After what seems like years of promises, discussions and consultations on measures to improve and modernise the structure and perimeter of financial regulation, the Government finally introduced the Financial Services and Markets Bill into Parliament on 20 July 2022, just in time to have its first reading before the Parliamentary summer recess.

The Bill describes itself as a Bill to "make provision about the regulation of financial services; and for connected purposes", and was described by Nadim Zahawi as a "landmark piece of legislation" and by UK Finance as a "once in a generation opportunity to improve regulation, enhance consumer protection and create a more competitive financial services sector". It's a wide ranging draft, which includes enabling powers for the introduction of regulation in new areas as well as amendments to the existing regime. Much of the content is as expected, and the devil will be in the detail of both debate towards the final legislation and then the implementation of all it introduces. It is notable but not surprising that no specific implementation period is mentioned for the vast majority of the provisions.

We look below at the key proposals, which stem mainly from the Government's "Future Regulatory Framework" review.

Repealing retained EU laws

Since Brexit, the UK financial services sector has been having to cope with an unhappy network of laws which has broadly comprised all EU Regulations that formerly applied being onshored onto the UK statute books with only minimal amendment, attempting to work in tandem with provisions of Directives that had previously been implemented into UK laws or regulatory guidance. The Bill now revokes many of these retained laws (together with any relevant secondary legislation and tertiary regulatory guidance) and provides the UK regulators with powers to adapt existing laws. While the list of laws to be repealed (both onshored and domestic) runs to around 12 pages in a Schedule to the Bill, this is not immediately quite so radical as it may appear, since the laws will not be repealed until replacements are in place – and the Government promises a "smooth" process - and the Bill itself already makes transitional amendments to some of the markets related retained Regulations, while the Government expects there will be a need to make further transitional changes to the current measures before they are finally repealed and replaced. Ultimately, the intention is to bring pretty much everything under FSMA in some way. We can but hope this will make it easier for everyone to find, and cross-reference, different requirements and that the regulators will take the opportunity to clarify retained provisions which are confusingly drafted, but which previously were not clarified because of fear of gold-plating.

Designated activities regime

The Bill introduces the new Designated Activities Regime, distinct from the regulated activities regime. The DAR will establish a framework to allow regulation of activities related to financial markets to be regulated within the FSMA model. Broadly, the intention is to include activities which are currently regulated within retained EU law. HMT will be able to designate the relevant activities, which will relate to financial markets, exchanges, instruments, products or investments, and will be modelled on the RAO. There will be a ban on carrying out designated activities unless in accordance with relevant rules. BoE will still regulate central counterparties and securities depositories, but FCA will regulate other financial market infrastructure firms such as data reporting services providers. The Bill also sets the framework for an FMI sandbox.

Critical third parties

The Government is already consulting on measures that will give the UK regulators powers to make rules, gather information and take limited enforcement action in respect of services that critical third parties provide to regulated firms and FMIs, and the Bill provides the regulatory framework for this. The changes will complement the existing ability of regulators to impose indirect obligations on these providers through requirements on firms that use them. But, recognising both the fundamental importance of certain providers (and therefore the systemic risks they pose), and that their dominance may make it hard for firms effectively to negotiate with them, the Bill gives HMT the power to designate certain third parties as "critical" which will enable BoE, PRA and FCA directly to oversee critical services that these entities provide. Financial institutions should welcome these measures, given the difficulties of negotiating with the largest service providers who are wedded to their standard terms.

Financial Promotions Gateway

The Bill confirmed the introduction of the new "gateway", which will mean that firms may approve financial promotions for unauthorised firms only if FCA has permitted them to do so. Firms will have to apply to FCA for permission, and FCA may choose to limit the permission, for instance to specific categories of product. The Bill contains only broad powers, including a power for there to be exemptions to the restriction. At consultation, one issue that was discussed was whether firms would be exempt from the need for the particular permission if they approved promotions only for their group companies. All these details remain to be confirmed. It will be interesting to see how much appetite there is for entering the gateway, not least as FCA has separately suggested that it is not entirely happy with the current breadth of exemptions that allow unapproved financial promotions to be sent to high net worth and sophisticated investors, so may be lobbying Treasury to review and tighten up on these.

Digital Settlement Assets

The Bill sets the regulatory framework for the regulation of stablecoins used as a means of payment, and aligning crypto-asset regulation as appropriate with the E-money and payment services regimes. Given the ongoing consultations about the wider regulation of crypto-assets, the Bill contains wide powers for Treasury to amend its proposed new definition of "digital settlement asset" as markets evolve. We are already promised a wider consultation later this year.

Implementation of mutual recognition agreements

The Bill contains powers for HMT to make any changes necessary to domestic law to implement mutual recognition agreements the UK makes with third countries and includes also powers to amend any equivalence decisions or agreements (whether stemming from retained EU laws or otherwise) to bring their operations into line with wider mutual recognition agreements.

