The financial services sector had a busy 2020 for many reasons, and the UK’s 2021/22 financial year promises to bring further developments. In this article, we take a look at the changes expected in banking, finance and asset management.
The loss of passporting rights was a key consequence of the Brexit deal from a financial services perspective. The UK and EU have been in talks to agree a framework of regulatory cooperation – the terms of the Brexit deal committed the parties to agreeing a memorandum of understanding on this by March 2021. As at the date of writing, an agreement had yet to be formally released, but a leak suggests that a pact was reached which promises “robust and ambitious bilateral regulatory cooperation” by meeting twice a year, albeit mentions of equivalence are reportedly light. More is likely to follow on this issue.
2. Individual regulation
The implementation of the SMCR extension to solo-regulated firms has been delayed to 2021. As such, early 2021 has proved to be a busy time for the regulators and newly regulated firms. FCA solo-regulated firms had until 31 March 2021 to complete their fitness and propriety assessments, certify relevant employees, train all staff on the Conduct Rules, and upload their information on to the FCA’s new financial services directory. That information is now published by the FCA as part of its Financial Services Register, giving the general public much more information than previously. We expect Q2 to be an adjustment period for those firms taking their first steps into the regulatory framework.
A further change relates to the FCA’s modification by consent of the “12-week rule” for benchmark administrators and firms using appointment representatives. The change to this measure – under which an individual can cover an approved person without themselves being approved – was made in 2020 due to the impact of the pandemic. The modification meant that the permitted period of cover was extended from 12 weeks to 36 weeks in a consecutive 12-month period. This direction will expire on 30 April 2021, so appointed representatives should plan accordingly.
The UK’s new financial year is expected to bring with it additional regulatory guidance on the proper approach to remuneration in the sector.
The European Banking Authority (“EBA”) issued its final draft regulatory technical standards on the criteria for ‘material risk takers’ for CRD IV purposes in June 2020. The draft amendments increased the emphasis on proportionality within the criteria and added a degree of flexibility to how they should be applied. The European Commission was set to consider the draft in Q1 2021, so an update is expected shortly.
The EBA is also consulting on its draft guidelines on sound remuneration policies under the Investment Firms Directive. Responses could be submitted until 17 March 2021, and the EBA expects to publish the final version by the end of June 2021.
4. Growth initiatives
The Chancellor’s delivery of the Budget on 3 March 2021 contained several new growth initiatives to encourage investment into the UK, all of which are likely to be welcome news for the financial services sector.
The government has committed to reviewing the banking surcharge regime this year, with any changes to be legislated in the Finance Bill 2021 or 2022. Change would be welcome – the 8% surcharge added to the increase of the main rate of corporation tax to 25% from 1 April 2023 is anticipated by many to make the UK less competitive and less attractive to investors.
The Budget also contained several new schemes which should create new investment opportunities and support economic recovery. The £375 million Future Fund: Breakthrough will focus on investing into the growth of tech companies, while the UK Infrastructure Bank is set to launch with £22 billion of financial capacity to boost investment into sustainable infrastructure schemes. The Net Zero Innovation Portfolio is a £1 billion fund which will focus on low carbon technologies, systems and business models across Great Britain and Northern Ireland. There will also be a super-deduction offer allowing companies to claim 130% capital allowances on qualifying investments until the end of March 2023.
5. Post-termination restrictions
In December 2020, the government launched a consultation paper into reforming the use of restrictive covenants (particularly non-compete clauses, which restrict ex-employees from working for a competitive business for a period of time after termination).
The paper proposed two alternatives to the current regime. The first was the introduction of a legal requirement that employers compensate employees for the duration of the non-compete clause (and possibly also non-solicitation, non-dealing, non-poaching and goodwill protection clauses) – a similar system to that in some European jurisdictions, such as Italy, France and Germany. The second is a complete ban of non-compete clauses altogether, which is the case in California.
The proposed changes could have a dramatic impact on many financial services businesses which rely on post-termination restrictions to protect their business from being lost to former employees. Consideration will need to be given to developing alternative strategies to ensure business continuity. Employees on the other hand may see a great opportunity to get their hands on the “cookie jar!”
The deadline for response to the consultation paper was 26 February 2021. Given that post-termination restrictions are commonplace in financial services, the outcome of the consultation will be eagerly awaited by employers and employees alike in the sector.