On 20 July 2022, HM Treasury laid the UK's new Financial Services and Markets Bill before Parliament. This major piece of post-EU legislation makes significant changes to the structure and content of UK financial services regulation. Here are our top five takeaways.

1. The Bill revokes retained EU law relating to financial services.

During the UK's membership of the EU, most financial services legislation was developed at an EU level. When the UK left the EU, the UK incorporated EU law into UK law in a process known as 'onshoring'. The resulting UK financial services landscape is a complex system in which requirements are spread across the UK regulators' rulebooks, primary and secondary UK legislation and onshored EU regulations and decisions.

The Bill's solution to simplify this landscape is to revoke EU-derived legislation, including onshored EU regulations and decisions, secondary UK legislation and some provisions of UK primary legislation (but not regulators' rules) from dates to be appointed by regulation. This does not mean that all EU-derived legislative requirements will simply be 'deleted'. The Bill allows (but does not require) HM Treasury and the UK regulators to incorporate those requirements into UK legislation and the regulators' rulebooks, with or without modification, and the enactment of the Bill will trigger a wide-ranging review of EU-derived legislation which may take some years to complete.

While there will be many substantive changes resulting from this review, the content of much of the UK's financial services requirements could remain broadly similar and the location of those requirements will be streamlined. The new approach will also mean that, in the future, many requirements may be amended more quickly or easily as they will not be subject to the legislative process that is needed to amend primary legislation.

2. The Bill creates a new designated activities regime.

The Bill empowers HM Treasury to 'designate' certain activities that are related to financial services. This power may be used to regulate some activities currently covered by EU-derived legislation as well as new activities. A list, which is described as 'illustrative but not exhaustive', of the activities that HM Treasury may designate is scheduled to the Bill. It includes: activities related to entering into derivative contracts; holding positions in commodity derivatives; short selling; acting as an originator, sponsor, original lender or securitisation special purpose entity in a securitisation; and offering securities to the public.

The Bill would prohibit persons from carrying on designated activities or from carrying them on otherwise than in accordance with new requirements, which HM Treasury and the FCA are given powers to create.

3. The Bill gives the UK regulators new international competitiveness and growth objectives and a net zero principle.

Existing legislation requires the FCA and PRA to act in a way that is compatible with, or that advances, their objectives. The FCA's existing objectives include consumer protection and protecting and enhancing the integrity of the UK financial system. The PRA's existing objectives include promoting the safety and soundness of PRA-authorised persons.

The Bill introduces new secondary objectives for both the FCA and PRA. These are to facilitate, subject to alignment with relevant international standards, the international competitiveness of the UK (including the financial services sector) and its growth in the medium to long term. The Bill also requires that, when discharging their functions, the FCA and PRA must have regard to the UK's net zero emissions target.

4. The Bill creates a regulatory regime for stablecoins.

The Bill introduces the concept of 'digital settlement assets', a term which is intended to capture stablecoins. The Bill empowers HM Treasury to establish an FCA authorisation and supervision regime relating to digital settlement assets, thereby bringing these assets within the scope of regulation. Additional measures introduced by the Bill include: enabling HM Treasury to recognise operators of systemic payment systems and systemic service providers using digital settlement assets for regulation and supervision by the Bank of England; and enabling the Payment Systems Regulator to regulate payment systems using digital settlement assets. HM Treasury is also given the power to amend the definition of digital settlement assets in the future. This is to ensure that the regime continues to have its intended effect as technology evolves in the forthcoming years.

5. The Bill addresses a host of other matters in the financial services sector.

These include:

• implementing outcomes from the Wholesale Market Review, such as removing the share trading obligation and the double volume cap under the UK MiFID regime;
• creating a regime through which the FCA, PRA and Bank of England could have supervisory and enforcement powers over third parties that provide critical services to financial institutions;
• introducing a regime, referred to as the Financial Market Infrastructure Sandbox, to allow financial market infrastructure to test distributed ledger technology; and
• applying a version of the Senior Managers & Certification Regime to central counterparties and central securities depositories.

The Bill will now move through the UK legislative process, during which it may be amended. It should be passed and become law by the end of this Parliamentary session (which is expected to be in May 2023). Firms should consider which areas of the Bill may affect them and track progress and consultations in those areas to ensure they are prepared for forthcoming changes.

Clifford Chance's full briefing on the Bill is available here. The Bill and government's explanatory note are available here.

Authors: Charlotte Chopping, Chris Bates and Monica Sah