The UK’s Big Bang 2.0 – bonfire or bluff?

Will the UK government’s Edinburgh Reforms deliver on the game-changing rhetoric or turn out to be more of a damp squib?

The second half of 2022 saw significant turbulence in British politics, with a government headed by Liz Truss lasting just 49 days. Following this, a spate of changes to City of London regulations – labelled the Edinburgh Reforms – was proposed in December.

Billed ‘Big Bang 2.0’, in reference to the previous set of sweeping reforms and financial market deregulation of the original Big Bang in 1986, the latest spate is focused on Britain’s post-Brexit future. Issues addressed include ring-fencing rules, ESG announcements, and Retained EU Law (REUL), all with the aim of taking advantage of “Brexit freedoms”.

The UK government said this would include a commitment to make substantial legislative progress over the course of 2023 on repealing and replacing EU-era Solvency II,  the rules governing insurers’ balance sheets. This is expected to unlock over £100bn ($120bn) of private investment for productive assets such as UK infrastructure.

“A practical and flexible solution was required to deal with the large volume of retained EU law which was on-shored in raw, unadulterated form by the EU Withdrawal Act.”

Martin Sandler, partner, Everards Sutherland

“The reforms are pragmatic in that they set out a flexible range of legal and regulatory mechanisms to transpose, amend or revoke REUL,” says Martin Sandler, financial services regulatory partner at Eversheds Sutherland. “They prioritise the areas to be addressed into various tranches, and they set out a broad range of substantive areas of regulation to be improved and modernized in the process. A practical and flexible solution was required to deal with the large volume of REUL which was on-shored in raw, unadulterated form by the EU Withdrawal Act.”

“Regulatory bonfire”

The Future Regulatory Framework (FRF) is another aspect of this, giving greater power to British regulatory authorities, namely the FCA and PRA. The media went as far as to dub Big Bang 2.0 a “regulatory bonfire”. But opinions in the financial services sector are that reforms will not be as far-reaching as the government says.

“I’m sceptical that any of this will make a change for the vast majority of UK financial services firms, because so many of our rules are baked into everyday conduct of business activity conducted by firms,” says Tim Dolan, Shareholder and Partner at Greenberg Traurig, in an earlier interview with GRIP. “To remove some of them now would actually create more administrative hassle for very little benefit. What I think will happen is that there will be changes around the regulatory capital regime for insurers and other very large institutions, but not for the vast majority of firms.”

“I want the world’s tech entrepreneurs, life science innovators and clean energy companies to come to the UK because it offers the best possible place to make their vision happen.”

Jeremy Hunt, UK Chancellor

One of the government’s main stated aims is to boost growth in British industries, including digital technology, life sciences, green industries and advanced manufacturing. “If anyone is thinking of starting or investing in an innovation or technology-centred business, I want them to do it in the UK,” the Chancellor Jeremy Hunt said in January. “I want the world’s tech entrepreneurs, life science innovators and clean energy companies to come to the UK because it offers the best possible place to make their vision happen.”

Change to ring-fencing regulations

Whether these reforms will facilitate this remains to be seen. “We have an overworked regulator with some firms being authorized to do things that don’t require authorization,” says Dolan. Despite this, he says FCA has developed ESG labelling that is “more pragmatic” than EU-developed categories.

One aspect of the proposed reforms was the change to ring-fencing regulations, a piece of legislation that came into force in 2019 that requires the largest UK banks to separate core retail banking services from their investment and international banking activities.

“In terms of ring-fencing, there may be savings or gains for very large institutions around capital. It’s very sensible. But it won’t move the dial for the vast majority of authorized firms,” Dolan adds.

The Edinburgh Reforms are due to come into force in mid-2024.

What’s in Edinburgh?

The Edinburgh Reforms package is an exhaustive, and potentially exhausting, range of measures covering various aspects of the financial services regulatory landscape. Taken together they would represent the Big Bang 2.0 that has been promised. So what are the most striking, and potentially most important, aspects of the reforms? 

1. Reforming the ring-fencing regime for banks. A major step, that would mean savings for some larger institutions, but not that significant for most authorized firms.  

2. Issuing new remit letters for the PRA and FCA with clear, targeted recommendations on growth and international competitiveness. This could be significant, but will also be difficult to enforce.

3. Commencing a review into reforming the Senior Managers and Certification Regime in Q1 2023.

4. Committing to having a regime for a UK consolidated tape in place by 2024.

5. Repealing the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, and consulting on a new direction for retail disclosure. There is demand for this.

6. Publishing the plan for repealing and reforming EU law using powers within the Financial Services and Markets Bill, building a smarter regulatory framework for the UK. It isn’t immediately clear how this will be done, or why this is included.    

7. Launching a Call for Evidence on reforming the Short-Selling Regulation. Again there is little detail on the intention here.

8. Consulting on removing burdensome customer information requirements set out in the Payment Accounts Regulations 2015. This is welcome, although it may tip the balance too far the other way. 

9. Establishing an Accelerated Settlement Taskforce. This matters but there is no detail or timetable.  

10. Increasing the pace of consolidation in defined contribution pension schemes. This is important but there is no indication of how it will be done.

11. Improving the tax rules for Real Estate Investment Trusts from April 2023. There is no indication of how this will be done. 

12. Becoming a world leader in sustainable finance. The government is ensuring the financial system plays its role in the delivery of the UK’s Net Zero target and wants the UK to be the best place in the world for responsible and sustainable investment. It will publish an updated Green Finance Strategy in early 2023 and consult in Q1 2023 on bringing ESG ratings providers into the regulatory perimeter.

13. A sector at the forefront of technology and innovation. The government is ensuring that the regulatory framework supports innovation and leadership in emerging areas of finance, facilitating the adoption of cutting-edge technologies. This includes, among other ideas, consulting on a UK retail central bank digital currency alongside the Bank of England.

14. Delivering for consumers and businesses. The government is continuing to work with the regulators and industry to ensure the sector is delivering for people and businesses across the UK. As part of this it is consulting on Consumer Credit Act reform and laying regulations in early 2023 to remove well-designed performance fees from the pensions regulatory charge cap.