Financial Services and Markets Bill

The future shape of the UK regulatory framework is becoming clearer as the UK Government has introduced its first piece of major financial services legislation since the UK left the EU. The Financial Services and Markets Bill aims to tailor the regulatory framework and rules to the UK, and updates the powers of the regulators.

Many of the initiatives in the Bill have already been announced in consultations by HM Treasury (HMT). The Bill confirms that the UK will diverge from EU regulations to some extent. Although the Bill is likely to be agreed in the current Parliamentary session, the resulting changes will take a few years to implement. Firms will need to keep track and analyse the impact of the evolving framework on their business models and operations.

One of the main aims of the Bill is to allow the regulatory framework to be adapted to the UK market. It gives the Government powers to repeal onshored or retained EU financial services legislation and create new regulator rule-making powers in areas which are currently covered by retained EU law (e.g. Solvency II). This is a specific framework for the financial services sector — a similar process is likely to be applied in other sectors through the 'Brexit Freedoms Bill', also announced in the Queen's Speech.

However, from the evidence of the consultations so far published by HMT, for example the Wholesale Markets Review (WMR), the Government's emphasis will be on tailoring the regulatory framework rather than introducing substantial divergence. The process also won't happen overnight. It is not likely that the Government will commence the revocation of particular onshored EU legislation until the regulators have drafted and consulted on replacement rules. The Government expects the process of revoking retained EU law to take a number of years to complete.  

In some areas, the Government has decided that more urgent amendment is needed to the current legislative framework rather than waiting to implement the revocation process. It is introducing direct amendments to UK MiFIR that were consulted on in the WMR published in July 2021, in particular:

• Removal of Share Trading Obligation & Double Volume Cap
• Updates to Systematic Internaliser regime To reduce unnecessary regulatory burden
• Simplifying the pre- and post-trade transparency regime
• Simplifying the commodities position limits regime

The FCA is concurrently consulting on rule changes that were proposed as part of the WMR.  

The Bill will lead to the repeal of EU legislation that sets the regulatory framework for Financial Market Infrastructure (FMI), such as EMIR. Therefore, it:

• Updates the powers of the Bank of England (BoE) so that it can set rules for central counterparties (CCPs) and central securities depositories (CSDs)
• Updates the powers of the FCA so that it can set rules for Data Reporting Services Providers (DRSPs) and Recognised Investment Exchanges (RIEs)
• Introduces the senior managers and certification regime (SM&CR) to CCPs and CSDs
• Allows HMT to apply SM&CR to Credit Rating Agencies and RIEs if it decides this is appropriate after consultation with industry

The Bill enables HMT to set up one or more FMI sandboxes, which will enable participating firms to test and adopt new technologies and practices. This could support testing of distributed ledger technology (DLT) as a previous call for evidence identified that the current UK legislative framework is not designed to support the use of DLT in FMIs.

The Bill also shows that the Government is updating regulators' powers to help manage the emerging risks from the ongoing digitalisation of financial services. For example, it allows HMT to designate third party providers to financial services firms and FMIs, such as cloud services providers, as critical, then enables the BoE, FCA and PRA to make rules, gather information, and take limited enforcement actions on these critical third parties with the aim of improving resilience in the financial sector and reducing the risk of systemic disruption.

Concerns are also growing around how the failure of a stablecoin could also cause systemic disruption in financial services. The Bill will extend the existing payments and electronic money legislation to cover stablecoins, establishing an FCA authorisation and supervision regime, and if a stablecoin becomes systemic, regulation by the BoE.

Recognising that the financial services sector is not just an industry in its own right but an engine of growth for the wider economy, the Government is introducing new secondary objectives for the PRA and FCA which require them to act in a way that advances the international competitiveness of the economy of the UK and its growth in the medium to long term. These are labelled as secondary objectives so as not to undermine the regulators' primary objectives of financial stability, market integrity, consumer protection and promoting effective competition.

The Bill also adds a new regulatory principle for the FCA and the PRA, requiring them, when discharging their general functions, to have regard to the need to contribute towards achieving the UK net zero emissions target.

As the regulators' powers are increasing, the Bill also introduces various changes that increase their accountability to HMT, external stakeholders and Parliament. These were consulted on as part of the Future Regulatory Framework Review.

Parliament has also responded to the increased powers of the regulators with the formation of a new Treasury Select Committee (TSC) sub-committee for Financial Services Regulation scrutiny (initially consisting of all TSC members). This initiative will please many parts of the financial services industry that are concerned that post-Brexit the regulators will have too much rule-making power without the detailed parliamentary oversight that was part of the EU framework.

Although card payments have overtaken cash payments in the UK, 5.4 million adults still rely on cash to a great extent in their daily lives. The Bill will contain legislation to give the FCA new powers over the UK's largest banks and building societies to ensure that cash withdrawal and deposit facilities are available within a specified reasonable distance for all communities.

The Bill will update the existing CCP resolution regime to bring it into line with the most recent Financial Stability Board guidance. It gives the BoE, as the resolution authority, the appropriate flexibility to resolve a failing CCP in the most effective way while maintaining critical clearing services and minimising the wider impact on financial stability.

For insurers in financial difficulties, the Bill makes amendments to existing insolvency arrangements to expand the protections available to an insurer and its policyholders.

The Government is concerned about the impact of the increasing volume of authorised push payment (APP) scams. The Bill enables the Payment Systems Regulator to require payment system providers to reimburse APP scam losses — replacing the current voluntary code that tries to reimburse consumers for the estimated loses of over £300 million a year.

The Bill is wide-ranging and will impact all sectors in financial services. There will be opportunities if the Bill meets its aims of encouraging an open, competitive and innovative UK financial services sector. However, firms will need to manage the challenge of changing and diverging regulation.