Grid Grind

Do you remember the good old days when FSA used to publish Policy Development Updates worthy of the name? It was something approaching a comprehensive list of forthcoming publications, providing a really useful, at a glance summary of what to expect over the next year. Yes, plans changed a bit from time to time, but it was seldom far off the mark. Since then, of course, we have had what FCA pretends is the same document, but it leaves out most of the information. Attempts to get them to restore the useful version have completely failed – far too much like hard work. But, even if they can’t be bothered to do it properly in their own name, they have finally had to relent when, combining with all other financial services regulators in town in the FS Regulatory Initiatives Forum, they have needed to produce a new Regulatory Initiatives Grid (RIG). Admittedly it is pretty well C19’d but it is a promising start.

Actually, it is a bit better than that. Published this month for the first time, the RIG provides a forecast – 12 months now, to be 24 months shortly – of all the planned regulatory initiatives due to emerge from HMT, BofE, PRA, FCA, PSR and CMA. To have all this drawn together in one succinct document is a valuable resource, which should be leapt on by trade bodies and financial services groups and anyone else that needs to track developments and stay on top of regulatory change. One of the most important aspects of this is its Brexit linkage, at a time when so much legislation and regulation needs to be novated to take account of independence.

Of course, for some there will be no need for this – they know everything in the public domain and all the rest as well. But for the rest of us, there is much in there that jogs the memory, updates the most recent recollection, confirms the expected or is just plain news.

Largely without over-ambitious diagrams or meaningless graphics, the RIG has clear sector listings. Therein we find the Duty of Care, the overlapping and interfering regulation that FCA tried so hard to kick aside but which inevitably caught the eye of the parliamentarians, who now can’t live without it. Deferred, presumed undead. There too is the Future Regulatory Framework Review, HMT’s little look at how we might regulate financial services in tomorrow’s world. Sometime next quarter we will see ‘formal engagement’ on that. Operational Resilience gets a predictable mention as does LIBOR Transition; both inevitable, neither exciting. Outsourcing gets another outing, this time with new technology in mind, while the Investment Consultants, due for Regulated Activity status shortly, get an indefinite reprieve – so, not as shortly as we thought. Then it hots up a bit. The Investment Firms Prudential Regime is picked up: ‘to be included in the upcoming Financial Services Bill’. Not a mention of any EU version thereof, but bound to reflect. There too is what looks like a retrospective reference to HMT’s consultation on the Overseas Funds Regime. It almost slipped away unnoticed, so the RIG may have rescued this one, albeit posthumously.

Although ostensibly dealing only with recognition of overseas funds for promotion to UK retail investors, the OFR (Overseas funds regime: a consultation – GOV.UK) is the UK’s principal exposition on what to do with equivalence. HMT clearly intends to rely heavily on FCA assessment. Just as Andrew Bailey, before moving onto to higher things, used to speak frequently of equivalence of outcome, so too does HMT. Wisely reserving ultimate authority over equivalence decisions to itself, HMT clearly intends that the UK should be able to play retaliatory politics whenever the EU gets up to its predictable tricks. This paper is all about the future FCA ‘recognition’ of funds for promotion to retail investors in this country, an area heavily affected by the Brexit removal of automatic recognition of all UCITS. Armed with equivalence and expecting most applications to relate to EU27 UCITS, FCA will find it quick and easy to tick the recognition box. But real success will look like extensive equivalence decisions for the wider world, opening reciprocal opportunities for the promotion of UK funds in fruitful regions.

Also among the Brexit opportunities is the future structure of authorised investment funds, expected to be covered in the Review of the UK Funds Regime, RIG-listed as sine die. Thanks to the dominance of UCITS, the sector is split simply into UCITS funds and non-UCITS funds (NURSs). While that, today, means those with an EU passport and those without, we are now at an inflection point. Barring some miracle, passports pass away at New Year and UCITS domiciled in this country cease to warrant the title. With that as an inevitable Brexit consequence, we have choices to make. Consider:

  • Accepting UCITS as the global standard for retail funds, retaining the restrictions in UK regulation and following the EU with dynamic alignment wherever it leads;
  • Using UCITS by borrowing the standard, piggy-backing on the EU while developing a superior brand that might put UK funds into the lead at home and away; or
  • Dropping UCITS as a regulatory concept, allowing a more flexible approach to authorised funds with a regulatory perimeter but free movement within, spanning the UCITS-NURS divide.

