Overview of the Act
- The Financial Services Act ensures the UK’s regulatory framework continues to function effectively following the UK’s withdrawal from the EU, and makes important updates to the regulatory framework.
- The Act enhances the UK’s world-leading prudential standards and promote financial stability by enabling the implementation of the full set of Basel III standards, a new prudential regime for investment firms, and giving the Financial Conduct Authority (FCA) the powers it needs to oversee an orderly transition away from the LIBOR benchmark.
- The Act promotes openness between the UK and international markets by introducing a new mechanism to simplify the process whereby overseas investment funds can be marketed in the UK and delivers a ministerial commitment to provide long-term access between the UK and Gibraltar for financial services firms.
- Finally, the Act includes a number of measures to maintain the effectiveness of the financial
services’ regulatory framework and sound capital markets.
Prudential regulation of credit institutions and investment firms
- Prudential regulation aims to ensure investment firms, credit institutions (banks and building societies), and other financial institutions have adequate financial resources and risk management processes in place to continue providing vital services throughout economic and financial cycles.
Investment Firms Prudential Regime
- Investment firms provide a range of services which give investors access to securities and derivatives markets. Investment firms differ from credit institutions in that they do not typically accept deposits or grant traditional loans; instead, investment firms provide investment services and perform investment activities. This means that, whilst there is some overlap, the risks posed and faced by investment firms, and the impact of those risks, are different from those of credit The current prudential regulatory framework does not adequately cater for these differences. The consequence is that the current prudential framework for investment firms:
- can be disproportionate – the requirements do not account for differences in size or business models of investment firms;
- can be inappropriate – the requirements are currently based on risks to which investment firms may not be exposed, whilst insufficiently addressing the risks to which they are exposed, the risks they may pose to consumers and to the integrity of the UK financial system, and the potential harms they could cause;
- may impose unnecessary administrative and compliance burdens – this is as a result of having to comply with a regime for which much of the administration, compliance, and reporting is not designed for investment firms.
- The Act enables the introduction by the FCA of a tailored Investment Firms Prudential Regime (IFPR) that aims to address the issues set out above. The IFPR will apply to investment firms prudentially regulated by the FCA and their holding companies. In contrast, investment firms that are systemically important to the financial system will continue to be prudentially regulated by the Prudential Regulation Authority (PRA) and will continue to be subject to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (the Capital Requirements Regulation or CRR). The PRA will continue to designate the investment firms that will be regulated under the CRR consistent with the PRA designation framework (Bank of England, Statement of Policy, ‘Designation of investment firms for prudential supervision by the Prudential Regulation Authority’, March 2013).
- The IFPR will ensure that the UK has a more effective prudential regime for investment This is in the context of the EU having adopted legislation for a new investment firm regime (Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms (EU IFR), and Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms (EU IFD)) in 2019. The UK played an instrumental role in designing this regime and the Government and the FCA remain supportive of its intended outcomes. The EU IFR/EU IFD legislation did not apply in the EU at the end of the Transition Period, and therefore does not form part of retained EU law in the UK.
- The Act enables the majority of the IFPR to be specified through rules made by the FCA. In a discussion paper published in June 2020 (FCA Discussion Paper, ‘Prudential requirements for MiFID investment firms’, June 2020), the FCA solicited views on its proposed rules. This approach will mean that the FCA is responsible for designing and setting the detailed firm- level requirements that apply to FCA-regulated investment firms, as well as supervising those firms. It will also mean that the UK’s prudential regulation regime for FCA-regulated investment firms is flexible, with the FCA able to update its rules to reflect industry changes. The FCA’s rules will be made using its existing rule-making powers under the Financial Services and Markets Act 2000 (FSMA) and the new rule-making powers introduced in the Act in relation to unauthorised parent companies of FCA-regulated investment firms.
- As this regime is entirely new, the Act places an obligation on the FCA to introduce prudential rules for FCA investment The Act details the areas for which the FCA must introduce rules – for capital, liquidity, exposure to concentration risk, reporting, public disclosure, governance arrangements and remuneration policies. Taken together, these are key prudential requirements relevant to investment firms. For the purposes of this regime, an “FCA investment firm” is an investment firm that— (a) has a Part 4A permission to carry on one or more regulated activities; (b) is not designated by the PRA; and (c) has its registered office or, if it has no registered office, its head office in the UK.
- To reflect the increased rule-making responsibilities of the FCA in this area, this Act introduces an enhanced accountability framework for the FCA. This framework imposes additional requirements on the FCA to enable greater scrutiny and transparency of its decision-making when implementing the IFPR. When making rules to implement and maintain parts of the IFPR, the FCA is required to have regard to a new list of matters. The matters relate to important public policy considerations, including: relevant international standards; the relative standing of the UK as a place for internationally active investment firms to carry on activities; the target for Net Zero emissions as set out in the Climate Change Act 2008; and financial services equivalence, granted by and for the UK, along with any further matters that HM Treasury may specify in These matters do not change the status of the FCA’s strategic and operational objectives as established in FSMA.
- In consultations, the FCA is required to publish an explanation of how having regard to the above matters have affected the proposed rules (aside from equivalence, where, instead, the FCA will consult the Treasury). When the FCA makes the final rules, it must publish an explanation complying with the above as well as a summary of the purpose of the new rules, in addition to fulfilling its existing FSMA publication requirements.
- The Act includes further provisions to support the introduction of the IFPR and ensure that the FCA can regulate and supervise FCA investment firms effectively. The Act therefore amends the CRR to cease its application to investment firms, other than those designated by the It extends the FCA’s investigative and supervisory powers to allow it to effectively supervise the IFPR and to amend rules to reflect changes to CRR, as instituted by the PRA.
- As country-by-country reporting is relevant to the activities of FCA investment firms, the Act makes amendments to the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (S.I. 2013/3118) to ensure their continued application to investment firms, now that these firms are subject to a bespoke regulatory regime. HM Treasury will introduce further amendments to existing legislation required by the introduction of the IFPR by a separate statutory instrument, made using powers contained in the Act.
The Basel III Standards
- Coordinated international standards are critical to improving the resilience of the global banking system and encouraging a predictable and transparent regulatory environment. The Basel Committee on Banking Supervision (BCBS), of which the Bank of England and PRA are members, sets global prudential standards for internationally active banks (the Basel standards).
- In response to the global financial crisis of 2007/08, the BCBS agreed the Third Basel Accord (Basel III standards), beginning in December 2010. These standards sought to strengthen the existing framework, notably by improving the quality and quantity of financial resources banks are required to maintain and expanding requirements to cover a wider set of risks that banks are exposed to. The BCBS also agreed some entirely new prudential measures, including macroprudential capital buffers, additional capital buffers for global systemically important banks, a minimum leverage ratio, and liquidity requirements, to help ensure banks are able to meet both short-term and long-term financial obligations.
- During the global financial crisis, significant variations in the calculation of risk weighted assets (RWAs) across institutions led to stakeholders losing confidence in risk-weighted capital ratios reported by From 2017 onwards, the BCBS finalised a package of reforms to the Basel III standards (this is sometimes referred to as Basel 3.1). The finalised reforms aim to restore credibility in the calculation of RWAs and to improve the comparability of banks’ capital ratios, without significantly increasing capital requirements at a global level. The internationally agreed deadline for Basel 3.1 implementation is currently 1 January 2023.
- The UK played an active role in negotiating and agreeing Basel III, as finalised by Basel 3.1, and remains committed to its full, timely and consistent implementation alongside other major This Act enables HM Treasury and the UK Regulators to implement those remaining Basel standards that have were not yet incorporated into the UK prudential framework at the time the Act was passed.
- Most Basel standards in effect in the UK at the time of introduction of this Act were implemented through Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (the EU Capital Requirements Regulation or EU CRR) and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (the Fourth Capital Requirements Directive or EU CRD IV).
- Some of the Basel III standards finalised between 2010 and 2017 are implemented in the EU through Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements (the Second Capital Requirements Regulation or EU CRR II) and Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (the Fifth Capital Requirements Directive or EU CRD V). EU CRD V has been transposed into UK law through the Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1406) and UK regulator rules, and therefore applies in the UK. Some parts of EU CRR II already applied in the UK and formed part of retained EU law at the end of the Transition Period with the necessary changes made under the EUWA to ensure that it continues to operate effectively.
- Some remaining EU CRR II provisions will apply in the EU from 28 June As this is after the end of the Transition Period, these parts of EU CRR II will not apply directly in the UK and do not form part of retained EU law.
- Most of the Basel 1 revisions agreed between 2017 and 2019 are not included in EU CRR II or EU CRD V, nor were they the subject of an EU legislative proposal at the time of introduction of this Act.
- The Government and the PRA remain committed to the UK’s implementation of the Basel standards. This Act will enable the implementation of the outstanding Basel III and 3.1 standards by giving HM Treasury the power to repeal the elements of CRR that need to be updated to reflect the latest Basel standards.
- Following repeal, many of the updates will be implemented through rules made by the This will primarily involve technical changes to the UK prudential framework as it relates to credit risk, market risk, counterparty credit risk, operational risk, large exposures, collective investment units, liquidity standards, reporting and disclosures, as well as other areas specified in the Basel standards.
- As for the IFPR, the Act also establishes an accountability framework to apply when the PRA makes rules to implement the Basel standards. The new requirements set under the accountability framework for Basel implementation are largely the same as for IFPR (see paragraphs 11 – 12), except the PRA must also consider the likely effect of their rules on the ability of firms to provide finance to UK businesses and consumers on a sustainable basis in the medium and long-term. This is to reflect the key role and importance of credit institutions who, unlike investment firms, hold and onward lend business and consumer deposits as the core of their business activities.
- As with the implementation of the IFPR by the FCA, the provision of rule-making responsibilities to the PRA – subject to an enhanced accountability framework – makes the UK’s prudential regulation regime more flexible, by enabling the PRA to update rules to reflect the nature of UK firms and the structure of UK markets.
