post Brexit Bonanza The Financial Services and Markets Bill 2022 23l Update
03 August 2022
03 August 2022
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:
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.
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.
Schedule 1 to the Bill explains which instruments will be repealed. They include:
Retained EU law which is already part of the regulators’ rulebooks will not be revoked through the Bill.
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:
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:
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.
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.
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.
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.
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:
The Bill makes a number of changes to the UK financial promotions regime:
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).
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.
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.