As part of the papers the government issued in its Edinburgh Reforms last week was a Policy Statement ‘Building a smarter financial services framework for the UK’.
The purpose of the Policy Statement was to set out the government’s plan to take forward the implementation of a comprehensive model of regulation based on the Financial Services and Markets Act 2000 (FSMA model). An essential part of this is the Financial Services and Markets Bill (the FS&M Bill) which is currently making its way through Parliament.
The FS&M Bill introduces a range of tools to enable the transition to the comprehensive FSMA model. Financial services related retained EU law (FS REUL) is covered by the repeal provisions of the Bill (there is a separate process for non- FS REUL which is covered by the Retained EU Law (Revocation and Reform) Bill). The FS&M Bill also introduces a range of new tools to enable the transition.
In terms of tools these include a new ‘have regards’ power. The FS&M Bill gives the government the ability to set specific ‘have regards’ that the regulators must consider when making their rules in specific areas of regulation. Significantly, this power is only relevant when new rules or amendments to existing rules are proposed. It cannot be used to require a regulator to go back and review an existing rule. The Policy Paper states that the government will only introduce an activity-specific ‘have regard’ where there is a significant broader public policy priority which is important enough to be considered explicitly as part of the regulators’ policy making process, and where scrutiny of rule proposals would benefit from a regulator’s explanation on how the policy priority has been taken into account.
In the Policy Paper the government illustrates its approach to using the ‘have regard’ power by way of reference to its reform of the Prospectus Regulation. In this context, ‘have regard’ is proposed for the replacement regime and is being used to highlight the importance of facilitating offers of securities to the public being made to a wide range of investors. The FCA, when making rules in relation to the admission of securities to trading on Regulated Markets and primary Multilateral Trading Facilities (MTFs), would be required to have regard to “the desirability of facilitating offers of transferable securities in the United Kingdom being made to a wide range of investors.” The FCA would be obliged to explain how having regard to this specified matter has affected any rules it proposed to make under the statutory instrument related to admissions to trading and admissions to primary MTFs.
The Bill also contains a power to require the regulators to make rules and keep them under review. HM Treasury is also given the power to require the regulators to review their rules when this is in the public interest. In terms of what could be in the public interest the Policy Paper provides two examples being where (1) significant developments in the relevant markets give rise to the possibility that the current rules may no longer be appropriate; or (2) substantial evidence gives rise to the possibility that the rules are not achieving their purpose.
In addition, the Bill gives the government the power to ‘restate’ FS REUL which the Bill repeals. When restating such law the government is also empowered to modify it through secondary legislation. However, in order to create consistency with the FSMA model the government states in the Policy Paper that it will not generally be looking to restate regulatory requirements into legislation where they could take the form of regulator rules.
A further tool is the Designated Activities Regime (DAR) which gives HM Treasury the power to designate activities which brings them into the regulatory perimeter. The DAR will be used as a replacement for some aspects of FS REUL and chapter 4 of the Policy Statement illustrates how the government will use the DAR to provide for the replacement of the Prospectus Regulation and elements of the Securitisation Regulation. Significantly, the DAR also has a forward looking element too.
The repeal of FS REUL under the Bill is a huge task and the Policy Paper sets out the government’s blueprint for doing so.
The Policy Paper states that HM Treasury has identified 43 ‘core’ files (areas of FS REUL) and sets out a full list in Annex 1 which includes the Markets in Financial Instruments Directive II and Solvency II. Work on these files has been divided into tranches and work is already underway to review, repeal, reform and replace the first tranche. The first tranche of files includes those pieces of legislation relating to the Wholesale Markets Review, Lord Hill’s Listing Review, the Securitisation Review and the review of the Solvency II Directive. The second tranche will include the remaining implementation of the outcomes of the Wholesale Markets Review and Solvency II, the Packaged Retail and Insurance-Based Investment Products Regulation, the Short Selling Regulation, the Taxonomy Regulation, the Money Market Funds Regulation, the Payment Services Directive II and E-Money Directive, and the Capital Requirements Regulation and Directive. The government expects to make significant progress on tranches 1 and 2 by the end of next year.
Where the government is not moving to immediately commence the repeal of a piece of FS REUL the Bill also gives it the power to make amendments until its repeal is commenced. Therefore, alongside the programme to repeal FS REUL, there will be various amendments along the way.
The Policy Paper contains three illustrative statutory instruments which are intended to give some further insights into the approach the government is taking. Two of the statutory instruments relate to the reform of the Prospectus Regulation and the Securitisation Regulation. There is also a statutory instrument that would give the FCA wider rulemaking powers in relation to payments regulation to ensure that the FCA has the necessary powers to make rules to replace financial services retained EU law.