On 20 July 2022, the Financial Services and Markets Bill (the Bill) together with explanatory notes was introduced into Parliament. The Bill supplements HM Treasury’s (HMT’s) work on the Future Regulatory Framework Review (FRF) which assessed whether the UK’s financial services regulatory framework is fit for purpose and able to support future growth, particularly in light of challenges such Brexit and Climate change.
Some of the key considerations in the bill include:
Retained EU Law.
- When the UK left the EU, the body of EU legislation that applied directly in the UK at the point of exit was transferred onto the UK statute book by the EU Withdrawal Act and became known as ‘retained EU law’. The Bill revokes retained EU law relating to financial services and enables HM Treasury and the financial services regulators (i.e., the FCA, the Prudential Regulation Authority (PRA), and the Bank of England (BoE)) to replace it with legislation designed specifically for UK markets. The Government expects it will take a ‘number of years’ to fully complete this process and will require a significant dedication of time and resources from the regulators.
To increase accountability, the regulators will be required to keep their rules under regular review and publish statements of policy on how they will do this. HMT will have the power to require a review of certain rules and a power to require a regulator to use their rule-making powers to make rules.
MiFID II framework.
- The Bill reforms the legislative framework governing the UK’s capital markets. In particular, the following changes to the MiFID II framework are proposed:
-removing the share trading obligation (STO)
-replacing the pre-trade transparency waiver regime; in particular, the Bill grants the FCA new rule-making powers to determine under which circumstances pre-trade waivers are available and any conditions that are to be attached to their use
-aligning the derivatives trading obligation (DTO) with the clearing obligation (CO) under the Markets in Financial Instruments Regulation (MiFIR) and EMIR, respectively
-granting the FCA new rule-making powers to develop a post-trade transparency regime
-revoking the requirement for the FCA to apply position limits to all commodity derivative contracts that are traded on a relevant trading venue and economically equivalent over-the-counter (OTC) contracts and transferring responsibility for setting position limits from the FCA to trading venue
Designated Activities Regime (DAR).
- The Bill creates a DAR which will sit alongside the Regulated Activities Order regime. The DAR will provide for the proportionate regulation of retained EU law activities that are not FSMA regulated. Activities likely to be covered by the DAR include entering into derivative contracts, engaging in short selling in relation to specified financial instruments, and offering securities to the public. Where an activity has been designated, anyone conducting that activity will be required to follow the rules for that activity unless they are exempt.
Critical Third Parties regime.
- The Bill will establish a framework for the designation of critical third parties (CTP). The Bill grants HM Treasury the power to designate certain third parties as “critical” (thereby requiring such persons to be authorised). Designations will be based on the materiality of the services which a third party provides to firms, and the number and type of firms which use a third party. A joint Discussion paper (DP22/3) was published alongside the bill to set outside how these new powers will be exercised in practice. For more information on the contents of this discussion paper please see our article here: https://www.lavenpartners.com/thought-leadership/operational-resilience-discussion-paper-outlines-p/
Regulatory gateway for approving financial promotions.
- The Bill establishes a new regulatory “gateway,” which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms. Any authorised firm wishing to approve the financial promotions of unauthorised firms will first need to obtain the permission of the FCA, which may be granted subject to limitations.
Cryptoassets
- The Bill will bring activities facilitating the use of certain stablecoins, where used as a means of payment, into the UK regulatory perimeter. The Bill confirms that this will be done primarily via amendments to the existing electronic money and payment system regulatory frameworks. The Bill introduces a definition of ‘digital settlement asset’ and gives HMT a power to amend the definition to ensure it keeps pace with developments. The Government intends to consult on its regulatory approach to wider cryptoassets, beyond stablecoins used for payments, including those primarily used as a means of investment (such as Bitcoin) later in 2022.
Formerly authorised persons.
- The Bill empowers the FCA and the PRA to take action against firms that are no longer authorised (provided they were authorised persons on or after 20 July 2022) for misconduct while they were authorised. Currently, except in certain specific circumstances, the FCA and the PRA are unable to take disciplinary action against formerly authorised firms.
New economic growth and international competitiveness secondary objectives.
- The Bill grants the FCA and the PRA a new secondary objective to advance long-term UK economic growth and international competitiveness. The competitiveness objective in particular was subject to much debate, fearing that it would lead to watered down regulatory standards in the UK. However, in response to this concern, the Government has made it a secondary objective making clear that financial stability and consumer protection is the priority for the regulators and Firms. Further, the competitiveness objective aims to provide greater focus on medium to long-term growth and international competitiveness.
The second reading of the bill is expected to take place on September 7th 2022, following Parliament’s return from summer recess.
