When Chancellor Jeremy Hunt presented the ‘Edinburgh reforms’ on 9 December 2022, treasurers could be forgiven for picking over the 31-point package of regulatory and tax changes announced.
For even though it is an early stab at what PwC describes as “the government’s vision for an open, sustainable, technologically advanced financial services sector that is globally competitive”, the reforms offer a picture of the UK’s post-Brexit financial regulatory architecture.
“The Edinburgh reforms introduce substantive policy developments across the financial services sector, focusing on areas industry have identified as particularly burdensome or where innovation and competition can be supported,” says PwC.
How may the Edinburgh Reforms, taken together with the UK’s Future Regulatory Framework proposals and the Financial Services & Markets Bill, impact corporate treasurers? James Winterton, associate director, policy & technical, at the Association of Corporate Treasurers (ACT), says: “As a general point, corporates are happy to deal with well-regulated and well-capitalised financial counterparties. Many of these regulatory reforms are aimed principally at freeing up the activities of [UK] regulated financial firms and potentially could result in some genuine improvements for their corporate clients too, if not simply introduced as another parallel set of rules that multinationals are forced to comply with, in addition to the existing EU inherited rulebook."
"The important thing, as we've seen with previous regulatory reform, is that corporates – in this case represented by their treasurers – need to be consulted to ensure that proposed changes are proportionate, without unintended consequences, and that the implementation phasing is realistic,” he adds.
A major consideration for treasurers is the intended transition of EU retained law into the regulators' rule book while conferring on the regulators new objectives for growth and international competitiveness, spelt out through ‘tranching’, the sequencing of highest priority reforms over the course of 2023. "Another challenge," Winterton says, "is that EU regulatory framework itself continues to evolve since Brexit, so the EU/UK regulations would start to diverge even if the UK kept the status quo."
In tandem, to strengthen the accountability of regulators, the government also issued new remit letters to regulators the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), detailing targeted recommendations for how regulators should have regard to government policy.
When it comes to where corporate treasurers could see tangible impacts from the Edinburgh reforms, a key area could be a consultation this year on removing banks without major investment banking activities from the ring-fencing regime and reviewing the deposit threshold for being in scope of the requirements. The government will also assess the practicalities of aligning the ring-fencing and resolution regimes, as well as other reforms of the ring-fencing regime.
Any review of how banks are regulated, particularly in terms of capital requirements, could determine the pricing of bank services to corporates or the availability of those services to corporates or even how complex or easy to use those services are.
Another major area of consideration for treasurers is reform of the EU’s Solvency II rules, which govern the insurance sector, with looser capital requirements intended to release more money for investment in green infrastructure projects. The increased pool of capital may ultimately deliver better financing terms, that treasurers would certainly be interested in.
A whole raft of other elements, such as Mifid II, an updated EU directive for protecting consumers whilst maintaining a level playing field in investment services, may be less impactful, but nonetheless will help define the new regulatory era.
A further speech by the Chancellor on 27 January 2023 referenced the importance of the Edinburgh reforms in the wider government plan to reboot the UK economy. He said: “Brexit is an opportunity not just to change regulations but also to work with our experienced, effective and independent regulators to create an economic environment which is more innovation-friendly and more growth focused,” he said.
“There is a critical need for easier access to capital, particularly scale-ups. I am supporting important changes to the pensions regulatory charge cap and I have used the regulatory flexibility provided by Brexit to change the Solvency II regulations which will begin to be implemented in the coming months.
“Alongside other measures announced in the Edinburgh reforms, this could unlock over £100bn of additional investment into the UK’s most productive growth industries.”
PwC: Edinburgh reforms at a glance
Deloitte: what the Edinburgh reforms mean for financial services
NatWest: summary of key points
Lawrie Holmes is a freelance business and financial journalist