What does the Financial Services and Markets Bill mean to you? Part 1

The Financial Services and Markets Bill was introduced to Parliament in July 2022 and has now reached the committee stage in the House of Lords. This is a late stage in its progression to becoming a new Act which will almost certainly occur later this year.

The Bill is wide-ranging and brings in quite a lot of significant changes, as well as some that are less significant. A large part of it is driven by Brexit issues as it contains post-Brexit housekeeping both to revoke retained EU law that relates to financial services and markets and, where necessary, to replace it with original UK law (rather than those laws which were adopted from the EU).

This article and the next look at some of the headline areas for change.

Reform of wholesale capital markets

The Bill removes certain restrictions on trading requirements. Lifting these particular restrictions is apparently driven by the desire to increase, improve and liberate trading (to some extent).

It includes similar changes to rules governing over-the-counter derivatives trading, in particular relating to where clearing mechanisms are a required feature in certain trades and post-trade risk-management activities.

Several new, more developmental, steps are also included in this Bill...

Designated activities regime

The Bill includes the establishment of a new designated activities regime. This will allow certain activities related to financial markets to be regulated in a manner that is consistent with the Financial Services and Markets Act 2000.

The designated activities regime appears to be expanding the reach of the regulators to include activities which might be said to be adjacent to, rather than core, financial services activities.

It will allow HM Treasury to use secondary legislation to issue lists stating which activities are designated activities and to give the FCA rule-making powers over those activities.

It’s intended to provide a practical approach to fill in gaps as EU-retained legislation is revoked. Some activities were within the UK financial services regulatory scope because of adopted EU legislation and not directly under the Financial Services and Markets Act 2000. It allows HM Treasury and the FCA to pick these up and ensure they do not ‘accidentally’ fall out of the regulatory basket.

The next change, I think, is a really interesting and striking area of reform...

Critical third parties

This part of the bill gives HM Treasury the power to designate critical third parties.

It allows either the FCA and/or the Bank of England and/or the Prudential Regulatory Authority (PRA) to have powers over these critical third parties including:

• Regulatory oversight of them
• Collecting information from them
• Taking limited enforcement actions against them

This follows the FCA report from June 2022 on UK Fintech regarding obligations placed on regulated financial institutions outsourcing critical functions to (sometimes quite small) unregulated suppliers.

It recognises that, while financial institutions and firms are recognised as trading in financial market, and are regulated, some of the greatest vulnerabilities sit with their outsourced suppliers (once upon a time, many of these were called back-office functions).

Collapse of a significant supplier could create huge damage but how the suppliers run their business and activities is currently beyond the reach of the regulators, even though it’s often foundational to financial institutions who are regulated. It’s particularly important in terms of having capital adequacy (that is, having enough money to run their business).

For example, if you are a regulated payment services provider, you have to jump through regulatory hoops. Your IT provider almost certainly is not regulated, and they don’t. But if they go down, your business functions, and potentially you whole business will go down too.

What this means to you

The law is always changing and it’s hard for any business-owner to keep on top of it all as well as doing their day job. That’s what solicitors like me are for! I keep aware of what’s changing and can help if, when, or ideally before you fall into any sticky situations. Just give me a call if you need advice.

This article is part 1 of 2, explaining areas that will change with the new Financial Services and Markets Bill. Part 2 will follow shortly.

For further advice, please call me now on?020 3609 8764.