- The Act provides the legal power needed to revoke some provisions of This ensures that the PRA can subsequently make the relevant rules, to ensure continuity, and minimise disruption for firms as elements of the regime transition from CRR to PRA rules.
- The Act provides powers for the PRA to make rules which apply to approved holding companies for the purposes of CRR and CRD, including sub-consolidated and consolidated prudential requirements and rules regarding matters such as governance and group-risk. This power is designed to ensure the approved holding companies’ provisions, which have been introduced through the transposition of EU CRD V, can be maintained effectively over time, including for the purpose of the implementation of Basel standards and ensures the application of the accountability framework contained in this Act wherever this power is
- The Act also provides for the Financial Policy Committee (FPC) to make directions or recommendations that apply to approved holding companies, ensuring a coherent regime now that approved holding companies are responsible for consolidated and sub-consolidated
- Benchmarks are indices that are used in a wide range of markets to help set prices, measure performance, or work out amounts payable under financial They play a key role in the financial system’s core functions of allocating capital and risk.
- Major interest rate benchmarks, such as LIBOR, EURIBOR and TIBOR (generically known as the “IBORs”), are widely used in the global financial system for a large volume and broad range of financial products and contracts.
- LIBOR seeks to measure the average costs at which banks can borrow from the unsecured wholesale lending market. It is produced by ICE Benchmark Administration Limited (IBA) and is calculated based on submissions that are made to IBA each day by a number of major global banks (the “panel banks”). They use a methodology which requires, to the greatest extent possible, submissions to be based on (or derived from) actual transactions (the rates at which panel banks have been able to borrow in certain currencies over particular time periods) and the expert judgement of the panel banks, which is to be used only when sufficient prescribed data are not available.
- LIBOR is internationally available and systemically It is available in five currencies (Sterling, US Dollar, Swiss Franc, Euro and Japanese Yen). LIBOR is published over seven time periods (known as tenors), ranging from overnight up to one year. These five currencies and seven tenors are paired to form 35 individual LIBOR rates.
- As of April 2021, it is estimated that approximately US$265 trillion of financial contracts globally reference LIBOR. The vast majority of exposure to LIBOR is in the derivatives markets, but these also include mortgages, consumer and commercial loans, structured products, money market instruments, and fixed income products.
- The FCA has regulated LIBOR since 2013, initially under FSMA and subsequently under Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the EU Benchmarks Regulation or EU BMR). The EU BMR aims to ensure the accuracy, robustness and integrity of financial benchmarks, providing market participants with confidence in the benchmarks they use. The EU BMR places requirements on administrators, supervised entities, and supervised contributors (see paragraphs 250–252) to benchmarks relating to governance, transparency and methodology
- Following the end of the Transition Period, the EU Regulation forms part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it operates effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law in the UK is referred to as the Benchmarks Regulation (BMR).
- As a result of its use in a significant volume of transactions LIBOR is classified and regulated as a ‘critical benchmark’ under the BMR (see paragraphs 253-254 for more detail). The cessation of a critical benchmark, such as LIBOR, could incur financial losses to consumers and impact market stability if not managed The BMR therefore gives the FCA the power to mandate administration of a critical benchmark in order to ensure its orderly wind-down and prevent threats to market integrity, financial stability, consumers, the real economy, or the financing of households and businesses.
- The BMR stipulates that a benchmark needs to be ‘representative’ of the underlying market or economic reality that it is intended to measure. Withdrawal of submissions from contributors could undermine the ability of a critical benchmark to reflect its underlying market or economic The regulation therefore gives the FCA power to mandate contribution from supervised entities to a critical benchmark in order to maintain the representativeness of the benchmark.
- In 2014, in response to cases of attempted manipulation of IBORs and the decline in liquidity in interbank unsecured funding markets, the Financial Stability Board (FSB) made clear that continued use of major interest rate benchmarks such as LIBOR represented a potentially serious source of systemic risk. This is because the underlying market that these rates intend to measure is no longer sufficiently active and panel banks are increasingly reliant on ‘expert judgement’ for The FSB recommended a long-term transition away from IBORs, with regulators signalling that firms should use alternative “Risk-Free Rates.”
- In 2017, the FCA secured voluntary agreement from the LIBOR panel banks to continue making contributions to the rate until the end of The FCA has publicly stated that, after 2021, it is not minded to use its current regulatory powers to compel panel banks to continue contributions. This means that from the end of 2021 panel banks will be free to cease their contributions to LIBOR if they wish to do so.
- In the absence of compulsion by the FCA to ensure panel banks continue contributing to LIBOR, there is a heightened risk that LIBOR will be found unrepresentative as a result of panel bank In this scenario, there is a strong possibility that LIBOR could cease to exist in its current form at the end of 2021 or shortly thereafter. This would likely leave parties to contracts which determine payments by reference to LIBOR without a workable means of determining those payments.
- However, the BMR does not currently provide the FCA with the appropriate powers necessary to manage the orderly ‘wind-down’ of a critical benchmark, such as LIBOR, before its eventual cessation, where the benchmark has become unrepresentative and it will not be practical or desirable to restore its representativeness.
Tough Legacy Contracts
- In addition to the issues set out in the previous section, there is a particular problem with contracts that cannot transition away from In anticipation of the potential withdrawal of panel bank submissions to LIBOR after the end of 2021, the FCA expects firms to actively transition financial contracts and financial instruments referencing LIBOR to alternative benchmarks before the end of 2021.
- However, some contracts, particularly in cash markets (i.e. loans, securitisations, mortgages and commercial contracts), face significant barriers to moving off These contracts are called ‘tough legacy’ contracts. There are also some LIBOR-referencing ‘non-financial contracts’, such as leases or consumer loans, that face the same problems.
- Furthermore, some of these tough legacy contracts do not have “fallbacks”, which are provisions that could be activated in the event that LIBOR were to cease to be available, such as switching to a specified alternative Without a fallback, these contracts therefore would be at risk of claims of frustration, which means that contractual obligations could end if the obligations were found to have been fundamentally altered. Some tough legacy contracts contain inappropriate fallbacks as they are designed to cater for the short-term unavailability of LIBOR instead of its permanent cessation and can lead to impracticable results.
- Often, tough legacy contracts are multilateral and involve obtaining the consent of multiple parties before a change to the contract can be enabled. In some cases, achieving consensus on the changes is likely to be difficult or impossible due to the number of parties involved, or due to the threshold of consent that must be achieved for the contract to be changed.
- Given these challenges, UK regulators believe that there will be an irreducible core of tough legacy contracts that cannot transition away from the use of LIBOR by end-2021. These contracts could be at risk of frustration in the event of LIBOR Cessation could result in widespread legal disputes between parties to these contracts, including where a party is dissatisfied with the operation of an inappropriate fallback.
- The Working Group on Sterling Risk-Free-Rates issued a ‘Tough Legacy Report’ (Working Group on Sterling Risk-Free Reference Rates, ‘Paper on the identification of Tough Legacy issues’, May 2020) in May 2020 which recommended that a legislative solution would be needed to assist these contracts.
- On 23 June 2020, in a written statement (Chancellor of the Exchequer, ‘Financial Services Regulation’, 23 June 2020) to Parliament the Government announced its intention to bring forward measures to amend the BMR.
Amending the Benchmarks Regulation
- As outlined in the previous sections, the FCA’s existing powers under the BMR are limited in a way that would prove unhelpful for LIBOR’s likely wind-down. The FCA has powers to deal with critical benchmarks that are at risk of becoming unrepresentative in order to restore their representativeness. The BMR also requires that an unrepresentative benchmark be ceased within a reasonable time period. As outlined above, however, there are circumstances in which it might not be possible to restore or maintain the representativeness of a critical benchmark. Furthermore, in such a situation, the benchmark’s sudden cessation could lead to risks of widespread claims of frustration and financial instability, particularly where there are “tough legacy” contracts.
- The Act amends the BMR to provide the FCA with additional powers to manage an orderly wind-down of a critical benchmark, such as The impacts of these changes are outlined in the following paragraphs.
- Amendments made by this Act expand the circumstances in which the FCA can conduct a formal assessment of a benchmark’s representativeness. Following a representativeness assessment, if the FCA considers that representativeness of a critical benchmark cannot reasonably be restored and maintained, or that there are not good reasons for taking steps to do so, the FCA will have the power to “designate” the benchmark.
- Once the FCA has designated a benchmark, it will have the power to require that the administrator changes the benchmark’s methodology, rules, or code of In the case of LIBOR, this could allow a change so that LIBOR is no longer reliant on panel bank submissions. Where the FCA exercises this power, it will also be required to carry out a review of this power at least every two years. It must also determine which provisions of the BMR should cease to apply to the administrator of a designated benchmark, where the FCA has exercised its powers to require that the administrator changes its benchmark’s methodology, rules, or code of conduct.
- The Act also grants the FCA powers to prohibit some or all use of a specific benchmark by supervised entities. Where the FCA designates a benchmark through the process described in paragraph 52, under the proposed amendments, all use of the benchmark will be prohibited once the designation comes into force in order to stop the pool of contracts referencing the benchmark from The FCA will have the ability to postpone the prohibition on use by a period of up to four months, and will have the power to exempt “legacy use” of the benchmark from the prohibition (i.e. use of the benchmark in contracts and other instruments that pre-dates the prohibition imposed under Article 23B). The FCA will have discretion to specify the scope of any permitted legacy use and the length of the permission period. In the case of LIBOR wind-down, this could prevent contract frustration by permitting parties to “tough legacy” contracts to continue to use LIBOR.
- Where the administrator of a benchmark intends to cease provision of a benchmark, it is required to notify the FCA under the Under the existing BMR, the FCA can compel the administrator of a critical benchmark to continue publication of the benchmark until either it has been transitioned to a new administrator, it can be ceased in an orderly fashion or the benchmark is no longer deemed critical.
