Trading and markets

The drive to re-calibrate the UK’s capital market structure will move up a gear in 2024 as the finer details of long-promised fundamental reform come into view and rule changes begin to take effect. The pace of reform reflects the speed at which UK policymakers can now act as well as the focus on delivery by all sides across politicians, regulators, and industry.

Bond and derivatives transparency

Work is well underway to redesign the market transparency regime for UK bond and derivatives markets. The Financial Conduct Authority (FCA) is consulting on pre- and post-trade transparency as well as changes to the content of post-trade information and the regime’s scope. The FCA is also consulting on new guidance to clarify the definition of a systematic internaliser (SI). Final rules will be decided later in 2024 and the future regime is intended to deliver more meaningful market transparency than provided by the current regime.

Consolidated tape for bonds

Momentum is building towards the development of a consolidated tape (CT) for bonds. The FCA’s recent policy statement clarifies key details such as the role of value-added services, governance, data licensing, and historical data. Following a short consultation on how best to compensate data providers for connecting to the bond CT, the final package of rules should be effective from April 2024. With the framework fully agreed, the FCA will start the tender process to appoint a bond CT provider. The FCA is operating on the basis that the bond CT will begin operations after the changes to the bond transparency regime take effect sometime next year.

Designated reporter regime

The Designated Reporter Regime (DRR) will be introduced in April 2024 and is intended to address ambiguity over which party is obligated to publicly report trades. Designation will apply at an entity level rather than an asset-class level and the new regime will decouple the obligation to report from SI status. While the seller will have the obligation to report they may discharge this obligation by agreeing with the buyer that they report on its behalf. Firms that want to register as a designated reporter need to notify the FCA.

UK EMIR Refit

New derivative reporting rules under the UK European Market Infrastructure Regulation (EMIR) Refit are due to come into force from September 2024. To aid firms’ preparation, the FCA has published detailed schemas and templates and is running a set of working groups with trade associations and key industry participants ahead of publishing UK EMIR guidelines in early 2024.

Public equity markets

Equity market reform is guaranteed to make headlines in 2024 as pressure grows for regulatory changes to improve the UK public listings market. Recent feedback from the FCA indicates a commitment to their proposed single category for equity share listings to streamline eligibility and encourage more companies to list in the UK. The FCA intends to implement the new proposals in Spring 2024 and then publish an entirely new ‘UK Listing Rules’ sourcebook in Summer 2024.

Further details on a CT for equities will come once the FCA has collected further evidence on the basic elements of the framework, such as the inclusion of pre-trade data, revenue sharing models, and data feeds. Moreover, HM Treasury (HMT) are actively taking forward the recommendations from the Investment Research Review to ‘re-bundle’ trading commissions and investment research and establish a central research platform.

Accelerated settlement

In the wake of the US decision to shorten to the settlement cycle to T+1, requiring most trades to settle the day after trade date, the UK’s Accelerated Settlement Taskforce is consulting with industry ahead of a final report later this year. Regulators will establish market standards ahead of any transition to T+1, and a range of working groups are being set up to ensure a smooth transition.

Green finance

The UK Government is expected to take steps in 2024 to fulfil the objectives laid out in its updated Green Finance Strategy with a view to embedding sustainability in its regulatory regime and becoming the world’s first net zero-aligned financial centre.

Taxonomy

First, the UK is due to present in the next few months its long-awaited UK Green Taxonomy to classify economic activities as environmentally sustainable following the advice provided by the UK’s Green Technical Advisory Group on the design and implementation of the taxonomy. The Government is proposing for nuclear energy to be included within the taxonomy, subject to a consultation to be published early this year. Reporting against the taxonomy classification will be voluntary for the first two years but is likely to become mandatory further down the line.

Sustainability disclosures

In addition, investment labels for use by UK fund managers will apply from July 2024 following the FCA’s Sustainability Disclosure Requirements (SDR) regime, which aims to protect consumers from erroneous or misleading claims about companies’ sustainability profiles and improve trust in sustainable investment products. The first proposals create a climate and environmental, social, and governance (ESG) disclosure framework for asset managers and their UK-based funds.

The FCA will consult this year on updating its TCFD-aligned disclosure rules for listed companies to reference the ISSB’s standards. With the EU looking to revise its Sustainable Finance Disclosure Regulation (SFDR) and introduce equivalence criteria for third-country firms under the Corporate Sustainability Reporting Directive (CSRD) in the near future, questions around international alignment will be a key concern for firms.

ESG ratings

Another area to watch out for is ESG ratings. Following the launch of the voluntary International Code of Conduct for ESG Ratings and Data Product Providers, the UK government could unveil proposals to regulate providers of sustainability ratings as early as Q1 2024. These efforts mirror similar initiatives elsewhere to crack down on greenwashing in the ratings industry.

Risk, capital, and financial stability

Embedding effective risk management to ensure financial stability is a key regulatory priority at any time, but especially so at a time of heightened global macroeconomic vulnerability and fragility.

Bank regulation

Preparation for the remaining Basel capital standards will be a big theme of 2024 as the banking sector gears up for UK implementation in July 2025. Having just published its first near-final policy material on market risk, credit valuation adjustment and counterparty credit risk, and operational risk, the Prudential Regulation Authority (PRA) will soon publish its second near-final policy statement on the remaining sections, such as credit risk and the output floor. Once the relevant legislative changes are made, the PRA will publish a single, final policy statement.

