14 July 2023

UK post-Brexit Financial Services Framework

A) Latest: UK post-Brexit Financial Services Framework

1. Financial Services and Markets Bill receives Royal Assent

On 29 June 2023, two key UK post-Brexit UK parliamentary Bills (previously tracked) received Royal Assent.

a) Retained EU Law (REUL) Revocation and Reform Bill

This legal Bill allows the UK to “take the next step in reasserting the sovereignty of Parliament”.

It ends the ‘special status’ of retained EU law (REUL) which was applied to UK statute on 31 January 2020 [as per EU Withdrawal Act]. It now enables EU law to be more easily amended, revoked, or replaced.

NB: Ongoing, GovUK maintains an online schedule of all EU legislation they can now retain, change or repeal. Before 31 December 2023, they intend to repeal an initial list of 591 legal items (i.e. “of little significance”, according to one legal firm).

b) UK Financial Services and Markets Act (FSMA) 2023

This separate Bill will repeal / modify specific REUL for financial services, as decided by HM Treasury (HMT). The objective is to deliver a “Smarter Regulatory Framework for financial services… tailored to the UK”. Retained EU legislation will be replaced with rules mostly set by the Financial Conduct Authority (FCA), now operating within a framework drafted by GovUK, verified by the local Parliament.

NB: the GovUK press release declared the legal approval of this Bill was a “rocket boost for UK economy”.

With these legal hurdles now cleared, fund firms impacted (on both sides of the Channel) now await specific details of exactly how (and when) HMT and the FCA intend to deploy the extensive powers they have acquired.

2. GovUK unveil a new “smarter” UK regulatory framework

“We want to be the world’s next Silicon Valley and a science superpower, embracing new technologies like AI in a way that brings together the skills of our financiers, entrepreneurs and scientists to make our country a force for good in the world. That means making sure our financial services sector, traditionally so nimble and agile, has the right architecture to provide the best possible security for investors as well as capital for businesses, and the best talent right here in the UK to make that happen.”

Jeremy Hunt, Chancellor of the Exchequer, Monday 10 July 2023

On Monday this week, the UK Chancellor made his annual ‘Mansion House speech’ where he announced his government’s latest package of reforms to stimulate the economy. This included latest plans to revoke specific EU financial services law as a means to deliver the “smarter regulatory framework for the UK”.

Mr. Hunt revealed his additional repeal of “almost 100 pieces of unnecessary retained EU law, further simplifying our rulebook whilst retaining our high regulatory standards”, as set out in a new HMT document published on the same day (see next item).

At the same time, the Chancellor expressed “delight” in the finalised EU-UK financial services Memorandum of Understanding (MoU), which will enable the UK to “build a new relationship with our European partners”.

Elsewhere, Mr Hunt hailed the formal signing of a ‘Mansion House Compact’ with major local Defined Contribution (DC) pension schemes. Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer (two-thirds of the market) have now agreed to commit 5 per cent of their investments to private equity and early-stage businesses, potentially unlocking up to £50 billion before 2030.

The government will also remove the MiFID II ‘unbundling rule’ (i.e. requiring firms to separate the cost of investment research from market trading costs) in H1-2024. Fintech services rules will also be reformed, while HMT and the Bank of England explore “potential designs for the digital pound”.

3. HMT publish their plan to new “smarter” UK regulatory framework

“Financial services retained EU law is complex and piecemeal. EU files often relate to more than one activity or type of firm, and separate EU files often set overlapping or similar requirements. This creates a complex environment for firms.”

Building a Smarter Financial Services Regulatory Framework for the UK: Plan for Delivery (HMT, 11 July 2023)

A crucial new paper published this week describes how the UK Government intend to deliver their ‘Smarter Regulatory Framework’ (SRF). The ‘Plan for Delivery’ document defines general SRF boundaries between HMT and the FCA, alongside targeted policy changes and legislative approach, ongoing.

Chapter 2 (p10-14) presents a table of legal progress, covering ‘traches’ of EU financial services law previously selected for reform or revocation. Actions now scheduled before end-2023 (of interest to Kneip) include:

Draft statutory instruments: published this week to be finalised and “laid before” the UK Parliament.

These are interim reforms to UK regimes such as Solvency II and the Data Reporting Services Regulations (i.e. part of MiFID II). It is claimed the S2 reforms alone “could unlock over £100 billion of private investment for productive assets such as UK infrastructure”.

Additional statutory instruments: will be drafted covering additional UK framework reforms.

This includes UK replacements for the revoked EU PRIIPs and Money Market Funds regimes, expected to be finalised and “laid before” the UK Parliament during 2024.

Key Consultation: During the Q3-2023 delivery of their UK Green Taxonomy, the UK government will publish a consultation considering their approach facing the EU Taxonomy Regulation.

As mentioned earlier, the UK Government will repeal circa 100 “unnecessary” pieces of REUL on 29 August 2023.

NB: although these relate to “various EU obligations across a wide range of financial services policy areas”, HMT verify “the effect of the amendments will be preserved by FSMA 2023” (i.e. no legal impact to industry).

