With the passing of the Financial Services and Markets Act in June, the UK government is primed to create a “huge amount of change coming through next year”, which will diverge from current EU legislation, according to Pippa Tasker, financial services partner at CMS.
The migration of legislation began with various elements in 2023, and Tasker said this would “continue into next year”, as further detail is added.
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Sumit Indwar, financial regulation partner for Linklaters, explained that while 2023 was a year in which policymakers were watching and responding to reforms put forwards by others, “2024 will be the year when much of this detail will be consulted on and discussed”, such as the divergence between the EU and UK’s MiFID regimes.
Details of both regulatory frameworks updates have begun to emerge and Michael Sholem, financial services regulation partner at Macfarlanes, warned that “small but meaningful differences are emerging” within areas such as trading rules and retail disclosures.
This increased the risk of “policy overload”, Sholem explained, as firms struggle in an increasing divergent environment to deal with numerous reviews, consultations and legislation.
Elections
Macfarlanes’ Sholem also noted that general elections in the US and the UK over 2024, along with ones to the European Parliament, could cause “some uncertainty, because the outcomes could result in a drastically different policy environment”.
For example, the return of a Republican to the White House, or a more rightward-looking EU, could cause the nations to shift gear on ESG, he said.
Rachel Vahey, head of policy development at AJ Bell, suggested the biggest development in regulation next year will be the upcoming UK general election, especially if there is a change in government.
“It is looking increasingly likely that after 14 years of Conservative and coalition rule, we are going to see a Labour government take charge,” she said.
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Vahey noted that until manifestos are published Labour’s plans are still unknown, but said they have “thrown some crumbs of information on their views” out over the last year.
In May, Labour revealed its National Policy Forum (NPF) consultation – a collaboration of all the major groups in the Party, which helps shape its overall policy agenda – outlined several UK finance focused objectives, including a push to protect the domestic market’s international standing and competitiveness, and bringing forward consumer focused regulation.
The election is likely to occur late next year, but insiders have begun discussing the possibility of an election as soon as May, leaving time for a new government to significantly impact regulation in 2024.
Vahey said the government had last year “set in train a wholesale shift in the workplace pensions arena with its Mansion House reforms”, and said this will likely continue under Labour.
She added that a Labour government “may even be tempted to go further”, by compelling large pension schemes to commit to UK private equity investment.
Meanwhile, Tasker noted the aforementioned Financial Services and Markets Act had created a framework that “gave Westminster a lot more power than it has historically exercised”, as the implementation of regulation that traditionally fell on the Financial Conduct Authority or Prudential Regulation Authority will instead go to HM Treasury.
This means that whichever party wins the election may “have much more of an impact” on regulation than before, Tasker explained.
ESG and resilience
Andy Pettit, director of policy research at Morningstar, said the most “visible impact of SDR” will be the new labels on ESG products, along with more detailed, consumer-facing disclosures.
However, Pettit remained cautious on the next stages of SDR: “We await next steps on the UK taxonomy, but at this stage are unaware of the extent to which it might diverge from the EU taxonomy.”
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Raza Naeem, financial regulation partner for Linklaters, said the “vast amount of regulatory development” in the ESG space this year, in both the UK and EU, will now be left for firms to “grapple with in 2024”.
“We are also seeing further ESG regimes emerge and develop across the globe,” he noted, arguing that global asset managers will be forced to consider whether it is possible to “come up with a consistent sustainability framework across their international business”.
Greenwashing continues to be a key focus for policymakers, Naeem said, and firms will continue to need to “think carefully” about stamping out any greenwashing across their business.
Naeem also added that “2024 will be the year of operational resilience for asset managers”, due to the “considerable uplift” that will be needed to comply with the EU Digital Operational Resilience Act.
DORA, which must be implemented by January 2025, will see almost all EU financial services firms complying with the new rules, in comparison to the UK ones which only apply to large UK asset managers, and are “very prescriptive and will require firms to implement systems builds”, Naeem warned.
He added: “We also expect the FCA to maintain a continued focus on operational resilience within the UK, noting the upcoming deadline for firms to ensure they can remain within the impact tolerances they had set for their important business services.”