- The Act increases the maximum time period over which the FCA can compel the administrator of a critical benchmark to continue its publication from 5 years to 10 years,subject to annual reviews of this power. Subject to the FCA’s use of these powers, this would provide for LIBOR’s availability for tough legacy contracts exempted from the prohibition on its use for a longer period. The FCA will also have the power, where an administrator proposes to cease publication of a benchmark, to prohibit new use of that benchmark, with the same exemption powers for legacy use of the benchmark outlined in paragraph 54 for a “designated” benchmark.
- The Act also extends existing requirements under the BMR that administrators of all benchmarks must publish a robust procedure outlining the actions that they will take in the event of changes to, or the cessation of a It gives the FCA the power to review and approve a critical benchmark administrator’s procedure.
- The amendments made by this Act require the FCA to issue statements of policy about the exercise of some of its new powers, including before the FCA directs a change in the methodology of a critical benchmark. The FCA is required to exercise some of the enhanced powers to advance its statutory objectives of securing an appropriate degree of consumer protection and/or protecting and enhancing the integrity of the UK financial The FCA may also consider international impacts before exercising some of its powers.
- The Act also provides for HM Treasury or the Secretary of State to make, by regulations, transitional, transitory or saving provisions in order to provide continuity with respect to decisions made or powers exercised by the FCA in accordance with the BMR before this legislation is commenced. This is to cater for a scenario where either a benchmark administrator informs the FCA of its intention to cease publication of a critical benchmark, or where contributors to the benchmark have notified the administrator of their intention to withdraw submissions to the benchmark before the relevant provisions in this Act are
Extension of the transitional period for benchmarks with non-UK administrators
- Many benchmarks are administered outside the UK and are not therefore subject to the UK’s
regulatory regime for benchmarks.
- The BMR provides a transitional period for UK firms to continue using benchmarks administered in third countries (i.e. any country other than the UK) while third country benchmark administrators seek to demonstrate compliance with UK benchmark rules. Through the Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019 (S.I. 2019/1212), the transitional period for third country benchmarks has been extended to the end of 2022 to provide additional time for third country benchmark administrators to apply for continued market access.
- Once the transitional period for third country benchmarks ends, UK firms will not be able to use benchmarks provided by an administrator located outside the UK unless that benchmark can be shown to follow similar rules. There are three ways to meet this requirement:
- HM Treasury can conclude that the relevant third country has equivalent rules to the BMR;
- the benchmark administrator can appoint a UK representative which can be recognised by the FCA;
- a UK benchmark administrator can endorse the third country benchmark and be held accountable for that benchmark’s compliance.
- As outlined in the Policy Statement (HM Treasury, Policy Statement, ‘Amending the transitional period for third country benchmarks under the UK benchmarks regulation’, July 2020) published by HM Treasury on 22 July 2020, the Government is concerned that many third country benchmark administrators may be unwilling or unable to apply for continued market access under the existing third country regime. Many jurisdictions do not have regulatory frameworks for benchmarks, making it hard for HM Treasury to make a finding of equivalence. Also, many third country benchmark providers lack an economic incentive to apply for access through recognition or endorsement where their benchmarks are provided on a non-commercial basis.
- This Act extends the transitional period for third country benchmarks under the BMR from 31 December 2022 to 31 December This is intended to provide economic and legal certainty for UK market participants. The Government intends to also consider any necessary changes to the BMR, to ensure an appropriate third country benchmarks regime is in place in the longer term.
Access to Financial Services Markets
Market access arrangements for financial services between the UK and Gibraltar
- Gibraltar is a British Overseas Territory which has its own institutions of self-government. Gibraltar enjoys legislative autonomy under its own constitution, brought into effect by the Gibraltar Constitution Order 2006. Gibraltar’s Parliament has the power to pass internal legislation, including on financial services, while the UK remains responsible for Gibraltar’s external relations and defence.
- The financial services industry plays an important role in Gibraltar’s economy and Gibraltar- based firms have made extensive use of the existing market access arrangements between the UK and Gibraltar. Currently firms based in Gibraltar service a large retail consumer base in the UK, particularly in the insurance sector, where more than 20% of motor policies in the UK are written by Gibraltar-based insurers.
- As the common EU membership of the UK and Gibraltar has ended, the Government is committed to creating a new legal and institutional framework that provides for mutual market access and aligned standards in financial services between both jurisdictions. The UK and Gibraltar have a historic and unique relationship in financial services, and the UK does not have the same level of market access arrangements with any other During the Transition Period, the UK and Gibraltar continued to enjoy reciprocal access to each other’s markets through a passporting regime similar to that available to EU firms. The Government introduced the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/589) and the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 (S.I. 2019/680) to prevent Gibraltar-based firms accessing the UK market from suddenly losing their access rights at the end of the Transition Period. These arrangements are however temporary and do not provide an effective long-term legislative regime for market access.
- The Act enables the establishment a new permanent market access regime, the Gibraltar Authorisation Regime (GAR). This new framework will ensure that Gibraltarian financial services firms can access the UK’s wholesale and retail markets on the basis of alignment of relevant law and practice, and close cooperation between the UK and Gibraltarian governments and regulators. The Act also makes provisions to facilitate the access of UK- based firms to the Gibraltarian market.
The Gibraltar Authorisation Regime
- The GAR will allow certain Gibraltar-based financial services firms to access the UK markets as “authorised persons” under FSMA, without having to apply for authorisation from the UK regulators if they intend to carry on GAR-approved activities in the UK.
- HM Treasury will specify by statutory instrument the UK regulated activities for which market access is available (approved activities), and the corresponding activities in Gibraltar’s law that a firm wishing to participate in the UK market must be authorised to carry on by the Gibraltar Financial Services Commission (GFSC). It is expected that the approved and corresponding activities will reflect the regulated activities that are carried on by Gibraltarian firms under the transitional UK market access arrangements which the GAR will The list of approved activities can be amended by statutory instrument based on the findings of a review process that HM Treasury will operate as part of the GAR. HM Treasury will also agree with the UK regulators, the Government of Gibraltar and GFSC the appropriate split of rule-making responsibilities between the regulators in the two jurisdictions, taking into account arrangements that existed before the end of the Transition Period, and define it by statutory instrument.
- Gibraltar-based firms in the GAR will continue to remain subject to Gibraltarian law and will be supervised by the GFSC. Within certain sectors, they may also be subject to further UK requirements, as is already the case now.
- The access of Gibraltar-based firms to the UK market will be based on three conditions that HM Treasury will need to periodically reassess: compliance with the objectives set out in the Act; alignment of law and practice of Gibraltar with that in the UK; and cooperation of Gibraltar entities with UK entities (all discussed below).
The condition of compliance with the objectives
- HM Treasury will be able to designate a regulated activity as an approved activity if it is satisfied that doing so is compatible with the specified objectives designed to support the UK’s financial services regulation and supervision.
The condition of alignment
- The GAR will be underpinned by the principle of alignment under which the relevant law and practice of the UK and Gibraltar are sufficiently aligned. This will ensure that regulatory and supervisory standards are applied in a consistent manner both in the UK and Gibraltar.
- The new framework respects Gibraltar’s regulatory autonomy by giving the Government of Gibraltar the choice as to whether to remain aligned with the UK’s law and practice in the areas where market access is of interest to the In those areas, Gibraltar-based firms’ market access will be dependent on Gibraltar’s law, regulatory standards, supervision, authorisation and enforcement practices being sufficiently aligned with those of the UK in relation to that activity and any related areas of relevance, such as data protection law and insolvency law.
- In considering whether the relevant law and practice of Gibraltar and the UK remains aligned, HM Treasury will consider the alignment of law and practice as regards to both its effect and text and the alignment of supervision, authorisation and enforcement practices. HM Treasury will also have regard to the advice of the UK financial services regulators.
- The principle of alignment under the GAR reflects the historic relationship between Gibraltar and the UK and the uniquely broad scope of market access available. It is therefore a more exacting test than exists under the equivalence regimes intended for more distant and narrower relationships.
The condition of cooperation
- In order to designate an activity as approved, HM Treasury will also need to satisfy itself that adequate cooperation between the Gibraltarian and UK authorities in respect of the GAR is taking place. ‘Adequate cooperation’ covers both the framework for cooperation and its practical Under the condition of cooperation, HM Treasury, the Government of Gibraltar, the UK’s Financial Services Compensation Scheme (FSCS) (also referred to in the Act as the ‘compensation scheme’ or ‘scheme manager’), and the appropriate financial services regulators in the two jurisdictions (FCA and PRA on the UK side and GFSC for Gibraltar) will work together to coordinate their regulatory, supervisory, and, if need be, insolvency activity to support the delivery of a well-functioning GAR.
- The terms of the cooperation among HM Treasury, the UK regulators and the FSCS, on the one hand, and the Government of Gibraltar and GFSC, on the other hand, will be set out in agreements, including in the form of memoranda of understanding, which will include, among other things, arrangements for the exchange of When assessing whether cooperation exists, HM Treasury will look at both the existence and the practical implementation of these agreements.
- To complement the condition of cooperation put on Gibraltar entities, the Act sets out a number of duties on UK regulators and FSCS to adequately cooperate with Gibraltar entities (i.e. both the Government of Gibraltar and GFSC) and HM Treasury for the purpose of the good functioning of the core mechanisms and principles of the GAR and to enable HM Treasury to fulfil statutory reporting duties to Parliament.
- Mutual obligations on cooperation between the UK and Gibraltar regulators for the purposes of the cooperation condition will cover both business-as-usual supervision of Gibraltar-based firms, and circumstances where the UK regulators intend to use their powers of intervention, which are described below.
