The UK Government has published its much anticipated Financial Services and Markets Bill (the Bill),  previously touted by the former Chancellor as "Big Bang 2.0". The Bill as introduced may or may not be that, but it certainly includes a large number of substantial measures that will effect a major overhaul of the UK's regulatory framework for financial services. 

These include the implementation of the UK's post-Brexit framework (which will involve the repeal of retained EU legislation and the migration of much of that law from the statute book into the regulators' rulebooks), new powers and objectives for the UK financial services regulators (including a new competitiveness and growth objective) and a number of measures relevant to financial market infrastructure operators, and payments, e-money and fintech firms. 

Other measures include a new regime for the approval of financial promotions, a wholly new regime to regulate a category of "designated activities", additional powers for the UK financial services regulators in respect of critical third party service providers and various provisions to bring payment systems and other actors connected with digital settlement assets into the relevant regulatory and legislative frameworks.

We already knew that much of this was coming, because of the government's consultations over previous years, including those on the Future Framework Review, the Wholesale Markets Review, the regulatory framework for the approval of financial promotions, an expanded resolution regime for CCPs and the extension of the SMCR regime to FMIs. However, despite the overall sense of familiarity, there is still a great deal to digest.

There are several provisions which generally relate to the regulation of the regulators, giving them new powers but making them subject to additional obligations and oversight. For instance, the FCA and PRA will have a new "secondary" objective that will require them act in a manner which facilitates the competitiveness of the UK and its growth. The existing sustainable growth principle to which they are both subject will be recast as a requirement to contribute towards achieving compliance with the net zero emissions target. Given that the FCA, the PRA and the Bank of England (in its supervision of CCPs and CSDs) will benefit from a significant extension of their powers under the new rules-based regime, various provisions will make the regulators accountable to HM Treasury and subject to its oversight.

It should be noted that there are some other post-Brexit policy initiatives that the government has been discussing but which are not included in the Bill, at least not as it was introduced to Parliament. So, the Bill may be subject to some substantial changes during its passage through Parliament and, despite the size and wide-ranging content of the Bill, we may also need to keep an eye out for further and additional legislation, particularly if there is a change of direction by a new prime minister and their government.

We consider the key points of the Bill in more detail below. For those of you who are part of, or interested in, the Fintech, FMI or payments sectors it is likely that you will want to read all Sections of this briefing. If you are less interested in those sectors you may wish to focus on Sections 1 and 2, and Sections 5 to 7.

  1. Revocation – a bonfire of EU law?
  2. New regulatory regimes
  3. New rules for financial market infrastructures
  4. Fintech and payments
  5. Regulating the regulators
  6. Other measures
  7. Next steps

1. Revocation – a bonfire of EU law?

One would be forgiven for taking political statements over the last few months to suggest not only that the scrapping of EU law will be comprehensive, but that it is also imminent. Only in the last couple of weeks one of the Conservative leadership candidates was talking about a "red tape bonfire" and overhauling the MiFID II trading rules, at least insofar as they apply to small companies – and this was after the Bill had already been published.

However, behind the political headlines, the rather more prosaic truth that emerges from the Bill is that the process of creating a comprehensive domestic model for financial services regulation – which will involve removing an intricate body of EU-derived financial services law from the UK statute book and replacing it with a UK Financial Services and Markets Act-based, rule-driven model – is not going to happen overnight.

What will be revoked?

The Bill establishes a framework that will enable the eventual revocation of retained EU law. In this regard, "retained EU law" is wide ranging. A non-exhaustive schedule to the Bill lists a significant number of provisions by name. This schedule includes all direct principal EU legislation (i.e., the EU regulations that were previously directly applicable and which were "onshored" into UK law at the end of the Brexit transitional period (including, among many others, UK EMIR, UK CRR, UK MAR, UK MiFIR, UK CSDR and UK PRIIPs)), UK subordinate legislation to implement or transpose EU obligations (such as elements of the Regulated Activities Order), all EU Delegated Regulations, Commission Decisions and Implementing Acts; and even a few sections of UK primary legislation. While not technically retained EU law, the raft of Brexit "deficiency-correcting" instruments that made changes to such law will also be revoked. On the face of it, that's a lot of combustible material for the bonfire.                                                                                                                    

When will the retained EU law provisions be revoked?

