Little may have changed at the regulatory level since the UK left the EU, but this could change, say Andrew Poole and Charlotte Longman of ACA Group.
Three years ago, the European Withdrawal Act finally cut ties between the UK and Europe. Taking back control was a key pledge by the Brexit-driven Vote Leave campaign, but little to no significant regulatory change has been generated between then and now in UK financial services. Is that set to change? It is certainly the hope of the new(ish) Chancellor of the Exchequer, who, in the weeks before Christmas announced a package of reforms known as the Edinburgh Reforms, hoping to drive growth and competitiveness in financial services and finally break free of the “chains” imposed by Europe.
‘Bonfire of regulations’
Much was made of the freedoms that Brexit would provide, and while UK regulators were quick to dismiss the notion of a bonfire of regulations, changes were anticipated. By not including financial services in any withdrawal agreement, dashing the hopes of the UK gaining the ‘equivalence’ moniker from the EU, perhaps that was the point in time that things could have changed. The market, though, swiftly adapted, with many already having Brexit hedge plans in place, establishing alternative investment fund managers (AIFMs) in Luxembourg and Ireland and delegating the portfolio management functions back to the UK firms. Maintaining a relative status quo however comes at a cost, as the changes required were not insignificant. Additional reporting and notifications to multiple regulators required a rethink of processes, and the need to hire qualified staff in those jurisdictions has also proved to be challenging. Not gaining the ‘equivalence’ badge could thus easily be viewed as the most costly ‘miss’ of the Withdrawal Act.
This isn’t to say that the UK has not been able to exercise some of the newly gained freedoms. The implementation of a ‘smarter regulatory framework’ is apparently on the cards, with the Financial Services and Markets Bill aiming to repeal all retained EU laws and tailoring (or untangling) those left behind to be more appropriate for the UK financial services market. Recent tweaks to established regulations have seen the FCA review the research and inducements sections of MiFID II, giving firms greater freedom to receive research in certain areas, essentially allowing for a ‘rebundling’ of research and execution across much of the fixed income space. The FCA also did away with the need for certain best-execution disclosures to be made, the infamous RTS 27 and 28 reports. These changes were certainly welcomed, but as the EU made very similar changes, including a much broader definition of a small or medium enterprise for the research rules, it is difficult to see these changes as a pure Brexit win.
PRIIPS divergence
What can be viewed as a hit – and one of the first examples of the FCA confirming divergence from EU rules following Brexit – is the changes to the Packages Retail and Insurance-based Investments Products (PRIIPs) regulation. Issues around PRIIPs’ performance and disclosure – which resulted in consumers being fundamentally misled – have already been repealed, and further changes are being consulted on. This is something that’s been welcomed by the wider industry.
The Edinburgh Reforms may very well free the UK markets, and a review of Solvency II might result in billions of pounds for investment into private companies via the established private equity sector, but this all remains very much aspirational talk. For the purposes of actual fund regulation, the changes have been disparate and superficial. Untangling the well-established and engrained operational methods utilised by fund managers was never going to be a quick or easy task. The FCA has, of course, been issued with additional objectives, namely to support the government’s ambition to encourage economic growth and promote international competitiveness. Perhaps maintaining a framework that is a fundamental cousin to the EU is the best way to bolster the UK’s position as a leading financial services hub. The UK certainly has not delivered any knock-out hits with its newfound freedoms.
*Andrew Poole is director of European regulatory advisory, and Charlotte Longman is director of regulatory reporting and asurance at risk and compliance firm, ACA Group.
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