Laura Miller examines forthcoming legislation to reform financial services after Brexit and what it means for the sector.
The Financial Services and Markets Bill implements the outcomes of the Future Regulatory Framework Review. It has been lauded by the Government as a significant piece of new legislation, and described by some as being on a par with the Big Bang deregulation of financial services in the 1980s. Others, however, see it as an uneasy compromise between the aims of the politics of the day, specifically post Brexit, and the independence of the UK financial regulators.
New focus on competitiveness
A major change is a new responsibility financial regulators (namely the Financial Conduct Authority and Prudential Regulatory Authority) must consider as a ‘secondary objective’ alongside its consumer-focused duties, to “promote the growth and competitiveness of the UK economy including the financial services sector”. The Government wants to require regulators to focus on both growth and international competitiveness when policing UK firms.
Peter Allen, partner and co-head of financial services at RSM UK, describes the change as a “compromise between industry lobbying” – which wanted regulators forced to promote the competitiveness of the UK financial services industry – “and the regulators, who publicly resisted any new objective”. The result – unless the bill is amended at Committee stage, which as Allen points out is not impossible given the Lords Select Committee’s recent criticism of the regulators – is the secondary objective, to promote competitiveness but not at the expense of the objectives of financial stability and consumer protection.
According to Jonathan Drake, partner for financial Services sector at law firm DWF, there was certainly “significant criticism” from the insurance sector in the consultations for the Bill that helped push for this new rule. The FCA and PRA were, he says, accused of having an “inflexible and slow-moving approach” that had “inhibited the growth of the UK as a major international centre for insurance and reinsurance”.
Having the secondary objectives of competitiveness and growth will, Drake says, hopefully alter the approach of both regulators. Several regulatory initiatives have referenced the need for more speed and flexibility, he says, though he adds “unfortunately these will be undermined by ongoing operational issues, for example the FCA apologising for the delays in dealing with change of control applications”.
The key is ensuring balance; protecting consumers from bad actors while not standing in the way of firms trying to innovate for the benefit of savers and investors. The compromise may well dissatisfy both sides.
Over time, RSM’s Allen says regulators will “at the very least have to pay more lip service to the industry’s international competitiveness”. This may lead regulators to have to prioritise that competitiveness over their reading of financial stability and consumer protection. However, Allen adds: “Any such impact will be slow, contested and incremental.”
Rule review powers
An additional new 'rule review' power will enable the government to direct the regulators to review their rules where it is in the public interest, as well as a power to require regulators to make rules.
Law firm Freshfields Bruckhaus Deringer points out it has been suggested these powers will expose the UK regulators to a greater degree of political interference than is currently the case.
Changes could potentially occur behind closed doors, Bloomberg reports, if the Government believes disclosure would damage the public interest. Normally, any reviews would be put before parliament.
Detail on these new powers is currently scant. However, lawyers at Freshfields Bruckhaus Deringer believe it is likely these powers will be among the more controversial aspects of the Bill as it passes through the legislative process.
Solvency II impact
The Financial Services and Markets Bill will also enable the reform of Solvency II. Detail on this in the Bill is scant but according to the Treasury it “could lead to a reduction in excessive capital buffers and give insurers more flexibility to invest in long-term assets like infrastructure”. Smaller insurers may need to comply with fewer requirements, similar to other insurance centres like Bermuda.’
The post-Brexit element, of which Solvency II is a part, is that UK financial regulators will also have greater responsibility for setting the rules that govern UK financial services. The Bill will reform EU-derived legislation governing the UK’s capital markets, ensuring it is “fair, outcomes based and maintains high regulatory standards”.
Tom Selby, head of retirement policy at wealth manager AJ Bell, says the implication of this change is insurers will be subject to less stringent regulatory requirements – in particular in relation to the capital they have to hold in reserve.
“This could be good news for customers if lower regulatory costs are passed on in lower charges or better rates,” he says. However, he adds the obvious counter to that is “if consumer protections are lowered then there could be a greater risk of detriment should a firm run into difficulties down the road”. There is also, of course, the possibility benefits will be swallowed up in higher profits or shareholder dividends.
