The Financial Services and Markets Bill: a mixed bag of regulatory reform

October 2022  |  SPECIAL REPORT: FINANCIAL SERVICES

Financier Worldwide Magazine

October 2022 Issue

The UK government has been discussing, promising, debating and threatening various regulatory changes over the past few years. While the financial regulators, in particular the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have been very busy since the beginning of the coronavirus (COVID-19) pandemic, ‘firefighting’ to ensure regulation kept up with the immediate consequences of the UK leaving the EU and the consumer challenges the pandemic brought, there has been relatively little change in the legal framework.

Now, just before the parliamentary summer recess (and the imminent change in prime minister), the Financial Services and Markets Bill was first announced in the Queen’s Speech and then introduced into parliament. Before the summer recess, it had achieved only the administrative first reading, so all debate about its many facets will come once parliament has reconvened.

A new set of UK laws

The most pressing reason for the new law, and probably the main driver behind its publication, is to sort out UK financial services laws and requirements in the wake of Brexit. UK financial institutions and their advisers are struggling with a patchwork of laws, many of which are ‘onshored’ versions of EU regulations. These are EU laws which, pre-Brexit, were directly applicable in the UK and did not need to be implemented in any domestic legislation. To prepare for as orderly a transition as possible when the UK left the EU, swathes of these laws were adopted pretty much wholesale onto the UK statute book, amended only minimally to reflect the fact that the UK was no longer in the EU. Existing UK laws and regulatory requirements, equally, were subject to minimal amendment on that basis. The idea was always to regroup and redraft once Brexit had been navigated. The tricky part now is that the UK no longer needs to comply with requirements set at EU level that do not suit its markets. However, the more it diverges from them, the less the chance of the EU considering UK laws equivalent in terms of potential agreements about mutual market access.

For the time being, the Bill has listed a huge swathe of laws that were ‘onshored’ and that will be repealed, but with the safety net that nothing will be repealed until a replacement law has been approved. The Bill itself already makes some transitional changes to some of the regulations relating to financial markets.

Ultimately, hopefully, there will be a set of laws and regulatory requirements which will be easy both to find and follow, with no inconsistencies. This will take time, and the Bill is very much the tip of the iceberg in terms of the work that will be needed to create the new UK statute and rulebooks.

Direct regulation of providers of critical services

Even before the publication of the Bill, HM Treasury had published a policy paper on the need to take action to mitigate the risk of systemic failure in the event of collapse of one of a relatively small number of third-party providers of critical services to financially regulated firms and financial market infrastructures. Driven mainly by the reliance that the financial services marketplace puts on technology and the cloud, and the realisation that many financial services firms use a small number of service providers, the PRA and the FCA in particular have already put in place measures to ensure firms have the best operational resilience possible, and in this way can keep an eye on third parties via the back door. However, the government recognises that the markets will remain vulnerable to the systemic risk of a third-party failure if there is no direct oversight of key participants. As a result, the Bill proposes, and the financial regulators are already consulting on, a framework whereby the Treasury can designate certain critical third parties, which will allow the financial regulators to impose proportionate supervision on them.

Designated activities

Similar, but separate, to the critical third parties proposals, comes a proposal to create a regime to be known as the ‘designated activities regime’, under which certain market players who were directly regulated under EU laws will now fall directly under the supervision of, mainly, the FCA. This regime is not to be confused with the ‘regulated activities regime’, under which most banking, insurance and financial services providers are already regulated, and nor will it replace the existing method of UK supervision of investment exchanges and central counterparties. It will work alongside all these existing regimes, but its creation is a recognition of the fact that the structure by which the more customer-facing actors in the market are regulated is not appropriate for, for example, data reporting services providers.

Digital assets

Again, the Treasury had announced some time prior to the Bill’s publication that it intended to introduce legislation to bring stablecoins within the scope of regulation where it is used as a means of payment. The Bill includes wide powers to enable it to do this, and to make changes to what is currently proposed as a new definition of a ‘digital settlement asset’ as the markets evolve. Ultimately, the desire is to align crypto asset terminology with its current nearest equivalents in the e-money and payment services regulatory regimes.

Access to cash

Despite industry statistics showing the sharp decline in the use of cash, and projections suggesting its use will decline still further, the UK government recognises the critical importance of retaining sufficient facilities to allow cash withdrawal and deposits, and the Bill has introduced a formal mechanism to protect access to cash. The Treasury will be able to designate institutions that must work under FCA supervision to ensure services are met, and the FCA will be able to impose conditions on those firms to ensure the required access is maintained. Separately, the Bill puts in place provisions to guard against reduction in wholesale cash distributors, including allowing regulation of any systemically important market participant that the Bank of England may identify.

Safer financial promotions

The Bill also confirms the government’s decision on another matter that has been under discussion for some time. There have long been concerns that the current ‘financial promotions’ regime does not work, for several reasons. Broadly, any promotion for a financial product or service, if not issued by a person authorised under the Financial Services and Markets Act 2000 or exempt, must be approved by an authorised person. Approval ought to entail a full due diligence on the promotion, so the approver can be satisfied the promotion is clear, fair and not misleading. However, the FCA has not been happy with the standard of approvals, and the Bill confirms that firms that wish to approve promotions will (subject to limited exceptions) need to have notified the FCA that they wish to act as approver and the FCA must permit them to do so. This tightening up of the regime will work alongside initiatives the FCA has already taken to restrict the marketing of high-risk investments.

Other changes

While these are the key changes, the Bill introduces several other elements of regulatory reform. These include extending the current ‘senior managers and certification regime’, which brings high levels of individual accountability to firms that carry out regulated activities, so that it will also cover the senior management of financial market infrastructures, such as central counterparties and central securities depositories, and potentially also to credit rating agencies and investment exchanges. Alongside this is a new power for the Bank of England to stabilise central counterparties that are in difficulties if it deems it necessary to do so.

Other safeguards include giving the regulators greater power to act against firms that are no longer authorised for misconduct while they were authorised and to impose conditions on changes in control if they have reservations about the new controllers which fall short of grounds for refusal. The Bill also seeks to put mandatory reimbursement of consumers who suffer because of authorised push payment fraud on a legal basis and to require the Payment Systems Regulator to impose a regulatory requirement on reimbursement by participants in the Faster Payment Service.

A final, and more permissive, proposed change would let credit unions conduct a wider range of regulated activities than is currently permitted.

What next?

Initiatives to implement some of the changes proposed in the Bill are already underway, pending the Bill becoming law, so there is a degree of urgency to get the new protections in place. That said, there is a long way to go in the Bill’s parliamentary process, and debates and changes as it progresses through the late autumn will shape the ultimate results.

 

Jonny Williams is a partner and Emma Radmore is a legal director at Womble Bond Dickinson. Mr Williams can be contacted on +44 (0)131 624 8701 or by email: jonny.williams@wbd-uk.com. Ms Radmore can be contacted on +44 (0)207 788 2372 or by email: emma.radmore@wbd-uk.com.

© Financier Worldwide

BY

Jonny Williams and Emma Radmore

Womble Bond Dickinson

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