UK Financial Services Act 2021 Published04/29/2021
The U.K. Financial Services Bill has received Royal Assent from Her Majesty the Queen and has become an Act of Parliament, the Financial Services Act 2021. Some provisions of the Act came into force on the date of Royal Assent, with a limited number following on June 29, 2021. The majority of the Act will come into force on a date specified in regulations yet to be made by HM Treasury.
The Act sets out certain details of the future regulatory framework for a new-look U.K. financial services industry outside the EU. The Act covers and introduces amendments across a broad range of areas such as: (i) prudential regulation of banks and investment firms; (ii) benchmarks; (iii) the U.K. Markets in Financial Instruments Regulation; (iv) the U.K. version of the European Market Infrastructure Regulation; (v) the U.K. Packaged Retail and Insurance-based Investment Products Regulation; (vi) the U.K. overseas funds regime; (vii) insider dealing, money laundering and market abuse; and (viii) access between the U.K. and Gibraltar. There have been a limited number of changes to the final Act compared to the version proposed in the Financial Services Bill (which was covered in detail in our previous piece linked below). Key changes from the Bill are:
- A new provision requiring the FCA to conduct a consultation on whether it should make rules specifying that authorized persons owe a duty of care to consumers. The consultation must be conducted, and analysis of responses published, before January 1, 2022. The FCA is currently planning to consult on the duty of care in May 2021. The FCA should make such general rules as it considers appropriate in this regard before August 1, 2022.
- New provisions making certain changes to the Proceeds of Crime Act 2002 and the Anti-terrorism, Crime and Security Act 2001, extending aspects of that legislation to electronic money institutions and payment institutions. In particular, exemptions under POCA from the activities of concealing criminal property, entering into arrangements to facilitate the acquisition or retention of criminal property and acquiring, using or possessing criminal property are extended to EMIs and PIs where those offenses are conducted in connection with an account maintained by the EMI or PI and the value of the property doesn’t exceed a certain threshold amount. Certain provisions on the forfeiture of money under POCA and ACSA have also been extended to those institutions.
Certain provisions considered by the House of Lords, including a statutory international competitiveness objective for the U.K. regulators, were not included in the final Act.
Items from the previously published Financial Services Bill which remain in the final text include:
Prudential Regulation of banks and investment firms
The U.K. Investment Firms Prudential Regime is introduced under the Act, governing investment firms that are prudentially regulated by the U.K. Financial Conduct Authority. The IFPR is intended to mirror the EU's new Investment Firms Regulation and Investment Firms Directive, which entered into force in December 2019 and will largely apply across the EU from June 2021. Like the EU regime, the U.K. IFPR will ensure that the U.K. has a more effective prudential regime for investment firms, but will not cover systemically important investment firms, which will continue to be regulated by the U.K. Prudential Regulation Authority under the U.K. Capital Requirements Regulation. The majority of the U.K. IFPR will be specified through rules made by the FCA. The FCA issued a separate discussion paper in June 2020 on its proposed rules and has since issued two of three proposed consultations on the detailed rules. The Act also introduces an enhanced accountability framework for the FCA when making decisions under the IFPR.
The Act implements those aspects of Basel III that were introduced into the EU Capital Requirements Regulation but that did not apply across the EU until after the end of the U.K. transition period, and consequently have not yet been implemented in the U.K, as well as Basel 3.1, which sets out a series of further reforms intended to restore credibility in the calculation of risk-weighted assets and improve the comparability of banks' capital ratios that have not yet been implemented by either the EU or the U.K.
The Act amends the U.K. Benchmarks Regulation (which onshores the EU Benchmarks Regulation) by providing the FCA with additional powers to manage an orderly wind-down of a critical benchmark. This is to deal with perceived deficiencies in the existing U.K. BMR which did not adequately manage the risks arising from an unrepresentative LIBOR or tough legacy contracts arising from the transition from LIBOR to risk-free rates. The FCA has been given enhanced powers to: (i) assess a benchmark's representativeness; (ii) "designate" a benchmark and thereby require the administrator to change the methodology for determining the benchmark; (iii) prohibit all use of a benchmark by supervised entities once it has been "designated", subject to an exemption for legacy use for a period that is within the FCA's discretion; (iv) compel a benchmark administrator to continue publication of a benchmark for 10 years (up from the existing five years in the U.K. BMR); and (v) review and approve a benchmark administrator's procedures for dealing with changes to, or the cessation of, a benchmark. The Act also extends the transitional period for U.K.-supervised entities to use third-country benchmarks from December 31, 2022 to December 31, 2025.
