Taskforce on Innovation, Growth and Regulatory Reform Report

1.     Restore a common law principles based approach to financial services regulation

The report welcomes the work being carried out by HM Treasury in the Financial Services Framework (FRF) Review  – see our blog post on the FRF here – and provides two examples of specific changes that could be made under this approach:

• Amend MiFID II position limits to introduce greater flexibility while preserving protections on critical contracts. Rather than a hard limit of 25%, the report recommends a more discretionary approach  to manage markets, similar to the US system and the UK’s traditional model.
• The scope of the regime should be reviewed and clarified to ensure that focus of the regime is on critical contracts:
  • Definition of ‘commodity derivatives’ should be reviewed.
  • Position limits should not apply to securitised contracts and contracts with no physical underlying commodity.
  • Contracts relating to liquidity provision and risk mitigation should be excluded.
  • An exemption from the requirement to aggregate group positions where group entities are not under common management should be introduced.

• Introduce a more discretionary and judgment-based approach to calculating central counterparty clearing house (CCP) margins. The current rules are overly prescriptive, ‘too mechanical in application and limit the opportunity for appropriate levels of innovation to be achieved in the UK’.

2.     Deliver a regulatory framework that supports UK global leadership in FinTech and digitalisation of financial services infrastructure.

The Taskforce believes Fintech to be a core driver of UK economic growth and prosperity – in 2020, £4.1bn was invested into UK Fintech, more than the next five European countries combined. It recommends that the government ensures its policy and regulatory approach continues not only to protect consumers but also creates an enabling environment that encourages growth and competition.

• The report urges the UK to return to a principles-based, market-led approach to Open Finance and to aim to ‘unlock the benefits of Open Finance in as little as two years’.
• TIGRR believes the current timeline for Smart Data legislation – currently expected in Q1 2022 – is too slow and recommends that BEIS brings this forward as soon as possible this year.
• The report recommends that, in the interim, the nine largest retail banks in the UK should be compelled to open up data for their non-invested savings, credit and mortgage products through APIs.
• The report compares the progress made by the Australian Consumer Data Right which will give consumers the right to access their financial data as well as utility and telecom data by 2021 even though Australia started on its open data regulatory initiative later than the UK.

• Increase competition in the banking sector by adopting a graduated regulatory approach for challenger banks.

• Reducing Anti-Money Laundering (AML) burdens for new Open Banking/Fintech services, which have been caught in the scope of the EU AML Directive.
• UK’s money laundering regulations should be amended to exclude Account Information Services (AIS) and Payment Initiation Services (PIS), and make clear that AIS and PIS are not classified as ‘Financial Institutions’ for the purposes of AML regulation.

• Accelerate UK plans to develop a Central Bank Digital Currency (CBDC) and launch a pilot within 12 – 18 months.
• TIGRR recommends that:
  • a CBDC pilot scheme is launched within the next 12-18 months to ensure the UK does not fall behind global competitors;
  • UK considers adopting a hybrid retail model whereby the CBDC is a claim on the central bank with intermediaries dealing with retail payments.

3.     Amend disclosure and transparency requirements for financial services products to make them more proportionate and less burdensome.

The report finds many aspects of the EU’s transparency and disclosure regime for financial services to be onerous. To illustrate this, the report refers to MiFID II transparency and disclosure regime which are designed to capture data on all EU member state markets and is therefore disproportionate for the UK outside the EU. Disclosure requirements should be proportionate for business, incentivise bespoke information provision to consumers rather than excessive reports laid out in prescriptive templates.

Although reform of disclosure requirements is beyond the scope of the report given the extensiveness of a such a review, the report suggests certain topics as areas for potential changes.

• The report suggests removing the requirement to provide costs and charges reports to professional investors and eligible counterparties from MiFID II.
• HM Treasury is also expected to propose changes to the UK MiFID delegated regulation in due course. These changes are expected to relate to costs and charges disclosure for wholesale clients, electronic communications with clients, reporting to wholesale clients as well as changes to provisions linked to best execution reports.
• Comparable changes and review of MiFID II is also taking place in Europe.

• The taskforce considers that Market Abuse Regulation (MAR) investment recommendation disclosure requirements create an ongoing cost for producers that outweighs perceived benefits and suggests removing the disclosure requirements for wholesale clients.

• The taskforce suggests confining the key information document disclosure requirement in the Regulation in Packaged Retail and Insurance-based Investment Products (PRIIPs) to genuinely complex packaged products that require special explanation to the retail market.
• A more proportionate approach to disclosure and reporting should also be considered in relation to the Cross-border Payments Regulation, Deposit Guarantee Scheme Directive, Mortgage Credit Directive and Payment Accounts Directive.

Other recommendations relevant to financial services

• The Taskforce recommends reforms to regulations which limit UK pensions and insurance funds. For example, regulations should enable defined contribution pension schemes to diversify investments into venture capital and businesses that drive Net Zero and levelling up commitments. The report also recommends that some of the issues which form part of the government’s current Solvency II review, such as matching adjustment and risk margins, are addressed without delay in order to release capital for investment in the UK. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) should also be amended to maximise private equity and venture capital investment in growth industries

• The report recommends replacing the UK General Data Protection Regulation 2018 (GDPR) with a new, more proportionate, UK Framework of Citizen Data Rights to give people greater control of their data, including more meaningful informed consent, while allowing it to flow more freely and drive growth across healthcare, public services and the digital economy.