4.HMT respond to ‘UK Retail Disclosure’ consultation

“The government intends to proceed with its plan to entirely remove all PRIIPs firm facing retail disclosure requirements from legislation. The FCA will be able to deliver a new retail disclosure regime which is tailored and proportionate to the UK market. This will support UK businesses, whilst maintaining the appropriate disclosure for retail investors to make informed decisions.”

UK Retail Disclosure Consultation Response, (HMT, 11 July 2023)

This week, the UK government also replied to their recent ‘PRIIPs and UK Retail Disclosure’ consultation.

As a reminder, they had previously cited the EU-PRIIPs KID regime as creating “unnecessarily prescriptive measures that led to information being presented to investors in unhelpful or, worse, misleading ways”; they also declared they would repeal “this EU-inherited PRIIPs Regulation as a matter of priority”.

At the same time, the EU-UCITS KIID was said to “remain a prescriptive format that can restrict firms’ ability to tailor disclosure to their clients.”

In the latest consultation response, the UK government confirmed their ongoing intentions, including:

Remove all PRIIPs firms facing retail disclosure requirements from UK legislation
Authorise the FCA to deliver a new retail disclosure regime “specifically tailored to the UK market”;
In scope: UCITS vehicles, ‘unauthorised’ firms and overseas funds (“to ensure a level playing field”).

Recognising stakeholder feedback, the UK government will ensure the FCA “has all the tools it needs” to design a new regime that tackles industry concerns such as:

Products in scope of the new UK disclosure regime
Accuracy of disclosure information
Balanced’ ‘flexibility’ with ‘comparability’ (e. to ensure “consumers are provided with the appropriate information to make effective investment choices”).

A transition period is also confirmed, to “provide certainty to industry and support them as they adapt to the UK’s new tailored retail disclosure regime”. More details will be supplied in due course, including the intended change in UCITS disclosure requirements. HMT and the FCA will also ensure “there is no gap between the old regime being removed and the new regime being put in place, to ensure certainty and minimal costs for firms”.

In terms of next steps, before end-2023:

GovUK will publish draft Statutory Instrument: to enable the FCA to deliver their new retail disclosure regime after the EU-PRIIPs regime has been repealed;
The FCA will publish new draft rules for their UK retail disclosure regime (following on from their previous ‘Future Disclosure Framework’ discussion paper).

B) Other UK developments

1. FCA: publish LTAF policy statement

The FCA recently published a new policy statement setting out new rules to broaden access to invest in long-term asset funds (‘LTAFs’).

Similar to EU-ELTIFs (to be revoked this year), LTAFs are new type of local open-ended product designed to invest efficiently in longer-term assets, such as venture capital, private equity, private debt, real estate and infrastructure. A reminder that LTAFs are a type of authorised Alternative Investment Fund (AIF), to be managed by a full-scope AIFM as permitted by the FCA. Alongside ‘Annex IV’ supervisory reporting obligations, LTAFs will also need to produce UK-PRIIPs KIDs (for the interim) whenever marketed to local retail investors.

Alongside the FCA’s changes to encourage retail investors and pension schemes to invest in LTAFs, firms will be obliged to disclose performance fees (in the prospectus, per stated rules), and provide an LTAF risk summary (per template specified in the FCA’s COBs handbook).

Firms in scope now have until 3 July 2024 (at the latest) to apply the FCA’s latest LTAF rules.

2. FCA: publish latest ‘Value for Money’ paper ahead of Consumer Duty deadline

This week the FCA also published a paper summarising the outcome of a recent consultation on a new ‘Value for Money’ (VFM) framework, ahead of the pending legal enforcement of the UK Consumer Duty.

On this occasion, the UK regulator was responding to feedback provided on their policy proposals to disclose, assess and compare the value for money of workplace pension schemes (including metrics and standards).

This follows on from the FCA’s previous application of their Consumer Duty policy statement for firms classed as manufacturer or distributor of a financial product or service, which apply for open funds from 31 July 2023.

As before, Authorised Fund Managers already subject to UK ‘fair value’ rules can use their annual Assessment of Value (AoV) report to meet the ‘price and value’ outcome of the Consumer Duty.

This specific area of Consumer Duty is now reflected in the European MiFID II template (EMT) V4.1.

A reminder the UK Consumer Duty will also apply to authorised EEA firms in the temporary marketing permissions regimes (TMPR).

3.Industry await FCA response to future UK asset management regime

Finally, a reminder that local stakeholders also await the FCA’s response to another major discussion paper: ‘Updating and improving the UK regime for asset management’.

With this FCA dialogue now closed, another Feedback Statement is expected later this year, possibly as part of a consultation paper with draft legal proposals.

Meantime, it is reported larger fund firms have pushed-back at the FCA’s suggested merger of UCITS, AIFMD and MiFID II regimes into a single (post-Brexit) UK fund manager rulebook, citing a significant increase in industry operational risks and costs, without clear benefits to the end investor or improved UK sector competitiveness.