United Kingdom: Banking & Finance

The United Kingdom’s (the terms United Kingdom and UK will be used interchangeably throughout this chapter) banking sector is regulated for prudential purposes by the Prudential Regulation Authority (PRA), which is part of the Bank of England, the UK’s central bank, and the Financial Conduct Authority (FCA) for conduct purposes. The Financial Policy Committee (FPC), which operates from within the Bank of England, acts as the macro-prudential regulator for the UK’s financial system.

The Financial Services and Markets Act 2000 (FSMA 2000), as amended, sets out the PRA’s and the FCA’s statutory objectives. The PRA’s principal objective is to promote the safety and soundness of the firms it regulates. In June 2022, the House of Commons Treasury Committee announced the creation of the Sub-Committee on Financial Services Regulation. This committee will scrutinise financial services regulatory proposals. A report, published by the committee on 13 June 2022, outlined Parliament’s approach to its scrutiny role now that the UK has left the EU. Parliament’s scrutiny of financial regulation proposals is set to increase as and when existing EU financial regulations are moved to the UK rulebook and need to be assessed for suitability within the UK framework.

The PRA has a three pronged approach to regulation and supervision:

• A judgment based approach;
• A forward-looking approach and;
• A focused approach.

The FCA’s strategic objective is to ensure that the relevant markets function well. The FCA’s operational objectives are:

• the consumer protection objective;
• the integrity objective; and
• the competition objective.

A new secondary objective laid out in the Financial Services and Markets Bill 2022 will apply to both the FCA and the PRA when it passes into law, expected 2023. This secondary objective is to facilitate the international competitiveness of the UK economy and its growth in the medium to long term. Competitiveness here in the new objective is different from the existing competition objective. Competitiveness is about the UK financial sector being competitive vis a vis the financial sectors of foreign countries/regulatory regimes (e.g. the EU). Competition is about enabling consumers to have access to a range of financial services’ providers.

The FPC’s primary responsibility is to protect and enhance the resilience of the UK’s financial system. This involves identifying, monitoring and taking action to reduce systemic risks. Its secondary objective is to support the economic policy of the government.

Under FSMA 2000 (as amended), it is a criminal offence for a person to carry on a ‘regulated activity’ in the United Kingdom unless authorised to do so or exempt from the authorisation requirement. Regulated activities are defined in secondary legislation. Deposit taking is a regulated activity that requires authorisation. Other regulated activities that require authorisation include:

• dealing in investments as principal;
• dealing in investments as agent;
• arranging deals in investments;
• managing investments;
• safeguarding and administering investments (i.e., custody); and
• providing investment advice and mortgage lending.

Investments include:

• shares;
• debentures (including sukuk);
• public securities;
• warrants;
• futures;
• options;
• contracts for differences (i.e., swaps); and
• units in collective investment schemes.

Please see the answer to the question above. Each regulated activity must be authorized.

No. Each regulated activity must be authorized.

Yes. The UK FCA has established a regulatory sandbox for innovative propositions that are either regulated business or support regulated business in the UK financial services market, open to authorised firms, unauthorised firms that require authorisation and technology businesses. The sandbox provides the ability to test products and services in a controlled environment, reducing time to market, providing support to identify appropriate consumer protection safeguards and better access to finance. Previously the sandbox operated on a cohort basis, meaning firms could only apply during specific time periods. However, the sandbox is now open for year-round applications.

At present, the UK has no specific cryptocurrency laws, cryptocurrencies are not considered legal tender and exchanges have registration requirements. Gains or losses on cryptocurrencies are, however, subject to capital gains tax. In his address on 12 July 2022, to the British High Commissioner’s Residence in Singapore. Sir Jon Cunliffe highlighted the importance of extending the regulatory framework to encompass the use of crypto technologies and assets, grounded in a principle of ‘same risk, same regulatory outcome’.

On 16 December 2022 the Basel Committee on Banking Supervision (“the Committee”) published its statement on the prudential treatment of banks’ exposure to crypto assets, including tokenised traditional assets, stablecoins and unbacked crypto assets. This expresses the Committee’s final prudential standard. This policy is set to be implemented by 1 January 2025. Under this standard, banks will be required to classify crypto assets on a continuous basis into two groups:

• Group 1 crypto assets – these assets must meet in full a set of classification conditions;
• Group 2 crypto assets – these are all other assets that fail to meet any of the classification conditions. These are higher risk.