Convenient as the UCITS brand might be, whether for its inherent value or simply its established profile, there is a respectable argument for denouncing the concept of the regulator as brand manager. Of course we place no obstacles in the way of those wishing to adhere to the UCITS standard, committing themselves, if they wish, to dynamic alignment. But that assumes that a UCITS from a jurisdiction with no regulations reinforcing the brand can be fully trusted to adhere to the landmarks. Despite the notorious indifference of the Luxemburg regulator to enforcement of fund requirements, or even to serious investor protection, perception, based on the official position, may prove to be too strong for the survival of the brand without regulatory support. Such a step would be quite brave. This may become a rare example of the industry imploring the regulator to keep rules in place. And not just as is, but dynamically aligned.

So, if UCITS are to be retained in the UK, what scope should be available for NURSs? There is in this space something approaching congruence between the interests of the industry and the duties of the regulator. If UCITS can be improved on, as FCA has said in recent time, and the EU is uninterested in serious enhancement, firmly asserting the perfection of their handiwork, it feels like a tantalising opportunity to develop a UK brand. Just ensure that it addresses all known weaknesses and stays safe and suitable for retail investors, enshrine it in regulation and then allow it to compete with UCITS in a world of equivalence.

Posted in: AIFMD, Brexit, EU, FCA, UCITS
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Remember the world outside?

If you ever thought that Brexit had become an over-discussed issue, that must have been several months ago. It is a topic that is destined to succeed in fighting its way out of the shadows that have over-cast it. Whether you regard the intervening months as light relief depends on your point of view. For some, of course, this is a truly tragic time; for rather more it is a time of considerable frustration, seeing good businesses damaged by events well beyond local control. Getting back to Brexit looks positively appealing.


With that in mind, many people will have fallen on the FCA’s Business Plan with excitement, having hunted high and low for a diverting read. We well understand your disappointment only to find that all the promised regulatory entertainment is heavily qualified and subject to FCA finding the time to do a little bit of BAU.


So we forecast that recent events will be a hook on which the regulator hangs its oven-ready strategic shift away from techy discussions on nice points of regulation to bigger issues more likely to gratify the press, the politicians and even the public. It may seem curious to forecast a shift without knowing who will lead the charge, but there we may see this shift determine the selection of leader. Having been of the view that only an internal candidate would accept the poisoned chalice, we now think it may be that FCA gets a much more political leadership, focused on taking UK regulation through Brexit into a very different place.


Meanwhile, there is work to be done. The first priority is to keep the team healthy. The next is to be certain that clients are not damaged by disruption. The third is to ensure that the areas that FCA has raised since the beginning of the year, variously but pretty consistently, in its January Dear CEO letters, in its Sector Views and now in its Business Plan, are thoroughly reviewed and well under control. Busy and distracted as they may be, we expect they will try hard to be seen to follow-up wherever possible.


We wish everyone a safe, if unadventurous, summer.






Posted in: Brexit, FCA, Miscellaneous
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The City Needs More Ambition

Where is the City’s ambition? Some consider the City to be the home of ravenous ambition, both individual and corporate. That might be true, but it is not the question of the hour; that question relates to the City as a financial centre, as a financial jurisdiction and as a hugely important part of the nation’s economy. What does the City want in the new life, post Brexit, that this country has chosen?

Sometimes you just feel like saying “why bother to ask?” You know that what you will get is a torrent of grief about the damage that Brexit will do to the country, how the City should be at the heart of Europe, how important passporting is and how the EU is going to take us to the cleaners. But that is the last war; we need to look at the way that we are going to use the opportunity, a rare opportunity, to shape our financial regime for the future. That would be so much better than spending the year bemoaning the past.

