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The Treasury’s recently announced changes following its wholesale capital markets review are significant, but not revolutionary — at least not for now. Marie Kemplay reports.

Speaking in early March, John Glen, economic secretary to the Treasury and City Minister, remarked that the UK government would not be seeking to make “changes for change’s sake”, such as any shifts away from the EU’s Markets in Financial Instruments Directive regime, when it comes to post-Brexit financial regulation.

Yet, in the same address to the Association for Financial Markets in Europe’s (AFME’s) Future of UK Wholesale Financial Markets Conference, he also reiterated the UK government’s ambition to use “post-EU freedoms” to create a financial services sector that is “open, green, competitive and technologically advanced”. On top of this, he said he plans to use this freedom to deliver “a financial services regulatory framework that is agile, fit for the future, and supports high standards”.

The government has already announced several changes in relation to wholesale markets regulation. For instance, Mr Glen reiterated changes that had previously been announced to: abolish the share trading obligation (STO), a rule determining at which venues shares can be traded; amend the scope of the transparency regime for fixed income and derivatives markets; and scrap the double-volume cap (DVC), a measure that limits the volume of trading of equities on so-called ‘dark’ venues.

Mr Glen also announced several new changes that he described as “common sense, yet significant”, including: a loosening of the regulations impacting systematic internalisers (investment firms that frequently and on a large scale will deal on their own account when executing client orders, outside of a trading venue), and a change in the scope of the derivatives trading obligation.

Details still to come

These changes, while certainly meaningful, do not appear to mark any especially drastic or unexpected shifts when taken in isolation. Symbolically, however, they provide an early indication of the government’s willingness to act in areas it feels are not right for the UK market. Conor Macmanus, director of financial services risk and regulation at PwC, says: “Some of these changes relate to rules which were never thought about positively from a UK perspective, so it was to be expected that once the powers to make those changes existed, they would be amended or removed. But the overall thrust of what they’re trying to achieve, and a lot of the detail, remains to be seen.”

This is a view echoed by Ash Saluja, financial services partner with law firm CMS, who says: “The general direction of travel is a positive one, in that it’s about a UK-specific framework, calibrated for the new world we’re in, which includes removing some specific rules that were never really liked within the UK context.” He adds, however, that we are “still scratching at the surface”.

The big thing for me is the direction of travel of the UK versus Europe in relation to regulatory alignment

Ash Saluja

Far more significant are likely to be changes still to come. For instance, within its response to the wholesale markets review, the Treasury highlights several areas for further exploration, including the potential creation of a new venue specifically geared towards small and medium-sized enterprises, and how to enable the market conditions for the development of consolidated tapes for fixed income and other asset classes. It also references numerous areas where the Financial Conduct Authority (FCA) is expected to consult and be responsible for managing changes to wholesale financial markets regulation.

New regulatory framework

Indeed, this approach is in line with the Treasury’s Future Regulatory Framework (FRF) review proposals, the latest version of which were published in November 2021. A key plank of it being to return direct responsibility for designing and implementing the UK’s financial services regulatory framework to the FCA and the Prudential Regulatory Authority (PRA).

Over the years, the scope of EU financial services regulation, the FRF review posits, expanded and impacted the ability of UK regulators to operate in the way originally envisaged under the UK’s Financial Services and Markets Act 2000. Crucially, at the point of leaving, all EU legislation that applied directly in the UK was transferred onto the UK statute book under the ‘onshoring’ programme. This includes EU financial services regulation, which in effect means at present there are many areas that can only be changed via primary legislation in parliament. A time-consuming exercise and a disproportionate use of parliamentary resources, in the long-term, the FRF review argues.

Repealing EU law

However, to empower regulators in the way envisaged, the government will need to gradually repeal and replace the retained EU law. In effect, each piece of relevant retained EU law will need to be addressed individually.

“There is still a lot of work to be done on the detail of what broader changes there are going to be, and how they will work,” says Mr Saluja. “Each piece of European legislation will need to be looked at individually, and each will raise questions about whether we amend it, remove it or replace it with general principles. That process will be incredibly detailed.”

It is clear this is a process that will take several years. Many of the specific changes already outlined, such as the removal of the STO or the DVC, are also contingent on when parliamentary time can be found.

No radical deregulation

Based on what has been announced so far, there is little to suggest that the government is going to pursue a major lowering of, or reduction in, regulatory standards in order to make UK capital markets more competitive. This is significant given that deregulation has often been a prominent theme in popular discourse around Brexit.

Indeed, within the wholesale capital markets review, “maintaining high regulatory standards” is referenced multiple times as a key principle underpinning any such reforms. “The general thrust of what they’re trying to achieve is to remove burdens which are deemed to be unnecessary. So, it’s clearly not a radical deregulatory agenda. But there are amendments, which will be helpful and are sensible to reduce unnecessary costs on the sector,” says Mr Macmanus.

