Together they discuss:
- regulatory levers that the Government hopes will grow the economy;
- Financial Services and Markets Act and the process for reforming onshored EU legislation;
- recent Government reshuffle, and the appointment of the new City Minister;
- Long Term Asset Fund and the ISA; and
- likely impacts of change on the financial services industry.
David Gauke: Hi, this is David Gauke Head of Public Policy at Macfarlanes and welcome to the third of our policy in practice Autumn Statement specials. On this occasion we are going to talking about Financial Services and everything that Jeremy Hunt and the Treasury have said about that. I’m delighted to be joined by Michael Sholem, Partner in our Financial Services practice and Gavin Haran, a familiar figure in these podcasts and dealing with asset management policy. So Michael and Gavin, let’s start with the big question, what have we heard about financial services policy in the Autumn Statement?
Gavin Haran: Yeah I’ll pick that one up David. Let’s take a step back first, there isn’t too much in the Autumn Statement I think we have to say around financial services, but there are some quite specific things which continue the trajectory that we are already on, in terms of the Government’s policy. So if we take a step back, the Government’s challenge essentially is it needs to increase economic growth, there was no public money left to do that so, what the Government is doing is focusing on regulatory leavers predominantly, as a means to get finance going and hopefully support business and grow the economy. And with that the hope is that increased economic growth of course will help the public finances in terms of increased tax revenues. That’s the broader context in terms of what the Government is trying to do. What we’ve had over the past year, year and a half, is a series of announcements that aim to facilitate investment in growth producing assets, UK assets, private market assets in particular and what that means overall is introducing more risk into the system, which is really the purpose of the series of announcements we’ve had from the Edinburgh Reforms through to the more recent Mansion House Statement and this Autumn Statement as well, so it all fits into that broader package with tax and other areas, that the Government has introduced this time. The second big piece of context is obviously Brexit and with that we had the passing of the Financial Services and Markets Act just a few months ago and what that does is to kick off a process by which all of the onshored EU financial services legislation will be reconsidered, some of it will be scrapped and much of it will be reformed. And part of what’s happening, and some of that by the way, I should say, is happening in tandem with reforms to UK already onshored and instigated financial services regulations. So it’s all being treated as a piece. So what we have in this Autumn Statement is first of all, a package of reforms to pensions which we won’t cover so much on this podcast, as our more informed colleagues in the pensions team who will be talking about those package of measures, that deals with the supply side.
David Gauke: Already in the can Gavin, that’s already recorded you’ll be pleased to know.
Gavin Haran: Done and dusted.
David Gauke: Yeah it’s excellent.
Gavin Haran: Well this follows very much - listen to that first if you haven’t listened to it already. But that’s dealing really with the supply side, getting that capital flowing from investors and pension savers, insurers, etc. On the demand side we’ve got this long term asset fund structure which we’ll come on to, which one of the announcements in the Autumn Statement is concerning. And the final piece of these announcements is for joining the gaps between financial services regulation of kicking off this process of scrapping some of the onshored EU legislation and reforming it. So what we are going to talk predominately on this podcast is that long term asset fund initiative and the changes that happened at the Autumn Statement and this process of reform.
David Gauke: Michael anything you want to say at this point to add to that?
Michael Sholem: Sure, I guess to move on and pick out some areas in financial regulation terms that are important tick, alongside the Autumn Statement the Government published on the same day, a couple of policy notes and draft statutory instruments designed to reform two of those onshore bits of legislation, namely the former EU Short Selling Regulation and the former PRIIPs Regulation (Packaged Retail Investment and Insurance Products Regulation) which is a mouthful. So this is the first stage really of the gradual reform, unwinding, and creation of a new UK regime for financial services that was enabled in primary legislation by the Financial Services and Markets Acts that Gavin mentioned. The interesting thing about it really and Gavin can speak a bit more about the process, but the way in which all this onshored legislation is going to be changed, is firstly the length of time it appears it’s going to take in terms of consultation then going to the Government and the Government being involved in that reform process and secondly the degree to which the Government and regulators will see that it’s appropriate to diverge from the EU approach in these policy areas, and that’s something we flagged before when talking about the Financial Services and Markets Act. For example, the reform and essentially cancellation and replacement of the need for a key information document under the PRIIP’s regime when you are selling an investment to retail consumers, represents quite a bit of divergence from the EU approach to these matters and it will be interesting to see if the Government decides to carry on with that divergence in other areas when they go through this long process of changing and recasting all the onshored legislation. Gavin do you want to say a few bits about how that process will work in terms of consultation policy documents and statutory instruments?
