On 21 March 2024, HM Treasury (HMT) published a Policy Paper on its approach to designation of critical third parties to the UK financial services sector.


The paper highlights the increasing reliance by financial services firms and financial market infrastructure (FMI) firms on third parties outside the finance sector for key functions and services, through outsourcing and other third-party arrangements. It flags in particular that, if many firms rely on the same third party for key functions and services, the failure or disruption of that ‘critical’ third party could threaten the stability of, or confidence in, the UK financial system.  As such, the Bank of England’s (BoE) Financial Policy Committee (FPC) concluded in 2021 that this increasing reliance could increase financial stability risks for the UK financial system, in the absence of greater direct regulatory oversight of the resilience of the services they provide.

In response to the FPC’s conclusion, the Government set out in 2022 its intention to bring forward a regime to manage the risk from ‘critical third parties’ (CTPs),and the statutory framework for the regime was delivered in the Financial Services and Markets Act 2023 (FSMA 2023).

Under FSMA 2023, HMT has the ability to designate a third-party service provider to the UK financial services sector as ‘critical’ and gives the BoE, the Prudential Regulation Authorityand the Financial Conduct Authority the power to set and enforce rules, as well as the ability to gather information and conduct investigations on designated CTPs.

In December 2023, the financial regulators published a consultation on their proposed rules for CTPs. The regime is designed to be proportionate to the risk it seeks to mitigate, and is targeted at services provided by CTPs to the UK financial services sector.

Designation of CTPs

Criteria for designation

The relevant criteria is set out in section 312L of FSMA 2000. Under those criteria, HMT may only exercise its designation power if, in its opinion, a failure in or disruption to the provision of the services that the third party provides to firms could threaten the stability of, or confidence in, the UK financial system. In forming this opinion, HMT must have regard to:

  • The materiality of the services provided to the delivery, by any person, of essential activities, services or operations (wherever they are carried out).
  • The number and type of authorised persons, relevant service providers or FMI entities to which the person provides services.

HMT generally expects to make designations of CTPs based on recommendations from the financial regulators, although it is possible for HMT to designate a CTP without such a recommendation.

Process for designation

HMT expects to receive recommendations for designations from the financial regulators over time. It anticipates that each recommendation may take around six months to process.

The indicative process for designation is summarised below:

Receipt of recommendation:

  • HMT considers recommendation.
  • HMT writes to prospective CTP to open period for formal representations.
  • Prospective CTP is invited to send formal representations.
  • HMT consults the financial regulators and, where appropriate, will also consult wider organisations.

Period for formal representations concludes.

Considerations and decision:

  • HMT considers all evidence and representations.
  • HMT makes final designation decision.
  • HMT informs prospective CTP of outcome.
  • If appropriate, HMT makes and publishes the Designation Regulations.

Although the regime is focused on the services CTPs provide, HM Treasury will designate CTPs at the entity rather than the service level.

Communicating a designation decision

HMT will write to the prospective CTP to confirm its designation decision. Where HMT has decided to proceed with a designation, Designation Regulations will specify the date on which the designation takes effect, for example, the day after the day on which they are made. Every designation is made by a statutory instrument (Regulations) and is therefore automatically made public on legislation.gov.uk. HMT will also maintain a list of designated CTPs on gov.uk.


HMT has asked the financial regulators to regularly assess the list of CTPs. In addition to submitting recommendations to make a new designation, the financial regulators will be able to submit recommendations to remove a CTP’s designation. HMT will generally only remove designations on the basis of these recommendations from the financial regulators. It anticipates following a similar process for de-designation as set out above for designation, although possibly to a shorter timeframe, particularly if there is clear agreement between HMT, the CTP and the financial regulators.