However, although section 1 of the Bill stridently states that the legislation referred to in Schedule 1 "is revoked", it is unlikely that this will be a "Big Bang 2.0" event, or that the revocation of any part will happen any time soon. Section 1 is expressed as coming into force on such day as the Treasury appoints and so any revocation (either in full or, more likely, in part) will be controlled by the Treasury. In its explanatory note to the Bill, HM Treasury is clear that it expects that it will take a number of years to complete the process of revoking retained EU law (which in itself implies a staggered process rather than a one-off event).

As a practical matter, given that the overall aim of the Future Regulatory Framework is to replace provisions that are currently in retained EU law with rules in the UK regulators' rulebooks, the revocation of individual parts will not happen unless and until the regulators have drafted and consulted on rules that are ready to be enforced. This will necessarily be a significant programme of work for the regulators, requiring a substantial commitment of resources and spanning a number of years.

It therefore remains to be seen how different in substance the UK regimes that will be developed to replace retained EU law will be in practice. The exercise will almost certainly end up being something more than just a cosmetic relabelling exercise, figuratively replacing the EU flag with the Union flag. But it is also unlikely that the UK regulators will want to jettison too many elements of EU-derived law where the provisions have worked well in regulating firms and markets, particularly where the UK was instrumental in the original EU initiatives.

What is certain is that the FCA and the PRA should be able to make and change rules rather quicker than the EU – or indeed the UK parliament – can make and change legislation, and without some of the checks and balances that parliamentary scrutiny currently provides (subject to the oversight provisions mentioned in Section 5 below). This will likely mean that there will be an increase in the volume and frequency of highly significant consultations, on which firms and industry will have to focus often against tight deadlines.

So, unless there is a radical change in direction from a government that will be led by a new leader, if there is to be a bonfire of EU regulation, we should perhaps not expect a fast and furious conflagration – rather, it is likely to be a rather slower-burning, albeit comprehensive, affair.

So, will nothing change until the relevant revocation(s)?

No – there will actually be some quite significant changes in the meantime. These will give effect to the outcome of the 2021 Wholesale Markets Review and, broadly speaking, involve reforms to the UK's financial services regulatory framework for the capital markets. Because these changes were rehearsed at length during consultation, there are no surprises.

These changes are, somewhat confusingly, described as "transitional amendments" – this is because they will take place during a time that the Bill defines as the "transitional period". This, in relation to any EU-derived legislation, simply means the period ending with the eventual revocation of that legislation – in other words, the "transition" from the current regime founded on retained EU law to the new, domestic rules-based regime.  HM Treasury will retain the power to bring the transitional amendments into force at a time of its choosing, although there appears to be little reason why it would want to delay doing this once the Bill becomes law.

Transitional amendments to UK MiFIR

The "transitional" changes that will be made to UK MiFIR pending its eventual revocation and replacement by a FSMA-based regulatory rule regime include the following changes:

  • The Article 23 Share Trading Obligation will be removed – so firms will be free to trade shares on any UK trading venue or overseas, with any counterparty, or on an OTC basis.  
  • The existing statutory regime governing the basis upon which waivers from pre-trade transparency for equity instruments may be granted will be replaced, so the 'hard wired' reference price, negotiated trade and large in scale waivers will go. Instead, the FCA will have the power to make rules in this regard, subject to conditions – it will also have the power to withdraw already-granted waivers and to suspend the availability of such waivers for up to six months (extendable by a further six months).  
  • The double volume cap mechanism under Article 5, UK MiFIR (which limits the use of the equity waivers under the existing reference price and negotiated trade waivers) will be removed.  
  • As regards fixed income instruments and derivatives, again the FCA will have the flexibility as regards pre-trade waivers (and their withdrawal and suspension) and will be required by rules to impose post-trade transparency requirements (which may include provisions relating to deferrals and suspensions).  
  • The definition of systematic internaliser will be narrowed back to the qualitative-only definition (i.e. by reference to the "organised, frequent, systematic and substantial basis" criteria) and the existing quantitative criteria will be removed. It will still be possible for firms to opt into the regime.  
  • Although the Article 28 UK MiFIR derivatives trading obligation (DTO) will remain, there will be changes:  
    • The DTO will be aligned with the UK EMIR clearing obligation in terms of the counterparties that are in scope.  
    • The FCA will have the power to suspend or modify the DTO, with the Treasury's consent.  
    • The FCA will also be able to make rules that will disapply the DTO (and also the MiFID best execution obligation and the requirement to operate an MTF or OTF where a firm operates a multilateral system) where the firm carries out its activities as part of a risk reduction service (i.e. a service provided to derivatives counterparties for the purpose of reducing non-market risks in derivative portfolios, such as portfolio compression). A corresponding amendment will be made to UK EMIR to provide for an exemption from the clearing obligation for use of such risk reduction services.