Markets in Financial Instruments Regulation
The Act makes certain changes to U.K. MiFIR, many of which reflect the EU's incoming changes to the third-country regime (from June 2021). The Act requires FCA-registered overseas firms to keep the data relating to all orders and transactions in the U.K. in financial instruments which they have carried out, whether on their own account or on behalf of a client, for a period of five years, and provide these to the FCA if requested. The Act also gives the FCA powers to set reporting requirements for overseas firms. This approach allows the regulator to adopt a proportionate regime for smaller firms and to minimize the burden on registered overseas firms by requiring only information which is not provided through home-host regulator cooperation arrangements.
The Act also gives HM Treasury powers to impose additional requirements on FCA-registered overseas firms through regulations and the FCA will be given powers to impose temporary restrictions or prohibitions on registered overseas firms or to withdraw their registration. The FCA will be required to monitor the regulatory regimes of other countries to ensure continued equivalence. The Act also aligns the EU and U.K. reverse solicitation regimes by clarifying that the reverse solicitation exemption for overseas firms will not apply if the firm (or a firm acting on its behalf) solicits a U.K.-established eligible counterparty or professional client.
Overseas Funds Regime
The Act extends the U.K. temporary marketing permissions regime for EEA funds (specifically undertakings for collective investment in transferable securities, known as UCITS), enabling them to continue marketing in the U.K. until the end of 2025. The Act also establishes an Overseas Funds Regime which will allow overseas collective investment schemes to be marketed to U.K. investors where HM Treasury has granted "equivalence" to the applicable category of third-country scheme. An overseas scheme will be equivalent if it is deemed to be subject to rules that achieve similar outcomes to the U.K. regime.
Insider dealing, money laundering and market abuse
The Act amends the U.K. Market Abuse Regulation (which onshores the EU Market Abuse Regulation) to:
(i) clarify that both issuers and any person acting on their behalf or on their account are expected to maintain an "insider list" of individuals who have access to inside information; and
(ii) require issuers to disclose transactions in their financial instruments by persons discharging managerial responsibility within two working days of those transactions being notified to them by the senior managers (as opposed to the current timetable which may require issuers to make the disclosure on the same day that they are notified of the transaction). The Bill will also increase the maximum prison sentence for market abuse to 10 years (up from the current limit of seven years).
The Bill introduces amendments to the U.K. Sanctions and Anti-Money Laundering Act 2018 to preserve HMRC's access to information on ownership of U.K.-linked overseas trusts, guaranteeing the extra-territorial application of SAMLA remains effective.
Amendments to EMIR and PRIIPS
The Act amends the U.K. European Market Infrastructure Regulation to require firms to offer clearing services on FRANDT terms and requiring trade repositories to establish procedures to improve data quality and ensure orderly transfer of data between repositories.
Some clarifications are also being made to the U.K. Packaged Retail and Insurance-based Investment Products Regulation to address the uncertainty around the scope of the requirements and the potential harm to consumers arising from the disclosure of information on performance. The U.K. PRIIPs Regulation will be amended so that:
(i) the FCA is empowered to clarify the scope of the rules on whether a product or category of product falls within the Regulation;
(ii) the exemption for UCITS retail schemes will be extended to December 2026 (with a Government review of the disclosure regime for U.K. retail investors also planned in the longer term); and
(iii) the requirement for Key Information Documents to give a brief description of performance scenarios will be replaced with a brief description of information on performance and the assumptions made to produce them.
View the Financial Services Act 2021.
View details of the Financial Services Bill.
View details of the FCA's first consultation on the new investment firm prudential regime.
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