Edinburgh reforms cement UK financial divergence

On 9 December, Chancellor of the Exchequer, Jeremy Hunt, released the ‘Edinburgh reforms’, with the aim of boosting UK competitiveness and attractiveness to global markets.

The reforms address a regulatory divergence from the EU, seizing a new approach to financial regulations post-Brexit as the government distances itself from pieces of retained EU law.

The announcement comes as the next step from the proposals set out in Mansion House 2021, a roadmap to make the UK financial services sector more open, sustainable, and technologically advanced with a global competitive edge. These objectives hope to promote job creation and support business growth across the UK.

Hunt addressed the forthcoming independence: “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.”

Key updates include:

• Changes to the UK’s regulatory architecture
• The scrapping of PRIIPs and ELTIFs
• Revisiting the VAT treatment of investment funds
• Facilitating lending with easier access to bank capital
• Adjusting tax incentives for funds
• Changes to the ring-fence and senior managers’ accountability

Raising the high notes

The reforms aim to ensure better access to capital by making the UK an attractive place for firms to list and raise capital.

The provision of investment research will be formally reviewed, in particular the effects of the EU’s MiFID unbundling rules that do not apply to leading markets such as the US.

The Chancellor has also issued remit letters to the FCA and Prudential Regulation Authority (PRA) which stress the new secondary competitive goals. This means regulators will be required to assist the international competitiveness of the UK economy and its long term growth.

In addition, the UK will be replacing the EU’s Long Term Investment Fund regime with the new Long-Term Asset Fund (LTAF). Structured around the UK market, this aims to encourage firms to employ more capital in productive assets such as UK infrastructure and low carbon and clean energy.

Innovation station

The update draws on the desire to invest in emerging technologies to facilitate UK growth. This involves a commitment to publish a consultation on a proposal to establish a UK Central Bank Digital Currency.

Another advancement is the extension of the Management Exemption to cryptoassets, signifying more overseas investment cashflow into that market.

A recommitment was also mentioned for the Financial Markets Infrastructure Sandbox in 2023, permitting firms and regulators to test, adopt and scale new technologies which could change the game for financial institutions.

Championing sustainability

The UK has committed to publishing a new green finance strategy in 2023 and to consult on ESG ratings to work towards becoming the world’s first net-zero aligned financial centre.

The reforms act as a catalyst for greener investments in sustainable energy supplies such as nuclear, hydrogen, and off-shore wind.

A call for consultation

While there is room for radical change, the reforms are subject to consultation which may dilute their effect in the long run.

Speaking on this, Gavin Haran, head of policy for asset management at Macfarlanes stated: “The Government’s proposed reforms are bold. The scrapping of some regulations, such as PRIIPs and ELTIFs, make sense because the UK is already divergent from the EU in those areas. The industry has been calling for some of the proposed reforms like revisiting the VAT treatment of investment funds; others are expected, such as changes to the UK’s regulatory architecture. However, a lot will depend on the details that emerge from subsequent detailed reviews. For instance, if the UK does opt to re-bundle payments for research, will managers opt to return to charging their clients for it?”

“The reforms try to offer something to everyone, but there are definite risks attached, particularly in changes to the ring-fence and senior managers’ accountability,” he added. “It is possible that the reforms could be watered down through the consultation process. The regulators too are likely to be less keen to remove some of the rules that they had a hand in creating.’

Now that its divergence from the EU is taking shape, it is evident that the UK is championing itself as a leading domicile for the financial industry as there is an increasing risk of firms looking further afield than London and Edinburgh as financial capitals.

Read the Chancellor’s full statement here.