The Committee’s approach to cryptoassets is an example of their commitment to act in a coordinated way to mitigating emerging financial stability risks. The standard will provide a robust and prudent global regulatory framework for internationally active banks’ exposure to cryptoassets that promotes responsible innovation. While cryptoassets are at times referred to as cryptocurrencies, the Committee is of the view that such assets do not reliably provide the standard functions of money and it is unsafe to rely on them as a medium of exchange or store of value.

The Committee expects that if a bank is authorised and decides to acquire crypto-asset exposures or provide related services, the following should be ado ted at a minimum:

• Due diligence: Before acquiring exposures to crypto-assets or providing related services, a bank should conduct comprehensive analyses of the risks noted above. The bank should ensure that it has the relevant and requisite technical expertise to adequately assess the risks stemming from crypto assets.
• Governance and risk management: The bank should have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services. Given the anonymity and limited regulatory oversight of many crvpto assets, a bank’s risk management framework for crypto-assets should be fully integrated into the overall risk management processes, including those related to anti money laundering and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring. Given the risk associated with such exposures and services, banks are expected to implement risk management processes that are consistent with the high degree of risk of crypto assets. Its relevant senior management functions are expected to be involved in overseeing the risk assessment framework. Board and senior management should be provided with timely and relevant information related to the bank’s crypto-asset risk profile. An assessment of the risks described above related to direct and indirect crypto-asset exposures and other services should be incorporated into the bank’s internal capital and liquidity adequacy assessment processes
• Disclosure: A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.
• Supervisory dialogue: The bank should inform its supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks.

In June 2019 Facebook confirmed its intended launch of a global cryptocurrency known as Libra in 2020. As a consequence of intensive regulatory scrutiny, on 15 Jul 2019, Facebook announced that Libra will not launch until all regulatory concerns have been met and Libra has the appropriate approvals.

On 31 May 2019. the FSB published a report on crypto assets which was delivered to the G20 Finance Ministers and Central Bank Governors at their meeting in Fukuoka, Japan on 8-9 June 2019. The report recommended that the G20 keep the topic of regulatory approaches to crvpto assets and potential gaps, including the question of whether more coordination is needed, under review.

Since January 2020, businesses that use crypto assets have been subject to increasingly stringent anti-money laundering obligations under the Money Laundering Regulations 2017. They must also now register with the FCA.

No.

On 16 December 2022, the Basel Committee for Banking Supervision published its final version of its ‘Prudential treatment of cryptoassets exposures’, to be implemented by 1 January 2025. This publication outlines the risk exposures relating to digital securities, stablecoins and cryptocurrencies. Key points to note from the rules are:

• There is a 1250% risk weighting for unhedged cryptocurrency exposures;
• The high risk weighting does not apply to assets held in custody;
• If a bank is perceive to have an infrastructure risk, the committee can impose an infrastructure risk add on of 2.5% for digital securities and stablecoins;
• Cryptocurrency exposures are limited to 1% of Tier 1 capital;
• A combination of redemption risk and regulatory supervision will be used to assess low risk stablecoins.

These BCBS Cryptoasset Standards provide clarity to banks considering their approach to crypto currencies. However, non-bank market firms who are not subject to the Basel standards may be put at a competitive advantage in relation to offering crypto products and services. Despite this, it is important to recognize the benefits of introducing the standards, including financial stability and managing systemic risk.

Part 4A of FSMA sets out the main requirements.

Applications, by way of detailed forms, must be made to the PRA, and include a permission table that sets out Part 4A Permissions by function. Although the PRA manages a single administrative process, the FCA also assesses the applicant firm from a conduct perspective. Authorisation is granted only if and when both regulators are satisfied.

In addition to the basic application forms, an applicant must provide:

• Business plan including details of the rationale for the business.
• Ownership of the bank.
• Business strategy.
• Financial resources.
• Non-financial resources.
• Management structure.
• Responsibilities.
• Controls and governance arrangements.
• Significant additional detail about the bank’s: policies; capital; liquidity; financial projections; IT systems and processes; compliance; internal audit; outsourcing arrangements; senior managers; and owners and influencers.

