On 16 June 2021, the Taskforce on Innovation, Growth and Regulatory Reform (TIGRR) published its report setting out recommendations to the Prime Minister on how the UK can reshape its approach to regulation now that the UK has left the EU.
The Prime Minister asked three Conservative MPs, Iain Duncan Smith, Theresa Villiers, and George Freeman to form the Taskforce and identify and develop proposals across a range of areas that will drive innovation, growth and competitiveness through regulatory reform.
It will be up to the Government to decide which of the report’s proposals to take forward and implement, subject to further consultation.
[UPDATE: BEIS has now published a call for input following up on some of the TIGGR reform proposals. The call for input focuses on some of the higher level (rather than FS specific) regulatory questions – they ask about making greater use of common law, about the proposed “proportionality principle”, about whether the regulators should have competition and innovation statutory objectives, and about how regulators can make use of regulatory sandboxes amongst other things. In total there are 35 questions across six broad areas.]
The report contains a number of general as well as sector specific proposals for improving UK regulation. This blog analyses the report’s proposals and their implications for the UK’s financial services sector. It then goes on to summarise the report’s general proposals, as well as those specific to financial services and data protection.
Implications for firms
The TIGGR report contains a large number of cross‑sectoral regulatory reform proposals. Some have the potential to bring about significant changes in UK regulation. For example, the proposals on reforming data protection regulation are wide ranging and, if adopted, could in our view have implications for the UK's ability to retain its "adequate" status under the EU GDPR framework and for the free flow of personal data from the EU to the UK to continue. The report’s “proportionality principle” could also lead to significant changes in the way that regulators devise new regulation and think about the costs and benefits involved.
However, other recommendations are less far-reaching. Many of the proposals for financial services regulation are already being taken forward by the UK government or regulators. These include the report’s recommendations on introducing scaleboxes, reforming Solvency II and MiFID, and its proposals for a more proportionate prudential regime for smaller UK banks. Many of the other financial services recommendations are also very specific and relate to existing items of regulation, and so in our view are unlikely to lead to significant changes for UK firms, even if fully implemented by the government.
The report also recommends the UK moves away “from the EU’s code-based system to a more principles-based approach based on common law.” As set out in our blog on regulatory divergence, this is something HMT and senior financial regulators such as Andrew Bailey have also discussed. This has the potential to lead to significant changes, because rather than seeking to reform a particular regulation, it aims to change the basis on which the UK regulates industry as a whole. However, as we observed in our blog, “while this may alleviate firms of some day-to-day compliance concerns, it is likely to place more power in the hands of the regulator and increase the importance of their supervisory judgements. A supervisor’s view of a firm and whether it is meeting the intended regulatory outcomes will come to hold more weight, and supervisors may in turn find it even more difficult than it is today to treat firms in the same peer group consistently. Furthermore, as “outcomes” come to supersede “process”, firms will be less able to rely upon a defence of having followed the right policies and procedures should misconduct or other regulatory breaches occur. Consequently, while firms may welcome a simplified approach to process and procedures, they may in fact find other aspects of this approach more intrusive and burdensome.”
The report is also notable for what it does not contain. There are no proposals for a wholesale ripping up, or “bonfire” of EU financial services regulations. Nor are there any proposals for UK regulators to be given a competitiveness objective (generally understood as a duty for regulators to ensure their regulation either contributes to, or does not harm, the economic performance and attractiveness of the industry they regulate when compared to other countries). Instead the report recommends regulators focus on fostering competition (how vigorously companies within a market compete with one another for customers) and innovation in the markets they regulate. This suggests the report’s authors see drawbacks in both a more radical regulatory overhaul, and in focusing regulators on the competitiveness of UK industry, rather than competition and innovation in themselves.
General regulatory reform proposals
The report argues that “the UK’s departure from the EU after 45 years offers a one-off opportunity to set out a bold new UK regulatory framework”. It says that whilst “adding more regulation is easily done. Removing it is harder” and “two in five businesses currently consider regulation an obstacle to success in the UK.”
The report’s first “headline proposal” is to promote productivity, competition and innovation through a new framework of proportionate, agile and less bureaucratic regulation. This headline proposal is underpinned by fourteen more specific proposals. We set of those most relevant to the financial services sector below:
Reimpose the “one in, two out” regulatory duty on all government departments. It is unclear whether this requirement would also extend to regulators such as the PRA or FCA as the report only mentions government departments explicitly.
Make the UK a pioneer and leader in agile, adaptive regulation to increase productivity, competition and innovation. The Taskforce recommends the government and regulators have three specific things in mind when developing regulations:
- Boosting productivity
- Encouraging growth
- Stimulating innovation
It recommends the UK adopts a common law approach to allow for more forward looking, judgement-based regulation.