Transitional amendments to UK Securitisation Regulation

Under the UK Securitisation Regulation, certain securitisations can be designated as Simple, Transparent and Standardised (STS). Currently, banks and insurers are able to benefit from a preferential capital treatment (relatively speaking), in terms of how much capital they must hold, when investing in an STS securitisation as compared with other types of securitisations, but only where the originator and sponsor of that STS are established in the UK (or, until the end of this year, are located in the EU and the securitisation is designated as STS under the EU Securitisation Regulation). The UK Securitisation Regulation will be amended to allow the establishment of an equivalence regime for STS securitisations originated in non-UK jurisdictions.

Under the changes introduced by the Bill, HM Treasury will be able to designate a country or territory outside the UK as having an STS securitisation framework equivalent to that of the UK. This in turn would mean that the preferential capital treatment outlined above would be extended to investments in such "STS equivalent non-UK securitisations".

It should be noted that these transitional changes relate narrowly to the establishment of an STS equivalent non-UK securitisation framework. Other changes that HM Treasury is now considering as a result of its review of the UK Securitisation Regulation are outside the immediate changes proposed in the Bill.

Power to make further transitional amendments

Aside from the above, HM Treasury will also have the power to make further transitional amendments to any of the legislation referred to in Schedule 1 where it considers it necessary or desirable to do so for one or more listed purposes, including protecting and enhancing the stability of the UK financial system, promoting the effectiveness and functioning of the financial markets, protecting UK economic competitiveness and protecting consumers.

2. New regulatory regimes

The Bill also includes three new regulatory regimes which include new powers in respect of both authorised firms and, in some cases, unauthorised persons. 

Designated Activities Regime

The Designated Activities Regime (DAR) is a new regime for the regulation of certain financial services activities outside the existing regulated activities authorisation regime. Initially, most designated activities are expected to be those which are currently regulated through retained EU law. 

Under the DAR, HM Treasury will have a power to designate certain activities relating to UK financial markets or exchanges and financial instruments, products or investments issued or sold to, or by, persons in the UK.  Under the designation, the designated activity may be prohibited or subject to specific rules and requirements.   Where relevant, the FCA will be able to make rules in relation to designated activities and may also have the power to give directions and other enforcement powers.

Activities which are likely to be designated include certain activities related to derivatives; short selling; acting as an originator, sponsor, original lender or securitisation special purpose entity in a securitisation; selling a securitisation position to a retail client in the UK; certain activities related to benchmarks; offering securities to the public, and arranging for the admission of securities to trading.

The DAR is expected to apply to both authorised and non-authorised persons and therefore persons who are not currently authorised or regulated by the FCA may find themselves subject to some FCA rules in the future.

Powers in relation to critical third parties

Third parties providing critical services to authorised firms, payment and e-money institutions and financial market infrastructures (FMI) may be designated as "critical" by HM Treasury.   If designated, the services provided by such third parties will be subject to direct oversight by the Bank of England (Bank), the PRA and/or the FCA.  This may include making rules, giving directions, gathering information and taking enforcement action.  

The new regime is intended to address concerns around a large number of regulated firms or FMI being dependent on a small number of third party service providers and the associated risks to the financial system in the event of the failure of such third party.  Therefore a third party may be designated as "critical" only if a failure in or disruption to the provision of the relevant services could threaten the stability of, or confidence in, the UK financial system.   This assessment will include the materiality of the services provided and the number and type of service recipients.

Discussion Paper on the exercise of these powers, including through minimum resilience standards and resilience testing, has also been issued by the Bank, the PRA and the FCA with comments due by 23 December 2022.

Approving financial promotions

The Bill introduces a new regime for the approval by authorised firms of the financial promotions of unauthorised persons.  This follows concerns that authorised firms may have been approving promotions relating to matters for which they have no particular expertise or where they have not carried out due diligence on the unauthorised person or the contents of the promotion.