Another potentially bigger benefit of changes to Solvency II could be felt in politically-driven investment, which could expedite problem solving in the recent Government search for opportunities to increase investment in the UK and the ‘Levelling-Up’ agenda.
DWF’s Drake says: “It seems the proposed changes to Solvency II – and specifically the calculation of the risk margin/matching adjustment – would have the potential to release significant amounts of capital currently held by life insurers and which might become available for investment.” On a company and sector level the reforms also have the potential to allow life insurers to increase the scale of their UK investments.
Specific new consumer protections were also key parts of the Bill. These included powers to enable the Payments Systems Regulator to direct banks to reimburse victims of authorised push payment (APP) fraud. These measures are set to be particularly welcome. David-Jan Janse, CEO and co-founder of SurePay, an online payments firm, describes “an epidemic of APP fraud that shows no signs of stopping”.
APP fraud has been on a rise since the start of the pandemic and by last year it had already overtaken card fraud. More than £580m was lost in 2021 to APP fraud, a 40% increase since 2020, as criminals continue efforts to exploit the pandemic, according to the latest report published by UK Finance in June.
Janse says fraudsters are “restless in finding new ways of tricking people out of their money and the solutions they are deploying are becoming increasingly sophisticated”, and typically target vulnerable and non-digital natives less familiar with transacting online.
Elsewhere in the Bill other consumer protections included new rules for firms to approve financial promotions to better reflect FCA demands they are fair, clear, and not misleading. Powers enabling credit unions, which provide low-interest forms of credit, to offer a wider range of products to their members, are also part of the Bill.
Access to cash
The Bill also brought into legislation previously announced measures to safeguard access to cash. Under the new rules, the FCA will be granted new powers over the UK’s largest banks and building societies, to ensure cash withdrawal and deposit facilities are available in communities across the country.
To support the FCA, the government said in May that it will in due course set out its expectations for a reasonable distance for people to travel when depositing and withdrawing cash. This will reflect the existing spread of cash withdrawal and deposit facilities in the UK. According to a Q1 2021 study from the FCA, 95.4% of the UK population is within 2 kilometres of a free cash access point.
Alice Haine, personal finance analyst at Bestinvest, says safeguarding access to cash in the UK is “fantastic news for the elderly, the vulnerable, the ‘unbanked’ and small businesses who still need to be able to source notes and coins with ease to pay for their everyday living needs”.
Cash is the second most frequently used method of payment in the UK, and around 5.4 million adults rely on cash to a very great or great extent in their daily lives. Access to cash has particularly become more of a challenge for those living in rural communities, as more and more bank branches close and lenders focus more on online modes of transacting.
Haine says: “Those living in rural areas travel further to withdraw and deposit cash, reflecting higher distances to all services such as shops and financial facilities such as banks, building societies, post offices and ATMs.” Access to a free source of cash within 2km drops to 76.6% for the UK rural population, she points out. It is, Haine adds, “a social and moral responsibility to ensure cash is still available for those that need it”.
Impact on the City
How could changes listed in the Financial Services and Markets Bill affect practices and standards in the City? Slowly, is the broad response.
Peter Allen, partner and co-head of financial services at RSM UK, says the impact will be “slow and incremental”. This is not, he says, another Big Bang scenario, referring to the 1980s Big Bang, which saw a significant deregulation of the London financial services industry, and resulted in rapid technological and structural change, catapulting London from regional to global status as a dominant financial centre.
The current Bill, says Allen, “is essentially a spring cleaning exercise”. It will allow the UK government and regulators to ‘take back control’ of financial regulation from the EU directives which were carried over wholesale into UK legislation after Brexit.
Regulators are able to delve into areas that they haven’t been involved in before, such as cloud computing and crypto assets, Allen points out, in more niche parts of the Bill. It also allows aspects of EU-originated regulation to be changed to reflect specifically British concerns.
Though it may be part of a move towards radical change, the outlook for the current Bill is it will not produce radical change on its own.