Mandate a new “Proportionality Principle” at the heart of all UK regulation. The proportionality principle would require government departments and regulators avoid a “disproportionate negative impact on smaller businesses.” It would also obligate regulators to ensure that the costs of implementing a regulation be proportionate to the level of risk the regulation is seeking to address, and that regulations should be outcomes focused, rather than process driven.
Use digital sandboxes to test innovations more quickly and ensure regulation is based on evidence of impact. The Taskforce recommends more regulators adopt sandboxes to enable firms to test innovative products or business models. The report cites the FCA’s regulatory sandbox as an example of good practice.
Regulators should introduce “scaleboxes” to provide agile regulatory support to high growth innovative scale-up companies. Scale-ups are companies that achieve rapid growth in size and scale. The Taskforce says that regulators should introduce “scaleboxes” to provide additional supervisory support to companies in their growth phase. This same recommendation was also made in the Kalifa Fintech review and is already being implemented by the FCA and UK government.
Give regulators statutory objectives to promote competition and innovation in the markets they regulate. A number of regulators, including the FCA, already have objectives to promote competition, but the Taskforce recommends these be extended more widely and also include innovation. The Taskforce cites the formulation of the Payment Systems Regulator’s (PSR) competition and innovation objectives as an example of good practice. The PSR’s competition objective is “to promote effective competition in the markets for payment systems and services” and its innovation objective is “to promote the development of and innovation in payment systems”.
Delegate greater flexibility to regulators to put the principles of agile regulation into practice, allowing more to be done through decisions, guidance and rules rather than legislation. The Taskforce emphasises moving away from the EU’s approach of implementing international regulations through legislation rather than regulator’s rules. The UK government has already committed to adopting such an approach for financial services regulation, as part of HMT's regulatory framework review of the sector.
Give the House of Commons Regulatory Reform Select Committee a remit to scrutinise all regulators and regulatory reform proposals. The Taskforce recommends bulking up this committee’s remit and resources (including through use of seconded experts) in order to provide additional parliamentary oversight of government department and regulators’ activities.
Include consideration of the wider effects of proposed policies in Regulatory Impact Assessments (RIA), including on innovation, competition, the environment and trade. This will ensure a wider range of factors are considered as part of the general cost benefit analysis undertaken by the RIAs.
Establish a framework for regulators to report publicly on how they have promoted competition and innovation in the markets they regulate. Specifically, each regulator would have to report on any regulatory and policy decisions where it perceived a tension between its objectives to promote competition and innovation and its other statutory objectives. The regulator should explain how it resolved this tension in each case and give its rationale so that Parliament can scrutinise whether regulators are giving these objectives sufficient weight.
Produce a simple annual innovation scorecard to assess departments and regulators on the markets for which they are responsible. Departments and regulators would receive an overall score or grade to assess their efforts to promote innovation.
Set a UK Standards strategy to promote the use of British standards internationally as a way to boost British influence and promote trade and exports. The Taskforce recommends UK regulators work with international counterparts to promote British standards, and increase cooperation in innovative areas such as AI, cybersecurity, agri-tech and fintech and to improve market access for cross-border service providers.
Financial services reform proposals
The report contains a “headline proposal” to reform regulations limiting UK pension and insurance funds to enable greater investment in UK domestic growth. This headline proposal is underpinned by a number of more specific proposals:
- Enable Defined Contribution (DC) pension schemes to diversify their investment into venture capital and businesses that drive Net Zero and levelling up commitments. The report expresses support for the introduction of Long Term Asset Funds (LTAFs), which the FCA is currently consulting on. It also suggests reforming the calculation method for the 0.75 per cent charge cap on fees and administrative expenses, as this is the largest obstacle to DC pension funds backing private equity and venture capital funds.
- Amend the matching adjustment and risk margin in Solvency II to release capital for investment in the UK. HMT is already consulting on proposals to reform Solvency II, including the matching adjustment and risk margin, so this proposal is effectively already being taken forward. See our blog here for further details.
- Attract private investment to help regenerate local infrastructure and support the UK’s levelling up agenda. The report recommends introducing regulations that encourage and enable local authorities to invest their pension funds in their own local economic regeneration.
The report contains a “headline proposal” to restore a common law principles-based approach to financial services regulation. This headline proposal is underpinned by a number of more specific proposals:
- Amend inherited MIFID II position limits to introduce greater flexibility whilst preserving protections on critical contracts. The report recommends reforming MIFID II’s commodity position limits and notes the FCA is supportive of such reforms. We expect HMT to set out proposals either to reform or abolish these position limits when it publishes its MIFID II consultation paper later in the summer. See our blog for further information about the expected reforms.
- Introduce a more discretionary and judgement-based approach to calculating CCP margins. The report recommends removing existing EU based model validation rules for calculating margin requirements and replacing them with a more discretionary and judgement-based approach.
