The UK exited 2022 with its fourth chancellor of the calendar year and a package of financial sector reforms said chancellor Jeremy Hunt promised would “turbocharge growth and deliver a smarter and homegrown regulatory framework for the UK”.
When announcing the package in December, Hunt effectively stated how the European Union’s (EU) primacy in setting financial services legislation had left UK regulators simply as supervisors, not rulemakers.
As his department, HM Treasury, said at the time: “This constrained the regulators’ ability to determine the most appropriate regulatory requirements for UK markets”. Adding that returning the power to make rules to UK regulators would allow the UK “to seize the opportunities of EU exit and secure the UK’s position as a global financial hub”.
There is certainly merit to this argument – rules established at the EU level often mean committees of politicians were drafting detailed, prescriptive rules for risks that were, in effect, very small.
What’s more, there was relatively little consumer research or piloting of new rules, such as the much-lamented system for disclosure under the Packaged Retail and Insurance-Based Investment Products (Priips) regulation.
The government has taken the opportunity to address this wrong and others, including the Markets in Financial Instruments Directive (Mifid) regulations, where it intends to remove the 10% drop rule.
We have campaigned for this rule to be scrapped, as it encourages clients to focus on falling markets at a time when most may well be best advised to ride out the volatility.
On the fund management side, the government has produced proposals for creating investment vehicles – long-term asset funds – designed to increase investment in illiquid assets by creating longer redemption periods (of at least 90 days) than exist for normal mutual funds.
This is designed to create an investment vehicle that has high standards of governance and consumer protection without creating systemic risks that might come if investors were able to withdraw their investment without notice.
The Treasury has also created proposals for a new tax regime for qualifying asset holding companies in certain fund structures. These moves are to be applauded.
There are, however, two features of the review that may cause scepticism about a tsunami of growth being unleashed by the reforms.
First, these are reforms being carried out by a government already in the second half of its electoral term. As a result, the reforms have largely been hoovered up from a range of ongoing reforms and tweaks to the system, rather than being a radical package based on a fundamentally new approach to markets and regulation.
For many working in financial services, this more pragmatic approach may be welcome, given the disruption caused by some more intrusive reforms in the past, but pragmatic reforms are not likely to radically change the experience of investors.
Second, the idea EU regulations were holding back UK growth means the reforms tend to reflect the sprawl of EU financial regulation, as the government repeals or replaces unwise decisions here and there, while the majority of EU rules, including rules on compulsory professional indemnity insurance, which have held back the growth of the advice profession for several decades, will remain for the foreseeable future.
One legal firm commenting on the package of reforms complained that “the UK government appears to have had a failure of ambition that may see the sunlit uplands of a truly competitive UK funds industry remain tantalisingly out of reach for future generations”.
History will tell whether these reforms are a pragmatic leg-up for the investment sector or a big, missed opportunity for economic growth.
Dr Matthew Connell is director of policy and public affairs for the PFS