Accessing the UK market
- Under the new regime, Gibraltar-based firms intending to operate in the UK will have to notify the GFSC of their intention and obtain the GFSC’s consent to carry on an approved activity in the UK. Firms will not be able to carry on regulated activities in the UK for which they do not have authorisation in Gibraltar, or those for which the GFSC withholds consent to carry them out in the UK. Any restrictions on permissions that the GFSC applies to Gibraltar- based firms will equally apply to the activities they intend to carry out in the UK. Those limitations will act as a safeguard to ensure that firms are compliant with domestic
- Firms already operating in the UK through arrangements that the GAR will replace will also be required to notify the GFSC of their intention to continue operating in the UK. The GFSC will then convey this information to the relevant UK regulator, enabling them to update the public register of firms operating in the UK.
Changes to market access and reporting duties to Parliament
- As part of the GAR, the Government will operate a periodic review process to ensure that compliance with the objectives, alignment and cooperation conditions is sustained. HM Treasury will conduct the review process using the information received from the government of Gibraltar, duly verified by an independent entity, and the views of the UK financial services
- HM Treasury will engage with the government of Gibraltar to resolve any emerging issues bilaterally, as a failure to maintain alignment and cooperation between both jurisdictions will be detrimental to Gibraltar-based firms and could limit the market choices for UK During the preparation of the report detailed below, HM Treasury must consult the FCA and the PRA.
- The Act places a duty on the Government to lay before Parliament a report on the operation of the GAR every two years. The report will set out, in particular, whether the three conditions underlying the regime of compliance with the objectives, alignment of law and practice, and cooperation continue to be satisfied in respect of approved activities or are achieved in respect of new During the preparation of the report, HM Treasury is required to consult the FCA and the PRA. Based on these reports, HM Treasury could propose to adjust the regulations setting out the approved activities, for example, by expanding or reducing the list of regulated activities which are approved for market access.
- Gibraltarian firms will continue to remain subject to the laws of Gibraltar and will be supervised by the However, as is already the case currently, the UK regulators have certain powers available, for example, to protect UK consumers and/or the UK’s financial stability if concerns arise in respect of an incoming Gibraltar-based firm. The Act provides powers in relation to individual firms for the UK regulators to ensure necessary levels of protection for financial stability and consumer protection.
- The Act constrains the use of the UK regulators’ intervention powers to a limited set of circumstances. They will only be able to use those powers on their own initiative if certain conditions specified in the Act are met.
- The Act requires the UK regulators and FSCS to cooperate among themselves and with the GFSC and update their memoranda of understanding accordingly to set out adequate procedures and approaches to resolving possible supervisory concerns under the GAR.
- The UK regulators will also have powers over Gibraltar-based firms by virtue of these firms being ‘authorised persons’ under This reflects the current position in relation to FSMA being applicable to Gibraltar-based firms ‘passporting’ into the UK.
- In order to provide sufficient procedural safeguards, the Act also sets out a Gibraltar-based
person’s right to make representations and refer a matter to the Upper Tribunal.
- The Government is committed to ensuring that UK customers of Gibraltar-based firms continue to enjoy an adequate level of protection under the FSCS, in line with protection provided by UK-based The Act gives HM Treasury the power to set out in regulations the types of firms which are not eligible to participate in the FSCS.
- The Government will work with the FCA to ensure that, once the GAR comes into force, individuals and eligible small businesses using financial services sold in the UK by Gibraltar- based firms can refer disputes to the UK Financial Ombudsman Service (FOS). Customers of Gibraltar-based firms that are already voluntarily subject to the FOS scheme will continue to be covered, with no loss of eligibility for their customers in respect of actions occurring before the GAR takes effect. The FCA will be responsible for providing for this change in its rules.
Transitional arrangements in the event of market access withdrawal
- If market access were withdrawn for an approved activity, the Government would ensure that this does not create a cliff edge for Gibraltar-based firms operating in the UK, which could otherwise result in disruption for UK business and consumers.
- The Act provides for transitional arrangements so that Gibraltar-based firms can continue to undertake the relevant activity in the UK for a temporary period of time after market access is withdrawn. Gibraltar-based firms would not need to apply to be covered by this mechanism and they would be able to use this period of time to apply for authorisation from the UK regulators or exit the market in an orderly fashion. The Government will be able to specify on an activity-by-activity basis the specific duration for the winding-down arrangements. The UK regulators will also be able to restrict the extent of business under the transitional arrangements, so that a Gibraltar-based person carrying on an activity for which access has been withdrawn is limited to the performance of existing contracts or to transferring property, rights or liabilities to an authorised person or to complying with requirements imposed by the UK regulators.
Market access for UK firms
- As market access is a sovereign matter, it will be the responsibility of the Government of Gibraltar to legislate in their own domestic legislation for the reciprocal market access for UK- based firms. In order to facilitate the access of UK-based firms to the Gibraltarian market, the Act makes provision for the procedure that UK-based firms should follow as a precondition for accessing the Gibraltarian market, and requires a UK-based firm wishing to carry on activity in Gibraltar to have domestic authorisation to carry on regulated activities in the UK and to notify the UK regulators of their intention if such market access is available. The appropriate UK regulator would then notify the GFSC. Ultimately, the Government of Gibraltar will decide the scope of inward market access.
Further legislative regimes encompassing Gibraltar-specific rights
- The core of the new GAR intends to create a market access gateway based on approving ‘regulated activities’ which will replace the Financial Services and Markets Act 2000 (Gibraltar) Order 2001 (S.I. 2001/3084) (the Gibraltar Order). However, certain Gibraltar-
specific regimes conferring rights on Gibraltar-based persons in UK markets and UK-based persons in the Gibraltarian markets are set outside the remit of the Gibraltar Order, and therefore need to be addressed separately to ensure continued market access.
- Given their differing characteristics and functioning, and that they mostly encompass activities that are non-regulated activities under FSMA, these regimes cannot simply be brought under the core mechanism of GAR. Yet, the size of these regimes does not justify the creation of a parallel legislative regime effectively mirroring the core mechanisms of GAR.
- Therefore, the Act includes powers for HM Treasury to preserve access for the economic activities which currently exist between the UK and Gibraltar, and to subject Gibraltar-specific regimes outside the scope of the GAR to principles and mechanisms similar to those in the
Overseas Funds Regime
- The UK investment management industry manages the savings and pensions of millions of UK citizens. They raise capital from investors into collective investment schemes (alsocommonly referred to as ‘investment funds’ or simply ‘funds’) and allocate it across the wider global economy. 75% of UK households use an asset manager’s services either directly or indirectly, for example through workplace pensions.
- Asset management is a highly internationalised industry and it is common practice for asset managers based in one country to establish or ‘domicile’ their collective investment schemes in another country and sell these schemes to investors around the world.
- Many of the schemes which are currently marketed to UK investors, including retail investors, and for which UK firms provide portfolio management services, are established in the EEA.
The term ‘retail investors’ refers to ordinary people when they invest their personal savings and pensions, rather than professional, experienced investors or financial companies. Many of the schemes established in the EEA that are marketed to retail investors are classified as
‘UCITS.’ In the UK, ‘Undertakings for Collective Investment in Transferable Securities’ (UCITS) are schemes that have been authorised by the FCA as such. In the EEA, UCITS are schemes that are authorised by their national competent authority under Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (the UCITS Directive). The UCITS Directive also created the
‘passporting’ regime for UCITS, allowing them to be marketed to retail investors across the EEA.
- As of 2019, there were around 2,600 UK-domiciled UCITS authorised by the FCA which can market to retail investors. By comparison, in 2019 the FCA had received passporting notifications for around 9,000 UCITS that are domiciled in the EEA, which enables them to market to UK investors.
- Data from the Investment Association, the trade body for the UK asset management industry, indicates that around a quarter of their members do not operate any UK domiciled schemes, and instead exclusively market EEA-domiciled schemes, most of which are EEA UCITS, to UK investors through the passporting regime.
Existing approach to recognising third country collective investment schemes
- Prior to the introduction of the Act, an overseas scheme had to be ‘recognised’ before it was able to be promoted to the general public in the UK. EEA UCITS that market into the UK via the passporting regime automatically become recognised when the appropriate regulator in the relevant EEA member state notifies the FCA of the scheme’s intention to market to investors in the Schemes domiciled outside the EEA must apply for recognition through a process that requires a detailed assessment by the FCA of the scheme, its operator and its trustee and depositary, if there is one. This process is set out in section 272 of FSMA. To become recognised, the FCA must be satisfied that each scheme, its operator and its trustee and depositary, if there is one, meets several tests in legislation and that adequate protection is afforded to investors in the scheme.
- The passporting regime under the UCITS Directive ended at the end of the Transition Period.
- In recognition of the important role EEA schemes play in the UK market, the Government established a ‘temporary marketing permissions regime’ (TMPR). The TMPR enables EEA UCITS to continue marketing into the UK for a temporary period, provided they had exercised their right to do so under the passporting regime before the end of the Transition Period. Existing legislation states that schemes wishing to continue marketing in the UK beyond the end of the TMPR must be recognised under section 272. The TMPR is currently scheduled to end at the end of 2023 but may be extended by one year at a time via statutory instrument. The Act will extend the TMPR to the end of 2025.
- The existing process of recognition, in section 272, is not suitable for the number of schemes that the Government expects will want to continue marketing into the UK beyond the end of the TMPR. Applications through this process are resource intensive for scheme operators and for the FCA, creating a significant operational The existing process also operates on a scheme-by-scheme basis, which is not well suited to dealing with potential changes to regulation or requirements that impact on a large number of schemes. Overall, the existing process is not fit for the purpose of recognising a potentially large number of overseas schemes.
- The Act introduces a new Overseas Funds Regime (OFR) to allow overseas collective investment schemes to be marketed to all investors, including retail investors, in the UK market on appropriate terms. It introduces two new mechanisms; one for retail collective investment schemes, and one for money market funds (MMFs), which are a type of collective investment scheme that invests in liquid assets (such as cash, government bonds and corporate debt) and represent a low risk, short term and high liquidity investment often used as an alternative to Through the OFR, HM Treasury has the power to grant ‘equivalence’ to a specified category of schemes from an overseas country or territory. The Act also extends the TMPR to ensure sufficient time for the OFR to be established.