Any prospective bank planning to apply for a deposit-taking permission should arrange a pre-application discussion with the PRA. The PRA and FCA are also expected to be in communication with the applicant throughout the process.

Firms other than deposit taking institutions (which in practice includes some investment banks) usually apply only to the FCA, as the PRA’s jurisdiction is limited to deposit-taking banks and certain designated investment firms classified by the PRA as being of systemic importance.

The PRA and the FCA must make their decision within six months of receipt of the completed application but can deem an application incomplete and require further information, which defers the start of the six-month period. In practice, the licensing process may take up to a year to complete.

If the regulators grant permission, each can impose such requirements or limitations on that permission as it considers appropriate.

An applicant for a banking licence must pay a non-refundable application fee, which varies according to the type of banking business to be carried on. Once authorised, UK banks must pay an annual licensing fee to the PRA or FCA, based on a number of factors, including annual income and types of banking business.

Prior to the UK’s exit from the EU, if an entity was already authorised as a bank elsewhere in the European Economic Area (EEA) it could ‘passport’ into the UK directly, without applying for authorization from UK regulators. Post Brexit transitional arrangements are now in place. From January 2021, EU law ceased to apply in the UK and the ‘passporting’ of financial services between the UK and the EU is no longer applicable. Consequently, the Temporary Permissions Regime (TPR) was introduced to allow financial firms to operate in the UK without FCA authorisation, while they applied for full FCA approval. The deadline for firms to apply for full FCA authorisation under the TPR was 31 December 2022. Any financial firms that have not applied are not longer able to continue their UK operations.

International banks headquartered outside the EEA may operate in the UK through a branch, a subsidiary or both but they need to go through the new bank authorisation process for either approach.

The PRA requires a deposit- taker to be either a body corporate or a partnership. UK-headquartered banks are generally UK public limited companies or private limited companies.

The organisation of a bank should be established by the board, which also has ultimate responsibility for organisational structure. Organisational systems should be proportionate to the nature, scale and complexity of a bank’s business. A bank must have:

• Decision-making procedures and an organisational structure that clearly specifies and documents reporting lines and allocates functions and responsibilities.
• Adequate internal control mechanisms to secure compliance with decisions and procedures at all levels of the bank.
• Effective internal reporting and communication of information at all levels.
• Appropriate and effective whistleblowing arrangements.

Banks should segregate the duties of individuals and departments so as to reduce opportunities for financial crime or contravention of regulatory requirements and standards (for example front-office and back-office duties should be segregated to prevent a single individual initiating, processing and controlling transactions). Responsibility should also be segregated in a manner that supports the bank’s compliance obligations on conflicts of interest, remuneration structures and prevention of market abuse.

Corporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management, including how they:

• set the bank’s strategy and objectives;
• select and oversee personnel;
• operate the bank’s business on a day-to-day basis;
• protect the interests of depositors, meet shareholder obligations, and take into account the interests of other recognised stakeholders;
• align corporate culture, corporate activities and behaviour with the expectation that the bank will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations; and
• establish control functions.

Yes. The PRA has issued a supervisory statement setting out the expectations for firms in relation to the following:

• proportionality;
• material risk takers (MRTs);
• application of clawback to variable remuneration;
• governing body/remuneration committees;
• risk management and control functions;
• remuneration and capital;
• risk adjustment (including long-term incentive plans);
• personal investment strategies;
• remuneration structures (including guaranteed variable remuneration, buy-outs and retention awards);
• deferral; and
• breaches of the remuneration rules.

The FSA issued the first Remuneration Code in August 2009. This Code regulates the position of Capital Requirements Regulation (CRR) firms from a conduct perspective. The PRA’s Remuneration Code also addresses remuneration policies for prudential purposes. The requirements of the Codes are supplemented by a variety of guidance, including from the UK Regulators and the European Banking Authority (in particular its Supervisory Statement SS2/17 issued on 17 December 2021). These Guidelines were effective from 1 January 2022. Following Brexit, the 2021 Guidelines do not specifically apply to the UK but the December Supervisory Statement stated that the PRA expects all firms to comply with all aspects of the EBA Guidelines.

