Edinburgh Reforms: UK Govt Wants To Transform Financial Industry
The Chancellor of the Exchequer, Jeremy Hunt, has announced The Edinburgh Reforms, a set of changes that will increase competition and growth in the UK financial services sector. These changes include the move to a CBDC and to Net Zero.
In its move toward Net Zero, the UK has put a high priority on investments that are good for the environment and stressed the need for private funding to reach goals. As part of the changes, the UK government plans to update the Green Finance Strategy next year. They may also give regulatory authorities control over ESG ratings.
With the help of the Financial Services and Markets Bill, stablecoins will be able to be used as a form of payment, and cryptoassets will become more regulated. The announcement also said that the Financial Market Infrastructure Sandbox will be used in 2023 and that the Bank of England will think about making a digital pound.
The Chancellor said that financial services are one of the UK’s five key growth sectors. He then announced over 30 reforms to make the UK’s financial industry more open, sustainable, and technologically advanced.
The Chancellor highlights that: “The Edinburgh Reforms seize on our Brexit freedoms to deliver an agile and home-grown regulatory regime that works in the interest of British people and our businesses.”
One of the rules is called “ring-fencing,” and it says that big banks must keep investment banking and retail banking separate. The Bank of England says that this rule was put in place in 2019 to “increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers.” This is likely to be changed.
Also, at the beginning of 2023, the government will introduce new rules to get rid of performance fees on pension regulatory charge caps and to work more with the Financial Conduct Authority (FCA) on financial advice and guidance.
Dr. Angela Gallo, Senior lecturer in finance at Bayes Business School, stated: “Together with the removal of the bank bonuses and the discussion on call-in power, this political decision seems to have little to do with fixing the financial system or ensuring financial stability. “
In the wake of the financial crisis, these were the main reasons for many of these reforms. However, this seems to have more to do with a desire to loosen regulations. More and more, it seems like the government’s plans are aimed at the role of central banks and regulators. Even though putting up fences was expensive, the system has already gotten used to it. If deregulation is done without a clear goal in mind, it can be dangerous.”
Professor of banking at Bayes Business School, Dr. Francesc Rodriguez Tous, said: “Part of why banks are important to the economy is that they offer basic services like current accounts and loans. One of the main reasons why governments all over the world spent billions to save banks during the Global Financial Crisis of 2008 was to keep these services from going down. Ring-fencing is an attempt to keep some basic banking services from being affected by the troubled global financial markets.
“It means banks can still engage in investment banking as long as their retail banking operations are ring-fenced. It is therefore puzzling that this is one of the reforms targeted by the government, given that its repeal will most likely lead to less money flowing into the UK economy in the short term. Moreover, there is no widespread clamour for its repeal from the banking industry itself. We don’t know what will happen when repealed, but what we do know is that its introduction has led to more investment in mortgages as well as lower rates in the UK.”
Jonathan Herbst, the global head of financial services regulation at Norton Rose Fulbright, said this about the reforms: “The direction of travel will be very welcome. There is no doubt that the measures make a difference in some areas, and it will be interesting to see how reforms related to ring-fencing, the SMCR, PRIIPs, and research work out. But people shouldn’t get too excited about this. There is no sign that the world will go back to how it was before the financial crisis.
“Most of the UK regulatory regime reflects either international commitments or policy developed over many years to reflect the lessons of experience. There are some interesting proposals but, in terms of the bigger picture, there is no talk here of fundamentally changing the MiFID settlement or the rest of the post financial crisis package of measures. There is little call in the City for this and most of the current law reflects international commitments.”
Responding to the Chancellor’s statement, David Postings, chief executive of UK Finance, comments: “The banking and finance industry is the engine of our economy, delivering jobs and investment up and down the country. The comprehensive package of reforms the Chancellor has announced today, coupled with the landmark Financial Services and Markets Bill, form a major step in ensuring the sector remains strong and internationally competitive. We will continue to work with the government in supporting the economy through the current challenges and in creating growth for the future.”
Khalid Talukder, co-founder of DKK Partners, adds: “With Britain facing economic turmoil and huge financial challenges, the time is right for the Chancellor to unleash the country’s potential through sweeping, but sensible regulatory reforms. The financial services industry plays a crucial role in job creation and powering the economy and driving growth. The UK must seize this opportunity and get onto the front foot and make use of first mover advantage.”
This move by the UK government solidifies its vision for the future of the UK’s financial industry and economy by securing their place in the international regulatory space.
