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The Chancellor’s statement on the future of UK financial services: a new chapter

  • United Kingdom
  • Financial services and markets regulation - ESG
  • Payment systems and digital commerce
  • Financial services

12-11-2020

Introduction

The statement made on 9 November 2020 by Rishi Sunak, Chancellor of the Exchequer, while short, is packed with details of new policy developments for UK financial services.  The Chancellor divided his new chapter on the UK’s financial services industry into three parts:

  • Certainty of regulation following the end of the Brexit transition period to ensure openness
  • FinTech and innovation
  • New green plan

Certainty and openness

Equivalence

Announcing the UK’s equivalence findings and its approach to equivalence, Sunak said,

“I remain firmly of the view that it is in both the UK and EU’s interests to reach a comprehensive set of mutual decisions on equivalence.”

“But it is now clear there are many areas where the EU is simply not prepared to even assess the UK.”

City Minister John Glen previously said on more than one occasion that the UK would not unilaterally reveal its equivalence determinations, which raised fears that the UK might respond in kind to the EU’s decision to refuse to even make assessments of the UK’s equivalence prior to the end of the Brexit transitional period.  Fortunately, the UK Government has decided that unilateral free trade is a boon for all, regardless of whether trading partners reciprocate and has found the EU as equivalent in respect of 28 of the 32 equivalence regimes included in its published equivalence table.  The UK Government has set out the detail of the statutory instruments by which equivalence will be granted to the EEA online.

As well as the EEA, the UK Government has published equivalence decisions in respect of a further 33 countries and has also published guidance on how it will,

“use equivalence when it is in the UK’s economic interests to do so taking a technical, outcomes-based approach that prioritises stability, openness, and transparency.”

The UK Government’s approach to granting equivalence to non-EEA countries is set out in the HM Treasury publication “Guidance Document for the UK’s Equivalence Framework for Financial Services”.  By extending the scope of the UK equivalence regime to so many countries, the UK Government has demonstrated a greater potential to liberalise and promote cross-border trade in financial services using equivalence than the EU had ever considered possible.  Hopefully the EU will follow the UK’s lead.

Our abbreviated table below shows selected equivalence regimes of particular relevance to asset management firms and for selected countries: 

Equivalence Regime

EU/EEA

Jersey, Guernsey,

Isle of Man

Switzerland

Hong Kong

Singapore

USA

Credit Requirements Regulation:

 

 

 

 

 

 

  • credit institutions (Art 107(4))

Yes

Yes

Yes

Yes

Yes

Yes

  • exchanges (Art 107(4))

Yes

 

 

 

Yes

Yes

  • investment firms (Art 107(4))

Yes

 

 

Yes

Yes

Yes

  • internal models

(credit institutions) (Art 142(2))

Yes

Yes

Yes

Yes

Yes

Yes

  • internal models

(investment firms) (Art 142(2))

Yes

 

 

Yes

Yes

Yes

Credit Rating Agencies Regulation

(Art 5(6))

Yes

 

 

Yes

 

Yes

EMIR:

 

 

 

 

 

 

  • Regulated markets (Art 2a)

Yes

 

 

 

Yes

Yes

  • Recognition of third country CCPs (Art 25)

Yes

 

 

 

Yes

Yes

Benchmarks Regulation – equivalence of legal and supervisory framework (Art 30)

Yes

 

Yes

 

 

 

MiFIR – derivatives trading obligation (Art 28(4))

 

 

Yes

 

 

Yes

MiFID – share trading obligation (Art 25(4)(a))

 

 

 

Yes

 

Yes

Closer financial services relationships with non-EU countries

The Chancellor said that he would use “the freedom to build new, deeper financial services relationships with countries outside the European Union”, citing the deal currently being negotiated with Switzerland, the recent dialogue with India and the (slightly) improved terms for financial services in the UK-Japan Comprehensive Economic Partnership Agreement compared with the EU-Japan Joint Economic Partnership Agreement it built upon.

Reform of UK funds regulation

The Chancellor announced a series of reforms to UK funds regulation: a call for evidence on the UK’s new overseas funds regime (“OFR”); a consultation on reforming UK investment funds regulation;  and the UK’s first long term asset fund (“LTAF”) to be up and running before the end of 2021.  It is encouraging to see the Government make measurable public commitments towards this new and innovative fund structure. We anticipate that the industry will welcome it as a step towards providing better and more effective investment options for pension funds as well as potentially, in the future, other funds with long term investment strategies

Tax treatment of exports of financial services

Exports of financial services to the EU will get equal VAT treatment to financial services exports to any other country.  To make sure UK financial services exports to the EU remain competitive, the Chancellor stated that the UK will treat those exports the same as for other countries.  He explained in his speech that “this means UK firms will be able to reclaim input VAT on financial services exports to the EU…” 

This marks a big change for the industry.  At the moment supplies of many financial services both within the UK and the EU are VAT exempt, which precludes the recovery of VAT on input costs incurred by the financial services industry.  By contrast, supplies of financial services outside the EU member states are currently effectively zero-rated thereby allowing input tax recovery and so encouraging inward investment.  The changes announced are expected to come into effect on 1 January 2021. 

