A report from the Taskforce on Innovation, Growth and Regulatory Reform provides recommendations for how the UK can “re-imagine” its approach to regulation post-Brexit.
On 16 June 2021, the Taskforce on Innovation, Growth and Regulatory Reform (the Taskforce) published a report (the Report) providing recommendations for how the UK could “refresh” its approach to regulation post-Brexit. The UK government convened the Taskforce in February with the directive to “re-imagine, quickly and creatively, the UK’s approach to regulation”.
The Report, which covers a broad range of sectors, includes notable recommendations in relation to financial services regulation. While it does not suggest a “bonfire of regulations”, the Report does convey a desire to move away from the European style of technical and prescriptive rule-making. The focus is very much on creating a flexible and adaptive regulatory system in the UK to encourage innovation and growth. The Report also hints at some specific areas of onshored EU legislation that the government may target for change in the near term.
Financial services proposals
A key recommendation of the Report is to restore a common law, principles-based, approach to financial services regulation. The Report argues that, as a result of adopting EU regulation, the UK has been left with “highly prescriptive rules which are stifling business”. It goes on to provide examples of specific areas requiring a more discretionary approach, including the MiFID II position limits regime for commodity derivatives, and margin rules for central counterparties (CCPs).
Fintech and digitalisation
The Report makes several recommendations designed to help the UK remain at the forefront of innovation in financial services. Many of these recommendations clearly stem from a desire for the UK to continue to compete as a global fintech hub, including:
- The quick expansion of Open Banking to Open Finance: The Taskforce considers that mandating a quick expansion and assuming a more principles-based, market-led approach would create a “digital Big Bang” in fintech, and could potentially unlock the benefits of Open Finance in two years. As such, the Report recommends that the government lays the enabling legislation for Open Finance and broader Smart Data initiatives as soon as possible.
- The implementation of a graduated regulatory regime for banks: The Report recommends that the Bank of England and the PRA implement a graduated regulatory regime so that smaller banks and challengers do not face undue barriers to their establishment and growth. The Report suggests that this approach could help increase competition in the UK retail banking sector. The PRA has already published a Discussion Paper on creating a “strong and simple” prudential regime for smaller banks, with more proportionate capital requirements.
- The removal of Account Information Services and Payment Initiation Services from the scope of anti-money laundering regulation: These two key Open Banking services, which never come into possession of a customer’s funds, are included within the scope of EU anti-money laundering legislation. According to the Report, their inclusion has forced non-bank providers of such services to endure unnecessary costs. The Report suggests that this situation could be one reason why Open Banking has not reached its full potential.
- The launch of a pilot scheme for a UK central bank digital currency (CBDC) within 12-18 months: The Report highlights developments related to CBDC in other jurisdictions and advocates the UK act as quickly as possible so as to gain “first mover advantage” and ensure that digitisation occurs “on the UK’s terms”, in the most effective and safest way. The Bank of England recently announced the creation of a CBDC Taskforce and published a Discussion Paper on new forms of digital money. Although actively exploring the possibilities, the Bank of England is taking a considered approach and has stated that it has not yet made a decision on whether to introduce a CBDC in the UK. However, if the Bank follows the Report’s recommendation, developments in this space could happen much faster.
Disclosure and transparency
The Report considers many aspects of the transparency and disclosure requirements brought in by EU financial services legislation as too onerous. It explains that the UK, now outside the EU, can reform disclosure requirements, with the aim of making them proportionate for firms and an emphasis on the provision of bespoke information to consumers, rather than “excessive reports” following prescriptive templates. The Report suggests a wider project should be undertaken to review and reform disclosure requirements, and provides some illustrative examples of changes it views as beneficial, including:
- Removing the requirement to provide costs and charges reports to wholesale clients under MiFID II
- Removing the disclosure requirements from MAR in relation to investment recommendations when made to wholesale clients
- Restricting the requirement to produce a KID under the PRIIPs Regulation to genuinely complex, packaged products that require special explanation to the retail market
General proposals for the future of regulation
As well as the financial services-specific recommendations outlined above, the Report makes various general proposals about how regulation should be developed and made, implemented, and scrutinised in the UK. As an overarching principle, the Report suggests that regulation should be proportionate, and that best practice for developing regulation must start with thinking deeply about the desired outcome and taking into account the overall impact on both individual businesses and the economy.
Specifically, the Report recommends:
- Ensuring new regulation is only created when absolutely necessary
- Focusing on creating “agile” and “adaptive” regulation, to help increase innovation
- Mandating a new “Proportionality Principle” throughout UK regulation, such that regulation is outcomes-based and proportionate to the risks it seeks to prevent
- Giving regulators specific statutory objectives to promote innovation in the markets they regulate
- Parliament delegates greater responsibility to regulators to do more through guidance, decisions, and rules that can be adapted quickly (along with enhanced scrutiny and accountability)
For now the Report only contains recommendations for the government to consider. However, in a letter welcoming the Report, Boris Johnson stated, “We will give your report the detailed consideration it deserves, consult widely across industry and civil society, and publish a response as soon as is practicable”. The Taskforce intends it will inform the government’s approach in the months and years to come.
The Report suggests that there is momentum within government to make some fundamental changes to the way in which regulation is made, which could result in some significant alterations to the regulatory landscape.