Gavin Haran: Yes absolutely. Let’s talk about the process in general because I’m sure some of our listeners will be at the coalface and recipients of all of this. So what we got is a structure, but let’s actually start with the Act, the Financial Services and Markets Act puts an obligation on the Financial regulators, the PRA and the FCA to reconsider all of that onshored financial services legislation and the FCA call this progress the Future Regulatory Framework and what they are doing is to consult on each piece of regulation with some proposals around what might be done, so that could be retain the legislation as it is and put in our Rulebooks, we will scrap certain parts or amend certain parts, and we might well reform it. So that’s the process to start with, you’ll have FCA/PRA consultations with proposals which the industry can response to.
Off the back of that, which may actually include more than one consultation, depending how detailed the proposals are, the FCA will effectively make a recommendation to Government and then the Government kicks off the legislative process by a Statutory Instrument which will be taken in Parliament, which scraps the onshored legislation and essentially sets the parameters for the regulators to undertake the reform that they are proposing to do. Now I think what’s really interested about this is, first of all as Michael said you know you get potentially here a process of divergence on some or many regulations, but also the Government has, the Treasury has, an expanded role in financial regulation. We’ve talked, you know, I’m sure most of our listeners, are habitual listeners to this podcast, but we’ve talked in the past about the call-in power that the Government considered having, which will be a power to tell the regulator what to do. Now they haven’t gone down that route, but what is interesting about this process is that via the Statutory Instruments and the policy notes, two of which we have published yesterday in the Autumn Statement, is the Government has a role in setting the parameters including the conceptual parameters, including keeping certain EU concepts for instance under the new regulations, the Government has the role to do that through this and its legislative responsibility will be to do that. So you are going to have dual process of the FCA/PRA coming up with some of the detail, but the Government setting that overall framework for each and every piece of this onshored legislation and then once the Statutory Instrument is taken of course you will then get scrapping of the legislation and the FCA or PRA will do the detail work on its handbook which might have got more consultation of course.
So you’ve got quite a long and convoluted process and I think the important thing for listeners to bear in mind, in terms of how this will work, is the FCA in particular suggest they will do it in series of tranches, so you’ll get perhaps, I don’t know, eight or ten EU regulations which would be bunched together, not necessarily with any thematic commonality, but just because they are being dealt with at the same time through ease or you know preparation that the FCA have done already - you’ll get bunch of regulations out together consulted on around the same time, and then those regulations should go to the Government you know round about the same period of time before the next tranche is dealt with. So you are going to get a lot of consultation on a lot different topics happening at the same time in a staged fashion, so that’s the process that we will have to look out for and there is no time limit to this but the expectation is that this will be a multi-year process at least, I believe the Treasure has said as much.
Michael Sholem: Do the Treasury control which piece of legislation goes in which tranche because you can see a scenario, that it’s a political decision essentially as to which part of the EU legislation you choose to tailor to the UK regime for reasons of competitiveness, for reasons of consumer protection for example, while you might decide to leave some of the more obscure pieces of legislation till later in the process? Is the Treasure driving that decision making or is that really the regulators who have decided which tranche each piece of legislation goes into?
Gavin Haran: Good question. I think this is part of the constructive or dysfunctional ambiguity of the system, is that it’s not really defined. I think, you know, the FCA will certainly set out its process and publish things and engage with the industry around it. I believe the FCA is predominantly driving the regulation because it’s looking at the details and it has to take that first step of consulting on them so it’s really a case of when the FCA is ready to consult, then they will consult on you know, the legislation within particular tranches. Now haven’t said this of course, certain things are Government priorities, such as, we look at you know the example which came yesterday, the scraping of PRIIP’s, which was an initiative really driven by the Government and announced by Rishi Sunak when he was Chancellor, and so you got an example there where the Government has taken the first leave and announced something and then kicked it to the FCA to say well come up with a replacement. So it is ambiguous given the level of detail and amount of regulation it will be the FCA driving a lot of this because they are closer to the regulations, but there is clearly a political overlay there where the Government could push things in terms of announcing a set policy direction. So this is going to be an interesting tension I think we’ll see through this whole process.