However, even without any significant moment of regulatory change, the potential for longer-term shifts is clear. “The big thing for me is the direction of travel of the UK versus Europe in relation to regulatory alignment,” says Mr Saluja.

He continues: “There was a big debate throughout the Brexit process about the level of alignment needed to achieve regulatory equivalence with the EU. But now there seems to be a general acceptance that the EU is unlikely to grant equivalence to the UK in the near future, which has given impetus to the idea of the UK developing its own regime and thinking about regulatory equivalence on a more global level. So much of financial services is global in nature, and thinking about the UK as a place to do international business, there is an opportunity to calibrate the rules to support that objective.”

International competitiveness

Certainly, the UK government has an explicit aim of boosting the international competitiveness of its capital markets, particularly in the context of Brexit and the loss of access to EU markets that brought (although the exact impact is still to fully bear out). And, if EU regulatory equivalence appears to be off the cards for the moment, then it has the latitude to think more broadly about how to achieve that objective.

As part of the FRF review, the government has stated that it would like to introduce new secondary statutory objectives for both the PRA and FCA, to support growth and international competitiveness.

At present, the FCA has a strategic objective to “make sure relevant markets function well”, and three operational objectives to “protect consumers ... protect and enhance the integrity of the UK financial system [and] promote effective competition in the interests of consumers”.

Similarly, the PRA has a general objective “to promote the safety and soundness of the firms we regulate”, as well as a secondary objective to “facilitate effective competition in the markets for services provided by PRA-authorised firms”.

The introduction of this secondary objective, while complementary to each organisations’ existing aims, would be a significant step as it would be the first time either had an explicit remit to promote international competition, as well as targeting growth as an end in itself, rather than competition as a means of pushing up standards and increasing choice.

However, importantly, the fact that it would be a secondary objective means that the primary objectives would still trump this new growth and international competition aim should there be a situation where the two appeared to be in conflict.

Edwin Schooling Latter, director of markets and wholesale policy and supervision at the FCA, commented at the AFME conference that he welcomed the idea of the secondary objective, as it could be “quite empowering for me and my teams because, in a very literal way, if we had a change we wanted to make, that had no direct benefit versus consumer protection or market integrity, but just removed costs … we wouldn’t actually be able to do that under the current regime.”

He also noted the significance of a secondary objective in avoiding any “direct trade-offs” with the FCA’s existing primary objectives around consumer protection and market integrity.

Agile regulators

The government may also envisage empowering the FCA and PRA to have more direct responsibility for the country’s regulatory framework could also provide the UK with a competitive edge. The FRF review speaks of the importance of establishing a “coherent, agile and internationally-respected approach to financial services regulation that is right for the UK”.

While several market participants noted that this approach, in principle, should deliver a more efficient and responsive regulatory system, when compared to one that includes substantive input from legislators, they also cautioned about the importance of the FCA and PRA having appropriate resources in order to live up to these expectations.

Mr Macmanus says: “The agility aspiration is absolutely the right one, particularly when you consider how rapidly the financial services landscape is changing, but the regulators will need the right resources and capacity. The powers and responsibilities that they’ll have are going to expand considerably if the FRF goes through, and the sheer scale of regulation that will need to be moved from legislation into the rulebooks is enormous. To deliver on that aspiration, the resourcing point is really important.”

Finding a balance

Whatever new regulatory structure is ultimately approved for UK financial services, there will inevitably be a period of adjustment as regulators, market participants and legislators understand their respective roles within it and become accustomed to a new order. There may also be concerns about the regulator having too much power within the new FRF approach.

Kate Dawson, banking conduct and capital markets sector lead at KPMG’s Europe, the Middle East and Africa Financial Services Regulatory Insight Centre, says: “So far, I think the general feeling from the industry is that the Treasury and the FCA are both being quite open and talking a lot to the market, which is welcome. But then there are questions about what will happen as we get into this new system and how it is going to work going forward. There is a hope that the framework will continue to support interaction.”

For the FCA’s part, it has announced it will be establishing a wholesale secondary markets advisory committee, including 20 senior industry representatives, to “help develop reforms that improve market competition, increase consumer protection and enhance the integrity of markets, identify market changes that may affect the proper functioning of secondary markets, and provide data and analysis to support policy reforms”.

Future agenda

Ms Dawson also notes that in addition to considering the right overarching regulatory framework and making regulatory amendments to suit UK market conditions, the Treasury is also focused on the long-term agenda for the UK being a global capital markets centre. Areas of consideration are likely to include “increasing market efficiency, potentially by using technologies such as distributed ledger technology, looking at T+1 settlements (like the US is moving to), improving and increasing access to market data, as well as changes to support the integration of environmental, societal and corporate governance considerations into the market. These are all themes.” However, she also notes these are important themes for EU policy-makers, too.


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