New Financial Services and Markets Act will establish UK’s post-Brexit regulatory framework

Although the final published version is not yet available, we expect the new Financial Services and Markets Act will be lengthy and wide-ranging. It will provide for a comprehensive “rewiring” of UK financial services regulation by enabling retained EU financial services law to be revoked and replaced with rewritten requirements specifically designed for the UK. It also brings into regulation aspects of the sector which had not previously been within the UK’s financial services regulators’ remit, seeking to build what government has described as “a smarter financial services framework” for the UK.

Our comments below are based on our understanding of the final position reached in parliament prior to the Bill receiving Royal Assent on 29 June.

The FSMA model of financial services regulation

The Act takes forward the outcome of HM Treasury’s ‘future regulatory framework’ review, by enabling areas of financial services regulation currently contained in retained EU law to be brought into the UK’s 2000 Financial Services and Markets Act (FSMA) model. This is the UK’s existing domestic model for financial services regulation, for which parliament and government set the overall policy framework as well as regulators' objectives, following on from which the independent financial services regulators set detailed rules applying to firms.

The Act enables the move to a so-called ‘comprehensive FSMA model’, by creating the mechanism to enable areas of financial services regulation currently in retained EU law to be moved into the FSMA model. It does so by specifying the retained EU financial services law it revokes and empowering the UK’s financial services regulators to make rules for those areas to replace it. The Act also empowers HM Treasury to restate in UK legislation those aspects of retained EU law, modified as necessary, that continue to be needed for the comprehensive FSMA model.

A staged process is envisaged for moving retained EU law into the comprehensive FSMA model, with the government expecting much retained EU law to be replaced with rules in the UK financial services regulators’ rule books, rather than with legislation. Where it is necessary to replace retained EU law with regulators’ rules, the legislation is not expected to be revoked until the relevant rules have been drafted, consulted upon as required, and finalised. Prior to its revocation, HM Treasury will have the power to modify retained EU law for specified purposes, such as to protect consumers or the UK’s financial system.

As well as providing the statutory tools for the post-Brexit reshaping of UK financial services law and regulation, the Act enhances the powers – and expands the remit – of the UK’s financial regulators. This includes increasing their oversight of financial market infrastructure and so-called ‘critical third parties’ that provide services to the sector. The Act takes forward key measures identified in HM Treasury’s wholesale markets review and UK listing review, giving the Financial Conduct Authority (FCA) rule-making powers in relation to the new regime it introduces for ‘designated activities’. It also brings into regulation certain digital settlement assets used for payment and extends the financial promotion regime to certain cryptoassets.

A smarter financial services framework

Some of the detail of how the Act will impact in practice has already been communicated by the government in the context of the so-called ‘Edinburgh reforms’ announced in late 2022. Among the 30 or so areas for which reforms were proposed, an HM Treasury policy statement gave more detail on how the new legislative and regulatory powers in the Act could be used.

It also outlined the government’s approach to implementing the programme to repeal retained EU financial services law. According to the statement, HM Treasury had, by last December, identified 43 “core” items of retained EU financial services law which would be divided into tranches to transition into the comprehensive FSMA model.

The first tranche relates to taking forward proposals from market reviews including the wholesale markets, listing and securitisation reviews. The second tranche focusses on areas perceived to have the greatest potential to drive economic growth for the UK, with the third tranche covering the remainder of the core files. According to the policy statement, the government expects to make significant progress on those core items in the first two tranches by the end of 2023.

Illustrative statutory instruments have already been released for prospectuses, securitisation, and payment services and e-money. These were not intended to be final, but indicate how the new powers in the Act could be used to separate out detailed legislative provisions into high level regulations and detailed firm-facing rulebook requirements. They are examples of how the FSMA model could be used on the ground. However, absent the corresponding consultations on the rulebook text, the full picture of how the regulatory regimes in these areas will look remains unclear.

There will need to be close liaison and coordination between HM Treasury and the relevant regulators where retained EU law is to be replaced by their rules, to ensure there are no gaps – either in terms of coverage or timing. Impacted businesses will need to know whether there will be material changes from the existing retained EU regimes being replaced, and when the replacement rules will be live. Repeal of retained EU law and activation of replacement rules will need to be synchronised and the market fully apprised as to any changes.