In December 2022, the PRA and the FCA published CP15/22 and 22/28 which envisage the abolition of existing limits on the ratio between the fixed and variable components of the remuneration of employees of PRA and FCA regulated firms. This follows an announcement in September 2022 by the Chancellor of the Exchequer at that time, The Rt. Hon. Kwasi Kwarteng MP, of the U.K. government’s intention to remove restrictions on remuneration known as “bankers’ bonus caps”. The current proposals aim to remove the provisions in the PRA’s rulebook and the FCA’s handbook dealing with remuneration restrictions. A transition period is envisaged where remuneration awarded in respect of a performance year prior to the implementation date for the removal of the restrictions will be subject to the restrictions in force at the time of the performance year in question. Firms will remain subject to the remaining rules on remuneration, including the requirement to set an appropriate ratio between fixed and variable remuneration. The consultation period closes on 31 March 2023.

The Financial Services Act received Royal Assent on 29 April 2021. The FS Act establishes the legislative framework through which the UK will implement the final Basel III standards. The UK aims to have implemented the Basel standard in full by 1 January 2025.

The UK’s Capital Requirements Regulations (UK CRR) implements the Capital Requirements Directive IV (CRD IV) into the UK. These capital requirements are part of the framework agreed by the Basel Committee for Banking Supervisions.

Some significant revisions have been made to capital requirements under the UK CRR. These revisions include the following.

• Under the UK CRR, the geographical scope of all group consolidation provisions was revised to restrict the consolidation of the capital and liquidity requirements to within the UK. This means that the UK can no longer act as the EU consolidated group supervisor for a UK group with EU business.
• Under Articles 114 to 119 of the UK CRR, no preferential treatment will apply for the risk-weighting of certain EU exposures. As the UK is no longer a member of the EU, the UK government will treat the EU as a “third country” and will treat UK exposures as preferential.
• UK financial firms will no longer need to notify EU authorities of use of macro-prudential tools.
• The functions carried out by the European Supervisory Authorities (ESAs) have been transferred to H.M’s Treasury, the PRA and the FCA. The FCA and PRA have also been given the power to make binding technical standards and correcting deficiencies in existing onshored binding technical standards. H.M’s Treasury now has the function to make statutory instruments to make UK CRR-related regulations.

The UK has implemented the LCR regime and is aligned with the CRR requirement that banks should have enough high quality liquid assets in their liquidity buffer to cover the difference between the expected cash outflows and the expected capped cash inflows over a 30-day stressed period and accordingly with effect from 1 January 2018, the ratio requirement that banks have to meet is 100%.

As of 1 January 2022, the PRA has implemented the Basel Committee on Banking Standards NSFR standard into PRA rules. It further transferred the BCBS LCR standard into PRA rules. The Basel 3.1 standards did not make amendments to either liquidity standard.

Yes. Generally English banks are subject to the same corporate law disclosure requirements as other English company. The need for interim reporting will apply to public companies that are subject to the disclosure rules of a stock exchange and typically on the London market will require semi-annual reporting if there is no US market aspect.

Yes. Consolidated supervision in the UK is derived from the requirements set by the Basel Committee on Banking Supervision. It enables prudential supervision of a bank to look to the strength of the bank’s group and not just the entity itself. Following the CRR regime, calculations are required of group capital requirements and resources and reporting is made at both group and entity level.

Part 12 of FSMA 2000 (as amended) implements the requirements of the EU’s Acquisitions Directive (2007/44/EC) into English law. A person intending to acquire or increase ‘control’ over the shares or voting power of a UK-authorised bank or its parent undertaking above 10 per cent, 20 per cent, 30 per cent or 50 per cent must notify and obtain consent from the PRA prior to acquiring or increasing control. Failure to do so is a criminal offence. The PRA must consult the FCA before reaching a decision on whether to approve a proposed change of control.

Change of control forms are detailed and require disclosure of information about the ultimate beneficial owner of the proposed acquisition.

A person wishing to decrease control of the shares or voting power in a UK-authorised bank or its parent undertaking below 50 per cent, 30 per cent, 20 per cent or 10 per cent, must notify the regulator of the intention to do so. Failure to notify is an offence. There is no requirement for regulatory consent to the reduction of control.