Michael Sholem: And as listeners to this podcast will know, the Financial Services and Markets Act provides still quite a lot of power to the regulators to shape the direction of travel on these onshored pieces of legislation, given the sheer volume of that legislation and the FCA has a huge task in being able to consult on each one of them, and as you said it seems a sensible approach to take it in tranches and it will be interesting to see in the coming year how political the process becomes and how much scrutiny actually is paid to the revised piece of the legislation.
Gavin Haran: Just to follow up on that point, and another interesting one, we are talking about the onshored EU legislation, but you notice though the FCA of doing this process that they are also looking at UK driven and unique and specific regulations as well. I think that’s just the reflection of the fact that over a long period of time you’ve had EU regulations and UK regulations developing in tandem and completely undifferentiated, so if you start to start to change certain EU regulation that has a knock on effect to other parts of your already onshored UK regulations and so you see for instance in a recent announcement around what the FCA would do on asset management reform and asset management regulations, they are proposing to change the AIFMD which is of course an onshored EU piece of legislation, but at the same time to make some reforms to the Non-UCITS retail schemes regime (NURS) in the UK, so that’s a UK specific thing. They’re dealing with them both in tandem as if you start to change one fund structure it might make sense to change another. So, what you are going to see through this, and we might talk about some of these regulations, is that while all of this EU change is going on as well, you’re seeing changes to things like the Senior Managers regime, which is UK driven and specific. So it’s all, you are going to see a process of reform which is very bottom up and dealing across the board and not just specific certain EU rules.
David Gauke: Michael raises an interesting point about the power in the hands of the FCA and the issue here about scrutiny which he touches on and of course is a familiar one to us, we’ve spent quite a lot of time thinking about how the Financial Services regulators ought to be scrutinised, and one interesting development not directly related to the Autumn Statement but within this field is of course we've had a change of personnel at the Treasury, we’ve got a new City Minister in Bim Afolami, and Bim has been very forthright in his time before being a minister about looking again at the scrutiny of Financial Services regulators and he has co-authored a paper calling for a new select committee to have specific responsibility. I think Gavin, you possibly heard him speaking just a few days before he became City Minister on this subject If I remember correctly?
Gavin Haran: That’s right yeah, Bim was speaking at a political event for a Financial Services audience, as was the former City Minister, Andrew Griffith and I think the key point that Bim made, and obviously this was prior to his appointment, but nonetheless expresses his views, is that his concerns are not so much even about the specifics of particular regulations and rules, but more about the overall burden of regulation and the overall direction of regulation and his key point was that you want regulations to have more of a pro-growth underpinning but you also need some sort of accountability structures to ensure that the Regulator is accountable against that, and the Financial Services Markets Act actually does give the regulator secondary objective to the competitiveness and growth. So, Bim is obviously thinking I don’t think there is a change in the overall policy direction here and certainly not this, you know the process of onshored reform that we are referring to, but also just stepping back and looking at how the structure works might well be a priority for Bim in his new job.
David Gauke: Yeah, I think that’s quite possibly one to look out for. I know Bim pretty well, we were fellow Hertfordshire MPs for a spell and it’s certainly an issue which he has been very focused on so we’ll see what he does now that he is in the Treasury. If I may, can I move on to LTAFs which is again a topic which the firm has taken quite a lot of interest in and for any listener who hasn’t listed to our podcast with Faye Jarvis, she touched on that when we were discussing pensions, but I said that we were going to talk about this in greater detail on this podcast, so Gavin, do you want to just sort of set out where we are with LTAFs and what Jeremy Hunt has said this week, or rather not so much what he said in the speech, but was in the underlined documents.
Gavin Haran: Buried in the underlined documents! Yeah, it’s an interesting one, but let’s just remind people what the LTAF is, the Long Term Asset Fund. This was a new type of fund structure which the Government announced and it became live from November 2021. What it aims to do is to get retail investors and retail investors’ money into private market investment, so things that are quite difficult for those retail investors or impossible in some cases for those retail investors to access, whether with private equity, private credit, infrastructure and so on. And the hope is obviously those type of assets will yield a better return for investors, particularly if they are saving for retirement, but the broader social and economic benefit is that you will get more money, particularly money sitting in pension pots, which might be underutilised, flowing into things which can help produce economic growth in the UK.