The new regime takes the form of a regulatory "gateway".  Broadly, any authorised firm wishing to approve the financial promotions of an unauthorised firm will first need to obtain the permission of the FCA to carry on this activity (unless a specific exemption to this requirement applies).  The FCA will also be able to place limitations on the types of promotions that a particular firm will be able to approve.  For example, a firm could be restricted to approving financial promotions in its field of expertise.

This new regime will allow for greater oversight of financial promotions by the FCA and will form part of the FCA's increased focus on the approval of financial promotions.  Further measures by the FCA in this area are set out in FCA Policy Statement 22/10 and include requirements for firms to include their name (or Firm Reference Number) in any retail promotions that they approve as well as to monitor the continuing compliance of approved promotions.

3. New rules for financial market infrastructures

New FMI rulemaking powers and requirements

The Bill includes a new general rulemaking power exercisable by the Bank in relation to central counterparties (CCPs) and central securities depositories (CSDs), as previously proposed by the government in its Consultation on the Future Regulatory Framework Review. This broad new power would allow the Bank to replace provisions in retained EU law relating to the regulation of CCPs and CSDs with its own rules over time and also enable rules applying to CCPs and CSDs to be updated more quickly in response to emerging risks and new forms of technology, and developments in international standards.

While the power would be exercisable primarily in relation to UK CCPs and CSDs, the Bank would be able to extend the application of rules applying to UK CCPs and CSDs (in whole or in part) to their overseas equivalents.  Subject to an exception for systemic non-UK CCPs, the Bank would only be able to apply rules to non-UK CCPs and CSDs to the extent it is authorised to do so under secondary legislation made by HM Treasury.

In addition, new provisions would enable the Bank to impose requirements on recognised CCPs, recognised CSDs or systemic non-UK CCPs (relevant FMI entities) to advance its financial stability objective or if it appears to the Bank that the relevant FMI entity has failed, or is likely to fail, to satisfy the applicable recognition requirements or has failed to comply with another obligation imposed on it by or under FSMA.  The Bank would also be able to impose or vary a requirement in response to an application made by a relevant FMI entity.  These powers are similar to the existing powers that the FCA and PRA have in relation to authorised firms they regulate under FSMA.

The FCA will also be granted a general rulemaking power in respect of recognised investment exchanges and data reporting service providers to enable it to replace the provisions in retained EU law relating to the regulation of these entities.

FMI sandboxes

The Bill provides HM Treasury with a new power to introduce an "FMI sandbox" through secondary legislation, allowing participant FMIs (including trading venues, CSDs and potentially other types of FMI) to test and adopt new technologies and practices for delivering FMI services within a "safe space". Participants in an FMI sandbox would be able to carry out such testing in a modified legal and regulatory environment with HM Treasury having the ability to temporarily "switch off" or modify the application of UK legislation that would otherwise apply to the participant's activities.

The UK government's ambition is for the FMI sandbox to foster effective innovation and competition in the provision of FMI services, ultimately providing benefits for users of FMI services and their clients. It will also allow HM Treasury, regulators and the industry to better understand what changes might be needed to the FMI legislative framework to support the effective and safe adoption of new technologies such as distributed ledger technology. FMI sandboxes will be particularly attractive to both new and incumbent FMIs looking to offer new services, or implement new technologies, which are not wholly compatible with existing legal and regulatory rules.

The Bill also contemplates the potential for arrangements tested and implemented as part of an FMI sandbox to be made permanent. If the performance of an FMI sandbox is determined to have been successful, HM Treasury would have the ability to make permanent changes to legislation to allow FMIs to continue to use the new technologies or practices outside of the sandbox.

New Senior Managers and Certification Regime for FMIs

Following a consultation by HM Treasury in July 2021, the Bill introduces a Senior Managers and Certification Regime (SMCR) for UK CCPs and CSDs, which closely mirrors the existing SMCR for banks, insurers and other authorised persons and includes a Senior Managers Regime, a Certification Regime and Conduct Rules. The Bill also gives HM Treasury the power to apply the SMCR to credit rating agencies and recognised investment exchanges.

The Bank and the FCA will also have the power to make prohibition orders if it appears that an individual is not a fit and proper person to perform an in-scope function.

