The reforms aim to support the UK government’s ambitions for the UK to be the “world’s most innovative and competitive global financial centre.” The Edinburgh Reforms are also presented as an opportunity to capitalise upon “Brexit freedoms”, taking advantage of the UK’s position outside of the EU, to build a smarter regulatory framework. In the UK Government’s own words, the Edinburgh Reforms “set out plans to repeal, and replace, hundreds of pages of burdensome EU retained laws governing financial services”.
There are 30 policy initiatives within the Edinburgh Reforms, which are grouped into four categories:
- A competitive marketplace promoting effective use of capital
- Sustainable finance
- Technology and innovation
- Consumers and business
Together with the Financial Services and Markets Bill, the proposals set the agenda for an overhaul of UK regulatory policy not only for 2023, but for many years to come.
In the offshore jurisdictions, such as each of the Crown Dependencies, where many of the clearing banks and other financial institutions have overseas branches, some of the proposals will have more of an impact upon the financial services offering in each of these jurisdictions than others. We briefly consider below how some of the changes could impact upon the financial services regulatory landscape in our jurisdictions.
Reforming the Ring-Fencing Regime for Banks
Ring fencing was introduced in the aftermath of the financial crisis of 2008 and required the largest banks in the UK to ring fence their retail operations to increase depositor protection and strength the financial system. Appleby acted in each of the Crown Dependencies on the transfer of billions of pounds worth of deposits, ancillary and supplemental to Part VII UK schemes, in order to achieve ring-fencing compliance.
In the wake of the publication of the final report of the Skeoch review of the ring-fencing regime in March 2022, which made a series of recommendations aimed at reducing the rigidity of the regime, the UK government has confirmed its intention to reform the ring-fencing regime for banks and to consult in mid-2023 on a series of near-term reforms, as follows:
- Taking banking groups without major investment banking operations out of the regime.
- Raising the current £25 billion threshold of retail deposits for coming within scope of the rules to £35 billon.
- Removing the blanket geographical restrictions from legislation that prevent ring-fenced banks from establishing operations or servicing customers outside of the European Economic Area (EEA).
- Adjusting the restrictions on ring-fenced banks undertaking certain activities, for example servicing relevant financial institutions (RFIs), with the statutory definition of RFIs to be updated.
The reforms aim to “quickly improve the functionality of the existing regime” whilst “maintaining appropriate financial stability safeguards”. Following consultation, the intention is to bring forward secondary legislation later in 2023.
This is arguably the proposed reform that could have most impact upon financial services in the offshore jurisdictions. On the face of it, the reforms could potentially mean an increase in banking activity being undertaken outside of the EEA, which would include Jersey, Guernsey, the Isle of Man and other offshore jurisdictions. Lifting of the blanket ban on ring-fenced banks operating in, or servicing customers from, these jurisdictions could present an opportunity for ring-fenced banks to expand existing operations and complement already established non-ring-fenced service offerings.
Reviewing the practicalities of aligning the ring-fencing and resolution regimes has also been announced, as an independent review found that the benefits of the ring-fencing regime would decline over time as the resolution regime is embedded and deals with the problem of banks who are “too big to fail.” This has the potential to have a knock-on effect on local recovery and resolution legislation in the offshore jurisdictions (where applicable) and may require adjustments to resolution plans post implementation of any changes.
Improving the tax rules for Real Estate Investment Trusts (REITs)
With effect from April 2023, new rules will remove the requirement for a REIT to own at least three properties where they hold a single commercial property worth at least £20 million.
This is of interest from an offshore perspective, as for many years, the Channel Islands have seen significant growth in the establishment of Guernsey and Jersey UK REITs, for structuring new investment and restructuring existing portfolios of UK residential property. Changes to increase flexibility in this structure could further promote its use and attractiveness for investing in UK property.
