Second Report - Edinburgh Reforms One Year On: Has Anything Changed?

The full Committee has previously concluded in its report on the Future of financial services regulation that “there should be a secondary objective for both the Financial Conduct Authority and the Prudential Regulation Authority to promote long-term economic growth” but that “pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK’s strong regulatory standards.” The Sub-Committee’s opinion is that completing all 31 strands of the Edinburgh Reforms is a vital step towards addressing examples of over-zealous regulation that disadvantage British companies.

The Sub-Committee agrees with the Treasury that the UK’s regulators should consider economic growth when designing new regulations, and the best way to promote economic growth in the UK is through a strong, well respected, independently regulated, and financially resilient financial services sector.

The Sub-Committee has raised concerns with the FCA about the risks to widening retail investment in Long-Term Asset Funds, since they are riskier non-liquid assets. These concerns are in part formed by our work looking into the failure of London Capital and Finance, and the role of promoters in potentially misusing exemptions for high net-worth individuals and so-called sophisticated investors, to garner greater sales. The Sub-Committee continues to have concerns in this area, and therefore about the protections the FCA is, in part, drawing upon for Long-term asset fund sales to a wider range of retail investors.

In our July 2023 report on venture capital funding we concluded that we were in favour of pension scheme consolidation where appropriate. Our view has not changed since. We therefore restate our conclusion on pension scheme consolidation in this report:

Our evidence suggests that UK pension funds may be an untapped source for a deeper domestic capital market more inclined to risk investment in high-potential businesses. We welcome the Government’s announcement of work on pension fund consolidation in the autumn. We will scrutinise the details of those proposals closely. Any change must pay due regard to the balance between risk and reward for pension investors. We encourage the Government to progress this work with urgency.

The Sub-Committee remains sceptical that a government-approved monopoly for providing data to market participants through a consolidated tape is good for competition. Once a monopoly were granted, the incumbent would have little incentive to reduce costs or to innovate. Given the claimed benefits that a consolidated tape would provide to market participants, and the widespread consensus within the market that these benefits do exist, it is not unreasonable to expect the financial markets of the UK to be able to create their own conditions for such a tape to emerge without the regulator granting a monopoly. The Sub-Committee’s preference would Edinburgh Reforms One Year On: Has Anything Changed? 27 have been that market forces created a consolidated tape, therefore the Government and regulators should continue to monitor the impact on market forces of the new tape.

While the Treasury has delivered what it set out to do in these six strands of work, namely publishing documents, welcoming a regulatory consultation, and establishing reviews or taskforces, none of these are in of themselves reforms to the UK’s financial services regulations. We do not consider reviews alone to be reforms. They are merely the preparatory work for future potential reforms. We believe the Treasury is incorrect in considering these strands of work as having delivered reforms. Only when the recommendations from these various reviews, taskforces and strategies have been implemented into regulatory rule changes can these be deemed to be financial services reforms that have been delivered.

Based on the evidence the Sub-Committee has heard, there is the potential for small changes to the ring-fencing framework to improve its interoperability with the PRA’s resolution regime, but any longer-term plans to eventually remove the ring-fencing regime entirely should only be entertained once substantial evidence of what benefits this would bring is available.

The continued viability of building societies and mutuals is of high importance to the Committee. A diverse, competitive and vibrant financial services sector is strengthened by the presence of mutuals and building societies.

Given that Parliament has expressed its will through the Mutual Deferred Shares Act 2015 that building societies should be able to raise finance through mutually deferred shares, the Committee expects the Government to address the lack of progress made on the secondary implementing legislation as part of its Edinburgh Reforms work in this area.

There is consensus among the Treasury, industry, and the Financial Conduct Authority that there are problems within the Packaged Retail and Insurance-based Investment Products (PRIIPS) regime in addition to a wider problem with cost disclosures. Such an example can be found with investment companies, where EU- derived regulation, since removed by the EU and other international jurisdictions, disadvantages these British companies in the global marketplace. The Sub- Committee supports the efforts being made to correct these issues and has written to the Chancellor. We welcome the draft statutory instrument on PRIIPS and look forward to the forthcoming statutory instrument on the Markets in Financial Instruments Directive (MiFID). (Paragraph 49) Overarching Sub-Committee conclusions

The Chancellor’s Edinburgh Reforms speech made big promises. However, from what has been completed so far, the Sub-Committee is of the view that none of the achievements to date will make a substantial difference to the UK economy.

Many of the strands of work included in the Edinburgh Reforms are not reforms, but are more preparatory work for potential reforms in the future and should be 28 Edinburgh Reforms One Year On: Has Anything Changed? treated as such. However, even among the reforms that we agree are genuine changes in regulatory rules, the categorisation of some as reforms to be championed by the Chancellor as significant and worthy of attention is unconvincing. For example, it is not obvious to the Sub-Committee how a small £25 million tax cut such as the reform to Real Estate Investment trusts, or a change to the Investment Manager Exemption to include cryptoassets, which is deemed to have no economic impact, sufficiently meet the Chancellor’s description of the Edinburgh Reforms, which he described as “a bold collection of reforms taking forward the Government’s vision for an open, sustainable, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens. These reforms will create jobs, support businesses, and power growth across all four nations of the UK”.

The Sub-Committee understands and supports the Treasury in carrying out reforms that follow the appropriate processes. Reforms to the financial services rules should be evidence-based, taking into consideration views from both industry and wider society. This engagement takes time and must be done correctly, giving stakeholders sufficient time to consider their responses. Nevertheless, the time taken between the Treasury announcing a policy objective and the implementation of changes to rules has been too long. Often Treasury consultations end, and the next stage of the process stalls at this point, with Treasury responses and next steps taking considerable time.

The Treasury’s priorities in its financial services reform plan should be reforms that will make the most difference to the UK’s economic growth, and reforms that prevent harm to consumers and businesses, making sure they are provided with well-designed, suitable financial products. We call on the Government to take this into account in pursuing plans to reform the financial services sector.

The Treasury and the regulators have told us the process of moving the onshored rules into the regulators’ rule books will take many years. The regulators and the Treasury must ensure that there is a sustained and focussed pace of change in order capture the benefits these changes can bring in a timely manner.

The Sub-Committee notes the proposed establishment of a Lord’s Committee on Financial Service Regulation. While its remit is a matter for the House of Lords, duplication of work should be avoided. The Sub-Committee will continue to carry out its scrutiny of new regulatory consultations as and when they are published. The full Committee will naturally continue to consider the wider context of the regulators work, as it has always done. Consideration of the existing acquis could prove a rich seam of work for the Lord’s Committee.

The Financial Services and Markets Act 2023 legislated for the creation of Cost Benefit (CBA) Panels dedicated to supporting the regulators in producing cost benefit analysis for each of their reforms. The Sub-Committee has consistently been of the view that the regulators’ cost benefit analysis did not capture the full costs faced by firms, nor did they adequately explain and quantify the benefits of the reforms they were proposing. We will continue to scrutinise the cost benefit Edinburgh Reforms One Year On: Has Anything Changed? 29 analysis of each proposal, and will pay close attention to the impact the CBA panels have, and whether they improve quality of the CBAs that are published in future. (Paragraph 59) 30 Edinburgh Reforms One Year On: Has Anything Changed?