The PRA has 60 business days from receipt of the application to approve the acquisition or increase of control (with or without conditions), or to object. This period may be interrupted once by up to 20 business days in cases where the PRA requires further information.

The Acquisitions Directive was supplemented with Level 3 Guidelines published by the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors and the Committee of European Securities Regulators (together, the Level 3 Committees). The Level 3 Guidelines updated on 1 October 2017 contain guidance on general concepts such as the meaning of the term ‘acting in concert’ and the process for determining acquisitions of indirect holdings.

When considering whether or not to grant approval, the PRA considers the suitability of the person, having regard to their likely influence over the bank. This will involve considering the following statutory items:

• the reputation of the section 178 notice-giver;
• the reputation and experience of any person who will direct the business of the UK authorised person as a result of the proposed acquisition;
• the financial soundness of the section 178 notice-giver, in particular in relation to the type of business that the UK authorised person pursues or envisages pursuing;
• whether the UK authorised person will be able to comply with its prudential requirements (including the threshold conditions in relation to all of the regulated activities for which it has or will have permission);
• if the UK authorised person is to become part of a group as a result of the acquisition, whether that group has a structure which makes it possible to—
  1. exercise effective supervision;
  2. exchange information among regulators; and
  3. determine the allocation of responsibility among regulators; and
• whether there are reasonable grounds to suspect that in connection with the proposed acquisition money laundering or terrorist financing is being or has been committed or attempted; or the risk of such activity could increase.

The National Security and Investment Act 2021 (“NSIA”) came into force on 4 January 2021. The NSIA gives the government powers to scrutinise and intervene in business transactions to protect national security. Potential acquirors of qualifying entities in one of the 17 designated sensitive areas of the U.K.’s economy ((i) advanced materials, (ii) advanced robotics; (iii) artificial intelligence; (iv) civil nuclear; (v) communications; (vi) computing hardware; (vii) critical suppliers to government; (viii) cryptographic authentication; (ix) data infrastructure; (x) defence; (xi) energy; (xii) military and dual-use; (xiii) quantum technologies; (xiv) satellite and space technologies; (xv) suppliers to the emergency services; (xvi) synthetic biology; and (xvii) transport) are under a mandatory notification obligation to notify the government of the proposed acquisition. An acquisition is a “notifiable acquisition” if it meets the following criteria: (i) it relates to a qualifying entity that carries out certain activities in the U.K. within one of the 17 sensitive areas of the U.K.’s economy; and (ii) the shareholding stake or voting rights increase above 25%, 50% or 75% or the acquisition is of voting rights which will enable the securing or prevention of the passage of any class or resolution governing the affairs of the entity.

Given the current geopolitical context, regulatory scrutiny of potential acquirors continues to be heightened. Potential acquirors should factor this into their deal timescales and ensure that all disclosures and notifications required by the regulators are as full and timely as possible to minimise any disruption to deal timetables. Where appropriate, regulatory dialogue should be initiated and relevant professional advice sought sooner rather than later.

Following the invasion of Ukraine by Russia, amendments to the Russia (Sanctions) (EU Exit) Regulations 2019 have been made in respect with financial institutions and investment. It is now prohibited for a person to deal with a transferable security or money-market instrument if it has a maturity exceeding 30 days, and was issued on or after 1 March 2022 by

• An entity incorporated or constituted under the law of the UK and owned by one or more of the entities listed in Schedule 2
• An entity acting on behalf or at the direction of the above.

It is further prohibited for a person to directly or indirectly deal with a transferable security or money market instrument if it was issued:

• On or after 15 December 2022
• By a relevant entity (i.e. a person who is not connected with Russia)
• For the purposes of making an investment in relation to Russia.

Financial services are prohibited from providing financial services for the purpose of foreign reserve and asset management to the following:

• The Central Bank of the Russian Federation
• The National Wealth Fund of the Russian Federation
• The Ministry of Finance of the Russian Federation
• A person owned or controlled directly or indirectly by any of the persons above;
• A person acting on behalf or at the direction of any of the persons above.

