On 19 July 2022, the current Chancellor of the Exchequer delivered his first Mansion House speech in which he discussed the Government’s priorities for the coming months. These priorities included controlling inflation, delivering on the Government’s promise to create conditions for a private sector recovery and moving forward on its plans for reforming the UK’s financial services industry, an industry that creates £1 for every £10 of the UK’s economic output.
The Chancellor stated that the Government’s plans for reforming the UK’s financial services industry would be through a Financial Services and Markets Bill (Bill). The Bill, which the Chancellor described as “a landmark piece of legislation”, has been trailed for some time, implementing the outcomes of the Government’s Future Regulatory Framework Review.
Future Regulatory Framework Review – putting the jig-saw together
The Future Regulatory Framework Review (FRFR) was established by the Government to consider how the UK’s financial services regulatory framework should adapt to be fit for the future, and in particular to reflect the UK’s new position outside the EU.
The Government’s approach to the FRFR was to issue two main consultation papers. The first consultation was published in October 2020 and looked at coordination between the UK regulatory authorities. The second consultation considered how the regulatory framework needed to adapt particularly post Brexit. This included proposals for introducing new growth and competitiveness objectives for the PRA and FCA and the establishment of a new Designated Activities Regime which would be a mechanism to allow for the regulation of certain activities currently outside of the authorisation process established by the Financial Services and Markets Act 2000 (FSMA).
The Government responded to its first main FRFR consultation in its second FRFR consultation document.
As part of the FRFR the Government also conducted consultations looking at the UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology, access to cash, wholesale markets, financial promotions and central counterparties (CCPs) and central securities depositories (CSDs). Since the summer of 2021 the Government has been publishing its responses to these consultations except for the one covering CCPs and CSDs.
Key points from the Government’s response to its second main FRFR consultation
Key points in the response to the second main FRFR consultation include that the Government will:
- Introduce new secondary growth and competitiveness objectives for the PRA and the FCA.
- Make changes to the regulatory principles requiring the UK regulators to have regard to the Government’s commitment to achieve a net zero economy by 2050 as set out in section 1 of the Climate Change Act 2008.
- Put in place mechanisms by which the UK regulators will consult HM Treasury on rule changes and supervisory policy that could interact with existing deference arrangements, and to assess compliance with relevant trade agreements with overseas jurisdictions.
- Add a requirement for the FCA, PRA and Payment Services Regulator to publish statements of policy on how they conduct costs benefit analysis.
- Introduce a new statutory requirement for the PRA and the FCA to publish statements of policy on how they review their rules, and for the Payment Systems Regulator to publish a statement of policy on how it reviews its generally applicable requirements.
- Give HM Treasury the power to enable it to set ‘have regards’ which the UK regulators must consider when exercising their rules in specific areas of regulation.
- Introduce a new legislative framework for a Designated Activities Regime which brings certain activities related to financial markets into the framework created by the FSMA.
Key points from the Government’s response to its CCP and CSD consultation
Key points in the response to the CCP and CSD consultation include that the Government will:
- Introduce a power for the Bank of England (BoE) to impose requirements on individual CCPs and CSDs, similar to the FCA’s and PRA’s ability to impose requirements on the firms they regulate under section 55L and 55M FSMA.
- Take powers to the effect that, should it deem necessary to change the overseas framework in the future, it would be possible to grant the BoE further powers to apply domestic rules to non-systemic overseas CCPs and overseas CSDs
The Bill implements the Government’s FRFR proposals and, unsurprisingly given the breadth of its coverage, runs to over 300 pages.
The Bill is broken down into three chapters covering:
Revocation of retained EU law
- Revocation of retained EU law (clauses 1 to 7)
New regulatory powers
- Designated Activities Regime (clauses 8)
- Financial market infrastructure – including the share trading obligation and derivatives trading obligation (clauses 9 to 19)
- Financial promotion (clauses 20)
- Digital settlement assets (clauses 21 and 22)
- Mutual recognition agreements (clauses 23)
Accountability of the UK regulators
- FCA and PRA objectives, powers, engagement etc (clauses 24 to 42)
- Bank of England regulatory powers (clauses 43 to 45)
- Payment Systems Regulators powers (clause 46)
- Access to cash (clauses 47 and 48)
- Financial market infrastructure (clause 49)
- Central counterparties in financial difficulties (clause 50)
- Amendments to the FSMA (clause 52 to 59)
The Bill also contains a number of schedules including those relating to the revocation of retained EU law (schedule 1) and amendments to the onshored Markets in Financial Instruments Regulation and European Market Infrastructure Regulation (both schedule 2).
The Government has also published an explanatory memorandum which provides further commentary on the Bill’s provisions and is a significant document itself running to over 200 pages. For those interested in the position regarding the removal of the share trading obligation and aligning the derivatives trading obligation with the clearing obligation under the European Market Infrastructure Regulation, commentary can be found on pages 14 to 18. Commentary on stablecoins can be found on pages 33 to 35.
Retained EU law
We will be providing further commentary on the Bill as we digest its contents but in terms of retained EU law it is worth briefly noting that schedule 1 sets out those pieces of retained EU law which are to be revoked. These are:
- All direct principal EU legislation, such as Regulations;
- Secondary legislation made under primary legislation, such as instruments made to implement EU obligations under the European Communities Act 1972, and instruments made under the European Union Withdrawal Act 2018 which addressed deficiencies in EU law.
- All EU tertiary legislation, such as Delegated Regulations, Commission Decisions, and Implementing Acts.
- Some parts of primary legislation.
The Government is aware that it will take some years to complete the process of revoking retained EU law and during this transitional period HM Treasury will be given powers to make targeted modifications for certain purposes including protecting the stability of the UK financial system. The Government also expects that many provisions in retained EU law will be replaced by the UK regulators in their rulebooks, rather than in legislation. Whilst the Bill commences the revocation of retained EU law the Government is not expecting to revoke retained EU law unless the UK regulators have drafted and consulted on rules. The Government will not be revoking retained EU law that is already part of the regulators’ rulebooks as these rules can be updated by the regulator’s themselves.
More to come
The Chancellor noted that the Bill was only part of the Government’s financial services agenda. For example, later this year it will publish a second Economic Crime Bill with new powers to encourage better private sector information sharing. In addition, the explanatory memorandum to the Bill notes that the Government intends to launch a consultation 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 this year.
“Anyone who thought that post-Brexit there would be a period of inactivity needs to change their view. The Bill is proof of the seriousness of the divergence agenda from the EU. The new powers of the regulators need to be seen in this context. All the devil will be in the detail to follow but this is nothing less than the beginning of the development of a new UK regulatory regime.
“Financial institutions and others, such as technology companies and other critical third parties, now need to position themselves to ensure that they can operate within this new regulatory landscape.”