Presumably there will be a clear point at which the retained EU law regime ends and new requirements – whether in regulators’ rulebooks or legislation – take effect. The Financial Services Regulatory Initiatives Forum, which prepares the regulatory initiatives grid giving a 24-month consolidated view of forum members’ forthcoming regulatory initiatives, has indicated that it aims to provide an update on “important and imminent changes” triggered by Royal Assent. Even within tranches, individual workstreams progressing a particular retained EU law file will likely have their own timetable driven by the relevant regulators. So an interim update will be welcome clarification for firms, as it should assist them in their planning for the most immediate regulatory engagement and changes ahead.

Authorised push payment scams

While the detailed proposals for many reforms will emerge over the coming months and years, one area on which Royal Assent starts the clock ticking is in relation to payments firms’ liability for authorised push payment (APP) scams. This has been long in the making, but the timeframe is now clarified as the relevant provision in the Act commences two months after the date of Royal Assent.

The Act requires the Payment Systems Regulator (PSR) to publish, within a further two months, a draft requirement for payment services providers to reimburse qualifying victims of APP scams carried out using the Faster Payments Scheme. The requirement must be imposed on payment services providers within six months from the date the provision comes into force.

Among other provisions in the Act which also take effect two months from the date of Royal Assent are those extending existing legislative provisions to cover digital settlement assets; provision for cash access services and wholesale cash distribution; and provisions in respect of insurers in financial difficulties.

New secondary statutory objectives

The FCA and Prudential Regulation Authority (PRA) will be equipped with new secondary statutory objectives, set by the Act, to facilitate the international competitiveness of the UK economy and its financial services sector, and growth in the medium to long term. Each regulator is also to apply the regulatory principle to contribute towards the secretary of state achieving compliance with the UK’s net zero emissions target and environmental targets, where the regulator considers exercise of its functions is relevant to making such contributions.

When making rules, the FCA and PRA are required to “have regard” to certain factors specified by HM Treasury in secondary legislation. The draft securitisation statutory instrument, for example, requires the FCA and PRA to have regard to the coherence of the overall framework for the regulation of securitisation. A duty to review their rules is also imposed on the FCA and PRA for the first time.

New legislation and regulators’ rules

The Act specifically lists more than 250 pieces of retained EU financial services legislation that will be revoked. However, this process will not be immediate and is likely to take years, with replacement legislation, where required, still to be drafted and passed through parliament, and consultations on new rulebook text yet to be launched.

New regulatory powers

The Act’s new designated activities regime (DAR) extends the FCA’s rulemaking powers to activities connected to the UK’s financial markets or exchanges or to financial instruments, products or investments with a UK connection. This is because they are issued by, or sold to or by, a person in the UK – or are proposed to be.

The DAR regulates the activity itself and enables the FCA to make rules with respect to carrying it on. Under the DAR the effect is that, unless the activity is prohibited or an exemption applies, the rules on conducting the activity apply to the person undertaking that activity.

The activities in the DAR, all irrespective of whether or not they are carried on by authorised persons, currently include:

• entering into derivatives contracts;
• holding positions in commodity derivatives;
• short selling specified financial instruments;
• acting as a party to a securitisation transaction;
• offering securities to the public or applying for securities to be admitted to trading; and
• using or contributing to a benchmark.

Given the provisions in the DAR extend to financial products, instruments and investments that include cryptoassets, the DAR is an example of the government planning-ahead for such possible developments in financial services markets. With power given to HM Treasury to designate additional relevant activities, the expansion of the regime could see many more entities caught by regulatory rules with the resulting potential for greater scrutiny of the conduct of these market activities by the FCA. We could, however, also see the possible prohibition of certain activities entirely.

EU-UK relations in future

The recently signed memorandum of understanding (MoU) on financial services cooperation between the EU and UK represents a framework for future cooperation and information-sharing. This establishes a joint EU-UK financial regulatory forum, expected to meet at least semi-annually. The MoU refers to equivalence in the context of the parties’ exchanging views and to ‘dialogue’ where the parties adopt, suspend or withdraw equivalence relevant to either side also, however, making the point that such decisions are autonomous.

The Act’s introduction of a new third-country ‘equivalence’ regime for ‘simple, transparent and standardised’ securitisation represents a significant innovation for the UK’s securitisation regulatory regime, despite the EU having ruled out providing reciprocal equivalence. Although the exact detail of the UK’s regime – to be set out in the final statutory instrument and firm-facing rules – is still to be published, the regulators’ approach to securitisation is expected to utilise the flexibility and adaptability which the FSMA model provides.