Alternative Investment

Travers Smith’s Alternative Insights: UK red tape

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A regular briefing for the alternative asset management industry.

Regulate in haste, repent at leisure

The promise of a post-Brexit bonfire of UK regulation never seemed likely to live up to its hype. In politics, the reality rarely matches the rhetoric – and, in this case, that would be no bad thing: the business and finance community has been pushing the government to moderate its ambition to review or revoke” EU-derived laws by the end of this year – a time frame that is as unrealistic as it is worrying.

Still, one might have expected that the rhetoric would at least point to a consistent direction of travel – a commitment to ease unnecessary burdens and not to impose new ones. Unfortunately, some of the regulatory changes proposed recently suggest that there may be a disconnect between the government’s right hand and its left.

For example, as we reported in December, the government’s determination to proceed with changes to UK limited partnership law will certainly add burdens to the UK private funds industry. Some of the changes are sensible and proportionate and have been under discussion for some time. But the latest proposals, included in a bill currently before Parliament, go beyond what is necessary to curb misuse. Unless amended, they will damage British competitiveness, driving UK firms even further towards foreign fund structures.

Equally concerning is a significant change, announced in December, to forthcoming rules on the UK’s new “consumer duty”. The rules themselves – published in July 2022 by the FCA, the UK regulator, and effective from July 2023 – will require regulated firms “to act to deliver good outcomes for retail customers”. Although that is a laudable aim, the new rules are wide-ranging, detailed, and onerous, requiring a significant investment of resource by affected firms with relatively little time to prepare.

Firms with private funds that serve mainly institutional investors – including many small firms with limited resources – were relieved that the rules included a clear exemption for products that had a minimum investment amount of at least £50,000, presumably as a proxy for non-retail products. Those firms have been working on that basis: many compliance teams have reported to senior management that their firm will be out of scope.

It was therefore alarming that, at the end of last year, the FCA said it was proposing to amend the rules in a way that would remove the £50,000 threshold for investment funds, apparently arguing that the more restricted scope – which seemed eminently sensible to most observers – was unintended. If the FCA proceeds with that change, the additional costs and disruption for many private markets firms will be dramatic.

This all comes on the back of the FCA’s new Investment Firms Prudential Regime. Introduced in 2022, this applied new (and onerous) regulatory capital, liquidity and remuneration rules to many private capital firms. This was a UK-specific regime introduced after Brexit. Although modelled on a new EU regime, anecdotal evidence suggests that the UK “IFPR” has impacted more private capital firms than the EU equivalent. These 500+ pages of additional UK rules hardly amount to cutting red tape.

The UK does have a highly regarded rule-making process and – to give credit where it is due – the FCA’s recent approach in other areas has been good. For example, the application of TCFD-aligned disclosure requirements on climate related risks and opportunities to asset managers has, on the whole, been handled well, and proposals for a wider ranging “Sustainability Disclosure Requirements” (SDR) regime have generally been welcomed by the industry, following a meaningful dialogue with stakeholders.

And, of course, industry will not always approve of changes, even if they do follow a long and thoughtful process, as evidenced by reaction to the Bank of England’s post-Brexit proposals on capital requirements for banks. That’s inevitable – even after the government adds international competitiveness and economic growth as secondary objectives for regulators later this year.

But too much change, too quickly is both overwhelming and dangerous, and the UK’s reputation for sound and effective rulemaking needs to be re-established.

But it is late changes to policy proposals, or those that are pushed through with unnecessary haste, that are particularly troubling – and increasingly common.  They circumvent (or at least condense) the usual consultations, impact assessments and opportunities for outside scrutiny – and those are vital for effective regulation.

Another notable current example of this apparent trend is the introduction, by amendment of the National Security Bill after it was introduced into Parliament, of a “Foreign Influence Registration Scheme“.  If it makes it through the rest of the legislative process unamended, the scheme could criminalise activities that pose no threat to national security – including by organisations and individuals making well-intentioned attempts to help policymakers design effective laws.  Opportunities to offer comments on those provisions have so far been limited.  As we have argued elsewhere, this is part of a broader concern that government is often failing to attach sufficient weight to certainty, predictability and stability in its approach to regulatory reform.

More structurally, the UK’s new financial services architecture will give increased power to regulators and will add to the pressure on them to make new rules quickly.  Unless the regulators are able to resist that pressure, it could exacerbate the growing problem. 

New regulation, and reform to bad or outdated rules, can be positive, of course, and there are undoubtedly many opportunities to improve the UK’s financial services rulebook without diluting the protections it offers.  As we discuss in our Financial Services Regulation 2023 New Year briefing, there are many changes on the horizon for European firms this year, and not all of them are bad news.  Indeed, many of the Chancellor’s so-called Edinburgh reforms promise welcome changes – including, for example, a commitment to ditch the PRIIPs retail-facing disclosures

But too much change, too quickly is both overwhelming and dangerous, and the UK’s reputation for sound and effective rulemaking needs to be re-established.  Evidence of the better, less burdensome regulation promised in headline speeches is not always easy to discern in practice – and, in part, the political desire to move quickly is undermining that objective.

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