Outcomes based equivalence
- Regulation in other countries will not be identical to that in the UK, but the overall effect of their rules may combine to achieve similar outcomes. Under the OFR equivalence will be judged on outcomes. Assessments of outcomes will be underpinned by compliance with internationally agreed standards and through different combinations of rules for MMFs and retail collective investment schemes if these practices provide an equivalent outcome to the corresponding UK legal framework.
- Retail collective investment schemes in a particular country or territory must offer at least equivalent investor protection. When assessing overseas schemes and comparable UK schemes, HM Treasury will consider the UK legislation and FCA rules that apply to the kind of UK authorised scheme that is most similar to the category of overseas schemes being
- For MMFs, law and practice in a particular country or territory must offer equivalent effect to Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (MMFR).
- As the concept of outcomes-based equivalence means that the UK and overseas regulatory frameworks do not need to be identical, there may be circumstances where a country meets the standard of equivalent investor protection, but it is desirable to specify additional requirements as a condition of marketing in the UK.
- Additional requirements may also be applied to MMFs wishing to market to retail investors through the OFR, which meet the MMFR equivalence standards and the standard of equivalent investor protection. MMFs which meet the MMF equivalence standards, but market to UK investors through section 272 of FSMA or by notifying through the National Private Placement Regime (NPPR), as explained below, will not be subject to additional
- Additional requirements can only be applied to schemes which already meet the equivalent investor protection test and MMFR equivalence, in the case of Therefore, it will not be possible to use these additional requirements to address fundamental shortcomings in the overseas regime, because a country’s regime must offer equivalent investor protection, and MMF equivalence in the case of MMFs, as a precondition of an equivalence determination.
Additional requirements may be used to provide consistency with the UK regime where necessary.
- Additional requirements may not be necessary in all cases and would be based on aspects of the UK framework which were judged to be important to ensure consistency or comparability between overseas schemes and those on offer in the UK. Examples may include the requirement for schemes to have independent directors or complete value assessments.
- If additional requirements are necessary, they will be set out in the statutory instrument used to give effect to the equivalence The FCA will have the power to make rules in relation to the additional requirements as specified by HM Treasury, to the extent that these may be necessary to provide further clarity to schemes on how they may be expected to comply. This power will not permit the FCA to establish new additional requirements which go beyond what is specified by HM Treasury.
Recognition and notification
- Once an equivalence determination is granted, individual schemes wishing to market in the UK will need to be recognised by the FCA.
- Retail collective investment schemes from a country which fall within an equivalence determination will need to apply to the FCA to gain recognition. The FCA will not be responsible for verifying scheme’s compliance with the overseas regulatory framework, reflecting the fact that the equivalence determination has already confirmed that schemes in the specified category offer equivalent investor protection. The FCA will have the power to require scheme operators to provide it with such information as is reasonably considered necessary for the purpose of determining the application. This would include information which confirms that the scheme is eligible for recognition and meets any additional requirements, where they have been specified as part of an equivalence determination. The Act also disapplies the notification requirements under the NPPR for schemes which are recognised under the retail equivalence regime of the OFR. This is because there are already sufficient reporting requirements under the OFR, such as the FCA power described above, as well as a requirement for a cooperation agreement.
- The process for MMFs gaining market access will depend on whether they intend to market to retail or professional clients. MMFs that wish to market to both retail and professional clients must either:
- be located in a country or territory with equivalence determinations for both MMFs and retail schemes and apply for recognition under the OFR; or
- be located in a country or territory with an equivalence determination for MMFs and be recognised as suitable for marketing to retail investors under section 272 of
- In order to market solely to professional investors in the UK, MMFs must provide MMF equivalence and notify with the NPPR. The NPPR is a mechanism that allows some types of non-UK authorised or recognised schemes to market to professional investors in the UK, that are not allowed to do so through domestic marketing or passporting regimes.
- The Act also specifies that the OFR and section 272 of FSMA apply to both a collective investment scheme and a part of a collective investment scheme. This makes it clear that the regimes can recognise, if appropriate, schemes from other countries or territories where these are structured as umbrella funds and sub-funds. Umbrella funds and sub-funds are a way of structuring collective investment schemes: an umbrella fund is effectively a legal entity which groups together different sub-funds, with each sub-fund having its own pool of assets, typically to provide a range of different investment strategies for investors. Market practice has evolved considerably since FSMA gained Royal Assent in 2000 and it is now common for funds to use this structure. Where countries or territories allow schemes to be structured in this way, HM Treasury can therefore ensure it is the sub-fund that can gain recognition for marketing to UK investors. HM Treasury has the power to make modifications where appropriate to clarify how Part 17 and provisions made under Part 17 have effect in relation to parts of schemes recognised or seeking recognition under the OFR and section 272. To ensure that legislation outside of Part 17 FSMA is sufficiently clear, the Act gives HM Treasury the power to modify or amend legislative provisions in FSMA and other parts of the statute book, so that HM Treasury can clarify whether and how provisions, relating to schemes recognised or seeking recognition under the OFR or section 272, have effect for parts of schemes. HM Treasury is only permitted to use these powers in relation to legislation that was made before the OFR and the amendments to the section 272 regime under section 25 are commenced.
Modifying or withdrawing equivalence
- It may be necessary to revise the additional requirements from time to time, to account for material changes in the relevant regulatory For example, HM Treasury will consider adding further additional requirements in response to new FCA rules that apply to UK authorised schemes.
- Similarly, it may also be necessary to modify the category of schemes specified in an equivalence Any changes would be made by way of secondary legislation, amending the statutory instrument that gave effect to the equivalence determination.
- If it becomes apparent that the required standard of equivalent outcomes is unlikely to be or is no longer met, HM Treasury and the FCA will engage with the overseas regulator and finance ministry with a view to rectifying the situation or outlining next steps. If it has not been possible to remedy the situation within an appropriate amount of time, it may be necessary for HM Treasury to withdraw an equivalence determination.
- The withdrawal of an equivalence determination will be undertaken in an orderly and controlled manner to ensure that investors are protected, and businesses have time to In such circumstances, the Government will engage with industry and stakeholders as appropriate to ensure the process is predictable.
Suspension or revocation of individual schemes
- There may be instances, including where there is the potential for harm to investors, where it is necessary to temporarily suspend or revoke a scheme’s The OFR will therefore provide the FCA with a power to suspend or revoke recognition of an individual retail scheme or market access for an MMF.
- Scheme operators (and, in certain circumstances trustees and depositories of a scheme), will have the opportunity to make representations to the FCA following the receipt of notification of the proposed suspension or revocation of the scheme. Following a decision by the FCA to suspend or revoke the recognition of the scheme, the operator may refer the matter to the Upper Tribunal.
Amendments to section 272
- Section 272 of FSMA is not repealed but will continue to be available for individual retail schemes that are not eligible to be recognised through the OFR because they are not covered by an equivalence determination for retail schemes. Section 272 will also remain for MMFs that still wish to market to both retail and professional investors, and which are assessed as MMF equivalent but not eligible to be recognised under the OFR.
- The Act makes minor amendments to section 272 to make it more efficient for the industry and the FCA, but this does not change the fundamental features of the in-depth assessments required for schemes accessing the UK market through this route.
Markets in Financial Instruments Regulation
- EU Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (‘MiFIR’) allows third country investment firms to provide cross-border investment services and activities to certain professional clients and eligible counterparties in the EU as long as they come from jurisdictions which have been determined to have equivalent rules.
- At the end of the Transition Period, this equivalence regime (sometimes referred to as the
“Title 8 Regime”) formed part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it operates effectively following the end of the Transition Period. Under this regime, HM Treasury has the necessary powers to assess whether a third country is equivalent for the purposes of the Title 8 Regime, as such allowing cross-border market access for that jurisdiction’s investment firms. This Act updates the Title 8 Regime to broadly reflect the changes the EU introduced to their own regime.
- The Act provides the FCA with a power to specify reporting requirements for firms that register under the Title 8 The purpose of this change is to ensure that the FCA has an appropriate degree of oversight over firms that could register under the regime. It will also enable HM Treasury to, where appropriate, impose specific requirements on firms that have registered under the Title 8 Regime to address issues related to the firm’s carrying on of business in the UK, as opposed to the home state.
- The Act includes amendments to the equivalence assessment criteria to reflect the changes to
the UK’s prudential rules as a result of provisions in this Act as set out in paragraphs 6-14. The FCA will have the power to make rules to operationalise the additional requirements as specified by HM Treasury, to the extent that these may be necessary to provide further clarity to firms on how they may be expected to comply. This power does not permit the FCA to establish new additional requirements which go beyond what is specified by HM Treasury.
- The Act also introduces additional powers for the FCA to impose temporary restrictions or prohibitions on, or withdraw the registration of, firms that register under the Title 8 It finally includes further amendments to clarify the scope of the reverse solicitation exception, which allows third country firms to service UK clients at the client’s own initiative, without relying on the Title 8 Regime.
Cancellation of permission to carry on regulated activity
Changes to the Financial Conduct Authority’s cancellation of authorisation process
- Firms carrying on a “regulated activity,” as defined in section 22 of FSMA must be authorised to do so in the UK by either the FCA or the PRA or be exempt from authorisation. The FCA keeps a public record of authorised firms, individuals and other bodies that are, or have been, regulated by the PRA and/or the FCA. This is known as the Financial Services Register (the Register).
- The Register allows consumers to check that firms offering financial products and services are authorised. It provides those firms’ contact details and the products and services they are authorised to provide, and whether those firms, or certain individuals at the firms, have been sanctioned or had other action taken against them.
