Introduction
On 29 June 2023, the long-awaited Financial Services and Markets Act 2023 (the “Act”) received Royal Assent, clearing the Act’s final hurdle prior to its implementation. The Act is the framework for the UK’s post-Brexit financial legislative and regulatory landscape. Focusing on the promotion of competition, innovation and investor protections, it hopes to ensure the UK’s continued leadership in the global economy by providing “a smarter financial services framework”. While the Act is 349 pages in length, we have set out some of the key themes and regulations currently making headlines.
New Regulatory Framework
The Act provides the foundations for a significant overhaul and re-structuring of the UK financial services and markets regimes. The changes include the revocation of retained EU laws, the introduction of new powers and objectives for the regulators of such markets, as well as a number of measures relevant to financial market infrastructure operators and market participants.
The Act will also introduce the new Designated Activities Regime (“DAR”), which will provide a mechanism for the regulation of financial markets’ activities where HM Treasury considers it would be disproportionate or inappropriate to bring such activities within the scope of the current regulated activities regime. DAR will initially cover activities which were previously provided for under EU law relating to entering into commodity derivative contracts and holding positions thereunder, short selling activities, securitisations, securities offerings and the market’s use of benchmarks.
The Act provides new rule-making powers to the Financial Conduct Authority (“FCA”) and the Bank of England, as well as direct accountability for those regulators, while also conferring perimeter-setting powers to HM Treasury.
Critical Third Parties (CTP)
The Act inserts new provisions in the Financial Services and Markets Act 2000 (“FSMA 2000”) which grants HM Treasury the power to designate a person that provides certain services to one or more authorised persons, (authorised e-money institutions, payment institutions and registered account information services) as a Critical Third Party (“CTP”). Such designation is permitted where, in HM Treasury’s opinion, a failure or disruption relating to the provision of such services by the relevant CTP could threaten the stability of, or confidence in, the UK’s overall financial system. Prior to designating a person as a CTP, HM Treasury must consult with the FCA, the Prudential Regulation Authority (“PRA”) and the Bank of England, and then HM Treasury must provide written notice to the person being designated as a CTP, specifying a reasonable period within which the person may make representations in relation to HM Treasury’s proposal. It remains to be seen which service providers will receive the CTP designation.
Wholesale Markets
The Act removes unnecessary friction in the UK’s wholesale markets by amending the UK Markets in Financial Instruments Regulation (“MiFIR”) to reflect the outcomes and understanding obtained by HM Treasury’s Wholesale Markets Review. These changes are to include the following:
- Commodities Derivative: The Markets in Financial Instruments Directive (“MiFID II”) requirement for position limits apply to all exchange-traded contracts will be revoked. Any over-the-counter (“OTC”) or contracts that are economically equivalent to exchange traded derivatives will also be removed from the current position limits’ regime. Going forward, the FCA shall have the power to set limits on OTC contracts and support trading venues in setting position limits.
- Fixed Income and Derivatives: The Act includes a new power granted to the FCA to make any necessary changes to the trading obligations to mitigate disruption to markets. This seeks to rectify the mismatch in the scope of parties captured by the trading and clearing obligations currently set in MiFID II.
- Derivatives Trading Obligation: HM Treasury will now align the scope of the Derivatives Trading Obligation (“DTO”) with the European Market Infrastructure Regulation (“EMIR”) Clearing Obligations. The FCA will now have the power (if it obtains HM Treasury’s consent) to modify or suspend the DTO if they consider it is necessary for the purpose of preventing or mitigating disruptions to the financial markets.
- Post-Trade Risk Reduction: Services focused on post-trade risk reduction (“PTRR”) will be exempt from the DTO. PTRR services reduce risk in derivatives portfolios by applying “rebalancing” or “compression” exercises to derivatives contracts outstanding between counterparties. The Bank of England will be given the power to make rules providing for an exemption from the EMIR Clearing Obligations for the use of PTRR services.
- Stablecoin: The Act grants power to HM Treasury to issue and facilitate the use of Digital Settlement Assets (“DSA”) as a means of payment within the regulation. DSA’s are defined widely as “a digital representation of value or rights whether or not cryptographically secured that can be used for settlement of payment obligations, transferred, stored or traded electronically and uses technology supporting the recording and storage of data” and is intended to cover other digital and crypto assets that meet such definition. However, it should be noted that the definition of DSA is not meant to capture those crypto assets that are primarily used for speculative investing (such as Bitcoin).
Conclusion
At the time of this Client Market Flash, the Financial Services and Markets Act 2023 (Commencement No. 1) Regulations 2023 provides that DAR and CTP provisions are due to enter into force on 29 August 2023. We will continue to monitor changes and new developments relating to the Act, and provide additional updates on the key fundamental changes as and when they come into force.
We would like to thank Emily Cox for her contribution to this alert.
For further information, please contact:
Jennifer J. Kafcas, Partner, Crowell & Moring
jkafcas@crowell.com