Prospective bank investors located in a non-Financial Action Force compliant jurisdiction are likely to have difficulty getting approval from the PRA on the basis that money laundering and terrorist financing risk is on the mandatory assessment criteria under the FSMA change in control regime.

In June 2022 the UK government proposed the National Security Bill. It is currently at the reporting stage in the House of Lords. The National Security Bill is intended to better enable UK law enforcement and intelligence agencies to deter, detect and disrupt modern threats to national security.

Certain parts of UK regulation (for example in relation to TLAC) deal specifically with globally systemically important banks which are subject to enhanced supervisory and recovery and resolution planning requirements.

This will depend on the nature of the breach but sanctions range from reprimands to fines to suspension of loss of a banking licence. There are also criminal sanctions for certain violations (e.g. in relation to change of control).

The current resolution regime is set out in the UK’s Banking Act 2009 which provides for resolution and recovery measures and has been amended to reflect the requirements of BRRD. The PRA rules require banks to maintain recovery plans and resolution packs to enable institutions and the PRA better to plan effectively for recovery or resolution in the future. The Banking Act 2009 introduced a special resolution regime with new insolvency procedures of bank insolvency, bank administration and also empowers the institutions to transfer the bank to a third party or to take it into temporary public ownership. As part of the new powers granted to the Bank of England under the Banking Act 2009, the Bank of England has bail-in powers to write down and covert capital into full equity.

The UK government does not insure bank deposits. The UK offers protection of deposits up to £85,000 per person per firm, administered by the Financial Services Compensation Scheme (FSCS). This body is responsible for ensuring that compensation is paid to insured depositors and other eligible claimants to cover amounts due from failed banks and in other appropriate cases. The FSCS is free to consumers. Banks are required to develop and maintain a method of identifying all depositors who would be eligible if the bank in question were to fail. The FSCS is independent from, but accountable to, both the FCA and the PRA.

The FCA also has extensive rules on client asset protection which apply to firms holding client assets. These rules require client assets to be segregated and reconciled within set time periods.

Yes. Bail-in involves shareholders of a failing institution being divested of their shares, and creditors of the institution having their claims cancelled or reduced to the extent necessary to restore the institution to financial viability. The shares can then be transferred to affected creditors, as appropriate, to provide compensation. Alternatively, where a suitable purchaser is identified, the shares may be transferred to them, with the creditors instead receiving, where appropriate, compensation in some other form.

Certain arrangements are subject to safeguard provisions to protect netting and set-off.

There are a range of excluded liabilities including:

• liabilities representing protected deposits
• any liability, so far as it is secured
• liabilities that the bank has by virtue of holding client assets
• liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or investment firm
• liabilities arising from participation in designated settlement systems and owed to such systems or to operators of, or participants in, such systems
• liabilities owed to central counterparties recognised by the European Securities and Markets Authority in accordance with Article 25 of Regulation (EU) 648/2012 (EMIR) of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade depositaries
• liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration
• liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits
• liabilities owed to creditors arising from the provision to the bank of goods or services (other than financial services) that are critical to the daily functioning of its operations

A “protected deposit” is defined in section 48C as one which is covered by the FSCS, or equivalent deposit guarantee scheme, up to the coverage limit of that scheme.

The UK is currently subject to the EU’s TLAC rules in the CRR II Regulation which have been in force since 1 January 2019 in relation to globally systemically important banks.

Cybersecurity continues to be one of the top legal and regulatory trends in the United Kingdom as is the development of an appropriate and effective regulatory framework for crypto assets and digital banking. Developments in artificial intelligence, algorithmic solutions, green finance and climate change are likely to require an appropriate legal and regulatory framework in due course.

The energy crisis, exacerbated by the war in Ukraine and Russia’s shutdown of gas supplies into Europe has called into question the UK’s ability to meet its’ Net Zero commitments. Currently, the UK has no single ESG law or regulation. The current regime consists of domestic and EU-derived laws and regulations, many of which are not ESG-focused.

The UK government is set to launch a consultation on the regulation of ESG ratings in Q1 of 2023 as part of a package of reforms to the financial system following Brexit. On 8 December 2022, H.M’s Treasury published a statement dubbed the ‘Edinburgh Reforms’, in which the Chancellor states that the UK is the world’s premier location for sustainable finance. The Chancellor announced the following ESG-related steps:

• an updated Green Finance Strategy to be published in early 2023 – this may provide guidance on transition plans and the UK’s green taxonomy;
• ESG ratings providers are to be brought into the regulatory perimeter.