The report contains a “headline proposal” to deliver a regulatory framework that supports UK global leadership in Fintech and digitalisation of financial services infrastructure. This headline proposal is underpinned by a number of more specific proposals:
- Mandate the expansion of Open Banking to Open Finance quickly, and take a more market-led, Australian-style approach. The Taskforce argues that the adoption of Open Finance is the natural evolution of Open Banking and would benefit consumers in a number of ways, including through increased competition through greater access to a wider range of financial products/services, greater control of financial data, and smarter analytical tools and dashboards which would enable consumers to make better financial decisions.
- Increase competition in the banking sector by adopting a graduated regulatory approach for challenger banks. The Taskforce recommends adopting a graduated prudential regime which banks can progress through as they grow in size. As with some of the other proposals in the report, this is already under active consideration. The PRA has published a Discussion Paper on a “Strong and Simple” prudential regime for non-systemic UK banks and building societies, which explores proposals along similar lines to those recommended by the Taskforce.
- Reduce AML burdens for new Open Banking/Fintech services, which have been caught in the scope of the EU AML directive. The Taskforce recommends that Account Information Services (AIS) and Payment Initiation Services (PIS) be excluded from the UK’s money laundering regulations. It says that AIS and PIS should not be classified as “Financial Institutions” for the purposes of AML regulation as neither ever comes into possession of client funds and as a result “the money laundering risks are so low they are virtually non-existent.”
- Accelerate UK plans to develop a Central Bank Digital Currency (CBDC) and launch a pilot within 12-18 months. In order to maintain the UK’s status as a leading Fintech centre, the Taskforce recommends the UK accelerate its plans for a CBDC. In April the BoE and HMT announced the creation of a CBDC Taskforce to coordinate the exploration of a potential UK CBDC, however it is not clear if this will deliver a pilot in the timeframe recommended by the report.
The report contains a “headline proposal” to amend disclosure and transparency requirements for financial services products to make them more proportionate and less burdensome. This headline proposal is underpinned by a number of more specific proposals:
- Remove the requirement to provide costs and charges reports to professional investors and eligible counterparties from MIFID II. The Taskforce argues that these reports, which have currently been temporarily suspended by the FCA, are costly, time-consuming to produce and are not beneficial to wholesale clients. It recommends they be abolished permanently. The report also cites MIFID II’s extensive transaction reporting (with 65 data points per transaction) as an area for further potential reform.
- Remove the “investment recommendation” disclosure requirement from MAR for wholesale clients. As with the costs and charges reports for MIFID, the report argues these disclosures are not valued by the buy-side and are costly and time consuming to produce.
- Confine the KID disclosure requirement in PRIIPs to genuinely complex packaged products. The Taskforce says that the PRIIPS KID requirements should be confined to genuinely complex, packaged products that require special explanation to the retail market. Vanilla bonds should be exempt from the scope of the PRIIPs KID in order to galvanise retail participation in capital markets. Outside of the retail market, the UK should allow for key information to be provided in less-prescriptive ways than those set out in the Regulation’s templates.
Data protection reform proposals
The report contains a “headline proposal” to replace the UK General Data Protection Regulation 2018 (UK GDPR) with a new, more proportionate, Framework of Citizen Data Rights. Such a framework should give individuals more substantial rights concerning the use of their personal data by organisations while freeing data for innovation and public interest. This headline proposal is underpinned by two more specific proposals:
- Reform GDPR to give people meaningful control of their data. The Taskforce says that the UK GDPR places too big a burden on individuals to consent (or not) to organisations' use of their personal data. The report argues that this approach means that individuals are often overwhelmed by the volume of consent requests which they are likely to accept without proper consideration to access digital content and services. The new UK data protection framework should instead emphasise the legitimacy of data processing and how it benefits individuals and society. To achieve this, the report suggests that the Government could explore whether the future regulatory architecture should enable "Data Trusts" or "Data Fiduciaries" - i.e. private and third sector organisations to which consumers would delegate their data authorisations and negotiations.
- Reform GDPR for artificial Intelligence (AI), including removing Article 22 of GDPR and focussing instead on the legitimacy of automated decision-making. The report argues that the new UK data protection framework must ensure that its requirements do not hamper much-needed progress and innovation in AI. The report calls out current rules on data access, transfers, retention, data minimisation and purpose limitation as particular areas of concerns. The report also recommends removing Article 22 of GDPR, which sets out a general prohibition (and the exceptions) for fully automated decision-making, including profiling, which produces legal effects concerning an individual, or similarly significantly affects him or her. The report argues that the requirement makes it burdensome, costly and impractical for organisations to use AI to automate routine processes. If removing Article 22 is deemed too radical, the report argues that the UK GDPR should at a minimum permit automated decision-making, remove the requirement for a human review of fully automated decisions, and reduce explainability requirements.