In terms of timing, as we said in our June 2022 briefing on HM Treasury's response to its July 2021 consultation on an SMCR for FMIs, it is unlikely that the new regime will apply before 2023 at the earliest. Factoring in the fact that the establishment of the legislative framework is dependent on how long it takes for the Bill to receive Royal Assent, the Bank of England will need to consult on its own detailed implementing rules.

Expanded resolution regime for CCPs

In February 2021, HM Treasury consulted on an Expanded Resolution Regime for CCPs to give the Bank additional powers to mitigate the risk and impact of a CCP failure and the consequential risks to financial stability and public funds.

The Bill reflects the legislative outcome of this consultation, introducing a new, bespoke resolution regime for CCPs. The regime contains new powers that the Bank may exercise in relation to a CCP in resolution, including powers to "tear up" one or more contracts with clearing members to return the CCP to a matched book and to reduce or cancel variation margin payments owed to clearing members.

4. Fintech and payments

The Bill contains a number of provisions focussed on payments (including payment systems) and fintech. We outline a number of the key provisions below.

Alongside the Bill, there have been a number of other recent legal and regulatory developments in the payments and fintech space – both in the UK and internationally – including:

  • HM Treasury's consultation and call for evidence on Payments Regulation and the Systemic Perimeter– which, in summary, sets out various proposals in relation to changes to the regulatory and systemic perimeters in relation to payments, and provides additional context as to how the government and HM Treasury might exercise some of the powers included in the Bill;  
  • the Law Commission's highly anticipated Digital Assets consultation paper – which, among other things, explores whether the law should be reformed to explicitly recognise a third category of personal property (in addition to things in action and things in possession) for digital assets; and  
  • CPMI and IOSCO's final guidance on stablecoin arrangements – which, in short, sets out guidance on the application of the Principles for Financial Market Infrastructures to systemically important stablecoin arrangements.

The provisions in the Bill should be understood in the broader context of the ongoing focus on the payments and fintech sectors, and the government's ambitions to maintain and grow the UK's position as a global fintech hub and leader in financial services.

Digital settlement assets

The Bill introduces the concept of "digital settlement assets" (DSA). The term "DSA" is used in a number of places in the Bill, including in relation to amendments to the Banking Act and the Financial Services (Banking Reform) Act 2013 (FSBRA) and in relation to certain new powers conferred on HM Treasury (each outlined further below).

The Bill defines a "digital settlement asset" as:

"a digital representation of value or rights, whether or not cryptographically secured, that— (a) can be used for the settlement of payment obligations, (b) can be transferred, stored or traded electronically, and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology)."

The same definition is tracked into the amendments to the Banking Act 2009 and FSBRA.

This definition is broad and, notably, not limited to cryptographically secured assets or assets using DLT.  However, and notwithstanding the breadth of the definition, the Explanatory Notes show a clear focus on stablecoins which is unsurprising and consistent with the focus on stablecoins in HM Treasury's consultation and call for evidence, and its subsequent response.

The Bill also gives HM Treasury the power to amend the definition – the Explanatory Notes confirm the intention to enable HM Treasury to amend the definition "in the event that there are changes in the features, underlying technology or usage of these assets, so that the regulation can continue to have effect as intended." This seems to be an implicit recognition that technology and innovation in financial services is now developing at a pace and in a way which may require definitional amendments in the future, notwithstanding the broad and technologically-neutral way in which the definition of "digital settlement assets" has been drafted.  

Digital settlement assets: the Banking Act 2009 and the FSBRA

The Bill amends the scope of Part 5 of the Banking Act 2009 to enable HM Treasury to recognise payment systems which use or involve DSAs, and certain service providers in relation to those systems (called "DSA service providers"). In essence, the effect is to expand the scope of those systems (and operators), and service providers to or connected with those systems, that can become subject to Bank supervision.

The term "DSA service provider" is given a prescriptive definition in the amendments to the Banking Act 2009, and captures (among others) persons who create or issue DSAs involved in the payment system, persons who provide services to "safeguard" DSAs, and persons which qualify as "digital settlement asset exchange providers" (which is itself specifically defined in the amendments).

The amendments to the Banking Act 2009 also extend the "specified service provider" (SSP) concept to include service providers to DSA service provider and service providers to (or connected with) payment systems that include arrangements using DSAs.

