The Financial Services and Markets Bill gained Royal Assent on 29 June 2023, becoming the Financial Services and Markets Act 2023. Described by Economic Secretary to the Treasury Andrew Griffith as a "rocket boost for the UK economy", this important piece of legislation will implement the UK's post-Brexit future regulatory framework for financial services and place within the regulators' rulebooks much of the EU law inherited on the UK's withdrawal from the EU. The government envisages 'smarter', more nimble, financial services regulation tailored for the UK and focused on boosting the UK's economy and competitiveness on the world stage. The UK's independent regulators will have greater powers to create firm-facing rules, within an  accountability framework that provides for Parliamentary scrutiny.

We will shortly be publishing a detailed client briefing on the new Act. In this blog, we highlight the key takeaways from the Bill's passage through Parliament.

• Revocation and replacement of EU-derived legislation – The Bill provided for the revocation of the EU-derived legislation on financial services listed in Schedule 1 to the Bill and gave the Government powers to make regulations amending and replacing that legislation legislation and the Government's announcement last December of its Edinburgh reforms indicated how it intends to set about implementing this programme of regulatory change in conjunction with the UK regulators. The finalised Act includes amendments to Schedule 1 expanding the list of statutory instruments and provisions of primary legislation in Schedule 1. It also includes amendments to the provisions exempting the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), the Bank of England (BoE) and the Payment Systems Regulator (PSR) from the obligation to consult on rule changes relating to EU-derived legislation on financial services that do not make material changes. Recognising the scale of the task facing the UK regulators in adapting their rulebooks to the new regime, the amendments will also exempt the regulators from the requirement to consult when revoking - without replacing - rules providing for 'retained EU obligations' and when making changes that are material but that reduce a regulatory burden.
• Status as retained EU law – Under the Act, the EU-derived legislation on financial services listed in Schedule 1 of the Act retains its status as 'retained EU law' under the European Union (Withdrawal) Act 2018 (EUWA) until it is revoked under the Act and the rights, powers, liabilities, obligations, restrictions, remedies and procedures derived from that legislation which are recognised under section 4 of the European Union (Withdrawal) Act 2018 (EUWA) also continue to apply until they are also revoked under the new Act. However, the Retained EU Law (Revocation and Reform) Act 2023, which also received Royal Assent on 29 June 2023, will, with effect from the end of 2023, give all outstanding 'retained EU law' a new status as 'assimilated law', revoke rights, powers, etc. recognised under section 4 of the EUWA and make other changes to the status of former retained EU law that might also affect the interpretation or application of the legislation on financial services covered by the new Financial Services and Markets Act until it is revoked under that Act (or regulators' rules that had implemented obligations under EU law).
• FCA and PRA competitiveness and growth objectives – The Act introduces new secondary objectives for the FCA and PRA to facilitate the international competitiveness of the UK economy (including in particular the financial services sector) and its medium to long term growth. Some tightening up of the drafting has taken place during the passage of the Bill through Parliament, to fully embed the new objectives throughout all relevant provisions of the Act. To ensure the regulators fully apply competitiveness and growth within their day-to-day operations, rule-making and decision making, a new provision will also require the regulators to report for two consecutive years to HM Treasury on how they have complied with their duty to advance the new objectives.
• Accountability and scrutiny of the regulators – While the Bill provided for scrutiny by requiring the regulators to notify the relevant Parliamentary select committee when publishing a consultation and to respond in writing to formal responses to relevant consultations from Parliamentary committees, further measures have been added to extend the notification requirement to a broader range of committees. This now includes a requirement to notify any relevant committee of the House of Lords or any joint committee. The finalised Act also enhances the provisions  in the Bill that required the regulators to keep their rules under review so as to assess whether they are working as intended, and to publish statements of policy on how they conduct rule reviews. The finalised provisions additionally require the regulators to include in their statements of policy information about how representations (including by statutory panels) can be made and considered. New provisions will also enhance transparency by requiring the FCA, PRA and PSR, when consulting on new rules, to include details about any representations made by Parliamentary committees.
• Regulators' engagement with the statutory panels – The Act puts the FCA's Listing Authority Advisory Panel and the insurance sub-committee of the PRA Practitioner Panel on a statutory footing and requires the regulators regularly to communicate on how they have engaged with their stakeholder panels and to publish statements of policy on their appointment of members of those panels. In the final form of the Act, new provisions go further and require the FCA and PRA to publish in their annual reports a summary of how they have complied with the statement of policy on panel appointments. HM Treasury has also been given power to make regulations to require the statutory panels to produce annual reports.
• Cost Benefit Analysis (CBA) – To address criticism of the adequacy of some of the regulators' previous CBAs  on proposed rules s, the Act requires the regulators to publish statements on their approach to CBA and to require the FCA and the PRA (with the BoE) to establish panels to support the development of their CBA. Additionally, amendments have been included in the finalised version of the Act to ensure more industry representation. The amendments require that the FCA CBA Panel includes at least two members who are employed by persons authorised by the FCA and the PRA CBA Panel includes at least two members who are employed by PRA-authorised persons. In each case, the two panel members from FCA or PRA-authorised persons must not be employed by the same person.
