The old saying, the devil is in the detail, springs to mind when mulling over City minister Andrew Griffith and chancellor Jeremy Hunt’s package of self-proclaimed 80’s style revolutionary reforms to boost the City’s global competitiveness post Brexit.
There is just one small problem underpinning the recent political rhetoric: hardly any of the measures are Brexit-related. Those that are very much fall under the classic kick-things-into-the-long-grass ‘review’ category.
Take the headline measure – a consultation plan to increase the ringfencing threshold between retail and wholesale banking to £35bn from £25bn for smaller banks.
Ringfencing, which came into force post the 2008 financial crash, ensures core retail banking activity cannot be intertwined with wholesale investment banking activities.
When the UK was an EU member state it was an outlier on ringfencing – rightly going way beyond other member states on UK-specific measures. It had nothing to do with membership per se.
The proposed consultations on a UK retail central bank digital currency and bringing ESG ratings providers into the regulatory perimeter’ are also non-Brexit-related.
This begs the question, is there anything substantial within the ‘Edinburgh’ proposals that in any way shape or form can be attributed to our newfound Brexit freedoms?
Short selling
Well, the government will no doubt point towards the proposals around short selling.
Mainly deployed by hedge funds, short selling is a trading strategy that looks to profit when the price of an asset, like a stock or bond, falls.
The practice is currently regulated by the UK’s enactment of the EU short selling rules – which applies to ‘publicly traded’ securities, UK sovereign debt (gilts), and the use of credit default swaps.
However, the government’s review into short selling is limited to shares admitted to trading on exchanges, or multilateral trading facilities.
Crucially, it does not extend to short selling provisions for bonds like UK sovereign debt, or derivatives such as UK gilts or CDS products.
This is hardly going to cause big ripples in the City. One only has to look at the mixed performance of long/short funds to conclude that having the freedoms to more short sell equities is not exactly a prerequisite to automatic investing success.
In fact, most of the funds continue to have a decent amount of long, as opposed to short, exposure at the moment.
Then there are the more esoteric proposed changes. In addition to short selling, the government is reviewing existing EU legislation around MiFID II’s investment research rules.
Brought in back in 2018, research unbundling rules – which require brokers to separate payments for research and trade execution – have been lambasted for leading to a lack of competition, favouring larger institutions that can afford to subsidise their research departments.
Regardless of the specific policy outcomes the review conjures up, if the UK is not aligned to the same research rules as the EU, it is going to be much harder for brokers to work out and process accurate research invoicing and spend.
Solvency II has also been thrown into the review mix – for what seems like an eternity now.
Originally brought in to reduce any possible risk of an insurer going belly up, EU rules have essentially forced insurers to hold a huge pile of cash that, until now, has been unable to be put to work elsewhere.
The government is hoping that this release of more than £100bn in capital will empower insurers to support more productive investments, like UK green energy, in the search for higher yields.
This sounds great in principle, but much harder to achieve in practice.
The problem is insurers have written guarantees with commitments in them that require some level of return, which, by definition, makes them more cautious.
Long-dated liabilities contracts held by life insurers tend to view illiquid private market type assets as risky.
The smaller and medium-sized insurance companies will be looking to understand the risks in investing in these types of assets; not just the management of that money, but advice on what these assets will do to their risk positions.
The Priips Kid
The other main Brexit-linked element is the hotly contested rule that covers the promotion of investment funds in Europe – the packaged retail and insurance-based investment products regulation (Priips).
From open and closed-ended investment to alternative investment funds, Priips covers a wide range of investment products.
The aim is to have one common key information document, known as a Kid, which investors can use to get all the main information around cost, risk and performance before they buy an investment product.
The issue with the Priips Kid is the way it calculates performance and costs.
But once again, if the UK is going to have a new methodology for calculating these different investment scenarios, is this not going to mean more operational headaches for investment managers with funds across the EU and UK?
Overall, the Edinburgh proposals raise far more questions than answers when it comes to whether the City can take advantage of its Brexit freedoms.
Only when the intricate policy detail emerges following this plethora of reviews can the City judge whether this government is really embarking on a second coming of Margaret Thatcher’s Big Bang.
Right now, it all feels a little too abstract.
Tim Focas is head of capital markets at Aspectus Group
