The Financial Services and Markets Act 2023

The new Financial Services and Markets Act 2023 (the Act), which received Royal Assent on 29 June 2023, has brought sweeping reforms to the regulation of the UK’s financial services sector.

Following Brexit, the Act seeks to create a new competitive financial framework for the UK by revoking retained EU law relating to financial services and replacing it with legislation designed specifically for UK markets, as well as introducing other key reforms discussed below.

In summary, the Act contains measures to, amongst other things:

1. allow for the revocation of retained EU law;
2. update the objectives of the UK’s financial regulators;
3. reform the UK’s wholesale capital markets regime; 
4. provide for the implementation of mutual recognition agreements with countries outside the UK;
5. bring cryptoassets into the scope of the UK’s existing financial services regulatory regime;
6. establish a framework for the protection of easy to access cash; and
7. introduce new insolvency arrangements that will apply to insurers in financial difficulties.

1. Revocation of Retained EU Law

The Act establishes a framework for the revocation of all retained EU law relating to financial services, and a transition to new requirements under the FSMA 2000 regime.  Certain of the Act’s provisions came into force on the date that the Act received Royal Assent (29 June 2023) and with others coming into force on a later date specified by HM Treasury.  

The aim of HM Treasury is to take a phased approach to the revocation of the retained EU law to the regulators’ rules or to legislation, as appropriate, prioritising those areas of legislation that may bring the greatest beneficial reform. Those in the first tranche include the Wholesale Markets Review, Lord Hill’s Listing Review, the Securitisation Review and the Solvency II review.

As the phased approach is expected to take several years, a “transitional period” will apply where targeted modifications will be made to retained EU law, until the EU law has been revoked.  

2. Financial Regulator Objectives

In order to ensure that the UK marketplace for financial services is strengthened post-Brexit, with effect from 29 August 2023, the Act provides new secondary objectives for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), requiring the regulators to focus on international competitiveness and medium to long-term growth. 

This move has garnered some criticism that this approach may signal a move towards a less stringent regulatory framework that prioritises economic growth over financial safety. However, the government asserts that the new objectives will not impede the UK from maintaining high international regulatory standards.

3. Wholesale Markets

The Act makes transitional amendments to the retained EU law contained in the Markets in Financial Instruments Regulation (MiFIR) and Markets in Financial Instruments Directive (MiFID II) (together the MiFID II Framework), pending eventual revocation and/or replacement, in order to align regulation more closely with the UK's capital markets post Brexit and to remove many of the previous restrictions. Changes include the following:

Removal of the Share Trading Obligation (STO)

The STO stipulated that shares could only be traded in certain venues. The government considered that this requirement did not increase transparency in share trading, and instead prevented firms from accessing the most liquid markets. The removal of the STO means that firms can trade shares on any trading venue in the UK or overseas with any counterparty or on an over-the-counter basis. 

Removal of the Double Volume Cap (DVC)

The DVC was a mechanism that limited the amount of trading that happens under the reference price waive and the negotiated transaction waiver for liquid instruments in an equity instrument. The Act removes the DVC in order to give firms greater choice over where they trade to get the best prices for investors.

Delegation of the pre-trade transparency waivers regime to the FCA

As elements of the pre-trade transparency waivers regime were considered to be too restrictive (such as the reference price requirements for the reference price waiver to be available which limited firms such that they were less able to achieve the best outcomes for clients), the FCA has been given relevant powers update the existing waivers regime.

4. Mutual Recognition

Following Brexit, the UK government is looking to enter into more free trade agreements, including Mutual Recognition Agreements (MRAs) for financial services. The Act allows the government to enact secondary legislation to implement MRAs into domestic law and to grant any additional powers required for the financial services regulators to implement MRAs. 

5. Regulation of Cryptoassets

The Act brings cryptoassets within the regulatory scope of FSMA 2000. Cryptoassets are now included in the definition of “investments” and will be subject to the general prohibition on carrying out “regulated activities”, which include managing investments and issuing electronic money, unless authorised by the FCA or otherwise exempted under FSMA 2000. 