Citizens are broadly aware that prophets of economic doom have turned out to be quite wrong and that the UK has been the best performing European economy.  Since 2016 thousands of British SMEs have abandoned EU markets but have been winning far more lucrative export contract all around the world.  The key high growth markets for our exports are North America, the Middle East and South Asia.  Exports to Taiwan have grown 40% in the last year.

Nevertheless, the gloom and doom factory is hard at work. Many of the loudest voices, including a number of media organisations, have adopted a strategy, or is it just a habit, of speaking only of privileges lost, contrasting a dark future with a wonderous past, and doing so entirely in the context of doing business with EU clients, as if there were none other. There is also a striking tendency to focus on ways that the EU can damage the City, saving EU negotiators lots of hard work, while ignoring ways in which we can discourage damaging measures, how we can take advantage of the EU’s liking for self-inflicted wounds and how we can maximise the value of financial services delivered to the wider world.

It is a strange thing to see City elders publicly fingering those issues that they hold most dear. The City is supposed to be full of dealers, traders and negotiators. They, of all people, should be alert to the obvious: the more you say you want something, the more the price goes up. Keep on banging on about ‘delegation’ and guess what. “Yes, my friend, you can keep delegation but you must let us have your fish, your marbles and your freedom to …………” You know the story. More effective, perhaps, to talk up ways that the UK can take advantage of any such daft restriction, while repeatedly pointing out what damage will be done to EU-domiciled investment funds if they lose their freedom to choose who manages their assets.  Or we can just to ask where, in the pecking order of EU considerations, features the consumer. Little wonder that the Brussels mob have spawned a raft of populist parties who show they do care about the poor bloody voter.

And there is another strange sight too: how passport-carrying financial directives have moved from being enemies of the industry and the people alike to hot competition for the Seven Wonders. Something of a case study, really. AIFMD springs to mind. Hands up all those who supported it when it was introduced. Bet you didn’t. So, why now so popular? Isn’t it because, since the referendum, it is fashionable to speak highly of the EU? Well, at least partly? But maybe it is also because of the EU’s self-fulfilment. Ever since bringing in AIFMD, in the teeth of opposition, the Commission, with a little help from its friends, has sought to eliminate other means of cross-border business, the very concept that they claim to prize.

So, what is it to be? What does the City want, trying to be realistic and, yes, starting from here? Some would say that dynamic alignment would do nicely. Others might observe that that provides no advantage in global markets and that EU regulation made by 27 nations, most of whom have no discernible financial services industry, might, just might, not be that considerate to a sector that many so dislike. Those of a more competitive spirit might note the opportunities for carefully crafted regulation that works against the interests of the City, entirely fortuitously, you understand.

The alternative, so widely known as divergence, which might arise from our own initiative but also, potentially, through our inactivity while the EU diverges, offers scope. Anyway, that is the way we are going and the City would do well to learn to like it. Yes, there may be a price to pay for diverging – the possible loss of any equivalence generously granted – but let’s measure the pros and cons when we get there, never forgetting that equivalence may have a short shelf-life in any event. Who will tell us what divergence might bring? Whose will be the voice that rattles the EU into trying to buy us off? Then let’s measure the pros and cons and see whether they are paying enough for our forbearance – that would be a change. What might it be? Investment funds that are safer and more liquid? Banking that is the best capitalised in the world? Insurance that is recognised as the best value? Properly regulated lending? Mortgages that truly cross national borders? Improvements to EIS, making it much less demanding for SMEs seeking risk finance? And are the regulators themselves the best we can devise? Answers on a postcard, and a loud one at that.


So, before we cast aside all such opportunities, let’s not forget that the EU itself, while expressing concern that a fully independent UK might plunge into de-regulation, is now looking at dropping recently introduced measures, strikingly including the ban on various inducements. We may not be able to prevent them from racing to the bottom, but there is no need for us to forego our place at the top.


Howard Flight and Oliver Lodge

March 2020


Lord Flight was a Conservative Member of Parliament 1997-2005 and a Shadow Treasury Minister 1999-2004.

Oliver Lodge is a regulatory consultant and an elected Member of the City of London Corporation

This article was originally published in The Daily Telegraph on 2nd March 2020

Posted in: Brexit, EU
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