The “Building a smarter financial services framework for the UK” paper unveiled in December 2022 was billed as a Big Bang 2.0 for the City of London. Chancellor Jeremy Hunt unveiled a package of 30 measures he said was an attempt to create “an agile, proportionate and home-grown regulatory regime”.

GRIP spoke to Martin Sandler, a Financial Services Regulatory Partner at law firm Eversheds Sutherland, to find out more about the impact these reforms might have.

How radical will these reforms be in your view?

“While politicians have used such heralding expressions for the Reforms as a “bonfire of EU regulations” and “Brexit dividend/freedoms”, the reality of the Reforms is more prosaic in that a practical and flexible solution was required to deal with the large volume of REUL which was onshored in raw unadulterated form by the EU Withdrawal Act. 

“The way the Reforms and associated consultations propose to address this seems pragmatic in that;

• they set out a flexible range of legal and regulatory mechanisms to transpose, amend or revoke REUL,
• 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 modernised in the process. 

“While the reforms are radical in the sense that they represent an almost unprecedented volume of regulatory change, the individual substantive proposals do not currently appear broad and deep enough to constitute “radical reforms”; however they do represent the beginnings of a departure from the EU regulatory framework and substance and perhaps an implicit recognition that equivalence is unlikely to be granted by the EU to the UK any time soon.”

What does it mean now that the FCA and PCA (Prudential Conduct Authority) are in charge of regulation?

“The FCA and PRA have derived and will continue to derive their powers from HM Treasury and from primary and secondary legislation. What is proposed, however, are flexible methods for transposing REUL into UK laws and regulations, including via statutory instruments or via rules made by the regulators themselves. It is thought that the latter method allows greater agility and flexibility, so we should expect a large proportion of REUL to be transposed into regulator rules (with appropriate modernising and UK-specific modifications). There will still be various checks and balances from HM Treasury and government, so the regulators will not have a totally free hand with respect to such rule-making.”

Chair of the Treasury Committee Harriet Baldwin said the decision to include such a broad group of changes in the package was “slight spin”. Would you agree?

“As stated above, while there has been some inevitable political spin in announcing the reforms, the substantive proposed reforms themselves seem to address real issues, are well thought through (although some, like the trading venue proposal are at a very early idea stage) and in any event will all be subject to rigorous consultation processes. Some commentators have expressed concerns that if the rules are liberalised to such an extent as to compromise the integrity and safety of the UK financial system, then the UK will no longer be an attractive place in which to do business. While the Reforms do propose changes resulting in a reduction in some of the seemingly excess capital requirements for insurers under Solvency II, or even the repeal and replacement of Solvency II, it seems unlikely that by the end of any consultation process that there will be a greater risk of undercapitalisation in the sector.”

What’s your view on the MiFID framework?

“These proposed wholesale markets reforms are designed to strengthen the UK’s position as a world-leading wholesale capital markets centre and are a response to industry demands. The proposed changes around reporting rules and commodity derivatives represent a divergence from MiFID II/MiFIR, which may further complicate the possibility of the EU finding the UK equivalent. However there is very little mention of EU equivalence within the Edinburgh Reforms statement and accompanying papers and the UK Government appears to be proceeding on the basis that equivalence is unlikely to be granted any time soon.”