Distinct approaches to ESG regulation have emerged between the UK and the EU. The EU has taken an expansive approach to ESG, however the UK has not onshored all EU rules in this area. Instead, there is a targeted approach which focusses on voluntary disclosures. This divergence in approach is expected to continue. The UK’s Green Technical Advisory Group published its advice to the UK government on the development of the UK Green Taxonomy on 10 October 2022 and it is evident that the UK will develop its own Green Taxonomy, rather than onshore the EU’s.

In January 2023, the FCA published its ESG Sourcebook, which sets out rules and guidance in relation to a firm’s approach to these issues. This is in line with the regulator’s objectives and the government’s commitment to work towards mandatory disclosure obligations, which align with the Task Force on Climate-Related Financial Disclosures, across the UK economy by 2025. The FCA expects firms to publish their first disclosures in line with the FCA requirements by 30 June 2023. Firms will need to familiarise themselves with the rules and introduce changes to their existing arrangements to meet the new obligations.

In December 2022, The United Nations Biodiversity Conference (COP15) was held in Montreal. This meeting involved the Parties to the UN Convention on Biological Diversity (the CBD). The CBD has three main objectives:

• The conservation of biological diversity;
• The sustainable use of the components of biological diversity;
• The fair and equitable sharing of the benefits arising out of the utilisation of genetic resources.

COP15 ended with the adoption of the Kunming-Montreal Global Biodiversity Framework (GBF). To achieve the goals of the GBF, delegates have decided on a variety of agreements and targets. The UK is a delegate of the CBD which means that these agreements will have effect on UK business and financial services. The UK government committed to protecting 30% of the UK’s land by 2030, however the British Ecology Society report published in March 2022 suggested that the UK will not meet this target. As such, in response to this report and the COP15 agreements, it is likely that there will be further changes in UK policy in order to meet these targets.

Delegates at COP15 agreed to take legal, administrative or policy measures to encourage and enable large and transnational companies to report, monitor and disclose their risks and impacts on biodiversity, including in their operations, value chains and portfolios. In the UK, it will be the TNDF which will provide such framework for reporting. The TNFD has listed priority sectors where specific sector guidelines will be produced. Infrastructure, healthcare, consumer goods and transports, are all key areas that depend on natural resources as part of their global supply chain or business. The TNFD has identified that this will mean that these sectors will be susceptible to financial impacts arising from climate change.

The ”Edinburgh Reforms”

In December 2022, The Rt. Hon. Jeremy Hunt MP, the U.K.’s Chancellor of the Exchequer, announced a package of reform proposals to enhance the competitiveness of the U.K. as a global financial hub. These proposals have become known as the “Edinburgh Reforms”. The proposals for reform are proactive, wide ranging and include changes to the Consumer Credit Act 1974 and the SMCR. The proposals seek to balance innovation with stability while boosting growth and the competitiveness of the U.K. post Brexit. Building on the opportunities offered by the U.K.’s current position outside the EU, His Majesty’s government intends to introduce a new framework for financial services regulation to support a dynamic, stable and competitive financial services sector. The Edinburgh Reforms include:

• reforming the Ring-Fencing Regime for Banks;
• issuing new remit letters for the PRA and FCA with clear, targeted recommendations on growth and international competitiveness;
• publishing the plan for repealing and reforming EU law using powers within the FSM Bill, building a smarter regulatory framework for the UK;
• overhauling the UK’s regulation of prospectuses;
• reforming the Securitisation Regulation;
• repealing the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, and consulting on a new direction for retail disclosure;
• intending to repeal EU legislation on the European Long-Term Investment Fund (ELTIF), reflecting that the new UK Long-Term Asset Fund (LTAF) provides a better fund structure for the UK market;
• launching a Call for Evidence on reforming the Short Selling Regulation;
• publishing a draft Statutory Instrument to demonstrate how the new powers being taken forward in the FSM Bill will be used to ensure that the FCA has sufficient rulemaking powers over its retained EU payments legislation;
• consulting on removing burdensome customer information requirements set out in the Payment Accounts Regulations 2015;
• welcoming the PRA consultation on removing rules for the capital deduction of certain non-performing exposures held by banks;
• bringing forward secondary legislation to implement Wholesale Markets Review reforms;
• establishing an Accelerated Settlement Taskforce;
• committing to establish the independent Investment Research Review;
• commencing a review into reforming the Senior Managers & Certification Regime in Q1 2023;
• committing to having a regime for a UK consolidated tape in place by 2024;
• consulting, in early 2023 on issuing new guidance on Local Government Pension Scheme asset pooling;
• increasing the pace of consolidation in Defined Contribution pension schemes;
• from April 2023, improving the tax rules for Real Estate Investment Trusts;
• announcing changes to the Building Societies Act 1986;
• delivering the outcomes of the Secondary Capital Raising Review; and
• consulting on reform to the VAT treatment of fund management.

In a post-Brexit Britain, the UK government has embarked on a regulatory overhaul of financial services regulation in order to maintain best practice and provide a framework for the revocation of retained EU law in financial services. The Future Regulatory Framework Review (FRF Review) aims to ensure that the UK’s financial services sector will have tailored rules to best suit UK markets. H.M’s Treasury announced on 9 December 2022 that it would be implementing the outcomes of the FRF Review. These outcomes include:

• Adding to the FCA’s objectives and regulatory principles;
• Building on the FCA’s existing accountability arrangements and strengthening stakeholder engagement;
• Giving powers to H.M’s Treasury, the FCA and the PRA to create a framework that provides greater responsibility to expert and independent regulators for setting regulatory requirements that apply to firms.

The Financial Services and Markets Bill (FSM Bill), published in July 2022, is the draft legislation that will enable to FCA to implement the FRF Review.

During the course of 2022, there has been a dramatic bout of instability and losses in crypto markets, giving rise to the so-called ‘crypto-winter’. Bitcoin, the signature crypto asset, lost 70% of its value between November 2021 and July 2022. Cryptoassets are only worth what the next buyer will pay for them, which makes them inherently volatile and prone to collapse. Therefore, it is important to note that technology will not make an asset with no intrinsic value a safe option.

On 11 November 2022, FTX, the cryptocurrency exchange and crypto hedge fund, filed for bankruptcy. The collapse of FTX shocked its own investors, the financial sector, and its customers. The rapid rise and demise of FTX raises the question of the urgent need for a regulatory framework to govern cryptoassets.

The collapse of FTX has led to an investor flight from cryptocurrencies which has caused Bitcoin to plunge nearly 25%. Subsequently, crypto brokers, Genesis, has frozen customer withdrawals due to the abnormal amount of requests to withdraw would have compromised the firm’s liquidity. On 20 January 2023, Genesis filed for bankruptcy.

A key concern in relation to crypto firms such as FTX is the lack of an appropriate regulatory framework.

The UK government is currently in the process of finalising plans for the regulation of the cryptocurrency industry. The regulations would include limits on foreign companies selling crypto assets in the UK, provisions for how to deal with the collapse of crypto-related companies and restrictions on the advertising of crypto products. The FSM Bill, as originally drafted, only provided the FCA with powers to regulate stablecoins. On 27 October 2022, Andrew Griffith, City Minister, put forward an amendment to the FSM Bill, which proposes to broaden the FCA’s remit to cover regulation of all crypto assets and activities relating to crypto assets.

On 28 July 2022, the Law Commission published a consultation paper on digital assets. The paper identified several key areas of the law that require reform in order to protect and recognise the rights of crypto-users and maximise the potential of digital assets. The Law Commission examined whether existing personal and property law could apply to such assets. However, digital assets are not tangible and they have unique features which distinguishes them from physical property. The challenge remains to find a way to acknowledge these features and build a strong legal and regulatory framework for the digital asset industry.

There is concern in the UK over the potential constitutional impact of the Bill of Rights (currently proceeding through the Parliamentary legislative process) on the UK’s economic competitiveness. The Bill of Rights aims to abolish the Human Rights Act 1998. It is currently at its second reading in the House of Commons in the legislative process.