Whether you think it’s a catastrophe or the best decision the country has ever made, Brexit has happened. And with the UK now no longer obliged to follow EU rules, the government is keen to make wide-ranging regulatory reforms.
To this end, in February 2021, the Prime Minister appointed TIGRR — the Task Force on Innovation, Growth, and Regulatory Reform — to look at how the UK could be less bureaucratic, foster innovation, and increase competitiveness.
The ensuing 130-page report is packed with ambitious and far-reaching proposals which the authors believe will: ‘…drive innovation and accelerate the commercialisation and safe adoption of new technologies… reduce barriers to entry… reduce administrative barriers to scaling-up high-growth businesses... [and] reduce the overall net burden of regulation on start-ups and SMEs…‘
So what’s being proposed?
And how would it change the regulatory environment for financial services firms, and asset managers in particular?
What are the TIGRR report’s key proposals?
The TIGRR report covers an incredibly broad range of sectors — from financial services to space and satellites, net zero technologies, transport, agriculture, clinical trials, nutraceuticals, and digital health. But it has two core proposals that cut through all sectors:
- Replacing the GDPR with a home-grown Framework of Citizen Data Rights
- Adopting a common law approach to regulation
Re-shaping our relationship with data
Ever since it came into force in 2018, the GDPR has been widely panned for ‘ruining the internet’ and imposing an unfair burden on business, so it’s not surprising that the government wants it replaced.
The report elaborates: ‘GDPR is prescriptive and inflexible and particularly onerous for smaller companies and charities to operate. It is challenging for organisations to implement the necessary processes to manage the sheer amounts of data that are collected, stored and need to be tracked from creation to deletion.‘
By contrast, the proposed new Framework of Citizen Data Rights will ‘give people greater control of their data while allowing it to flow more freely and drive growth across healthcare, public services and the digital economy.’
Beyond the broad strokes, it’s unclear how the new framework would be implemented and work in practice. Or how it would reconcile the seemingly opposing goals of ‘greater control’ and free flowing data.
What the report suggests is that the new framework should abandon prescriptive rules and be ‘based more in common law.’
Moving away from code-based rules
The report proposes using common law principles. This would not be limited to the way data is collected, managed, and stored, but would be applied across the board.
‘The EU’s code-based system, applies prescriptive statutory rules,‘ explains the report. ‘It seeks to accommodate the views of an array of national legislators and too often results in complication and statutory inflexibility which ends up limiting innovation and constraining business.‘
By contrast, using common law principles would make regulation simpler and more flexible, with parliament setting the parameters and case law fleshing out the rules.
So what would this look like in practice?
According to the report, the UK’s future regulatory framework should follow six core principles:
The report advocates a risk-based approach. ‘Regulators should scale their support and requirements appropriately to risk and the size of firms…’ it argues, because ‘…start-ups and other innovative market entrants … often have lower capacity and capability to shape and implement new rules.‘
The report also proposes implementing a ‘one in, two out’ regulatory policy, similar to The Red Tape Challenge, which the government implemented between 2011 and 2014. The proposal calls for the whole body of EU law to be audited and for ‘unnecessary’ rules to be removed.
While much less fleshed out than the proportionality principle, the gist of this principle is that regulation should take possible future scenarios into account.
Focusing on outcomes, not inputs
According to the report, regulators shouldn’t put prescriptive rules like mandatory technical requirements or processes in place. Instead, the focus should be on how good firms are at monitoring risks and identifying and fixing issues when they arise.
The report argues that regulators should engage more with businesses, including helping them to navigate current rules. The report uses the Global Financial Innovation Network — an initiative chaired by the FCA which aims to create a global sandbox for innovative businesses — as an example of what this should look like.
Here again, the FCA — and its regulatory sandbox initiative in particular — is used as an example of the approach regulators should take moving forward. As the report puts it, ‘regulators should make space for businesses to test and trial new business models, products and approaches.‘
This last principle ties in with experimentation and being forward looking. ‘Standards, testbeds, sandboxes and encouraging best practice are all ways regulators can be more responsive, learning and adapting rather than immediately creating definitive across-the-board rules.’
The report also proposes trials and pilot programmes for new products and business models, so firms can innovate while keeping risks in check.
TIGRR’s vision for financial services
Aside from a broad, overarching vision, the TIGRR report also hones in on specific sectors and makes practical proposals.
There are five key proposals for the financial services sector.
Firstly, the report recommends speeding up the timetable for adoption of a Central Bank Digital Currency and for a pilot to launch within the next 18 months.
