requirements for sharing information to clients, potential need for licenses or basically the necessity to train staff (after a review of senior management and certification regimes) to engage with UK clients or counterparts.

As first practical step, consider your relationships with the UK market including products, service delivery, physical presence; then, when individual regulations are released, it will be time for individual assessment of compliance.
 

How Deloitte can help

Deloitte can help you and your business stay ahead of regulatory compliance, from initiation and gap analysis to design of strategies and implementation for both operations and procedures.

Through our Regulatory Watch Service, Deloitte can also help you find a steady path forward in the shifting regulatory landscape.