July 27, 2022 | Jennifer Clarke
Estimated reading time: 6 minutes
A new frontier: Financial Services and Markets Bill explores post-Brexit finance
The UK Government has unveiled post-Brexit plans to reform the UK financial services market. The Financial Services and Markets Bill (FSMB), published on 20 July 2022, seeks to create a broad set of UK based laws to increase competition and growth in the UK, doing away with previously entrenched EU-derived regulation.
The 330 page Bill has been touted as the biggest change since the Financial Services in Markets Act (FSMA) 2020 and hopes to bolster the government’s vision for financial services to be “green, technologically advanced and globally competitive”.
As well as this vision, the Bill is a clear symbol of the government’s desire to move away from EU-based rules to instead create a bespoke legislative framework designed specifically to benefit UK financial markets. In unveiling the Bill, current Chancellor of the Exchequer, Nadhim Zahawi, commented that its introduction serves to repeal “hundreds of pieces of burdensome EU regulations” and seizes the “benefits of Brexit”.
The Bill is far-reaching, with changes across the length and breadth of financial services, from critical third parties (CTPs) to a review of designated activities. We’ve picked out the four that have piqued the most interest:
1. Changes to EU-derived legislation
The FSMB establishes HMT’s Future Regulatory Framework and sets out plans to reimagine EU-derived legislation that has previously governed capital markets. Under the current post-Brexit structure, UK regulators are unable to make changes to rules that are set out in EU-retained law. Under new rules, FCA will be given new powers aimed at enhancing the transparency and effectiveness of the market – as well as allowing a transition from EU-retained law to a new regulatory framework under FSMB.
Moving forward, the FCA and the PRA will be permitted to consult on new rules in the usual way and repeal retained EU law while introducing new FCA and PRA rules. It should be highlighted that – even where the regulators decide that the best option is to keep EU law – this decision will still need to go through the public consultation process and could therefore take years to fulfil. Under the FSMB, HMT will have powers to make targeted modifications to EU law in a transitional period, while UK regulators will be obliged to publish statements of their progress.
In particular, the FSMB focuses on removing the share trading obligation and double volume cap from MiFID II, which has been criticised for restricting how and where firms can execute trades.
2. Regulating stablecoins
As predicted in our recent Industry Data Report – Cryptopia: Regulation and Crypto on a Cliff Edge – the government has unveiled plans to regulate certain types of stablecoins. Stablecoins are named as such because they tether to traditional currency, such as the US dollar, thereby offering a stable yet alternative means of transacting. However, as recent market activity has shown, stablecoins are not always stable.
With this in mind, FSMB aims to capture “digital settlement assets” within the regulatory perimeter, where they are used as a means of payment. This will be done by extending the reach of the existing electronic money and payment system frameworks, rather than designing a new regulatory framework.
The Bill will also see the creation of the Financial Markets Infrastructure Sandbox, which will run to enable firms to test new technology and propositions under market conditions.
The UK Government has committed to embracing cryptocurrency as a means of encouraging growth within the UK, aiming to set itself apart as a leader in innovation. The EU has recently set out finalised plans for the Markets in Crypto Assets Regulation, and the FSMB’s proposals look to offer a UK-based counterpart – demonstrating the UK’s eager commitment to competitiveness. The Government has also announced that it will consult on its regulatory approach to cryptoassets in the broader sense later in the year.
3. Introducing a secondary regulatory objective
The FSMB introduces a secondary objective for UK regulators – one that was hotly contended. It asks that, as well as protecting financial stability and consumer protection, they should consider “growth” as a secondary objective. This means that the extent to which financial regulation affects UK market competitiveness will now need to be taken into consideration.
Commenting on the publication, UK Finance Chief Executive, David Postings, said that the Bill “represents a once in a generation opportunity to improve regulation, enhance consumer protection and create a more competitive financial services sector.” He added that proposals for the secondary competitiveness objective “sends a clear signal to the rest of the world that the UK is open for business.”
However, while some have welcomed the secondary objective, others have stressed that it must remain “secondary” and should not take precedence where regulation is needed to achieve the primary objective. The FSMB also asks that UK regulators “have regard” to climate change and the net-zero economy.
4. Supervision of ‘Critical Third Parties’
In June 2022, the HM Treasury issued a Policy Statement, which proposed that the FCA, BOE and PRA should directly oversee and supervise unregulated firms that deliver certain “critical services” to the financial services industry. These critical services include things such as cloud-based computer services and other outsourced arrangements.
Under the FSMB, HMT will be able to allocate “critical” status to certain third parity activities and will give regulators powers to make rules, gather information and take enforcement action against such third parties.
Following the publication of the FSMB, UK regulators published a Discussion Paper to explore how this will work in practice.
What happens next for the FSMB?
Before coming into force, the Bill must pass through the House of Parliament and House of Lords.
The UK’s primary financial regulator, the FCA, has long taken an optimistic stance towards Brexit. At the close of 2019, the FCA’s Nausicaa Delfas noted that “Brexit provides added impetus to look at things again.” Indeed, the UK government – not unexpectedly – has used Brexit as a springboard for new regulation. We saw this initially in “ambitious and innovative reform” for Solvency II and now again with the Financial Services and Markets Bill.
The government’s latest proposals have been welcomed by much of the industry, with the promise of less red tape, increased competition and economic growth on the horizon. However, it’s not all sunshine and rainbows. As with all legislative change there are often significant hurdles to implementation, both from an administrative level and for the compliance teams tasked with managing regulatory change across their organisation.
Moving from EU regulation to UK regulation will not be an easy task for regulators, especially considering that they must undergo the usual public consultation process. By the government’s own admission, this could take many years. For compliance teams, this will equal regulatory change on an unprecedented scale. Even where regulatory requirements stay the same, the likelihood is that the regulation from which the requirements derive will change. As such, we’ll see an industry-wide reshuffle of documentation. Considered alongside emerging regulation for innovation, ESG, cyber etc. this could be a crippling load to bear.
The other point of note is the newly proposed “rule review” power, which gives the government powers to direct regulators to reconsider decisions where it is “in the public interest”. On the one hand, this is a positive thing. No regulator is an island and doubtless some may welcome a second-shot for questionable regulatory decisions. The cynic in me, however (perhaps influenced by rumours of Andrew Bailey’s dissenting comments) wonders how far the government might exercise these powers. If recent action is anything to go by, could we see this power being stretched to benefit government? Only time will tell.
Are you prepared to manage the deluge of post-Brexit regulatory change?