Legal development

post Brexit Bonanza The Financial Services and Markets Bill 2022 23l Update

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    On 20 July 2022, the Financial Services and Markets Bill 2022-23 was introduced to Parliament and had its first reading in the House of Commons. The Bill, which is the most significant piece of post- Brexit legislation since the Financial Services Act 2021, contains provisions affecting a broad range of areas, including UK MiFID, critical third parties, the financial promotions regime, the Designated Activities Regime and stablecoins used as payments.

    Crucially, and of particular importance politically, it also provides a framework for revoking retained EU law and replacing it with UK-specific legislation implemented via the UK model of financial services regulation. The Bill was referenced in the Queen's speech published in April 2022 (see our briefing).


    In his Mansion House speech on 1 July 2021, the then Chancellor of the Exchequer, Rishi Sunak, set out the Government’s vision for a financial services sector that is globally competitive and acts in the interests of communities. As part of its subsequent Future Regulatory Framework Review, the Government consulted on how to adapt the UK's post-Brexit financial services regulatory framework by:

    • revoking retained EU law;
    • amending statutory objectives and regulatory principles; and
    • making the PRA and the FCA more accountable.

    The Bill implements the outcomes of the Future Regulatory Framework Review, giving the financial regulators greater responsibility for setting UK financial services rules and introducing a new, somewhat controversial, secondary objective for the FCA and the PRA: promoting the growth and international competitiveness of the UK economy.

    Eventual revocation of retained EU law

    Once in force, the Bill will introduce a framework for revoking retained EU law and replacing it with new rules be established under the Financial Services and Markets Act 2000 (FSMA). Retained EU law will continue to apply for a transitional period, during which the regulators will draft and, where necessary, consult on replacement rules. No retained EU law will be revoked until the replacement rules are in place.

    A timeline for this process is not specified in the Bill, but clearly it will take a number of years. During the interim transitional period, HM Treasury will make certain targeted amendments to retained EU law.

    Affected retained EU law

    Schedule 1 to the Bill explains which instruments will be repealed. They include:

    • direct principal EU legislation;
    • legislation enacted to implement EU directives (this would include, for example, legislation enacted to implement the EU Financial Collateral and Settlement Finality Directives);
    • instruments made under the European Union (Withdrawal) Act 2018 to address deficiencies in retained EU law (so-called onshoring legislation);
    • EU tertiary legislation, including onshored equivalence decisions; and
    • certain areas of primary legislation.

    Retained EU law which is already part of the regulators’ rulebooks will not be revoked through the Bill.

    Amendments to UK MiFID

    The Bill effects many of the changes that have already been discussed as part of the Wholesale Markets Review, which was consulted on in July 2021 and a response for which was issued in March 2022 (see our briefings here and here). The FCA also recently published a consultation paper on how it would use some of its powers in relation to UK MIFID (see our briefing here) as foreseen by the Wholesale Markets Review.

    Once enacted, Schedule 2 of the Bill will make certain changes to the UK Markets in Financial Instruments Regulation, including:

    • Share trading obligation: permanently removing the UK share trading obligation;
    • Pre-trade transparency: giving the FCA the discretion to decide what the waivers should be and associated conditions and limitations; removing the double-volume cap and replacing it with an obligation on the FCA to monitor the level of "dark" trading;
    • Systematic internalisers: introducing a definition of systematic internaliser which retains the “organised, frequent, systematic and substantial basis” but removes the role of calculations and gives the FCA power to make determination via rules;
    • Execution of trades at mid-point: providing for systematic internalisers to be able to trade in equities with their clients at the midpoint in all circumstances, rather than only for orders that are large in scale;
    • Derivatives trading obligation and UK EMIR clearing obligation: aligning the scope of the derivatives trading obligation (DTO) with that of the the UK EMIR clearing obligation;
    • DTO and temporary transitional power: enabling the FCA to suspend or amend the DTO outside of the limits set by the Temporary Transitional Power (TTP) (currently, the TTP allows certain counterparties to use EU venues when trading with an EU client who does not have access to a venue that both the UK and EU have granted equivalence) so that it can make changes to the DTO concerning which counterparties are subject to it, which derivatives are in scope and the venues that transactions must be concluded on;
    • DTO and other post-trade risk reduction services: the Bill expands the exemptions that currently are applicable to portfolio compression to cover other risk reduction services;
    • Transparency regime for fixed income and derivatives: permitting the FCA to determine which fixed income and derivative instruments would be in scope of the regime, and in which circumstances waivers would be available;
    • Position limits: changing the framework around the application of commodity derivative position limits; and
    • Data reporting service providers: giving the FCA a general rule-making power in relation to DRSPs.

    Stablecoins and DLT

    The Bill gives HM Treasury a power to bring digital settlement assets used for payments within the UK regulatory perimeter. The Government's initial focus will be on stablecoins referencing their value from fiat currency (e.g. Sterling), where used as a means of payment.

    The Bill defines a digital settlement asset as "a digital representation of value or rights, whether or not cryptographically secured, that can be used for the settlement of payment obligations; can be transferred, stored or traded electronically; and uses technology supporting the recording or storage of data (which may include distributed ledger technology)". The Government has indicated that this definition might change.

    Key provisions include:

    • granting HM Treasury the power to establish an FCA authorisation and supervision regime, based on existing electronic money and payments regulation and addressing conduct, prudential and market integrity risks for issuers of, and payment service providers using, stablecoins;
    •  enabling HM Treasury to recognise operators of systemic payment systems and systemic service providers using digital settlement assets for regulation by the Bank of England, subject to meeting relevant thresholds and following HM Treasury’s publication of a recognition order;
    • enabling HM Treasury to apply a bespoke administration regime (the Financial Markets Infrastructure Special Administration Regime (FMI SAR)) in respect of digital settlement asset firm, as consulted on earlier this year (see our briefing); and
    • amending or disapplying existing FCA or PRA rules in areas relating to financial stability to avoid relevant systemic stablecoin firms being subject to conflicting requirements.