As part of its approach to bank regulation, the PRA will focus on the calibration of the liquidity coverage ratio and firms’ ability to access central bank liquidity. The PRA is also exploring options to improve the effectiveness of the bank resolution regime, particularly in relation to small firms.

Non-bank financial intermediation

The intensification of risks from ‘non-bank financial intermediaries’ is driving greater regulatory attention on non-bank financial actors such as money market funds, hedge funds, private equity, pension funds, insurers, and commodity firms. The FCA is currently consulting on revisions to liquidity risk management in money market funds in a significant overhaul to current practice.

Having launched its first system-wide exploratory scenario exercise last year, the Bank of England (BoE) will launch further rounds of the scenario phase before concluding in late-2024. In parallel, the regulators are closely involved in the international work underway to develop a set of concrete policy outcomes for market-based finance.

Asset management

The FCA will soon set out draft proposals to make the regime for alternative fund managers more proportionate and reduce the cost of compliance with the regulatory reporting regime.

The agenda to shift domestic savings into more productive investment has been taken up by the Chancellor, who used his latest Mansion House speech in July 2023 to announce the industry-led compact that commits nine of the UK’s largest defined contribution pension providers to allocating at least five per cent of their default funds to unlisted equities.

Private markets are a high priority for regulators and the FCA is expected to launch a review of who is responsible within firms for valuations and how those valuations are passed upward. In parallel, the intermittent trading venue (ITV) is likely to be up and running before end-2024 and this is designed to facilitate trading in eligible private companies’ shares and help provide private companies with access to capital markets without requiring them to go public. The FCA will consult on the eligibility criteria and the wider framework in the coming months.

Retail investment

Establishing a new framework for UK retail investment disclosure for Consumer Composite Investments (CCIs) to replace the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation will form an important stream of work this year. This new disclosure regime will apply to all funds marketing to UK retail investors. In concert with industry the FCA will set out this year detailed methodologies for calculating cost, risk, and performance metrics.

Insurance

Reform of the Solvency II framework that governs the UK insurance sector, dubbed Solvency UK, is coming into view as the regulators prepare to publish final policy statements to ensure that changes can be completed by the end of the year. This will involve a new approach to issues such as the matching adjustment and internal model review processes.

The PRA has also signalled its intention to run a dynamic insurance stress test in 2025 –simulating a sequential set of adverse events over a short period of time– and firms will be provided with more details over the course of 2024.

Digital finance

With advances in digital technology continuing to reshape financial services, UK authorities are seeking to both improve safeguards and encourage responsible innovation.

Operational resilience

As the financial industry becomes more digital and operationally interconnected, operational risk and cyber resilience is a growing priority for policymakers. UK supervisors recently published a first set of draft rules under the new Critical Third Parties regime which gives the UK Treasury the ability to designate ‘critical’ service providers. These companies will then be subject to additional oversight on areas such as scenario testing, risk management, and cyber resilience. The regulators will publish further guidance later in 2024 before they assess which companies are to be designated as critical.

Artificial intelligence (AI)

With AI now firmly on the global policy agenda, the AI Safety Summit in late-2023 underlines the UK Government’s ambition to be a leading voice in the creation of global standards for AI. Building on the Government’s AI white paper published last year, setting out a more context-sensitive approach rather than a ‘one size fits all’ approach, individual regulators will draw up approaches to AI adoption in their own sectors.

The UK Competition and Markets Authority (CMA) has already published its initial findings into the consumer protection and competition considerations posed by foundational AI models and an update will be released soon. The UK financial regulators continue their dialogue with industry on how AI may impact the supervision of financial firms. Early feedback from industry indicates that AI capabilities change quickly and that regulators could consider designing and maintaining ‘live’ regulatory guidance such as regularly updated guidance and examples of best practice.

Data protection

Reform of current UK data regulation is on the cards for Spring 2024 with the UK’s revised Data Protection and Digital Information Bill seeking to make the collection and use of personal information easier for companies under the General Data Protection Regulation (GDPR) framework. The Bill is still subject to Parliamentary scrutiny and set to become law later in 2024. Furthermore, with the growing adoption of AI raising data protection considerations the Information Commissioner’s Office has launched its first consultation on whether it is lawful to train generative AI models on personal data scraped from the web. Further consultations will be issued throughout 2024.

Digital assets

With digital assets still operating largely outside traditional financial regulatory structures, HMT is set to develop later this year a regulatory framework for crypto-assets and other tokenized instruments. This framework is expected to cover activities such as issuance, disclosure, trading venues, intermediation, custody, market abuse, and lending platforms.

Following consultations from the FCA and BoE on stablecoins, further draft detailed rules will be issued in the second half of 2024 ahead of a new regulatory regime for stablecoins to be implemented in 2025.

The recently operational Digital Securities Sandbox aims to integrate digital asset technologies into financial market infrastructures by allowing for the temporary alteration and suspension of existing rules. This test case environment is designed for companies with clear regulatory barriers to their business model, and the outcomes will help inform the future legislative framework.

The FCA recently welcomed an industry report on UK Fund Tokenisation that outlines an approach firms can follow to develop and pilot models for fund tokenisation. The FCA will keep its Handbook under review and will work with the government on any required legislative changes in future.