So that’s what the LTAF is. So far, the structures’ really been designed for DC pension scheme savers, I’m sure on our separate podcast we might well be referring to that, but the other aspect is that this could be eligible certainly for advised retail investors and wealth management clients, so people who are quite sophisticated who might want to lock their money up for a period of time to access these types of investments.
Now what the announcement that happened at the Autumn Statement said was on this sort of retail individual saver side, the LTAF will now be eligible for inclusion in Individual Saving Accounts - ISAs. That’s something that the industry has been really pushing for and that’s because the ISA obviously has an attractive tax benefit, it’s well known, it’s popular for people who want to save and invest, so if you make the LTAF eligible within that structure you potentially make it a more popular and viable instrument for people that have ISAs. So this is a positive announcement, it partially addresses I think what the industry were asking for, however, there are some complexities around this and I think some operational challenges that still might reside for the industry. So first of all, the LTAF will be ISA eligible but it’s not eligible for what we know as Stocks and Shares ISAs so that standard and quite well-known ISA account that many people have to invest in financial instruments.
What the Government has announced is that it will be eligible for the innovative finance ISA, which is a kind of lesser well known fourth kind of leg of the ISA structure and at the moment this is an ISA that allows you to hold peer to peer loan, so it’s a longer-term instrument which are quite risky. Part of the challenge for the Government has been, the reason the LTAF can’t fit into an ISA is because the ISA requirements require that you would need to redeem your money as an investor within 30 days. Now the LTAF requires that you have a minimum of 30 days but also a notice period of 90 days, so in short you can’t necessarily get your money, you won’t be able to get your money back within a month, so that means it’s not eligible but general ISA, so what they are doing is changing the rules for this lesser well known type of ISA to permit LTAFs to be held in there. There is also a suggestion that open ended funds with extended notice periods will be eligible for the innovative finance ISA and that seems to be a reference to property funds and we are waiting for the FCA to come back with some new rules on that which will suggest that a longer term notice period. So you’ll have this ISA structure which you can put LTAFs, peer to peer loans, property funds in and then you’ll have cash ISAs and Stock and Shares ISAs dealing with your normal equities etc. Now this is all fine and good, it’s good there is ISA eligibility, but it does have some practical challenges. For a saver you would have to open potentially multiple ISAs, you might have you know, your general stocks and shares ISA, if you want an LTAF you’d have to go and open another type of ISA, an innovative finance ISA to put that in.
Another change that was announced at the Autumn Statement is it will now be permissible to open multiple ISAs within the £20,000 annual limit that every saver has, so technically it is possible to do that now, but you can see there is a bit of a burden and administrative headache there for the saver to go and do that. The other challenge is for the providers, it’s not really clear and it will depend very much on the provider themselves, but it’s not clear in every case that it will be easy or capable, or it may be easy for them to do, or it would be capable for them to offer this innovative finance ISA. In each and every case I have to look at whether that’s an easy ready thing that they will be able to do. So as I said I think overall this is a really positive announcement the industry is happy with it I think broadly speaking, but there are some challenges there potentially in terms of operational complexity and also in terms of how these are marketed to investors but I think there is still going to be some working through to see how that’s done.
David Gauke: Very good, Michael?
Michael Sholem: And presumably Gavin you know, the challenge there with marketing gets to the point around, it’s you need to demonstrate systems and controls to make sure that you are complying with a consumer duty and that you are ensuring that investors understand what exactly they’re getting and what the implications are of having different pots, potentially, for different parts of their investments.
Gavin Haran: Yeah absolutely, so you’ve got the regulatory requirements around it, you’ve also got, I mean, where these innovative finance items are offered at the moment is, of course, in relation to peer to peer lenders, so it would be a new thing for the type of asset management houses that will be offering LTAF’s which, of course, there is a growing amount. We know that there will be many more coming to the market next year and thereafter. So that’s a difficulty, but also now when you’ve got this multiple ISA capability, there needs to be some form of tracking of the limits that people have spread across separate ISA’s right, so there is a sort of complexity in terms of the taxes and operations around that as well. So I think there’s a lot to work through, it’s not quite so simple. I can understand by the way, why the Government did it. I mean to make, you’ve got this 30-day rule in place there for stocks and shares ISA’s, you would have to somehow carve out that rule specifically for LTAF’s and potentially for property funds which might be legally quite a difficult thing to do. So they’ve gone for something I think which is, you know to have a separate structure, which is perhaps easier and a bit more legally certain and perhaps quicker to do. So I can see the rationale there from the Government of course, but there may be some more difficulty for the industry.
