On 29th June 2023, the Financial Services and Markets bill received royal assent and became law: the Financial Services and Markets Act 2023 (the Act).
Replacing retained EU law
The Act principally legislates for the “Future regulatory framework review”. In summary, this establishes the post-Brexit arrangements which give powers to the regulators to replace retained EU law (more than 250 pieces of legislation were referenced in the Act).
Given the increased role of the regulators in remaking the panoply of post-Brexit financial services regulation, the Act also sets out new mechanisms for their scrutiny and accountability.
The Financial Services and Markets Act 2023 revokes pretty much all retained EU law concerning financial services subject to a “transitional period” for each provision to allow the regulators time to consult on new rules.
The Act also empowers the Treasury to reinstate retained EU law, modified as necessary, into UK legislation.
In terms of its most immediate affects, given the ability to revoke retained EU law, the long-trailed reforms to Solvency II – the prudential rules for insurers – will be progressed, relaxing capital requirements. The PRA published its final proposals in CP 12/23 on the same day as royal assent.
Lord Hill’s prospectus regime review can also move forward to implementation.
The Act also contains express amendments to MiFIR which implement aspects of the Wholesale Markets Review e.g. on pre and post-trade transparency.
Other key features of the Act
New secondary objective – growth and competitiveness
Importantly, the Act includes the new secondary objective for the regulators to support the competitiveness of the UK financial services sector and growth in the medium to long-term. The FCA has identified “7 drivers of productivity” that it says will shape its work to embed and facilitate this secondary objective in a manner that is consistent with its primary objectives. Further, the Treasury is currently consulting on metrics for measuring the regulators’ success, in particular, against the new secondary objective.
A new regulatory principle for the regulators is also introduced to have regard to the 2050 “net zero” target and, in one of its two concessions to the House of Lords, the government agreed to add other environmental targets derived from the Environment Act 2021, including air quality and biodiversity.
Other notable features of the new Act include:
- a Designated Activities Regime allowing the Treasury to identify activities that would be designated (without the participants themselves needing to be authorised). By way of example, this would include the current requirements in EMIR which apply to participants in derivatives markets;
- the creation of financial market infrastructure sandboxes, in particular to support distributed ledger technology;
- powers to the Treasury to designate as “critical” certain third-party providers of IT and digital infrastructure allowing the regulators to make and enforce rules and directions on them. For instance, in the future this might apply to AI platforms facilitating trading;
- establishing a regulatory gateway for financial promotions requiring an authorised person to have specific permission to approve third-party financial promotions unless they fall within an exemption;
- bringing stablecoins within the regulatory perimeter when they are used as a means of payment and bringing cryptoassets generally within scope of the RAO regulatory framework;
- a Senior Managers and Certification Regime for CCPs, CSDs and Recognised Investment Exchanges;
- updating the resolution and insolvency regimes for CCPs and insurers; and
- controversially, the Act requires that the Payments Systems Regulator introduce rules effectively providing for strict liability for payment services providers in the case of “authorised push payment” fraud.
The Act also seeks to protect the public’s access to cash which represents an interesting counterbalance to any future central bank digital currency. It includes powers to require certain designated persons, most likely the larger banks and building societies, to ensure continued reasonable access to cash services. The FCA could require a firm not to close the cash access service in an area if there was no suitable alternative. One complicating factor is that many retailers are now refusing cash and there were calls in parliament during the legislative process for the FCA to investigate what can be done about this.
Accountability of the regulators
With its elevated role in replacing retained EU law, the Government has been keen to ensure that the regulators are appropriately held to account. The regulators are already accountable in number in a number of ways (the Treasury appoints the CEO and board of the FCA and PRA) but the Act introduces further mechanisms, including Treasury powers:
- to require regulators to review specific rules;
- to require the regulators to have regard to certain matters when making rules;
- to disapply or modify certain rules in individual cases; and
- to require the regulators to respond annually to letters of recommendation on economic policy from the Treasury.
There are also requirements on the regulators to publish more on their engagement with the statutory panels, for example, the Practitioners Panel.
The Act also provides for a new panel to improve the rigour and quality of cost benefit analysis.
Reimagining a post-Brexit regulatory environment
In conclusion, the Act sets the ball rolling on the replacement of retained EU law, a process that may take some years.
Practical questions arise as to the capacity of the regulators to reimagine a post-Brexit regulatory environment that supports the UK’s competitive position. Clearly, it will be important for the financial services sector to step forward and engage in the development of its ideal regulatory environment.