New objectives and regulatory principles

The Bill introduces a range of new objectives and principles for BoE, PRA and FCA:

  • A new secondary objective for PRA and FCA to provide greater focus on medium to long-term growth and international competitiveness, but the Government is clear this must not detract from their current objectives of ensuring the UK markets are safe and function well and competitively and that consumers are properly protected. The new objective is designed to ensure the regulators cannot act in a way that benefits short-term competitiveness over long-term growth
  • A new regulatory principle for PRA and FCA requiring them to have regard to the need to achieve compliance with the net zero emissions target. The PSR does not need a new principle, but the climate change target will be incorporated into its sustainable growth principle
  • A framework for the BoE to ensure it has the right public policy objectives and is fully transparent and accountable. The Bill confirms its financial stability objective and sets a secondary objective of, so far as reasonably possible, facilitating innovation in clearing and settlement services from the CCPs and CSDs they supervise, and introduces regulatory principles for BoE similar to those the PRA and FCA already have (and including the new ones).

The Bill also ensures the current FSMA requirements on regulatory engagement with HMT and regulator accountability will apply as appropriately strengthened, and will include new requirements, such as a formal requirement for regulators to keep their rules under review and publish policy statements on how they conduct rule reviews. There will also be a new requirement to notify Treasury if a regulator is applying a "deference" measure – that is preferential treatment for firms from certain jurisdictions carrying on business in the UK, which aims to avoid duplication of regulation or unnecessary friction.

The Bill also includes requirements on wider co-operation, for instance requiring FCA, FOS and FSCS to co-operate on "wider implications" issues, under the framework that was formally launched at the beginning of the year, and to publish a statement of policy on how they will comply with this duty and allow stakeholders input on their compliance.

Access to cash

The Bill introduces a formal mechanism for protection access to and the provision of cash withdrawal and deposit facilities, following recent consultations and commitments regarding access to cash. FCA will be the lead regulator, with HMT given power to designate firms that will be subject to FCA oversight for the purpose of ensuring these services are available across the UK based on set criteria. It is likely these entities will be large banks or building societies. FCA will have power to regulate and monitor the provision of relevant facilities and can impose requirements on one or multiple designated entities in order to achieve the necessary degree of access. HMT will need to prepare a policy statement on baselines for the facilities.

Additionally, the Bill aims to address the risk of a reduction in wholesale cash distributors meaning the failure of any one could create systemic risk by providing BoE with powers to oversee the wholesale cash industry. It will be able to regulate the market activities of the industry to ensure it remains effective, reliable and sustainable, and will also be able to regulate a systemic participant in the market should it identify one.

SMCR extension to FMIs

Currently, there is little control over the conduct of individuals within CCPs and CSDs, so the Bill introduces the SMCR for these entities, and also gives Treasury power to apply an SMCR type regime to Credit Rating Agencies and Recognised Investment Exchanges if it considers it to be appropriate following consultation. Allied to this will be powers to make prohibition orders, similar to those for authorised firms.

Failure of CCPs

CCPs are key participants in financial markets, as they provide assurance that contracts between buyers and sellers on relevant markets will be fulfilled and so reduce risk of counterparty failure. The UK has had in place a resolution regime for CCPs in financial difficulties since 2014 and the Bill now expands this to give BoE power to stabilise CCPs where necessary and proposes a range of stability measures.

Miscellaneous other provisions

The Bill also proposes:

  • Changes that would allow PRA and FCA to take action against firms that are no longer authorised for misconduct while authorised (currently there are only very limited powers to do this)
  • Changes to reflect FSCS's new status as a "supervisory authority" by the Office for National Statistics and its reclassification to take out outside central government, which means its accounts are no longer consolidated within Treasury's accounts
  • Changes to the change in control regime which will allow PRA or FCA to impose conditions on approvals for new controllers where there is a concern over the new controller which falls short of being a "reasonable ground" to reject an application
  • Amending the PSRs to allow the use of regulatory powers to require mandatory reimbursement of consumers by payment services providers in respect of APP scams, and more widely put a duty on the Payment Systems Regulator to consult on and then impose a regulatory requirement on APP scam reimbursement by participants in the Faster Payments Service, and for the requirement to be in place within two years of the Bill taking effect
  • Replacing the BoE Cash Ratio Deposit scheme with a new BoE levy on eligible financial institutions
  • Giving credit unions power to offer a wider range of products to customers, subject to having appropriate permission. Specifically, they will be able to offer both hire purchase and conditional sale agreements, and conduct insurance distribution services. It will also expressly permit borrowing between credit unions and put in place an annual FCA reporting requirement in respect of annual accounts
  • To give HMT power to issue directions to any entity which is considered a "public sector body" by virtue of having the benefit of a guarantee under the Reinsurance (Acts of Terrorism) Act.

All in all, there's a lot in the Bill. Clearly there are large chunks which are markets focussed, reflective of the high level of markets regulation previously vested in European regulators and in EU Regulations. But there is at least something of relevance for all regulated entities as well as the articulation of some wider proposals. And, while there will now be a hiatus in the Parliamentary passage of the Bill until September, there are enough ongoing initiatives to keep the industry busy over the remainder of the summer.