2023 will be the year when…
…the UK jostles for position as the leading financial centre
In December 2022, the UK announced proposals for its most radical and extensive package of regulatory reforms. The Edinburgh Reforms, as they are known, will most certainly dominate the UK’s regulatory landscape during 2023 and beyond. They signal the UK’s intent to position itself as the world-leading financial centre and confirm the value it places on financial services as a source of domestic economic growth.
The central tenets remain consumer protection and market integrity. But a new secondary requirement is that regulation should promote growth and competitiveness. Though the reforms – in conjunction with the Financial Services and Markets Bill, which is currently being debated in parliament – denote regulatory divergence from the EU, they will remain close to international standards.
There is recognition, too, that parliamentarians are not necessarily best equipped to decide on detailed financial services rules and regulations. And so, the UK proposes to give greater power to regulators, allowing them to act quickly and flexibly to introduce new regulations.
Other countries will watch UK developments closely in 2023. The UK’s provisions, revisions and relaxation of rules are likely to be emulated elsewhere, creating competition and driving divergence across markets.
… previously untouched or lightly touched financial instruments get regulated
Globally, financial instruments, including derivatives, central bank digital currencies (CBDCs), crypto currencies, foreign exchange (FX) spot transactions and liability-driven investments could all come under greater regulatory scrutiny in 2023. Until now, these products were either lightly regulated, or not at all. But, following several high-profile shocks, concerns are mounting about protections for customers, and supervision and safeguards for the financial system.
The push to regulate crypto currencies, which have evolved rapidly, gathered pace in 2022. Crypto issuers and exchanges, notably the FTX Exchange, failed. Valuations fell and any suggestions that institutional investors might move into crypto appeared to lose traction. Whether the crypto market, as we know it, can survive, remains to be seen. But regulation seems very likely in 2023.
The FX spot market has attracted attention too. In December 2022, the Bank for International Settlements revealed that more than $80tn in “missing dollar debt” from FX swaps is hidden, off balance sheet, due to derivative accounting practices. The FX spot market, despite its significant size, is not regulated in major jurisdictions, and could come under greater scrutiny in 2023.
“The crypto market is now a shadow of itself. Any talk of institutional investors becoming interested in crypto is now in reverse. I think the conversation must now be around other applications for distributed ledger technology."
Rosali Pretorius,
Partner, Simmons & Simmons
…global regulators lead on innovation
While global regulators often look to the UK, both for inspiration and benchmarking purposes, other countries are increasingly at the forefront of innovation.
Abu Dhabi, for instance, created the world’s first voluntary carbon-trading market. Singapore, meanwhile, is regarded as especially nimble. In developing an innovative and responsible digital asset ecosystem, Singapore introduced a specific regulatory regime for stablecoin issuers and intermediaries. And recent consultations focus on the technology and cyber risk requirements for providers of digital payment token services under the Payment Services Act 2019 of Singapore.
Meanwhile, central banks in China, Switzerland, France and the UK, among others, are developing CBDCs. The move comes in response to an increasingly cashless world due to both the COVID-19 pandemic and rapid progress in digitalisation. Pegged to the value of the country’s fiat currency, CBDCs are intended to be as stable and secure as conventional cash and bank deposits but are digital rather than physical. Given that bitcoin, which is not anchored to sovereign balance sheets, is undergoing a period of extreme volatility, it seems likely that further CBDC developments will materialise in 2023.
…market surveillance gets renewed impetus
Understandably, market surveillance and enforcement activity were overtaken, at times, by the sheer scale and pace of events during the first waves of the pandemic. Activity began to normalise in 2022.
In the UK, the Financial Conduct Authority (FCA) broke the logjam, issuing £17m in fines to sell-side firms that failed to provide adequate surveillance over order flow. The uptick looks set to continue into 2023.
There are signs, too, of greater pragmatism from the UK regulator, and a willingness to embrace entrepreneurialism. Clients report that applications for authorisation or changes in control are being processed more quickly and with less resistance than in the past.
…ESG-related claims are challenged
Sanctions for greenwashing financial statements have, so far, been relatively few. However, cases are very likely to increase in 2023 as activists target organisations with the deepest pockets.
Darren Fox's regulatory tips for 2023
- Engage with the UK regulators. Firms in the UK have a once-in-a-generation opportunity to help the regulator determine what is wrong with the system to put it right.
- Respond to consultations, on a personal level or via the trade associations or law firms.
- Communicate where rules and regulations do not seem to serve a useful purpose.
- Suggest how they might be reformed in ways that do not harm customer protection, or threaten market integrity, but can facilitate growth and competitiveness..
… in conclusion
Overall, we see the regulatory landscape becoming more divergent in 2023. It comes alongside a rise in nationalist populism in some countries, which is likely to become more acute as economic growth rates slow. The UK has set out its own stall, with a raft of proposals designed to make its rule book fair and flexible enough to encourage competition and growth while protecting customers and safeguarding the integrity of markets. Will other countries follow the UK’s lead? Will expectations be realised? Check in to read our updates throughout the year.
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