April 25, 2023
Estimated reading time: 4 minutes
What are the Edinburgh Reforms?
Also known as the Big Bang 2.0, the Edinburgh Reforms are a set of sweeping changes coming for the UK’s financial services industry. Announced in the Autumn Statement in December 2022, the reforms aim to promote Britain as a leading center for sustainability and technological advancement, post-Brexit.
Why are reforms needed in financial services?
This package of Edinburgh reforms is being introduced for two main reasons:
- To establish the UK as one of the market leaders in financial services (in terms of sustainability and technology)
- To replace some of the European regulations that we are no longer regulated by, due to Brexit
The underlying benefit of both is to promote economic growth and financial stability in the UK. By making our own versions of any retained EU law and reviewing an entire catalog of rules, the UK can put itself at the forefront of innovation in finance.
Competitiveness in finance is notoriously fierce, so these amendments aim to propel the UK economy.
By announcing sweeping changes, businesses shouldn’t have any nasty surprises when it comes to compliance. Plus, it means that the government and regulatory bodies can maintain control over what changes, and when. This happens through ‘tranching’, which refers to the prioritization of policies. Therefore, the highest priority changes will be made first.
The UK government announced reforms once before, known as the Big Bang in 1986. These original sweeping financial reforms were announced because London’s stock exchange was falling behind the rest of the world and needed changes to boost participation from international companies.
That’s probably why such aggressive sweeping reforms were chosen this time around too – they’ve been proven successful in the past.
Overview of the Edinburgh Reforms
The Edinburgh Reforms feature 30 different policy changes. Heer are just some of them:
- SMCR review
- Wholesale markets
- Pension reforms
- Green Finance Strategy
The question of whether the Senior Managers Certification Regime is really working might be one that regulators have been asking themselves.
A review was launched in March 2023, to address issues such as personal accountability within the SMRC regime. This review should allow regulators to gather insightful feedback and make the changes necessary to improve the efficacy of SMCR.
Ringfencing currently applies to retail banks and requires them to separate core services in order to reduce overall risk. For example, the separation of pensions versus wealth and investments.
While the Edinburgh Reforms made it clear that ringfencing is worth retaining, we do expect changes in terms of the current regime. Importantly, the independent panel would like to reduce the rigidity and determine whether it’s genuinely helpful for banks without a significant investment sector.
The wholesale market refers to a sector of financial services generally applied to the financial instruments involved in funding. It includes transaction services, FX, equity and debt markets and derivatives.
This reform aims to position UK financial services as a global leader in wholesale and capital markets, attracting entrepreneurs and companies from all over the world.
As part of the Edinburgh reforms review of Wholesale Markets, MiFiD reporting requirements will change. One common criticism of the EU-retained MiFiD laws was that it was cumbersome and very heavy on paperwork. So now that Brexit has taken place, the United Kingdom can build an easier reporting system.
Under the Edinburgh Reforms, a new Securitization Regime has been set out. The main change is who will regulate pension investments. Though previously The Pensions Regulator supervised securitizations, this responsibility will now fall to the Financial Conduct Authority.
Green Finance Strategy
The Green Finance Strategy is another example of an EU Law that needs to be tweaked before the UK can follow a similar framework. The EU’s Green Finance Strategy was composed of regimes like the EU’s Green Bond Standard and the Sustainable Finance Disclosure Regulation, for example.
But as part of the UK’s own regulation, they’ve so far developed a Green Taxonomy in order to categorize investments and avoid greenwashing, among other plans. This strategy will further develop under the Edinburgh Reforms.
Regulators and compliance
The Edinburgh Reforms will be implemented under the Financial Services and Markets Bill (FSM Bill) as part of the Future Regulatory Framework. It’s likely that most of the policies will be governed by the FCA or the Prudential Regulation Authority.
As far as compliance, companies should expect an unrelenting sequence of changes over the coming years. Due to the ‘tranching’ approach, these sweeping changes are expected to be staggered over at least a 4-8 year period. Of course, much of this timeline relies on feedback from regulated entities – so now is the time to make your opinion heard.
In order to stay updated with the changes to come, CUBE has your back. Our dedicated regulatory intelligence platform works intuitively to show you the regulatory changes coming for your business. So, whether you’re operating in many jurisdictions or only one, you’ll get the relevant info to comply with ease.
Keep ahead of emerging accountability regulations and guidance by speaking to CUBE.