- The accuracy of the Register is integral to ensuring consumers considering a financial product or service have the required information to take informed decisions about who they deal If the Register is inaccurate, there is a risk that fraudulent individuals or firms will clone inactive firms to scam consumers. Improving the speed with which the FCA can cancel the authorisation of a firm that is no longer carrying on regulated activities, and reflecting this on the Register, will help to manage that risk. It will also allow the FCA to use resources more efficiently to better and more swiftly deliver in the public interest.
- In July 2020, the Government published a policy statement (HM Treasury, Policy paper,
‘Changes to the FCA’s cancellation of authorisation process’, July 2020) in which it sought views on proposed changes to the FCA’s cancellation or variation of authorisation process. The Act makes amendments to provide the FCA with the mechanism to cancel or vary authorisation more quickly when firms stop carrying on regulated activities. The Act also provides for the FCA’s annulment of the cancellation or variation of a firm’s authorisation.
- The grounds for the FCA to cancel a firm’s authorisation are set out in Part 4A of FSMA. Authorised firms are required to give the FCA prompt notice if they intend to cease carrying on one or more regulated activities permanently. Where a firm has not provided such a notification but the FCA believe that it is no longer carrying on a regulated activity, the FCA must demonstrate that one of the grounds set out in statute is met in order to cancel the firm’s authorisation. This takes considerable time and resource, delaying the process of cancelling the authorisation of inactive firms.
- The Act provides an additional process to sit alongside the existing cancellation procedure, to allow the FCA to streamline those cases where it appears to the FCA that a firm is no longer carrying on a regulated activity and cancel or vary their authorisation. This could be where the firm has failed to pay its fees or levies or provide information to the FCA as is required in the FCA Handbook. The Act provides the FCA with the mechanism to restore a firm’s authorisation or varied permission upon a firm’s application, where it considers it just and reasonable to do so. This application falls within the scope of the FCA’s power to provide for the payment of fees in paragraph 23 of Schedule 1ZA FSMA.
- The FCA may annul the cancellation or variation of a firm’s authorisation unconditionally, subject to conditions, with one or more regulated activities described differently or removed, or refuse to restore a firm’s authorisation or varied permission. Where the FCA refuses to annul the cancellation or variation of a firm’s authorisation or permission, the firm may refer the matter to the Upper Tribunal. The Upper Tribunal may give directions and make provision for placing the firm, and other persons, in a similar position, as if the authorisation had not been cancelled or the permission had not been varied. The Act also provides the FCA with the ability to refer to the Upper Tribunal an FCA decision to annul the cancellation or
variation of a firm’s authorisation or permission.
- The change only applies to firms both authorised and regulated solely by the FCA. Firms regulated by the PRA, often described as dual regulated firms, are not in scope of the
Rules about the level of care provided by authorised persons
FCA rules about the level of care provided to consumers by authorised persons
- Authorised UK financial services firms’ treatment of their customers is governed by the FCA
through its Principles for Businesses, as well as specific requirements in the FCA Handbook.
The FCA’s Principles require firms to conduct their business with due skill, care and diligence, and to pay due regard to the interests of their customers and treat them fairly. The FCA can take action against firms which breach the Principles, including through financial penalties.
- The FCA is considering options for addressing consumer harm in relevant markets, including the introduction of a duty of care. The FCA published a Discussion Paper on a duty of care and potential alternative approaches in July 2018, which was followed by a Feedback Statement in April 2019. This Feedback Statement committed the FCA to undertaking a consultation on options for change to address potential deficiencies in consumer protection. This consultation is due to be published in May 2021.
- The Act formalises the next steps of the FCA’s work by requiring the FCA to carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers, or other provision on the level of care that must be provided to consumers by The Act specifies that the consultation must be carried out, and an analysis of responses published before 1 January 2022, with any subsequent rules made before 1 August 2022.
Insider dealing and money laundering etc.
Amendments to the Market Abuse Regulation
- Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (‘EU MAR’), the UK’s civil market abuse regime, contains prohibitions on insider dealing, unlawful disclosure of inside information and market manipulation, and provides the FCA with the necessary information to prevent and detect such abuses via its reporting and notification obligations. Following the end of the Transition Period, the EU Regulation forms part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it continues to operate effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law in the UK is referred to as the Market Abuse Regulation (‘MAR’). The Act makes two amendments to MAR intended to strengthen the regulation, and reduce the administrative burden associated with compliance.
Inside Information and Insider Lists
- Inside information is information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers (an issuer is a legal entity which issues or proposes to issue financial instruments) or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or the price of related derivative financial instruments. The unlawful disclosure of inside information increases the risk of insider dealing which undermines the integrity of the market and investors’ confidence.
- Insider lists are lists maintained by issuers or persons acting on their behalf or on their account (such as advisers and consultants) Such lists must contain details of all persons who have access to inside information and who are working for the issuer under a contract of employment, or otherwise performing tasks through which they have access to inside information. Insider lists are critical to enable the FCA to investigate the unlawful disclosure of inside information and insider dealing. Insider lists also act as a control for issuers to appropriately manage their flows of inside information.
- MAR currently requires issuers or any person acting on their behalf or on their account to maintain an insider The use of “or” has caused confusion as some issuers’ advisers are not sure whether they are required under MAR to draw up their own insider list (i.e. separate to the issuer’s insider list). This creates the risk that some of the parties are not maintaining insider lists, which increases the risk of the unlawful disclosure of inside information and persons’ insider dealing on that information.
- The Act makes an amendment to MAR to remove confusion by clarifying who is required to maintain an insider list, establishing that issuers and any person acting on their behalf or on their account are all required to maintain such a list.
Transactions by senior managers
- MAR also requires persons discharging managerial responsibilities, and those closely associated with them, to notify the issuer and the FCA of their transactions in financial instruments related to that Currently, the notifications should be made to the issuer no later than three business days after the date of the transaction. The issuer is then also required to notify the public of such transactions no later than three business days after the transaction.
- This timetable for both notifications running concurrently from the date of the transaction creates a tight timetable for issuers to notify the public. In some cases, the issuer may only receive the notification from the senior manager or closely associated person on the day they are also required to publish the transaction, creating a challenging administrative burden for the issuer.
- The Act amends MAR to adjust the timetable within which issuers are required to disclose transactions by their senior managers to the public so that all issuers will now be required to disclose transactions within two working days of those transactions being notified to them by the senior managers or the persons closely associated with them. This is a more practical and sensible timetable, which preserves the timely and transparent disclosure of these transactions to markets but does not disproportionately burden issuers.
Extending the maximum criminal sentence for market abuse
- Criminal market abuse is split into two different areas: insider dealing and market manipulation. An example of insider dealing is where a person in possession of inside information uses that information for personal gain, for example, by buying or selling a share to which the information relates.
- The criminal market abuse regime in the UK is primarily composed of the insider dealing offences in the Criminal Justice Act 1993 and the market manipulation offences in the Financial Services Act These offences are currently punishable by up to seven years in prison.
- In terms of seriousness and the harm caused to society, market abuse is comparable to other economic crimes such as fraud or bribery, which carry a maximum sentence of ten The maximum sentence length for crimes of this nature has been identified as one factor in deterring individuals from committing criminal market abuse.
- The ‘Fair and Effective Markets Review 2015’ (Bank of England, FCA, ‘Fair and Effective Markets Review 2015’, June 2015), published by the Bank of England, FCA and HM Treasury, identified a culture of impunity in parts of the market, coloured by a perception that misconduct would go either undetected or Increasing the maximum sentence for market abuse to ten years was one of a number of recommendations made by the review.
- Furthermore, with a current maximum sentence of seven years, there is less scope for judges to impose an increased sentence in particularly serious cases when compared to other economic crimes. Increasing the maximum sentence will allow a greater level of flexibility in particularly serious cases where there are a larger number of aggravating factors, for example a very significant breach of trust by senior individuals or sophisticated criminality by organised criminal groups.
- The Act increases the maximum sentence for criminal market abuse from seven to ten years, bringing it into line with comparable economic crimes.
Amendments to the Proceeds of Crime Act 2002 and Anti- Terrorism, Crime and Security Act: Payment and E-Money Institutions
‘Money laundering offences: electronic money institutions, payment institutions and deposit-taking bodies’
- The Proceeds of Crime Act 2002 (POCA) provides the statutory basis for the principal money laundering offences in the UK. These offences are set out in sections 327, 328 and 329 POCA. In certain circumstances, a person can seek consent from the National Crime Agency (NCA), or other specified officers, to deal with property in a way which would otherwise constitute one of the principal money laundering offences. Such consents must be sought by making an authorised disclosure as specified in section 338 Authorised disclosures are commonly referred to as Defence Against Money Laundering Suspicious Activity Reports, or “DAMLs”. If the person or firm gets appropriate consent, they do not commit a principal money laundering offence in POCA when dealing with that property in a way that is covered by the consent.
- Additionally, sections 327, 328, 329 and 339A of POCA include provisions that currently allow deposit-taking bodies only, in certain circumstances, to process transactions where there is a suspicion of money laundering, if the transaction is below a threshold amount, without having to submit a DAML to the NCA and without committing a principal money laundering offence. The threshold amount for acts done by a deposit-taking body in operating an account is £250 unless a higher amount is specified in accordance with section 339A POCA. The threshold amount provisions only apply in relation to activity undertaken in operating an account maintained with a deposit-taking body; they do not apply in relation to transactions related to the opening or closing of an account, or when a deposit-taking body first suspects that the property is criminal.
- Currently, the threshold amount provisions in sections 327, 328, 329 and 339A of POCA only apply to deposit-taking bodies. Payment institutions and e-money institutions authorised or registered under the Payment Services Regulations 2017 or Electronic Money Regulations 2011 respectively (payment and e-money institutions) are not covered by these As such, payment and e-money institutions will in practice need to submit DAMLs for all transactions where there is suspicion of money laundering in order to avoid committing one of the principal money laundering offences, regardless of the amount. This expends significant amounts of time and resources by payment and e-money institutions as well as law enforcement who are required to process the requests.