Earlier legislation designed to cater for the UK’s departure from the EU treated the UK and the rest of the EU in the same was as now, but subsequent legislation introduced in March 2019, paved the way to boost the scope of the input tax recovery position for the UK financial services industry.

FinTech

The second part of Sunak’s new chapter for financial services is FinTech. 

In his statement the Chancellor recognised the importance of technology as a critical enabler of the UK’s financial services sector.  The COVID-19 pandemic has accelerated the deployment of digital channels which enable business and consumer customers to access financial products and services.

The success of UK financial institutions based is a result (in part) of our ability to attract the best talent, to innovate, and to act as a fulcrum between financial markets in the US, Europe and Asia.  As we leave the European Union, the resilience of the infrastructure (the “plumbing”) which enables the smooth and uninterrupted operation of the financial services sector, and our ability to remain in-step with a package of European regulations (over which we will have little or no control), will be critical to the UK’s ability to compete on the international stage. 

Ron Kalifa review

Currently Ron Kalifa is undertaking a review, first announced in the 2020 Budget, with the intention of establishing priority areas for industry, policy makers, and regulators to explore in order to support the ongoing success of the UK fintech sector.  This is one of the industries in relation to which the UK Government wants the freedom to provide a light touch regulatory and low tax environment to permit new technologies to thrive.  In general, such tax and regulatory approaches are contrary to EU state aid rules, which is why the UK Government considers state aid a red line in the UK-EU free trade agreement negotiations.

Payments Landscape Review

The Chancellor has renewed the government’s commitment to making sure that the UK remains at the cutting edge of the payments industry and will release new plans shortly on the back of its Payments Landscape Review. The consultation phase of that review concluded on 20 October 2020 and focused on gathering information from the sector to inform plans to drive customer benefit, the reliability of payment systems, the facilitation of competition and the development of payment networks. It is clear that the UK currently has advantages over other jurisdictions in certain areas such as in its rapidly growing Open Banking sector and it has been good to see the Government looking to strike a balance between driving innovation and competition whilst also ensuring that customers are appropriately protected.

Cryptocurrencies

The Chancellor announced a coming consultation on ensuring stablecoins meet the same high standards expected of other payment methods and that the Bank of England and HM Treasury are considering whether central banks can issue their own digital currencies (“CBDC”) as a complement to cash.

New green plan

The third part of the new chapter for financial services is green finance, and the environmental content of the statement is supported by policy papers published online, UK joint regulator and government TCFD Taskforce: Interim Report and Roadmap.  Speaking a year ahead of the rescheduled UN Climate Change Conference (COP26) in Glasgow, Rishi Sunak announced policies designed to manage climate risks in the financial sector while also seeking to position the UK at the forefront of the move to a sustainable future.

On the same day, Andrew Bailey, Governor of the Bank of England, made a speech on “The time to push ahead on tackling climate change” and Nikhil Rathi, Chief Executive of the Financial Conduct Authority, made a speech on “Rising to the Climate Challenge”.

Together the package of measures announced include:

  • Mandated TCFD (the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures) disclosures for all listed firms and financial institutions by 2025

    This builds upon the FCA Consultation Paper CP20/3 (Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations).  It was announced in conjunction with policy papers published by a joint regulator and Government TCFD taskforce including a roadmap (A Roadmap towards mandatory climate-related disclosures) which sees enhanced supervisory expectations and mandatory disclosures for seven categories of organisation: listed commercial companies; UK-registered large private companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes, with obligations biting between 2021-2025.

    The application of the TCFD approach to disclosures to premium listed companies was expected but timing for firms will be very tight.  It will however mean that there is more data for investors to review when deciding on whether to invest in a company and this will be very welcome given the increasing desire for firms to invest in a sustainable way.
     
  • Banks and Insurers will have to include climate risks as part of their capital adequacy stress testing
     
  • The UK will launch its first ‘green gilts’ (including the first Sovereign Green Bond in 2021) to fund low carbon infrastructure projects
     
  • The UK intends to adopt a Green Taxonomy

    Though it was not stated explicitly, this is presumably a UK equivalent of the EU Taxonomy standard which provides a scientific basis under which it can be determined how sustainable a business’ activities are, how sustainable the broader company is, and in turn how sustainable an entire portfolio of companies is.  How the taxonomy will be used in the UK is not yet clear but a UK Green Technical Advisory Group will be established to review these metrics to ensure they are suitable for the UK market.

The Chancellor addressed parliament and then later gave a statement at the Green Horizon Summit hosted by the City of London, Green Finance Institute and the World Economic Forum.  Eversheds Sutherland was a participant in the Green Horizon Summit (held 9 November – 11 November).

How Eversheds Sutherland can help

Our in depth understanding of the sector and experience with the practical implementation of ESG (including how screening processes work in practice) mean that we are very well placed to guide you through the implementation process and next steps in order to comply with the new legislation. We can also assist with gap analysis highlighting gaps between your current processes and the new rules.