The Act also addresses the regulation of stablecoins (a nominally less volatile form of cryptocurrency, as its value is tied to other assets) by introducing a regulatory regime for Digital Settlement Assets (DSAs), defined in the Act as “a digital representation of value or rights, whether or not cryptographically secured, that:

• can be used for settlement of payment obligations,
• can be transferred, stored or traded electronically, and
• uses technology supporting the recording or storage of data (which may include distributed ledger technology).”

The Act provides HM Treasury with broad powers to bring in future measures to regulate DSAs and includes DSAs among the payment systems over which the Bank of England has statutory oversight. 
These new measures aim to mitigate the risk of volatility in a previously unregulated market and increase standards for consumers.

6. Cash Accessibility

The government considers that the decline in cash usage causing a drop in the number of cash facilities available may pose a risk to the public’s ability to access cash, where 10% of adults have reported that they are reliant on cash to a great extent in their day-to-day lives.
The Act appoints the FCA as the lead regulator for access to cash, in charge of ensuring the reasonable provision of cash withdrawal and deposit facilities.

7. Insolvency Arrangements for Insurers

The Act updates the UK’s insolvency arrangements for insurers to bring them in line with developing international standards. It aims to reduce the possibility of policyholders and creditors being adversely affected when an insurer becomes insolvent by introducing the following changes:

Write-downs 

Where an insurer is unable to pay its debts, as an alternative to making a winding-up order, the Court has the power to reduce the amount of money owed by the insurer under one or more contracts under FSMA 2000.  
The Act clarifies the extent of this power by, for example, specifying that the contracts must relate to unsecured liabilities, with some exceptions, including debts to employees and pension schemes, and specifying the parties eligible to apply for a write down order and the test the Court must apply when considering applications. The Act also clarifies that this power is available when an insurer is, or is likely to become, unable to pay its debts, rather than only where an insurer is proven to be unable to pay its debts. 

The Act also requires the Financial Services Compensation Scheme (FSCS) to make payments to protected policyholders whose payments are reduced under a write-down and introduces a statutory moratorium on certain claims being brought by creditors against an insurer which is undergoing a write-down.

Contractual Termination Rights

The Act introduces a moratorium on insurers’ counterparties from using their contractual right to terminate certain financial and supply contracts with an insurer, where the insurer enters insolvency, restructuring or similar proceedings. The moratorium would apply in instances where an insurer is undergoing certain insolvency or write-down procedures in order to ensure that insurers are not unnecessarily exposed, and to reduce the risk to policyholders and creditors. 

Policyholder Surrender Rights

Certain life insurance policies with an investment element have a surrender value. Policyholders are often able to terminate their contracts early in return for a proportion of the surrender value, or switch between different funds to reduce investment exposure. The Act introduces a temporary moratorium on these rights where an insurer is undergoing certain insolvency or write-down procedures, lasting for an initial six-month period, with the possibility of extension if granted by the Court. 

Conclusion

“Getting Brexit Done” and the EU Withdrawal Act 2018 were only part of the picture, with the legacy of European law continuing to hang over the UK and, in particular, its financial services regulatory framework. Remaining subject to a fixed body of EU law was only ever intended to be a temporary measure, with numerous complexities caused by this approach. Following a consultation on the ideal architecture for UK financial services following Brexit, the Act moves away from onshored EU legislation to the approach taken historically under the Financial Services and Markets Act 2000, where primary responsibility for regulation is delegated to the UK’s financial regulators, subject to the oversight of Parliament.  

As a result, the Act has not left a single aspect of the financial services market untouched. The impacts of this new legislation will likely be felt by all market participants, whether those effects come immediately or later down the line through the introduction of further regulation or amendments to existing EU law. 

If you require further information, please do not hesitate to contact Ruth Lane or Sally Raynes.