Shearman & Sterling LLP | FinReg | UK Parliament Publishes Financial Services Bill for Post-Brexit Regulatory Framework
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  • UK Parliament Publishes Financial Services Bill for Post-Brexit Regulatory Framework

    The U.K. Government has published a Financial Services Bill setting out a proposed regulatory framework for the financial services industry following the U.K.'s exit from the EU. The Bill is part of the U.K.'s wider initiative under the Future Regulatory Framework Review to re-frame its regulatory framework. Although Brexit has brought challenges to the financial sector, there may also be post-Brexit opportunities for the U.K. to seize. The aim of these reforms is to cement the U.K.'s position as a global financial centre of excellence. A core piece of that will be to set conditions that continue attracting business to the U.K. and to look for opportunities to cut "red tape" whilst at the same time maintaining the U.K.'s globally recognized high regulatory standards. Key aspects of the Bill include:

    Prudential regulation of banks and investment firms

    The Bill introduces the U.K. Investment Firms Prudential Regime, 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 the first of three proposed consultations on the detailed rules. The current draft of the Financial Services Bill requires the FCA to introduce rules for capital, liquidity, exposure to concentration risk, reporting, public disclosure, governance arrangements and remuneration policies. The Bill also introduces an enhanced accountability framework for the FCA when making decisions under the IFPR. The provisions in the Financial Services Bill reflect the consultation and policy statement on the proposed prudential regime issued by HM Treasury earlier in 2020. 

    The Financial Services Bill will also implement 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. In addition, the Financial Services Bill will implement 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 Bill 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 will be 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 Bill 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 U.K. onshored EU MiFIR as it was in force on December 31, 2020 and in doing so adopted the EU's access provisions for third-country firms. U.K. MiFIR provides that an overseas firm may provide services to eligible counterparties and professional clients without establishing a branch if the firm is registered with the FCA. An overseas firm may apply for FCA registration if, among other things, its home country's supervisory and regulatory regime has been determined by HM Treasury to be equivalent to the U.K.'s regime. Many of the Bill's changes to U.K. MiFIR reflect the EU's incoming changes to the third-country regime (from June 2021). The Bill 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 Bill also gives the FCA powers to set reporting requirements for overseas firms. This differs to a certain extent from the EU approach. EU MiFIR stipulates that a registered third-country firm must annually provide to the European Securities and Markets Authority information relating to its EU business, including its scale, the scope of activities and turnover, as well as the policies and procedures in place for governance arrangements, risk management and investor protection. Further details are set out in Technical Standards. The U.K. approach is to delegate to the FCA the power to make rules on reporting requirements, which 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 Bill also proposes to give 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 Bill also clarifies 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. This change will align the EU and U.K. reverse solicitation regimes

    Overseas Funds Regime

    The Bill 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 Bill 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. Following an equivalence determination, individual schemes within the relevant jurisdiction will need to apply for FCA recognition if they intend to market to U.K. retail investors (or, in the case of money market funds, must be recognized as suitable for marketing to retail investors under s272 of the Financial Services and Markets Act 2000).

    Cancellation of regulatory permissions

    The Bill provides the FCA with a mechanism to cancel or vary FCA-regulated firms' authorizations more quickly where a firm ceases to provide a regulated activity and to restore authorization upon a firm's application where it is just and reasonable to do so. These changes will not apply to dual-regulated firms (which are also subject to regulation by the FCA and PRA).

    Insider dealing, money laundering and market abuse

    The Bill 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.

    Access to financial markets between U.K. and Gibraltar

    The Bill establishes a permanent market access regime (known as the Gibraltar Authorization Regime) which will preserve Gibraltarian financial services firms' access to U.K. wholesale and retail markets and will facilitate access to the Gibraltarian market for U.K. firms (although market access for U.K. firms will ultimately be a matter for the Gibraltarian Government). Under the GAR, ongoing access to the U.K.'s financial markets will depend on alignment between law and practice in the U.K. and Gibraltar.

    The Bill also proposes amendments to 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. 
    The FCA has published a statement welcoming the Financial Services Bill and urging market participants to continue their focus on transitioning away from LIBOR by the end of 2021.

    View the Financial Services Bill.

    View the Explanatory Memorandum to the Financial Services Bill

    View the FCA's statement on the Financial Services Bill.

    View details of the EU's Investment Firms Regulation and Investment Firm Directive.

    View details of the FCA's discussion paper on the U.K. IFPR.

    View details of the FCA's first consultation paper on the U.K. IFPR.

    View details of HM Treasury's updated policy statement on the prudential standards in the Financial Services Bill.

    View details of the HM Treasury's consultations on the Future Regulatory Framework.

    View details of the Payments Landscape Review.

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