- The Act amends POCA to bring payment and e-money institutions within scope of these threshold provisions.
‘Forfeiture of money: electronic money institutions and payment institutions’
- The Criminal Finances Act 2017 created new account freezing and account forfeiture powers under POCA and the Anti-Terrorism, Crime and Security Act 2001 (ATCSA). These powers enable certain law enforcement officers to apply for an account freezing order (AFO) from the court to freeze a bank or building society account if there is reason to believe that money present in the account is the proceeds of crime or that the money is intended by any person for use in unlawful conduct, or in the case of ATCSA, they have reasonable grounds for suspecting that money held in such an account is related to terrorism in a manner specified in that Act. Once the money is subject to an AFO, then law enforcement may seek to have it
- AFOs, and subsequent forfeitures, can be used to quickly deny access to funds that are suspected of being the proceeds of crime, or used to fund criminality, where it may not be feasible or practicable to undertake a criminal investigation into the holder of the funds, or to use other mechanisms in They can likewise be equally effectively used under ATCSA in the context of countering terrorism financing.
- Currently, these powers can be exercised in respect of accounts held at banks and building societies. This Act extends the AFO and forfeiture provisions in POCA (in England and Wales and Scotland) and ATCSA (across the UK) to ensure that these powers can also be applied to accounts held at payment and e-money institutions.
Application of money laundering regulations to overseas trustees
- A trust is a way of managing assets that involves a trustee holding the assets placed in the trust for the benefit of a specified person, or class of persons, known as the beneficiary
- Since 2017, overseas trustees that pay tax in the UK in relation to the assets or the income of an express trust have been required to register with Her Majesty’s Revenue and Customs (HMRC). Changes to the registration of trusts made by the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/991) will mean that in future HMRC will also need to register certain overseas express trusts that acquire land or enter into a business relationship in the Future money laundering regulations will need to be able to apply to overseas trusts in those sorts of cases.
- The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) creates the framework for implementing post-Brexit sanctions and anti-money laundering policy. SAMLA will replace the European Communities Act 1972 (ECA) as the statutory power the Government uses to impose and make changes to requirements in the UK’s money laundering regulations, currently the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692).
- The Act introduces amendments to SAMLA to ensure HMRC will still be able to access information on who owns and benefits from UK-linked overseas It ensures that the extra-territorial application permitted by SAMLA is fully effective in relation to overseas trustees with links to the UK.
Debt Respite Scheme
Statutory Debt Repayment Plan
- There are an estimated 9 million overindebted people in the UK (Money Advice Service,
‘Independent Review of the Funding of Debt Advice in England, Wales, Scotland and Northern Ireland’, 2018), of which only around 1.1 million receive debt advice each year. The Government wants to incentivise more people to access professional debt advice and to access it sooner, helping them reach sustainable debt solutions.
- The Financial Guidance and Claims Act 2018 (FGCA) made provision for the creation of a debt respite scheme by The scheme consists of two parts: Breathing Space and the Statutory Debt Repayment Plan (SDRP).
- The first part of the scheme is Breathing Space. It offers people in problem debt a 60-day moratorium on enforcement action, fees and certain forms of interest while they engage with professional debt advice. The Government is delivering this part of the scheme for England and Wales through the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (S.I. 2020/1311), which have been approved by Parliament and Senedd Cymru and came into force on 4 May 2021.
- The second part of the scheme is the SDRP. The SDRP could be offered to people in problem debt and would provide a revised agreement between the debtor and their creditors as to the amount owed on their debts and the timetable over which they have to be repaid. There is currently only a statutory debt solution focused entirely on repayment in There is no similar model for other parts of the United Kingdom. The Government believes that providing a solution with the same legal protections from creditor action as apply in Breathing Space should encourage more people to access debt advice sooner and repay their debts to a manageable timetable.
- The Government issued a call for evidence (HM Treasury, ‘Breathing space: call for evidence, June 2018) on the design of the scheme, and published a response on 18 June 2018. The Government subsequently sought views on a detailed policy proposal for the scheme and published a response (HM Treasury, ‘Breathing space scheme: response to policy proposal), which was accompanied by an oral statement by the Economic Secretary to the Treasury on 19 June 2019. The Government received advice from the Money and Pensions Service on the establishment of the scheme, in accordance with the FGCA, and this advice was published (HM Treasury, Guidance, ‘Breathing Space Scheme – Money and Pensions Service Advice’, September 2019).
- The Act amends the FGCA to ensure that the Government has the appropriate powers to implement the SDRP, in particular so that the SDRP can include debts owed to Government; and in England and Wales can be funded by a charging mechanism; and creditors can be compelled to accept amended repayment terms.
Successor accounts for Help-to-Save savers
- In September 2018, the Government launched the Help-to-Save scheme to promote and encourage saving among people on low The scheme is open to new accounts until September 2023. Help-to-Save accounts close four years after opening.
- Help-to-Save accounts are available to individuals on low incomes and in receipt of Working Tax Credit or Universal Credit, with weekly earnings equivalent to working at least 16 hours per week earning the National Living Wage rate (£617.73/month for 2021-22). Account holders may deposit up to £50 per calendar month over a four-year term from opening an account in order to receive Government bonuses.
- The terms and conditions supporting Help-to-Save require the account holder to nominate a bank account into which the bonus will be paid but neither the terms and conditions nor the legislation have made provision for the balance of funds remaining in the account when the account matures at the end of the four-year term. Without instruction from the account holder, the effect of the current legislation and terms and conditions would mean that those funds must remain in the matured Help-to-Save account, earning neither interest nor bonus. NS&I and HMRC are amending the terms and conditions supporting Help-to-Save accounts to make clear that, in the absence of instruction from the account holder, upon maturity the balance in a Help-to-Save account may be transferred to the nominated bank account to which the government bonuses are paid during the scheme.
- The Act provides HM Treasury with a power to make regulations, which would enable the transfer of the balance in a Help-to-Save account into a standard savings account (a successor account) automatically when the account matures after four years, in the absence of instruction from the account holder. This would ensure the remaining funds continue to be accessible while they await instructions from the account holder. The Act specifies that the successor account must be an account in the National Savings Bank, which is operated by National Savings and Investments (NS&I). NS&I currently and separately operate the Help- to-Save accounts.
Regulated activities and application of Consumer Credit Act 1974
- Buy-Now-Pay-Later products are credit products which charge no interest and are repayable in twelve or fewer instalments in less than twelve months. Currently, these products do not fall within the scope of regulation under FSMA. This is because they make use of an exemption in article 60F(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“the Regulated Activities Order”). The Regulated Activities Order defines the scope of regulated activities.
- The material effect is that Buy-Now-Pay-Later products do not currently benefit from the consumer protections that regulated credit agreements are subject to. Regulated credit agreements must comply with the relevant provisions of the Consumer Credit Act 1974 and secondary legislation made under it, such as providing certain information to borrowers in a prescribed Firms offering regulated credit agreements must be authorised by the FCA and comply with relevant FCA rules, such as undertaking affordability and creditworthiness assessments.
- This exemption was originally designed to exempt firms undertaking low risk, day-to-day business activities, such as deferring payment for goods and services, from the burdens of
- The Government has been following the growth of currently unregulated, interest-free Buy- Now-Pay-Later products as their use and prominence in online transactions has grown.
- On 16 September 2020, the FCA announced that its former interim-CEO, Chris Woolard, would undertake a review into the unsecured credit market. The final report of this review was published on 2 February The review found that currently unregulated Buy-Now- Pay-Later products could give rise to consumer detriment, and recommended that the necessary amendments to legislation be made to bring Buy-Now-Pay-Later products within the scope of regulation before any widespread consumer detriment could crystallise.
- The Government noted the evidence in the review, and agreed with its conclusion that Buy- Now-Pay-Later products should be brought within the scope of regulation under FSMA. However, the Government also recognises the utility that these products can have for consumers in managing their finances that the Act therefore gives HM Treasury the ability to bring interest-free Buy-Now-Pay-Later products into the scope of FCA regulation in a proportionate way.
- The Government will bring forward secondary legislation to bring currently unregulated Buy- Now-Pay-Later products into regulation when Parliamentary time allows. The final approach to regulation will be determined following a public consultation.
Amendments to the PRIIPs Regulation
- Packaged Retail and Insurance-based Investment Products (PRIIPs) are a category of financial assets regularly provided to retail investors. PRIIPS are defined in Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (the EU PRIIPs Regulation) as investments where, regardless of their legal form, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the retail investor; or an insurance-based investment product which offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations.
Examples of PRIIPs include Undertakings for Collective Investment in Transferable Securities (UCITS) Retail Schemes, Foreign Exchange Transitions, Exchange Traded Derivatives and Over the Counter Derivatives.
- The EU PRIIPs Regulation aims to increase the transparency and comparability of investment products, and sets the requirements for a disclosure document, known as the Key Information Document (KID), that must be provided to retail investors when they purchase, or receive advice on, PRIIPs.
- Before the end of the Transition Period, the EU PRIIPs Regulation was a directly applicable EU Regulation, and in order to ensure that the Regulation had full effect in the UK, HM Treasury made the Packaged Retail and Insurance-Based Investment Products Regulations 2017 (S.I. 2017/1127), which entered into force on 1 January 2018.
- Following the end of the Transition Period, the PRIIPs Regulation forms part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it continues to operate effectively.
- The PRIIPs Regulation is supplemented by a Delegated Regulation (regulatory technical standards, or RTS) that sets out further detail of the requirements under PRIIPs. The RTS also form part of retained EU law, and the FCA is empowered to update and amend the RTS in the
- The PRIIPs Regulation requires that a KID must contain certain information on the product in question, including the potential risks and returns associated with the product, the costs associated with investing in the product and performance scenarios illustrating the potential return of the product under a range of assumed market conditions. The methodologies for calculating transaction costs, producing performance scenarios and assessing Summary Risk Indicators (a numerical scale from 1 to 7 which indicates the investment risk associated with a product), along with detailed requirements on how information is to be presented in the KID, are set out in the RTS.
