The Financial Services and Markets Bill 2022-23: what's under the bonnet?

The long trailed Financial Services and Markets Bill has just been released. It's a big read, well over 300 pages, and sets the foundations for the UK's post-EU regulatory framework.

While we'll be pouring over the detail over the next few weeks and months as the Bill begins its passage through Parliament, there are a few early highlights worth flagging, and one notable omission that we'll start with.

No "call in" power yet, but could it arrive later...?

The trailed "call in" power, whereby the Treasury could request that regulators take another look at regulatory policy, has not made it to the Bill. How such a power might operate, and whether a "call in" would be done in public or behind closed doors, could be subject to further consultation and included in a government amendment to the Bill at a later point. Issues raised will no doubt cover whether such a power could be introduced with sufficient safeguards so as not to threaten regulatory independence, but also whether it could truly influence policy if and when government believes it needs to.

Implementation of the Future Regulatory Framework Review

The Bill sets out the new framework for UK to regulate financial services outside the European Union. Certain types of retained EU law will be repealed and the PRA, the FCA and the Bank of England will receive significant new powers and responsibility to create new regulation. There's also a new system of accountability.

Parliament and Government Scrutiny and Direction

The Bill provides that the Government would also have a new power to ensure that regulators "have regards" to elements of public policy when setting rules (for example financial inclusion) or be able to create an obligation to create rules in specific areas of regulation where they might not exist.

The PRA and FCA would also have a statutory objective to publish statements on how they review their rules, and for the rules to be kept under review, to provide transparency to stakeholders.

Regulators would also have a new requirement to publish statements on how they conduct cost benefit analysis, and establish new Cost Benefit Analysis Panels to provide feedback both before and after publication for each consultation.

In Parliament, regulators would need to notify the Treasury Select Committee (TSC) when they publish a consultation, and to respond in writing to any Parliamentary Committee that responds formally to a consultation. The TSC's new Sub-Committee looking at financial regulation will no doubt have an important role to play here too.

A new Designated Activities Regime

The Bill provides for a new legislative framework whereby the Treasury can designate activities connected to financial markets (for example exchanges, instruments, products or investments). Regulators would be able to make rules relating to those activities without needing the persons conducting the activity to be FSMA authorised, providing a less intensive regime where appropriate. Initially, these are expected to be mostly activities currently regulated through retained EU law.

Competitiveness objective

A new secondary objective to facilitate growth and competitiveness has been included for the FCA and the PRA. It could be seen as effective compromise between those who believe it should be a primary objective to ensure UK markets thrive, and those believe any objective might threaten financial stability and consumer protection, as well as the UK's trusted voice in international regulatory fora. This debate will no doubt continue.

Net zero

The Bill also provides that regulators need to have regard to the government's 2050 net zero commitment, by including this in their regulatory principles. This will apply to the PSR as well as the FCA and PRA.

International arrangements and agreements

The Bill seeks to advance the UK’s international agenda by providing for the implementation of mutual recognition agreements and recognition of equivalent Simple, Transparent and Standardised (STS) securitisations issued by entities outside of the UK and aligned with Basel and IOSCO standards. This should increase choice for UK investors.

Regulators would need to consult with government on rule changes and supervisory policy where it might impact on overseas deference arrangements or need where there is a need to comply with existing trade agreements.

Wholesale Capital Markets Regime

The Bill provides for a number of the changes suggested in the Wholesale Markets Reform consultation, including the removal of the double volume cap and share trading obligation. The Bank of England will also receive new tools to mitigate risks relating to the failure of credit financial institutions. There are new insolvency arrangements for insurers, and a new senior manager and certification regime for CCPs and CSDs with a power for the Treasury to apply the regime to CRAs and RIEs if the government determines it is appropriate following consultation with industry.

Critical third parties

With third party providers increasingly delivering essential functions to financials services providers, the Bill provides a mechanism for the Treasury to designate them as "critical". This could, for example, be a cloud service provider, and would give regulators the ability to oversee those firms and intervene to improve resilience. The ultimate enforcement sanction would allow regulators to prevent a critical third party from providing services to the financial services sector.

Cryptoassets

The Bill, for the first time, brings stablecoins and wider forms of digital assets used for payments / settlement into the scope of a tailored payment and electronic money regulatory regime. A wider consultation on cryptoassets (such as bitcoin) will come later this year.

Access to Cash

Access to Cash has long been a focus for those thinking about financial inclusion and the Bill intends to protect this provision. The FCA would be established as the lead regulator for retail cash access, with new powers over firms designated by the Treasury that provide deposit and withdrawal facilities across the UK (likely larger banks and building societies). The FCA will be able to impose requirements to ensure there is a reasonable provision of cash access. The Bank of England would also receive new powers to ensure the UK’s wholesale cash infrastructure remains effective, resilient, and sustainable.

Push payment scams

The legislation would allow the?PSR to require banks to reimburse authorised?push payment?(APP) scam losses, which have totalled hundreds of millions of pounds a year.

When will it all come in?

The Government is clearly keen to give the Bill some momentum, but it will be after the summer it heads to its Committee Stage. However, given the amount of content and related debate, it's still difficult to see it receiving Royal Assent before 2023.

Before then, there will no doubt be many amendments and continued debate around some of the framework issues. Given its importance across financial services, both at the point of implementation, and for the future framework created, this will be one to keep a close eye on.