• Politically exposed persons – New provisions have been added during the passage of the Bill through Parliament. The first of these new provisions imposes a duty on HM Treasury to amend the money laundering regulations to ensure that politically exposed persons who are entrusted with a prominent public function by the UK (and their family members or known close associates) should be: treated as representing a lower risk than persons so entrusted by a country other than the UK; and have lesser enhanced due diligence measures applied to them. A second new section imposes a duty on the FCA to review its 2017 guidance on banks’ treatment of politically exposed persons, and to publish draft guidance alongside the review, if the FCA concludes that the guidance should be revised.
• Enabling the introduction of Unauthorised Co-ownership AIFs – A new section of the Act introduced during the legislative process will insert a new Chapter 3B into Part XVII of FSMA.  The government is currently exploring whether to introduce regulations covering  unauthorised contractual investment schemes. If introduced, these regulations would fill a gap in the UK’s existing funds framework and may facilitate greater investment in UK real estate by UK funds. Respondents to the government's January 2021 call for input on its review of the UK funds regime had argued that there was demand for a flexible, tax-efficient, unauthorised fund structure for professional investors, that can invest in alternative asset classes. The Act legislates for the power to introduce the new type of scheme, so that the framework is ready should the government decide to proceed with this fund structure in the future.
• Sustainability disclosure requirements – A new section has been added to the Act that  will require the FCA and the PRA to comply with a request by HM Treasury to provide a report in order to inform a policy statement by the Treasury on disclosure requirements relating to sustainability. The FCA and PRA will need to have regard to that policy statement when making rules or issuing guidance about those requirements.
• Net Zero – The Bill as introduced provided for a regulatory principle requiring the FCA and PRA to have regard to the need to contribute towards achieving compliance with the UK's net zero target as set out in section 1 of the Climate Change Act 2008 (and for the BoE to have regard to similar regulatory principles as the FCA and PRA). An amendment agreed in the House of Lords included the protection of nature within this regulatory principle. However, the government viewed the amendment as too broad and therefore too open to interpretation. The final form of the Act includes amended provisions to ensure that, when acting to advance their objectives, the regulators will be required to consider the Government’s commitments to achieve the net-zero emissions target and the environment targets set out in the Environment Act 2021.
• Financing of illegal deforestation – A new provision agreed at Lords stage would have required anyone carrying on a regulated activity "that may directly or indirectly support a commercial activity in relation to a forest risk commodity" to establish and implement a due diligence system. The effect of this provision would have been to introduce mandatory checks to prevent the UK financial sector from lending to or investing in companies that engage in illegal deforestation and land grabs against indigenous peoples. The final Act includes an alternative provision which will commit HM Treasury to undertake a review to assess whether the financial regulatory framework is adequate for the purpose of eliminating the financing of illegal deforestation and to consider what changes to the regulatory framework may be appropriate. The government prefers this phased approach to ensure the UK approach is aligned with that of international partners and to enable further exploratory work to be carried out to ensure an effective regime.
• Cryptoassets (other than stablecoins) – A late-stage government amendment in the House of Commons adopted as Section 70 of the Act will allow HM Treasury to expand the UK's regulated activities framework to encompass cryptoasset related activities. HM Treasury issued a consultation earlier this year on its proposals in anticipation of the Bill's enactment. For details of HM Treasury's proposals, see our RegTalk blog.
• Non-UK CCPs – On UK withdrawal from the EU,  the Temporary Recognition Regime (TRR) enabled eligible non-UK central counterparties (CCPs) to continue to provide clearing services to UK firms whilst equivalence and recognition assessments were ongoing. A “run-off” regime was also established to enable non-UK CCPs that exited the TRR without recognition to wind down relevant contracts and business with UK counterparties in an orderly manner. The length of the run-off is determined by the BoE for each CCP. Prior to technical amendments introduced into the Bill at Committee Stage in the House of Lords in January, the maximum period the BoE could set for the length of the run-off was one year. The Act now gives the BoE the power to extend the maximum run-off period for non-UK CCPs from one year to three years and six months. This gives non-UK CCPs more time to apply for recognition. Further technical amendments at Bill stage were designed to ensure this new BoE power operated as intended with respect to CCPs whose run-off period might end before Royal Assent, specifically non-UK CCPs whose run-off period was to expire on 1 July 2023. In the event, these provisions were not needed as the new BoE power is in force from Royal Assent.
• CCP resolution – The Bill as introduced set out provisions replacing the resolution regime applying to CCPs and giving a broader set of powers to the BoE to bring the UK in line with the Financial Stability Board's 2017 guidance for CCP recovery and resolution. The finalised Act includes some minor clarificatory amendments to relevant provisions setting out the BoE's powers to take special resolution action with respect to CCPs.

When will the Act enter into force?

The Act will enter into force as follows:

• The following provisions entered into force on Royal Assent (29 June 2023): Part 7 (general); Part 5 of Schedule 2 (and section 2 so far as relating to that Part) section 20(3) (general requirement relating to financial promotion approval), so far as conferring a power to make regulations; section 24 (implementation of mutual recognition agreements); section 56 (FMIs – recognised bodies: senior managers and certification) and Schedule 10 (performance of functions relating to FMIs), so far as conferring power to make regulations; section 77 (Politically exposed persons: money laundering and terrorist financing); and section 78 (Politically exposed persons: review of guidance).
• The following provisions enter into force on 29 August 2023: section 22 (digital settlement assets); section 52 (Chair of the PSR as member of FCA Board); section 54 (cash access services); section 55 (wholesale cash distribution); section 58 (insurers in financial difficulties); section 60 (formerly authorised persons); section 61 (control over authorised persons); section 62 (financial services compensation scheme); section 72 (liability of payment services providers for fraudulent transactions); section 74 (reinsurance for acts for terrorism).
• The rest of the Act comes into force on such day or days as appointed by regulations to be made by HM Treasury.

Authors: Monica Sah, Christopher Bates and Sara Evans.