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Treasury & Capital Markets
UK pushes ahead with post-Brexit capital market reforms
Will they lead to more efficient, joined-up markets or less stringently regulated ones?
Keith Mullin 16 Aug 2022

Retained EU rules to be consigned to the scrapheap. But will the new rules be more effective?

The UK news agenda is quite depressing at the moment. We have the media trying to outdo itself fearmongering about the heatwave (by UK standards), drought being declared and hosepipe bans imposed in parts of the country to stop us running out of water!

We have the cost-of-living crisis and energy bills forecast to continue rising exponentially to beyond the financial means of a lot of households.

And we have the Bank of England telling us UK inflation will exceed 11% in the autumn, that we will enter recession this year, and won’t come out of it until 2024.

At least the ‘theatre of the absurd’ that is the Conservative Party leadership race is moving towards its dénouement (thank the stars).

With so much drama out there, it’s no surprise that the actually pretty joined-up work taking place to revolutionize the UK’s post-Brexit financial markets landscape has been overshadowed. More than six years after the UK narrowly voted to leave the EU, there’s been a veritable tsunami of activity in recent weeks around UK financial services.

The sweeping Financial Services and Markets Bill was published. The Treasury published its related response to the Financial Services Future Regulatory Framework Review (FRF) proposals to determine how the regulatory framework should adapt to make it fit for the future. The Secondary Capital Raising Review (the Austin Review, fronted by Freshfields partner Mark Austin) was published. And the City of London Corporation and the Treasury published their annual review of UK financial services. The Treasury had responded in March to the Wholesale Markets Review consultation, whose aim is to improve the regulation of secondary markets post-Brexit.

A lot of this year’s outcomes are the culmination of work done in previous years. Initial proposals from the FRF and Wholesale Markets Reviews came last year. As did the Kalifa Review of the UK fintech sector (by entrepreneur Ron Kalifa); and the Hill Review of the prospectus regime and the rules of admission to the Official List (the definitive record of UK securities listing). The Hill Review was fronted by Jonathan (Lord) Hill, former European commissioner for financial stability, financial services and capital markets union.

The Financial Services and Markets Bill, born out of the FRF Review, will consign hundreds of pieces of retained EU law to the scrapheap. It will also give the Prudential Regulation Authority and the Financial Conduct Authority secondary responsibilities to facilitate growth and competitiveness (below their primary responsibilities to maintain financial stability and support consumer protection).

The bill includes measures to increase regulatory accountability, a regulatory principle on net zero, and it crystallizes the outcomes of the Wholesale Capital Markets Review and the Hill Review. It also makes changes to the use of new technologies in financial services, with a focus on cryptocurrencies (including regulatory proposals for stablecoins).

The bill will also reform Solvency II, the EU regulation that sets out capital requirements for insurance companies. In essence, the shift to Solvency UK cuts the capital needs of UK insurers, creating a downside divergence between UK and EU insurers in terms of capital strength. The government spins this as freeing up capital to give UK insurers more flexibility to invest in long-term assets like infrastructure. At what cost remains to be seen.

The Secondary Capital Raising Review came up with 21 recommendations that were accepted by the government in full. Their objective? To make UK capital markets fit for purpose in the coming decades. Recommendations were ranged under eight headings:

  • Enhancing pre-emption rights, a bastion of UK shareholder protection where existing shareholders have the right to purchase new shares before outside investors are approached
  • Increasing the ability of companies to raise smaller amounts of funds quickly and cheaply
  • Supporting additional flexibility for capital-hungry companies
  • Involving retail investors in all capital raisings
  • Reducing regulatory involvement in larger fundraisings
  • Making existing fundraising structures quicker and cheaper
  • Increasing the range of choice of fundraising structures for companies
  • Raising the priority of an ambitious drive to digitalization.

I mentioned at the top that a lot of the work is joined up. The workstreams do appear to be well co-ordinated; their outputs sharing phrasing around key objectives. Austin’s review calls for public, quasi-public and private capital markets to be connected in a comprehensive, effective and world-leading ecosystem that enables and encourages companies to start, grow, scale – and remain – in the UK.

Members of the Capital Markets Industry Taskforce, set up in July by the City of London Corporation and the Treasury, represent an end-to-end ecosystem of public and private capital markets. The aim of the taskforce is to cement changes to be brought in under the raft of new regulations in the real world by stimulating industry engagement to ensure that the UK’s capital markets serve those who seek capital and those who have capital to invest, that they support the UK economy and that they strengthen its role as a global financial centre.

Julia Hoggett, CEO of the London Stock Exchange, is taskforce chair; and there’s a lawyer, a corporate/investment banker, an asset manager, an asset owner, a venture capitalist, an executive from a private company and from a listed company, and a representative from the advisory/audit/accountancy world.

The government isn’t done yet: coming soon are a second economic crime bill to push private sector information sharing, an online safety bill containing anti-fraud responsibilities for tech companies, a plan to apply distributed ledger technology to a UK sovereign debt instrument, and reforms to attract more green finance to the UK.

Green finance reforms will draw on the work of the Transition Plan Taskforce, set up in April with representatives from companies, financial institutions, regulators, policymakers and civil society. Calls for evidence on its report – A Sector-Neutral Framework for private sector transition plans – closed in July.

Finally the government is due to respond to the Ring-fencing and Proprietary Trading Independent Review by the end of this year.

There’s an awful lot going on to reform UK capital markets. I voted to remain in the EU. I say that purely for transparency. Nadhim Zahawi, in his first official speech as UK finance minister in July, said of the Wholesale Markets Review that it was about “stripping away poorly crafted EU rules” – not that he would have the remotest idea.

He’s likely equally unaware too that the UK was a powerful regulatory force when it was in the EU and had a big hand in crafting those EU rules. So, let’s see if what replaces them actually does lead to more efficient, effective and joined-up UK capital markets. Or if the UK doesn’t just end up with a less stringently regulated environment. We’ve all seen where that can lead.

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