SMART MOVE? - The Regulatory Reform: a smarter financial services framework for the UK?
In December 2022, the Treasury unveiled a package of over 30 regulatory reforms for the UK financial services sector. Together with the Financial Services and Markets Bill and a package of proposed reforms to Solvency II, the so called “Edinburgh reforms” are described as seizing on the benefits of Brexit to deliver “a smarter and home-grown regulatory framework … that is both agile and proportionate”. Should insurers be expecting a dramatic change in the regulatory framework and a cultural shift in the regulators’ approach in 2023?
The Edinburgh Reforms
The Edinburgh reforms cover a diverse and extensive package of changes across a broad range of financial services regulations which are at various stages of development. They include:
- Repealing hundreds of pages of EU retained laws – including Solvency II rules – and replacing them with rules set by the regulators within a framework established by legislation. The objective is to create a smarter regulatory framework that is “agile, less costly and more responsive to emerging trends”.
- New remit letters for the Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”), including targeted recommendations on growth and international competitiveness. These reflect the new secondary objective in the Financial Services and Markets Bill (see below).
- A review of the Senior Managers and Certification Regine (“SMCR”). The Government will be seeking views in Q1 2023 on the effectiveness, scope and proportionality of the regime and suggestions for improvements.
- Replacing the Packaged Retail Investment and Insurance Products (“PRIIPS”) regime with a new retail disclosure framework.
- Consumer credit reforms cutting costs for business and simplifying rules for consumers.
- Examining the boundary between regulated financial advice and financial guidance, reducing the regulatory burden while still providing consumer protection.
Financial Services and Markets Bill
The Bill takes forward the Government’s vision for a new regulatory framework, giving regulators responsibility for setting direct regulatory requirements within a framework established by Government.
The process of repealing and replacing EU retained law relating to financial services is expected to take several years. The provisions of the Bill repealing EU law will come into effect on a rolling basis, as the regulators consult on and finalise the rules that will replace them. The Government has however promised significant progress towards implementing the Solvency II reform package over the course of 2023.
The process of repealing and replacing EU retained law relating to financial services is expected to take several years.
The regulators will be subject to new accountability obligations and a new secondary statutory objective of advancing international competitiveness and growth. The proposal to give the Treasury powers to direct the regulators to make, amend or revoke rules in the public interest was shelved in the face of criticism that it might weaken their independence, international standing and competitiveness. The Treasury will have the power to require regulators to review rules and report on whether they are compatible with regulators’ objectives, function effectively and achieve their purpose, or whether those rules should be amended or revoked.
The Bill also introduces a new gateway for firms wishing to approve financial promotions for unauthorised persons. With some exceptions, firms will need to apply to the FCA for permission.
Solvency UK
The Solvency II reform package is described by the Government as introducing “a simpler, clearer and much more tailored regime”. Reforms include:
- A reduction in the risk margin for long-term life insurance business of 65% (which also applies to Periodic Payment Orders), and for general insurance business of 30%.
- Increasing investment flexibility for life insurers by broadening eligibility criteria for the matching adjustment, balanced by enhanced governance requirements.
- Removal of capital requirements for existing and new third country branches, provided the undertaking as a whole is appropriately capitalised.
- Increasing the threshold for application of the regime to £15 million in annual GWP (triple the previous threshold) and £50 million in gross technical provisions (double the previous threshold).
- Reducing reporting requirements.
- A new regime for new entrants, with a lower capital floor, lower expectations for key personnel and governance structures, and exemptions from some reporting.
It remains to be seen whether the reforms deliver a greater regulatory accountability and scrutiny and tangible changes in the regulators’ approach.
The Government expects these reforms to unlock over £100 billion for investment. Given that there will be no restrictions on commercial decisions on asset allocation, insurers will be free to use the capital released to make returns to shareholders. How much makes its way into investment remains to be seen.
CONCLUSION
The Edinburgh reforms will drive the regulatory agenda in 2023 and beyond. It remains to be seen whether the reforms deliver a greater regulatory accountability and scrutiny and tangible changes in the regulators’ approach. They will however provide the industry with an important opportunity influence the future of regulation in the UK by responding to consultations on the rules that will replace retained EU law.
