In the very last days before the Parliamentary summer recess, the UK Government introduced the Financial Services and Markets Bill 2022 for its first and second reading. Whilst the Bill contains proposals to enact many initiatives that have been trailed in HM Treasury (HMT) or the financial services regulators’ consultations, it also contains very wide-ranging powers for these regulators to shape the future of the UK financial services legislation.
Revocation of all EU retained law
The Bill proposes to revoke all EU retained law in respect of financial services in order to replace the ‘complicated patchwork’ of retained EU law with framework legislation and rules designed specifically for the UK by HMT and the UK financial services regulators. The revocation of retained EU law was proposed in the Future Regulatory Framework Review, but this had been expected to have been done gradually and over a reasonable length of time. As drafted, the Bill revokes all direct EU law, secondary EU law such as Delegated Regulations and even some primary legislation that will no longer be necessary once retained EU law is revoked. EU derived law that is contained in primary legislation (unless specified in Schedule 1) or in the regulators’ rules is not revoked.
The explanatory notes to the Bill clarify that the Government does not ‘expect to commence the revocation of individual parts of the Schedule unless the regulators have drafted and consulted on rules that are ready to be enforced’. Although on its face the Bill revokes all EU retained law relating to financial services, it is likely that the revocation will in practice take effect over time, possibly through different commencement dates. Prior to revocation the Bill also proposes a number of detailed revisions to UK MiFIR, UK EMIR and to the UK Securitisation Regulation which will apply for a transitional period prior to revocation.
HMT will have the power to retain legislation where this is necessary for the working of the Financial Services and Markets Act 2000 (FSMA) regime e.g. the Regulated Activities Order which contains elements of retained EU law.
A further example of the widening of powers given to the regulators is contained in the new ‘Designated activities regime’ (DAR). The DAR permits activities related to financial markets to be made subject to rules which apply to unauthorised persons. An example is given of a car manufacturer that enters into derivative contracts to hedge against future increases in the price of metal. HMT will be able to designate certain activities (those related to financial markets exchanges, instruments, products, or investments) with the effect that these are prohibited unless undertaken in accordance with the relevant HMT requirements or FCA rules, or are otherwise exempt. Whilst initially, the Government expects most designated activities to be those which are currently regulated through retained EU law, there is no limitation to HMT extending the DAR to cover other activities in the future.
To replace EU retained law with a new comprehensive FSMA model, the regulators need to have the appropriate powers to make rules. In many instances, FSMA already provides the necessary powers, or specific provisions contained in the Bill will provide such powers, e.g. under the DAR. However, the regulators do not have sufficient rule-making powers to replace all of the rules that are in retained EU law. To address this, HMT is given a restatement power to enable:
- the restatement into domestic legislation of any existing regulator rule-making powers that are set out in retained EU law;
- the modification of existing regulator rule-making powers; and
- the creation of new regulator rule-making powers in areas which are currently covered by retained EU law.
The Bill gives HMT the power to require the regulators to review rules if it considers it in the public interest to do so, as well as a power to require regulators to make rules. It has been suggested that these powers will expose the UK regulators to a greater degree of political interference than is currently the case; and while there are safeguards in the Bill, it is likely that these powers will be among the more controversial aspects of the Bill as it passes through the legislative process.
The Bill includes many previously trailed provisions including by:
- giving HMT a power to bring digital settlement assets (a newly introduced definition) into the scope of regulation when used as a form of payment;
- enabling HMT to designate certain third parties as ‘critical’ and giving the Bank of England, the PRA and the FCA the ability to directly oversee critical services provided to regulated firms and financial market infrastructures by designated critical third parties;
- establishing a regulatory ‘gateway’, which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms. An authorised firm will need to obtain the permission of the FCA before being able to approve the financial promotions of unauthorised firms. The FCA will be able to place limitations on the types of promotions that firms will be able to approve; and
- expanding the regulatory framework for FMIs, including by giving the Bank of England and FCA new rule-making powers, extending the application of the senior managers and certification regime to FMIs and enhancing the recovery and resolution framework for CCPs.
In addition, the Bill sets the scene for more international regulatory engagement, e.g. by updating the financial services regulators’ objectives to enable them to focus on long-term growth and international competitiveness or by providing for the UK to recognise equivalent STS (simple, transparent and standardised) securitisations issued by third-country entities.
Other issues dealt with relate to consumer protection concerns, such as the continued access to cash and enhancing the protection for victims of authorised push payment scams.
The Bill will next go through the Committee stage, which will start in September once Parliament resumes.