In addition to the amendments outlined in the Bill, the government is also consulting on widening the scope of Part 5 of the Banking Act 2009 further. The proposals, outlined in HM Treasury's consultation and call for evidence on Payments Regulation and the Systemic Perimeter, would enable HM Treasury to recognise (and bring into the scope of Bank supervision) certain "payment providers" and their service providers. For these purposes, "payment providers" are, in summary, those entities and actors within the payments chain that pose "systemic risk in [their] own right to the financial system or the UK economy". In other words, the proposals have the effect of extending Bank of England supervision beyond payment systems. The consultation acknowledges that some of these "payment providers" might also be subject to FCA's remit under the Payment Services Regulations or Electronic Money Regulations. The consultation explains that the proposal reflects the 'same risk, same regulatory outcome' principle – if actors in the payments chain pose systemic risk, they should be subject to the same supervision and regulation as other actors (like payment systems and other FMIs).

The Bill also amends the FSBRA to enable HM Treasury to designate payment systems which use DSAs, with the effect that those payment systems are subject to regulation by the Payment Systems Regulator (PSR).

Digital settlement assets: HM Treasury powers in relation to payments using DSAs

Finally, the Bill enables HM Treasury to make regulations (and confers a number of other and related powers on the Treasury) in relation to:

  • the regulation of payments that include DSAs;  
  • the regulation of recognised payment systems that include arrangements using DSAs, recognised DSA service providers, and service providers connected with such recognised payment systems or recognised DSA service providers; and  
  • insolvency arrangements in respect of such systems and service providers.

The powers are very broad, but the Explanatory Notes to the Bill provide more context and indicate that (among other things) these powers could (and perhaps are likely to) be used to "[e]stablish an FCA authorisation and supervision regime, drawing broadly on existing electronic money and payments regulation, to mitigate conduct, prudential and market integrity risks for issuers of, and payment service providers using, stablecoins". As outlined above, the focus on stablecoins is not surprising.

The industry will, no doubt, keenly await the detail of any regulatory and supervisory regime(s).

Liability of payment service providers for fraudulent transactions

The Bill contains important provisions in the context of authorised push payment (APP) and other scams which are not currently protected under the Payment Services Regulations.

The Bill obliges the Payments Systems Regulator (PSR) to prepare and publish a requirement for payment service providers to reimburse victims in cases of payment orders made as a result of fraud or dishonesty which are executed over the Faster Payments Service (which, according to the PSR, is the payment system through which the "vast majority" of payments resulting from APP scams are processed).

To support action by the PSR, section 62 of the draft Bill also amends regulation 90 of the Payment Systems Regulations to make clear that it does not affect the liability of any PSP to reimburse victims under the requirement to be implemented by the PSR. This amendment is intended to address any (actual or perceived) concerns that regulation 90 – which provides that payments executed in accordance with the unique identifiers provided by the payer are deemed to have been executed correctly – might be a barrier to the exercise of any relevant powers.

Exactly how this mandatory requirement will be implemented by the PSR is still being developed and the PSR is expected to consult on its preferred approach to APP scam reimbursement in Autumn 2022.

Access to cash

The Bill introduces measures to support financial inclusion by ensuring people across the UK can continue to access cash, an issue that has received much attention recently, particularly in the context of difficulties that some faced during the pandemic.

This includes a power for the Bank to make rules to ensure the continued reasonable provision of cash withdrawal and deposit facilities, for example, by requiring designated firms to refrain from the closure of a cash access service where there is no suitable alternative.

The Bill also establishes a statutory oversight regime of wholesale cash distribution, with the Bank given formal oversight responsibility including through powers to require the provision of information, give directions to designated firms and publish principles and codes of practice that the industry must follow.

5. Regulating the regulators

New regulatory objectives and principles

The Bill leaves unchanged the FCA's and PRA's existing functions and objectives, but has added a new "secondary" objective.  The new objective will require the regulators to act in a manner which facilitates, subject to aligning with relevant international standards, the international competitiveness of the UK and its growth in the medium to long term.    

The rationale for the new objective is that, as the regulators are tasked with setting detailed rules in areas currently covered by (formerly EU) law, they should have both the power and the responsibility to do so in a manner which promotes medium to long term growth and international competitiveness.  This objective, while secondary to the "primary" functions and objectives, is being seen as an important addition by many industry groups.

