On 29 June 2023 the Financial Services and Markets Act received Royal Assent. We’ve summarised the highlight’s for you here and are already looking forward to blogging on some of the more interesting details.
Critical third parties
The Treasury can now decide who is a “critical” provider of services to regulated firms and financial market infrastructures.
The Act gives the Bank of England, PRA and FCA power to directly oversee critical third parties including powers to make rules, gather information and take enforcement action.
The Treasury now has the power to put in place its long proposed regime under which a regulated firm wanting to approve the financial promotions of unregulated firms, will in future have to hold permission from the FCA to do so. This is sometimes known as “section 21 approvers”.
The Act changes FSMA so that cryptoassets including those used for payments such as stablecoins are in scope of regulated activities, including the Regulated Activities Order. As such, you will now find a definition of “cryptoassets” in FSMA, although Treasury has the ability to amend that in future.
This enables the Treasury to develop a regulatory regime for cryptoassets which is reflective of international standards including the Financial Stability Board October 2022 proposals.
The Act has introduced the concept of a “digital settlement asset” which is essentially a digital representation of value or rights, that can be used to settle payment obligations; can be transferred, stored or traded electronically; and, uses technology such as DLT.
The Treasury has been given power to establish a new regulatory regime for digital settlement assets, including establishing thresholds such that systemic providers will be regulated by the Bank of England. The Payment Systems Regulator will be responsible for regulating payment systems using digital settlement assets.
Additionally the Treasury has power to apply the Financial Markets Infrastructure Special Administration Regime to certain stablecoin firms.
The Treasury can now set up Financial Market Infrastructure (FMI) sandboxes. This will enable participating firms to test and adopt new technologies and practices. For example, the FCA has already stated its intention to use these sandboxes to test distributed ledger technologies (DLT).
The Act allows the Bank of England to have the primary responsibility for setting regulatory requirements for CCPs and CSDs in the UK. The Bank also now has the ability to create a legislative framework for systemic third country CCPs.
The FCA has also been give the power to make rules relating to DSRPs and RIEs which is a post-Brexit provision allowing FCA to replace retained EU law.
FSMA has been amended by the Act to introduce a version of the SMCR for CCPs and CSDs. The Treasury also has been granted power to apply the SMCR to CRAs and RIEs.
The existing resolution regime for CCPs contained in the Banking Act have been deleted. Instead the Act provides for an expanded resolution regime for CCPs.
The Act has made a number of changes to UK MiFIR including:
– Removal of the share trading obligation
– Replacing the pre-trade transparency waiver regime
– Removal of the double volume cap
– Changes to the definition of a systematic internaliser
– Removing restrictions on midpoint crossing for trades
– Aligning the derivatives trading obligation with the clearing obligation under UK EMIR
– An exemption for post-trade risk reduction services from the derivatives trading obligation
– Power for the FCA to modify or suspend the derivatives trading obligation
– Simplification of the transparency regime for fixed income and derivatives
– Simplification of the position limits regime
he Treasury and FCA have been given various powers under a new cash access regime that has been created by the Act.
A new oversight regime for wholesale cash distribution has also been created by the Act which the Bank of England is responsible for overseeing.
The Act has given the Treasury the ability to change legislation as needed so that mutual recognition agreements related to financial services can be implemented.
FSMA has been amended by the Act to create a framework under which all retained EU law can be revoked and transitioned to new requirements under FSMA. This is a process that is likely to take several years to complete.
The PRA and FCA are required by the Act to have regard to any SDR policy statement the Treasury issues and to report to Treasury on how they have done so.
The PRA and FCA are also now required by the Act to provide a report informing the Treasury for their SDR policy statement.
This essentially paves the way to achieving the long-term aim of the UK having a net zero-aligned financial centre.
There are a number of changes which apply to PRA and FCA. For example:
PRA and FCA objectives have been amended to include a requirement to have greater focus on medium to long-term growth and international competitiveness
PRA and FCA must now contribute to the UK net zero emissions target and have regard to national environmental targets as they carry out their respective functions
The Act introduces a number of changes that enhance the accountability of both the PRA and FCA
Lots to digest, and lots more detail to follow no doubt in various consultation papers and policy statements in due course. Some of these new regimes are material for the sectors they affect, others such as accountability of the regulators will be more watching briefs to see what changes.
Needless to say we’re watching too and we’ll keep you informed of developments as they emerge. You can subscribe to our blogs if you’d like to stay in the loop.
