Digital finance
Outside the EU, the UK is looking to capitalize on its newfound regulatory flexibility to ensure it can get on the front foot by encouraging innovative new technologies through well-calibrated, proportionate regulation.
For instance, Artificial intelligence (AI) is a relatively new and far-reaching technology, the application of which can be encouraged through well-crafted regulation. The UK’s financial regulators have set out their thinking on the potential benefits and risks of AI in financial services in a discussion paper, and this will inform the development of the regulatory framework for AI in the UK financial services industry throughout 2023 and beyond.
With the FCA chairing one of the two IOSCO workstreams on digital assets, momentum is building for the development of a more structured and comprehensive approach to demonstrate international regulatory leadership and build industry confidence. The FSMB is being amended to bring crypto within the regulatory perimeter, and HM Treasury is set to consult on proposals for a comprehensive regulatory regime for crypto.
Four years on from the implementation of the EU’s General Data Protection Regulation (GDPR), the UK Government is looking to review its current alignment with GDPR in terms of its data protection rulebook. With the UK Government expected to soon consult on these proposals, it remains to be seen how radical a departure from the EU the UK government will take.
Finally, as concern with the increasing financial services industry reliance on non-regulated third parties grows among regulators globally, the UK financial regulators are exploring how best to assess and strengthen the resilience of services provided by critical third parties and reduce the risk of systemic disruption. Formal draft rules will be published in 2023 once the FSMB becomes law, which is expected to be next spring.
Green agenda
As the race to net zero intensifies, the UK has high ambitions to be a global champion for the sustainable finance policy agenda and is working towards being the world’s first net zero financial center.
In response to the growing number of investment products marketed as ‘green’ or ‘sustainable’, the FCA has issued a draft package of measures to protect consumers and improve trust in sustainable investment products as part of the UK’s Sustainability Disclosure Requirements (SDR) regime. The measures include, among other things, sustainable investment product labels, restrictions on the use of certain sustainability-related terms, and consumer-facing disclosures. The proposals are meant to complement and build on the FCA’s existing requirements for asset managers and asset owners to make disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations.
Ahead of further announcements from the UK Government on the UK Taxonomy framework, the UK’s Green Technical Advisory Group – an independent group tasked with providing non-binding advice to the UK Government – delivered the first set of its recommendations on the development of a UK Taxonomy. The recommendations focus on issues such as the technical screening criteria, international interoperability, and Do No Significant Harm principle. With global firms representing a significant proportion of the UK financial services sector, there will be particular attention on how best to navigate potential future Taxonomy divergence between the UK and other jurisdictions.
Finally, the Bank of England and Prudential Regulation Authority (PRA) have also made strides to integrate climate change considerations into the existing supervisory and policy arrangements. By end-2022, the PRA is expected to set out its views on whether changes to the regulatory capital regimes or their application, are required to address climate risks.
Financial stability and prudential regulation
The focus of global regulators on banks and other market participants’ ability to meet unusual liquidity demands and withstand financial stress has been put into sharp relief in the UK by turmoil in gilt and currency markets in September 2022. As the underlying macroeconomic uncertainty shows no sign of receding in 2023, regulators will continue to watch closely for fragilities in the global financial system, which may erupt into periods of stress.
In the meantime, work continues on long-standing reforms to improve banking resilience. A key priority for both UK regulators and the banking sector is the forthcoming implementation of the Basel III standards. The Prudential Regulation Authority (PRA) has recently published proposals to implement the remaining elements of Basel III (or Basel 3.1 as the PRA refers to them) for the January 2025 deadline. For the market risk element, firms that want to implement the internal models approach (IMA) are expected to submit pre-application materials by January 2024, (i.e., at least 12 months in advance of the implementation date).
Reform of the UK’s insurance sector rules has garnered significant political and media interest in recent months, and further details of Solvency II reform were announced as part of the Chancellor’s fiscal statement in November. The reforms are designed to release investment into the economy by allowing insurers to direct more capital into areas such as infrastructure and climate transition projects. 2023 will see the UK Government and PRA work closely to develop the relevant technical framework for UK insurance market reform.
Under the UK Benchmarks Regulation (BMR) the FCA has required the LIBOR administrator to continue to issue certain settings on a synthetic basis, as synthetic LIBOR use has been granted to certain legacy contracts that need more time to transition. The FCA is now looking to determine the best way forward to wind down synthetic LIBOR in the UK and has consulted on whether certain settings can end in an orderly fashion by the start of Q2 2023.
Read the full report, Global Regulatory Forum 2022: Forging a resilient recovery, covering key developments across UK, EU, USA & APAC markets, including digital finance, the green agenda, and financial stability.
Bloomberg
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