- The Government supports the objectives of the PRIIPs Regulation, which seeks to enhance investor protection by standardising the disclosure document provided to retail investors when they purchase However, serious concerns about the unintended consequences of the PRIIPs Regulation have been raised extensively by governments, regulators and industry across Europe ever since it came into force in the EU in 2014. In particular, the Regulation has been criticised for requiring the disclosure of potentially misleading information to retail investors and for the lack of clarity surrounding its scope, which may have caused a reduction in the investment products made available to retail investors, reducing consumer choice.
- In the longer term, the Government intends to undertake a more wholesale review of the disclosure regime for UK retail investors, but in the meantime, the Act makes targeted amendments to the PRIIPs Regulation to avoid consumer harm and provide the appropriate certainty to industry.
- These amendments enable the FCA to clarify the scope of the Regulation, replace
‘performance scenario’ with ‘appropriate information on performance’ and enable HM
Treasury to further extend the exemption currently in place for UCITS retail schemes.
- The amendments to the PRIIPs made by the Act will address significant uncertainty among industry as to the precise scope of PRIIPs, without changing the definition of a PRIIP. They also remove the obligation for PRIIPs manufacturers to produce performance scenarios, the methodology for which has been criticised for producing misleading predictions; and provide UCITS retail schemes with an extended transitional period to comply with the Regulation, up to a maximum of five years.
Retention of personal data under the Market Abuse Regulation
- Under MAR, there are certain reporting requirements firms must comply with, to provide the FCA with the information they need to identify, prevent and tackle cases of market abuse.
When complying with their reporting obligations, firms will often share personal data with the FCA. Personal data is information that relates to an identified or identifiable individual.
- For example, some firms have a responsibility to report suspicious transactions to the FCA. When reporting the transactions, firms will provide the FCA with personal data such as names or account numbers, in order to identify the individual that carried out the
- Currently, Article 28 of MAR limits the amount of time the FCA can hold personal data processed for the purposes of tackling market abuse to five years. The Act amends MAR to remove the limit on the FCA holding MAR personal data for more than five This allows the FCA to hold personal data in line with the General Data Protection Regulation (GDPR).
- The UK General Data Protection Regulation (UK GDPR) is part of the UK’s data protection landscape that includes the Data Protection Act 2018 (the ‘DPA 2018’). The UK GDPR sets out requirements for how organisations, including the FCA, need to handle personal data.
- The GDPR specifies the data minimisation principle, where data held by organisations must be, among other things, limited to what is necessary.
- In some circumstances, the FCA needs to retain personal data for longer than five years, for example to investigate complex market abuse, to prosecute those cases and to enable the FCA to discharge its disclosure duties in certain prosecution cases by providing relevant information to the defendants which may support their This can occur over a prolonged period of time, which can be longer than five years.
Over the counter derivatives: clearing and procedures for reporting
- In 2009, the G20 committed to reform ‘over-the-counter’ (OTC) derivatives markets to improve their transparency and enable authorities to monitor systemic risks. This commitment was implemented in the EU through Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central
counterparties and trade repositories (the ‘European Market Infrastructure Regulation’ or
‘EMIR’). Following the end of the Transition Period, EMIR forms part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it operates effectively following the end of the Transition Period.
- The Act makes two technical updates to EMIR as part of retained EU law to further improve
the functioning of the UK’s regulatory regime for derivatives.
- The first update aims to enhance the accessibility of ‘clearing services’ for firms subject to the clearing obligation under EMIR. Some OTC derivatives (contracts agreed bilaterally between counterparties on tailor-made terms) must be “cleared” by central counterparties (CCPs), which are entities that reduce the risks arising from some trades by placing themselves between the buyers and sellers to the contracts traded on one or more financial While EMIR imposes an obligation to clear certain trades, access to clearing can be problematic for certain firms, especially smaller ones.
- There are two main access routes to clearing: counterparties can become a ‘clearing member’ of a CCP or establish indirect clearing arrangements with a clearing member or a client of a clearing member. Given the costs linked to becoming a clearing member of a CCP, smaller counterparties with a limited volume of activity normally favour indirect clearing arrangements. However, such arrangements are difficult to access, are often complex, and their terms can vary widely, meaning there is little competition to improve prices and services. Barriers to accessing clearing may cause market participants to cease transacting derivatives or to engage in non-cleared OTC derivatives trading, thereby increasing risk in financial markets.
- The Act requires firms offering clearing services to do so in accordance with Fair, Reasonable, Non-Discriminatory and Transparent (FRANDT) terms. The FCA is delegated the power to make rules outlining the grounds on which commercial terms will be considered to satisfy FRANDT requirements. The implementation of FRANDT requirements will promote transparency and accessibility in the clearing of derivatives, making it easier for firms to fulfil their clearing obligations.
- The Act also requires an enhancement of the quality of data collected by Trade Repositories (TRs). TRs are financial market infrastructures which receive and store derivative transaction data from reporting counterparties in a continuously updated database and all derivatives trades must be reported to a TR. TRs’ data is primarily used by financial regulators to better monitor risks associated with derivative markets and it is important to safeguard data quality so that the FCA and the Bank of England are able to monitor risks to financial markets
- The Act requires TRs to put in place procedures to improve data quality and policies to ensure the orderly transfer of data between TRs, where necessary. The FCA is also delegated the power to adopt rules for this update to EMIR as retained EU law.
Regulations about financial collateral arrangements
- The Financial Collateral Arrangement (No.2) Regulations 2003 (S.I. 2003/3226) (FCARs) transposed Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (FCAD), which simplified the process of taking financial collateral. The Act introduces an amendment to ensure that the existing legislation is valid and fully effective.
- Financial collateral is provided by a borrower to a lender to minimise the risk of financial loss to the lender if the borrower fails to meet their financial obligations. The FCARs provide a regime for the taking of financial collateral, in the form of cash, financial instruments or credit claims. Typical arrangements which fall within the scope of the FCARs are charges over shares, charges over cash deposits, and stock lending and repo arrangements.
- Subsequent litigation, though it has not invalidated the FCARs, has raised the issue of whether the UK’s 2003 transposition went beyond the implementing powers in the ECA, given the provisions within the FCARs were applied to a broader class of persons than the underlying EU directive.
- The Act puts the issue beyond doubt and ensure that the FCARs stand on a sound statutory footing by stating that the FCARs are, and always were, valid and fully The Act also introduces an amendment to the Banking Act 2009, to ensure that the appropriate Parliamentary procedure and levels of scrutiny are applied where HM Treasury makes future secondary legislation in this area.
Appointment of the Chief Executive of the FCA
- The FCA is the UK’s conduct regulator for financial It is headed by a Chief Executive appointed by HM Treasury. Currently, legislation does not specify a fixed term length for the FCA Chief Executive, and HM Treasury instead has the power to specify a term length of its choosing when making the appointment. This differs from the equivalent provisions for similar appointments, such as Deputy Governors of the Bank of England, whose terms lengths are specified in statute. The Act establishes a statutory limit on the term length for the FCA Chief Executive.
- The Government committed to making this change to the Treasury Select Committee during the passage of the Bank of England and Financial Services Act 2016 through the House of
- The Act amends relevant legislation to make the appointee to the role of the FCA Chief Executive subject to a fixed five-year term. The term may be renewed once, so that an appointee may be in the role for a maximum of 10 years.
- This is consistent with guidance from the Office of the Commissioner for Public Appointments (Cabinet Office, Governance Code on Public appointments, December 2016) which states that “there is a strong presumption that no individual should serve more than two terms or serve in any one post for more than ten years.”
Payment services and the provision of cash
- In recent years, the ongoing trend in payments in the UK has been away from cash (i.e. banknotes and coins) and towards card payments and other digital payment methods. However, cash remains important to the daily lives of millions of people across the United Kingdom, with UK Finance reporting that 23% of all payments were carried out using cash as of 2019.
- At the March 2020 Budget, the Government announced that it will bring forward legislation to protect access to cash and ensure that the UK’s cash infrastructure is sustainable in the longer
- To progress this work, the Government published the Access to Cash: Call for Evidence on 15 October 2020 seeking views on the key considerations associated with cash access, including deposit and withdrawal facilities, cash acceptance, and regulatory oversight of the cash
- As part of this Call for Evidence, the Government invited views on the potential for cashback to play a greater role in providing cash and how this can be It noted that cashback, where a purchase was made using a debit card, was the second most frequently used method for withdrawing cash in the UK behind ATMs in 2019. There were 123 million cashback transactions amounting to a total value of £3.8 billion. It also noted that cashback without a purchase has the potential to be a valuable facility to cash users in future and play an important role in the UK’s cash infrastructure.
- The provision of cash, where it is provided alongside the purchase of goods or services (“cashback with a purchase”), is exempted from the definition of a payment service for the purposes of the Payment Services Regulations 2017 (PSRs). As a result, the person providing the cash alongside a purchase of goods or services, for example a shop, does not need to be authorised by or registered with the FCA in order to provide this service.
- The Act amends the PSRs, so that, in certain circumstances, the provision of cash where there is no corresponding purchase of goods and services, is also exempted from the definition of a payment service. This will mean that “cashback without a purchase” can be offered on the same basis as cashback with a Before the Act, relevant persons had to be authorised by, or be registered with, the FCA, or act as an agent of a payment service provider to do so. This was a significant barrier to widespread provision of purchase-free cashback.
- The change therefore allows for the widespread offering of cashback without a purchase by shops and other businesses; meanwhile the Government is continuing to progress legislation for access to cash more broadly.
- Where the service is offered, a local business, such as a corner shop, café or pub, will be able to provide cash to a customer without them having to make an accompanying purchase.