David Gauke: One to watch and I suspect probably quite a live debate for a while to come. And I suppose, let’s turn to the final question then, what happens next? There’s clearly a lot of work coming down the track in terms of consultations and so on. Anything else to be looking out for?
Gavin Haran: Yeah, well I mean as we’ve said, you’re going to get a raft of consultations here on a lot of different onshored EU legislation. Really important one, a new retail disclosure regime in the UK as we’ve mentioned, you’ve got the statutory instrument kicking that off now, that’s going to be a considerable new structure, its clearly going to be divergent from the EU approach to PRIIPS as well, so it is possible it we’ll need to bear that in mind. We are going to have changes to the Senior Manager’s regime, we are also and leaving aside all of this onshored EU legislation, we’re going to have the sustainability disclosure requirements, so the UK’s approach to ESG regulations and sustainable finance, we’re expecting the final rules from the FCA before the end of 2023. And that’s really the tip of the iceberg as we sort of hopefully made clear through this discussion, you’re going to have a very long process of reform of EU and UK rules. So there is going to be a risk I think of policy overload, not only at the regulators, but also for the industry that’s going to be receiving all of this.
Michael Sholem: That SDR piece is particularly important for asset managers, it’s a really major development. The SDR is going to be materially different to the European Sustainable Finance Disclosures Regulation which is already in place and is required for when you want to market to investors in the EU broadly. You know, the SDR takes a explicit product labelling regime and imposes it on UK asset managers, so it will be interesting to see how the industry reacts to the proposals that have been delayed a few times to the final proposals, we’ve had consultations before, but it’s a really material thing that will happen in 2024.
Gavin Haran: And I should add to that, I mean obviously, what we’re alluding to here is divergence, and increasing divergence between the UK and the EU, I think that’s a given now and it will no doubt increase through this process. The other thing that I think a lot of managers, and financial services more generally, will be looking out for is equivalence decisions. There has certainly been a thawing of relations between the EU and the UK. We have very soon the UK’s overseas funds regime due to kick off as well and the beginning point for that will be equivalence decisions from the UK, from the Treasury, in respect of the EU or certain member states. What I think is really important around this is clearly we’re going to have divergence, but the tone from the regulators has I think moderated a little bit to say- look you’ve got certainly divergence in rules but the important thing for equivalence is are we looking at the same regulatory outcomes? And the tone at the moment from the regulators on both the EU and the UK side is - look we’re looking at the same problems and trying to get to the same outcomes, we might have quite drastically divergent approaches to how we get there, but that doesn’t necessarily mean you’re not going to get equivalence. So there is, I think a lot of uncertainty around this in the industry, I mean when does divergence in the rules actually become too divergent? We’re going to have some quite important decisions coming up in the Government in the next six months or so and that’s going to be another big thing to look for.
Michael Sholem: And I guess one other thing. We mentioned regulatory accountability earlier from the perspective of the Government itself and our new City Minister, but there has also been some developments in the parliamentary sphere, so the House of Lords Liaison Committee recently recommended the creation of a specific financial services regulatory committee, to enhance accountability and generally improve the scrutiny of financial services legislation given the importance of financial services to the UK, and then also the Lords Industry and Regulatory Committee has a consultation out specifically on the subject of accountability and regulators. So certainly for the House of Lords, it’s a live issue and we’ll have to see during 2024 whether we see some new mechanisms and structures put in place to enhance the accountability of regulators and look at the position of the UK as a financial centre more generally and make sure that there is parliamentary scrutiny of that.
David Gauke: Yeah, I think it’s, we said at the time when we were looking at this earlier this year, that we thought it would continue to be a live issue, even if not very much happened with the financial services and markets act as it was going through parliament. The debate is still live and for anyone who has not read it, we do have a piece on this that may be of interest.
I think it leaves it to me to thank Michael and Gavin for talking us through all that is happening in the financial services world, particularly in light of the various documents produced by the Autumn Statement process, with a clear warning that there is an awful lot more to come. Thank you for listening, I hope that’s been very helpful and that concludes the third and final of our Autumn Statement specials. Thanks for tuning in.