The Bank will also, for the first time, need to have regard to new regulatory principles modelled on the FCA and PRA's existing principles when exercising its FMI functions (which includes making rules and determining supervisory policy in relation to CCPs and CSDs).  In addition, although the Bank's financial stability objective will remain its primary statutory objective, a new secondary objective to facilitate innovation in the services provided by CCPs and CSDs, with the aim of improving the quality, efficiency and economy of clearing and settlement services will be introduced.  The Bank will also need to consider the effect that its regulation would or could have on the financial stability of other jurisdictions in which CCPs or CSDs may be established or provide services, and the desire to regulate these entities in a manner that ensures non-discrimination on the basis of nationality or location.

Sustainable finance and net zero

In addition, the Bill proposes replacing the FCA and PRA's existing sustainable growth principle with a new principle – the need to contribute towards achieving compliance with the net zero emissions target. The reason for the proposal is to embed the government's commitment to net zero specifically (as opposed to a more general commitment to sustainable growth) into the matters to which the regulators must have regard when discharging their functions.  It had originally been proposed to retain the sustainable growth principle and supplement it with the new net zero principle, but this was considered unnecessary duplication.  A version of this principle will also apply to the Bank (in respect of its FMI functions) and to the Payment Systems Regulator.

Oversight of the regulators

The Bill contains a number of new provisions recognising the significant extension of powers granted to the FCA, the PRA and the Bank (in respect of its supervision of CCPs and CSDs) and so seek to make them accountable to HM Treasury, but not under its control.  The tenor of the new provisions is therefore review, explain and consult, rather than approval or veto.

  • Reviews - The FCA, the PRA and the Bank will be required to keep under review rules made by them under statutory powers and HM Treasury will have the power to direct the FCA, the PRA and the Bank to carry out a review of their rules in certain circumstances.  
  • Power to direct the making of new rules – HM Treasury may pass regulations to direct the FCA, the PRA or the Bank to make new rules in relation to a specific activity or a specific description of person; to specify a timeframe within which the rules must be made; and to specify matters to which the FCA, the PRA or the Bank must have regard in making the rules. HM Treasury may not, however, specify the form, content, or outcome of any rules made.  There will also be a power for HM Treasury to make recommendations to the Bank and the PSR.
  • Deference decisions and international trade obligations – The FCA, the PRA and the Bank (in respect of its regulation of CCPs and CSDs) are required to consult HM Treasury if they propose to make rules or take certain other steps where there is a material risk that to do so would be incompatible with a notified deference decision. Limited exceptions apply.  (A deference decision is a decision by HM Treasury that the law or practice of another country is considered equivalent, either generally or in relation to a specific matter.  In the UK, the process involves an assessment of whether the corresponding provisions provide an equivalent outcome (as opposed, for example, to being closely corresponding in their terms).) A similar obligation to notify, but in this case not consult, HM Treasury is proposed where there is a material risk that the making of rules or taking certain other steps would be incompatible with an international trade obligation is proposed (although ultimately HM Treasury could use existing powers to block such rules or steps). 
  • Disapplication and waiver – The Bill contains a provision which would permit HM Treasury, in consultation with the relevant regulator(s), to make regulations which would broaden the existing framework for the regulator to disapply or modify the application of certain rules. There has been little commentary about this provision so it is difficult to gauge if or how it will be used in practice.

6. Other measures

The Bill also includes some other miscellaneous amendments to the UK regulatory regime.

Mutual recognition

New powers will be given to the Treasury to enable it to give proper effect to mutual recognition agreements (MRAs) to which the UK is, or is expected, to become a party. MRAs are agreements between the UK and its international trading partners, in respect of which each of the parties recognises the law and practice of the other's jurisdiction as being equivalent to their own. Among other things, the Treasury will have power to make changes to legislation to enable negotiated MRAs to be fully implemented, including granting additional powers to the regulators to enable them to ensure full implementation.

Action against formerly authorised firms

The Bill includes the ability for the FCA and PRA to take action against formerly authorised firms for misconduct while they were authorised.  This would apply to firms which cease to be authorised on or after 20 July 2022 and could include public censure, financial penalties and/or requirement for restitution.

Conditions on controllers

Also, the Bill would extend the circumstances in which the FCA and PRA may impose conditions on controllers to include where the FCA or PRA considers it desirable to do so in order to advance any of its objectives.

7. Next steps

The Bill is due to receive its second reading on 7 September 2022, before it goes through its committee and report stages in the House of Commons and then onto the House of Lords. There is still a long way to go in the legislative passage before it receives Royal Assent.