Shearman & Sterling LLP | FinReg | UK Taskforce on Innovation, Growth and Regulatory Reform Publishes Recommendations
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  • UK Taskforce on Innovation, Growth and Regulatory Reform Publishes Recommendations

    The Taskforce on Innovation, Growth and Regulatory Reform has published its report, making several recommendations for reforming the U.K.'s approach to regulation as well as practical suggestions for implementing the reforms. The main recommendation tasks the government with building a U.K. regulatory framework that has proportionality at its core and that is based on the principles of the common law. The report also provides specific proposals for regulatory reforms across several sectors, identified as high growth sectors, including the financial services sector. The TIGRR recommendations will be progressed by the newly established Brexit Opportunities Unit, which is being led by Lord Frost, Minister of State at the Cabinet Office. Consultations on proposals to implement these ambitious recommendations are expected later this year.

    The TIGRR report recommends the approach to regulation is reformed along traditional common law lines, moving away from the EU codified system. The report suggests that the government reconsiders the approach to regulation with the aim of enhancing productivity, encouraging competition and invigorating innovation.

    The TIGRR report makes three main recommendations for financial services. These are:

    ‚Äč1. Return to a common law principles–based approach to financial services regulation.
    • The Taskforce advocates that the U.K. returns to a common law principles–based approach to financial services regulation, freeing the U.K. of the rigid and too prescriptive EU approach. This is based on recommendations by Shearman & Sterling partner Barnabas Reynolds in his book "Restoring UK Law: Freeing the UK's Global Financial Market," which provides detailed analysis of the topic. Notably, the Taskforce goes further and recommends this approach is adopted for all regulated sectors, not only the financial services sector.
    • The report provides two examples where this can be put into action. The first example concerns the MiFID II position limits regime, which sets limits on the largest position a firm may have to a particular contract that is traded on an exchange. The second example suggests introducing a more discretionary approach to calculating CCP margins. CCPs are required to run a model for the calculation of margin and obtain regulatory consent for any significant change to the model before adopting the revised model.

    2. Deliver a regulatory framework that supports U.K. global leadership in FinTech and digitalization of financial services infrastructure. The Taskforce report sets out four ways in which the government can meet this recommendation, some of which echo the Kalifa Review recommendations. The Taskforce suggests that:
    • the government should mandate the advancement from Open Banking to Open Finance quickly;
    • a graduated regulatory approach for challenger banks is adopted, which will, the Taskforce states, increase competition, particularly in retail banking. The Prudential Regulation Authority is currently consulting on proposals to introduce a "strong and simple" prudential framework for non-systemic banks and building societies that are not internationally active;
    • the anti-money laundering burden on certain Open Banking service providers and other FinTech firms, such as Account Information Service Providers and Payment Initiation Service Providers, be reduced;
    • a U.K. Central Bank Digital Currency pilot is launched within 12 to 18 months.

    3. Amend the disclosure and transparency requirements for financial services products to make them more proportionate and less burdensome. The Taskforce believes that many of the disclosure requirements inherited from the EU regime are not appropriate for the U.K. in its position outside of the EU. Some of the examples highlighted in the report are:
    • the costs and charges transparency obligation when investment services are provided to eligible counterparties and professional clients and the best execution reporting obligation, required under the Markets in Financial Instruments rules;
    • the "investment recommendation" disclosure requirements under the U.K. Market Abuse Regulation, which obliges firms that prepare or distribute investment to take reasonable care to ensure that the information is objectively presented, and to disclose their interests or indicate conflicts of interest concerning the financial instruments to which that information relates;
    • the scope of the U.K. Packaged Retail and Insurance-based Investment Products Regulation (onshored from the EU) should be clarified and limited to those products that are truly complex and that require specific disclosure for retail investors to understand and compare the key features, risks, rewards and costs of the products. The FCA has been granted powers under the Financial Services Act 2021 to clarify the scope of the rules. The products that are within scope of the PRIIPs Regulation has been a concern since it was first proposed. The uncertainties of the application of the PRIIPs Regulation to capital markets instruments, including vanilla corporate bonds and standard exchange-traded futures, resulted in many capital markets industry participants conservatively including PRIIPs-specific selling restrictions in addition to Prospectus Directive selling restrictions, thus significantly reducing direct access for retail investors to these products.

    View the Report of the Taskforce on Innovation, Growth and Regulatory Reform.

    You may like to see our client note, "Re-Imagining the UK Approach To Regulation," which discusses the TIGRR recommendations in further detail.

    View details of the Kalifa Review of FinTech.

    View details of the PRA's proposals for a graduated prudential framework.

    You may like to see our client note, "PRIIPs and Capital Markets Transactions: a Better Way Forward?" in which we discuss the scoping issues, restrictions on access and costs that the PRIIPS regime has caused for relatively simple products.

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