Consulting on Consumer Credit Act Reform
The UK’s Consumer Credit Act 1974 (CCA) governs the regulation surrounding billions of credit card purchases, personal loans and consumer hire agreements made by UK consumers every year. On 16 June 2022, the government announced its intention to reform the CCA with consultation on the changes being open until 17 March 2023. Proposed changes include revising the types of breaches that could be subject to sanctions and considering whether more flexibility could be given to the form and timing of pre and post contractual information given to consumers.
The intention is that this reform will facilitate innovation in the credit sector and increase accessibility of credit products, contributing to growth in the sector and the economy more broadly. This is also an opportunity for the government to bolster existing consumer protections to ensure customers remain adequately protected in a modern and increasingly digital economy.
From a Jersey perspective, this is of particular interest, as whilst lending is not currently a regulated activity in Jersey, a working group has recently been established to consider enacting legislation to offer protection to consumers via appropriate regulation in this area. It will be of interest to note whether the proposed UK reforms are captured in draft, local legislation to reflect the adapting UK consumer credit landscape.
Various provisions of Guernsey’s Lending, Credit and Finance (Bailiwick of Guernsey) Law, 2022 came into force on 1 January 2023. One purpose of the new law is to introduce improved consumer credit protections. Firms offering or intermediating consumer credit services in or from within the Bailiwick will need to be licensed and will be regulated accordingly. The law introduces consumer protection measures for individuals who take out consumer credit or home finance, through what is termed a “regulated agreement”, from those licensed by the Guernsey Financial Services Commission. Consumers will be entitled to, and lenders must provide, information in advance of entering into a regulated agreement, clear statements of monthly payments, the total cost of credit and interest rates. This must be done in a way that allows customers to make meaningful comparisons between different types of credit, and also credit being offered by different lenders. Licensees will be required to follow various rules, including to treat customers fairly, to take account of customer vulnerability and, where appropriate, carry out checks that customers can afford the credit arrangements they sign up to. Customers will have the right to make early repayment of a credit agreement, which entitles them to repay in full, and terminate the agreement, without facing excessive charges. Partial repayment of a credit agreement will be at the lender’s discretion. Customers will also have the right to be treated fairly if they get into financial difficulty and will have certain rights in respect of unfair contract terms. It will be interesting to see to what extent the proposed changes to the CCA are already incorporated in Guernsey’s new law.
The Isle of Man does not have the extensive consumer credit regime currently seen in the UK and its hire purchase legislation only covers purchases up to £2,000. Legislative developments over the last decade have tended to focus on the oversight of lending businesses for anti-money laundering purposes, rather than consumer protection. We will be monitoring any future developments in this area. An opportunity for greater access to credit products may be welcomed by consumers.
The UK government is aiming to ensure that the financial system plays a major role in the delivery of the UK’s net-zero target and has confirmed its plan to release an updated Green Finance Strategy in early 2023 and to consult in Q1 2023 on bringing environmental, social and governance (ESG) ratings providers into the regulatory perimeter.
We have previously commented upon the regulatory approach to ESG across the Crown Dependencies and we anticipate the regulators in each of these jurisdictions will be keeping a close watching brief on changes to be introduced, with a keenness to ensure each of the jurisdictions demonstrate adherence to global standards and maintain the ability to attract ESG conscious investors.
Whilst the Edinburgh Reforms present an overhaul to the financial regulatory landscape in the UK, given the global footprint of the major banks and other financial institutions that will be affected by the proposals, it is impossible to view the changes as being self-contained to this location. The financial services industries in each of the offshore jurisdictions, together with local regulators, will be keeping a close eye on the detail of measures implemented and will be assessing how successfully such measures offer increased flexibility and improve competitiveness, whilst maintaining safeguards for depositors, investors and consumers. As changes are introduced in 2023 and beyond, we anticipate a ripple effect outside of the UK, with adjustments to financial services legislation and regulation in the offshore jurisdictions following in short order, in order to maintain attractiveness and competitiveness as international finance centres.