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The Edinburgh Reforms

Posted on January 19, 2023

Estimated reading time 2 minutes

Technology Impact Explored

Early in December last year, the Chancellor announced a set of reforms intended to drive growth in the financial services sector in a post-Brexit UK. One of the aims of the reforms is to build “a smarter financial services framework in the UK”. The Financial Services and Markets Bill (currently in the House of Lords) will include establishing the Future Regulatory Framework (FRF), to ensure the proposed framework is fit for future. The FRF fundamentally changes the UK’s regulatory architecture, transferring rule making powers to the regulators while conferring on them new objectives for growth and international competitiveness. The UK intends to take positive action to remain one of the most competitive and appealing financial services centres in the world.

Similarly, future-proofing regulation to embrace technology and innovation was a driver behind several of the announcements. To enable this, the Government confirmed its intention to expand the Investment Manager Exemption to include cryptoassets. This measure was announced as part of a wider package of cryptoasset measures, which aim to give effect to the government’s desire to maintain and enhance the UK’s position as a global leader in investment management activity and business.

Furthermore, The Financial Services and Markets Bill (FSMB) 2022, includes proposals for HM Treasury to have the power to develop a financial market infrastructure (FMI) sandbox to allow new technology to be trailed by FMI’s. This would allow financial market infrastructures and designated others to test the adoption of new technologies and practices (such as distributed ledger technology) by temporarily disapplying, modifying or even applying certain legislation for specific purposes.

This is an important step towards ensuring that financial market infrastructures in the UK are able to fully embrace technological innovation as part of a wider effort to ensure that the UK financial system, including capital markets, continues to be an attractive option for the full spectrum of market actors (e.g. operators of financial market infrastructures, technology developers, issuers, investors and financial intermediaries).

What does this mean for funds?

The FRF, carried out by the Treasury, hands more powers to the regulators to ensure post-Brexit the UK continues its drive for excellence in global financial markets.

The outcomes of the review cover many areas that add to regulatory objectives and regulatory principles overall; continue to build on regulators existing accountability arrangements; enhance scrutiny of regulated activities across the market and strengthen stakeholder engagement at the regulators themselves.

The FRF also notably gives powers to the Treasury and the financial services regulators to create a framework where the expert and independent regulators have greater responsibility for setting regulatory requirements that apply to individual firms.

Funds should be aware, in line with recent activities, that regulatory commitments look to continue to grow or at least change, and reporting on regulated activities could therefore continue to evolve. The UK government is putting greater budget behind developing AI, green finance and fintech and all of these initiatives will impact funds directly over the course of coming years/

Thought should be given to future proofing technology frameworks to create an environment that is agile, scalable, and pliable in order to minimise investor and regulatory risk as new developments in the post Brexit reforms continue.

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