The Bank of England issued a discussion paper on digital money in June 2021. But with the world becoming increasingly cashless — since the pandemic, cash payments account for less than a third of transactions — the report argues that the UK risks being left behind if it doesn’t act fast.
‘China will launch a digital yuan (or renminbi) in 2022, and is already running limited pilots to study how this will work,’ explains the report. ‘…Germany has already conducted trials to introduce blockchain settlement between central banks, and the EU announced recently its intention of taking forward a digital euro initiative.
‘If the UK is able to move quickly and capitalize first mover advantage, then it will be able to take a global lead in ensuring that such digital currencies are rolled out in the most effective and safest way.’
Secondly, the report proposes strengthening the UK’s position as a FinTech leader. To this end, it recommends:
- Reducing the anti-money laundering burden for open banking and FinTech services
- Adopting a ‘graduated’ approach for challenger banks, so that regulatory burdens increase proportionately as they grow
- Speeding up the transition from open banking to open finance
But it’s the last three proposals that are of most interest to asset management firms, because they recommend changes to three key pieces of legislation:
- the Market Abuse Regulation
Let’s take a more in-depth look at each proposal.
MiFID reform: lowering the burden
According to the report, MiFID is a ‘prime example’ of needlessly onerous regulation.
‘[MiFID] requires 65 data points for every transaction by both buyer and seller, and has increased the overall transaction data-gathering requirement on businesses by 270%,’ says the report. ‘These requirements are disproportionate for the UK outside the EU and do not always deliver useful transparency for consumers.‘
With this in mind, the report proposes:
- Permanently removing the requirement for firms to provide best-execution reports. Both the UK and EU have already suspended this requirement — the UK until the end of 2021 and the EU until February 2023
- Scrapping the requirement to provide cost and charges reports to professional investors and eligible counterparties. Again, the EU has made a similar proposal under its MiFID quick fix directive
- Amending disclosure and transparency requirements across the board, but falls short of making practical suggestions as these are ‘beyond the scope’ of the report
Re-thinking PRIIP KIDs
PRIIPs are one area where the UK has already diverged from EU rules.
Where the EU is pressing on with unpopular changes to PRIIP KID requirements — these are coming into force in July 2022 — the UK has exempted UK-based UCITS from the requirements until the end of 2026.
But the report proposes even wider divergence, and suggests that the requirements should be limited to genuinely complex products ‘that require special explanation to the retail market.‘ Vanilla bonds, the report argues, should be completely exempt.
The report also argues that, outside the retail market, firms should be able to provide key information in less prescriptive ways than those set out in the PRIIPs Regulation’s templates.
In addition, it proposes revising reporting and disclosure requirements in the Cross-Border Payments regulation, the Deposit Guarantee Scheme Directive, the Mortgage Credit Directive, and the Payment Accounts Directive.
Abolishing the MAR’s disclosure requirements
Here, the report recommends removing the investment recommendation disclosure for wholesale clients.
‘…subjecting [wholesale clients] … to those requirements,’ argues the report,’is burdensome and costly. It is also not supported by the buy-side it is intended to help. The obligation creates an ongoing cost for producers that outweighs perceived benefits.‘
A bold regulatory future awaits… or does it?
The TIGRR report outlines a bold new vision for the UK’s future. One where regulation is simpler, more flexible, and less burdensome.
‘Regulation should aim to be as simple, agile and proportionate as possible,‘ says the report. ‘…[it] should build on the strengths of common law in being adaptable. It should evolve in a predictable way… [it] should be smart, and digital wherever possible.‘
It’s hard to argue with many of these overarching goals. And if the government were to take the report’s financial services proposals on board, it would mean that asset management firms could do away with many unpopular regulatory requirements.
That said, what happens next is still unclear.
To date, the government is yet to respond in detail to the report, which means the proposals are far from being set in stone.
More to the point, divergence from the EU means that, while UK regulation may indeed be simpler and less burdensome, firms who also do business on the continent will have to comply with two regimes.
Regardless of how things turn out, Fundipedia can help you stay on top of regulatory changes in just a few clicks. Our platform makes it easy to collect and verify data from any third party and make it available across your firm. You can also run data experiments to identify and plug gaps.
Crucially, our system populates data into the format you require, and updates automatically whenever there are any changes. So, whether the TIGRR report brings about a regulatory sea-change or is quietly shelved, you can rest assured you’ll always be compliant.
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