    The Government plans to consult on a 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.

    Financial market infrastructure: piloting powers

    In 2021, HM Treasury published a call for evidence on the application of distributed ledger technology (DLT) to financial market infrastructures (FMI). Responses suggested that the UK's legislative framework was not designed to support the use of DLT in FMI and also spoke of the need to experiment with the use of DLT in markets.

    The Bill permits HM Treasury to establish one or more FMI sandboxes, which will enable participating firms to test and adopt new technologies and practices. FMI entities include existing recognised CSDs, and operators of multilateral trading facilities and the category can be expanded to include other types of FMI in the future. During the testing period, temporary amendments will be made to legislation, where the legislation in question may impede these activities. The list of legislation that can be amended for these purposes include UK CSDR, UK MIFID, Uncertificated Securities Regulations 2001 and Settlement Finality Regulations 1999.

    An FMI sandbox will be created by a statutory instrument setting out: the relevant legislation to be modified or disapplied; the activities that FMI are permitted to undertake in an individual FMI sandbox (e.g. securities issuance, settlement and maintenance); duration of the sandbox and the role of regulators.

    At the EU-level, the Regulation on DLT pilot regime, set to apply in 2023 (see briefing here), sets out aspects of a regulatory sandbox and will involve amendments to EU legislation (such as MIFID) where these are seen to impede activities on the DLT.

    SMCR for FMI

    The Bill introduces a senior managers and certification regime (SMCR) for CCPs and CSDs. This regime contains similar features to the existing SMCR for banks, insurers and other authorised persons.

    Authorised Push Payment (APP) scams

    APP scams occur when a person or business is tricked into sending money to a fraudster posing as a genuine payee. The Payment Systems Regulator's call for views, and subsequent consultation set out possible options to addressing APP scams. The Bill will amend the Payment Services Regulations 2017 to enable the PSR to use its regulatory powers to require mandatory reimbursement by payment service providers in cases of APP scams. The Bill also places a duty on the PSR to take regulatory action on APP scam reimbursement by participants in the Faster Payments Service.

    Critical Third Parties

    HM Treasury published a policy statement in June 2022 on critical third parties (CTP). This was in response to increased concerns raised by policy makers concerning the risks of systemic disruption in the event of a failure of an unregulated third party providing crucial services to a large number of financial services businesses. The Bill provides further detail on this regime and including:

    • granting HM Treasury the power to designate a third party to an authorised person, relevant service provider or FMI entity as a CTP (this will be the case if failure or disruption to the CTP’s services would pose a financial stability or confidence risk to the UK);
    • introducing criteria that HM Treasury must have consider when designating a CTP (e.g. materiality of the services provided to regulated firms in the context of the UK’s financial stability; and the number of regulated firms to which services are provided by the CTP);
    • giving the FCA, the PRA and the Bank of England a power to make rules over the services that CTPs provide to regulated firms to advance the relevant regulator’s objectives; and
    • giving the FCA, the PRA and the Bank of England a power to direct a CTP to do (or not do) something for the purpose of advancing a regulator’s objectives (e.g. setting conditions or restrictions on the CTP’s provision of services).

    Financial promotions

    The Bill makes a number of changes to the UK financial promotions regime:

    • amending FSMA to establish the regulatory gateway, which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms; and
    • introducing a new subsection 2A into section 21 FSMA 2000 so that an authorised firm can only approve a financial promotion if it is either permitted to do so having gone through the regulatory gateway under new section 55NA FSMA 2000, or an applicable exemption applies.

    These provisions are in response to concerns that the existing financial promotions regime did not adequately protect consumers, and gave rise to risks such as: lack of relevant approver firm expertise; lack of approver firm due diligence; and challenges in exercising appropriate regulatory oversight. HM Treasury consulted on this in July 2020 (see our briefing here) and confirmed its response in June 2021 (see our briefing here).

    Designated Activities Regime

    The Bill will introduce a Designated Activities Regime via a new part 5A to FSMA. The primary purpose of this regime will be to cover activities and products regulated by retained EU law that are not FSMA regulated activities and which apply to a broader range of entities than FSMA-authorised persons. The FRF review cited retained EU law version of the Short Selling Regulation and the retained EU law version of EMIR. It provided the example of a car manufacturer entering into a metal derivative contract and states that although the activity should be subject to appropriate level of regulation, it would be a disproportionate response to make entering into these derivative contracts a regulated activity, as this would require all entities wishing to use these contracts to apply for authorisation from the FCA.

    Under the Designated Activities Regime, where an activity has been designated, anyone conducting that activity will be required to follow the rules for that activity, unless they are exempt.

    Access to cash

    The Bill has certain provisions in relation to maintaining access to cash. This is in response to concerns that despite the increase in the use of digital payments, significant parts of the UK population still rely on cash in their day-to-day lives and measures are needed to maintain access and prevent financial exclusion.

    The Government issued a consultation on access to cash in July 2021, setting out a number of proposals. Under the Bill, the FCA will be the lead regulator for access to cash and HM Treasury can designate firms (these are likely to be larger banks and building societies) to be subject to FCA oversight for the purpose of ensuring the continued provision of cash access. The Bill requires HM Treasury to prepare a policy statement on cash access services.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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