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Financial Services Act 2021

Contents

Legal Background

Prudential regulation of credit institutions and investment firms

Investment Firms Prudential Regime

  1. The current prudential requirements applicable to credit institutions and investment firms in the UK are largely contained in the EU CRR, which applies directly, EU CRD IV, which was transposed through UK regulators’ rules, the Capital Requirements Regulations 2013 (S.I. 2013/3115), the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (S.I. 2013/3118) and the Capital Requirements (Capital Buffers and Macro-Prudential Measures) Regulations 2014 (S.I. 2014/894). They are also contained in delegated acts and implementing and technical standards that have direct effect in the UK.
  2. The EU CRR and EU CRD IV were a major EU legislative package that intended to address issues arising from the global financial crisis of 2008/9 following publication of the Basel III standards. Investment firms are subject to CRR and CRD IV, with several exceptions to account somewhat for the specific nature and activities of investment firms. The EU CRR provides much of the detail setting out how prudential requirements should be defined and calculated. In addition to implementing parts of the Basel III standards, CRD IV also introduced EU-specific requirements, including on remuneration and bonuses.
  3. The Capital Requirements (Amendment) (EU Exit) Regulations (S.I. 2018/1401) ("the Capital Requirements Regulations 2018") amend the CRR, which forms part of retained EU law by virtue of section 3 of the EUWA and therefore continues to apply in the UK following the end of the Transition Period.
  4. The Capital Requirements Regulations 2018 also amend two pieces of delegated legislation made under the CRR: Commission Delegated Regulation (EU) 2015/61 regarding liquidity coverage requirements for Credit Institutions; and Commission Delegated Regulation (EU) 1222/2014 with regard to the methodology for the identification of global systemically important institutions (G-SIIs).
  5. The Capital Requirement Regulations 2018 also make amendments to the following pieces of domestic legislation:
    1. the Regulated Covered Bonds Regulations 2008 (S.I. 2008/346);
    2. the Capital Requirements Regulations 2013 (S.I. 2013/3115);
    3. the Capital Requirements (Country-by-Country-Reporting) Regulations 2013 (S.I. 2013/3118); and
    4. Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 (S.I. 2014/894).
  6. Those amendments are made to address deficiencies of the retained EU law to operate effectively and other deficiencies arising from the UK’s departure from the EU. The Capital Requirements Regulations 2018 were revised in September 2019 by the Capital Requirements (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/1232). This reflected applicable amendments to the CRR made by CRR II in 2019 and, to a lesser extent, by Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures.
  7. More recently, the EU has updated the CRR package through Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic, which provides a number of specific prudential amendments to support banks and lending to the real economy through the Covid-19 pandemic. This was directly applicable in the UK. Some further parts of EU CRR II applied as of 28th December 2020, and these parts therefore form part of retained EU law, since they were in effect before the end of the Transition Period. Deficiencies in this retained EU law arising as a result of EU withdrawal have been fixed via the Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020 (S.I. 2020/1385). A number of EU CRR II provisions will apply in the EU from June 2021. As this is after the end of the Transition Period, these elements do not form part of retained EU law and will not apply in the UK.

The FCA’s general rule-making power and objectives

  1. Section 137A of FSMA provides the FCA with a general rule-making power to make requirements applying to FCA authorised persons to advance the FCA’s operational objectives. Section 1B(2) of FSMA specifies the strategic objective of the FCA, which focuses on ensuring that relevant markets function well. Sections 1C to 1E of FSMA also set out three further ‘operational’ objectives of the FCA, focused on consumer protection; protecting the integrity of the UK financial system; and promoting effective competition. When discharging its obligations, the FCA must act in a way that is compatible with the strategic objective and that advances one or more of the operational objectives.
  2. The Act requires the FCA to make rules with respect to the prudential regulation of investment firms. The FCA will rely in part on its existing general FSMA rule-making power to do so.

General functions of the FCA and regulatory principles

  1. The FCA is required to have regard to regulatory principles in section 3B of FSMA when discharging its general functions. The general functions of the FCA are set out in section 1B(6) of FSMA and include making rules.
  2. The Act requires the FCA to take into account additional considerations when making rules to implement the IFPR.

Consultation and reporting requirements for FCA rulemaking

  1. Section 138I of FSMA sets out the FCA’s consultation requirements and requires the FCA to consult the PRA and to issue a public consultation before making rules. Section 138F requires the FCA to give written notice of any rules it makes, amends or revokes to HM Treasury and the Bank of England without delay. The Act applies additional consultation and reporting requirements for the FCA when making rules to implement the IFPR.

The Basel III Standards

  1. As explained in paragraphs 19-20, most of the current prudential requirements for credit institutions and investment firms in the UK are derived from the EU CRR and EU CRD IV. In addition to elements of CRR II applying before the end of the Transition Period, EU CRD V has been transposed 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.

The PRA’s general rule-making power

  1. Section 137G of FSMA sets out a general rule-making power allowing the PRA to make rules applying to PRA-authorised persons to advance the PRA’s objectives. Section 2B of FSMA specifies the general objective for the PRA: promoting the safety and soundness of PRA-authorised persons. Sections 2C and 2H of FSMA also set out two further objectives for the PRA: contributing to the securing of an appropriate degree of protection for those who are or may become policyholders (the insurance objective), and facilitating effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities (the secondary competition objective).
  2. The Act allows for substantial parts of the CRR to be revoked and for the PRA to replace it, with updates, in PRA rules, to implement changes relating to the outstanding Basel standards. In order to do so, the PRA will rely on its existing general FSMA rule-making power and the rule-making power for holding companies in section 192V of FSMA, which is being replaced by this Act, as explained in paragraph 28 above.

General functions of the PRA and regulatory principles

  1. The PRA is currently required to have regard to the regulatory principles in section 3B of FSMA when discharging its general functions. The general functions of the PRA are set out in section 2J(1) of FSMA and include making rules. The Act specifies new considerations the PRA must have regard to when making rules implementing the outstanding Basel standards.

Consultation and reporting requirements for PRA rulemaking

  1. Similar to consultation requirements for the FCA, section 138J of FSMA requires the PRA to consult the FCA and to issue a public consultation before making rules. Section 138F requires the PRA to give written notice of any rules it makes, amends or revokes to HM Treasury without delay. This Act also applies additional consultation and reporting requirements for the PRA when making rules relating to the implementation of Basel.

Benchmarks

LIBOR transition

  1. In 2012, the Government accepted all recommendations of the Wheatley Review (opens in new window) and amended FSMA through the Financial Services Act 2012. Under the Financial Services Act, the administration of and contribution to LIBOR became "regulated" activities. From 1 April 2015, the FCA began applying regulatory requirements (opens in new window) to seven additional major UK-based financial benchmarks following the recommendations of the Fair and Effective Markets Review (opens in new window) .
  2. The UK regulatory regime for these eight benchmarks (including LIBOR) was replaced by the EU BMR on 1 January 2018. The Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 (S.I. 2018/135) (which implemented aspects of the EU BMR in the UK), provided for the dual operation of the pre-and post-EU BMR regulatory regimes for benchmarks.
  3. The EU BMR introduced a regulatory framework to ensure the accuracy, robustness and integrity of benchmarks used in the EU. The EU BMR significantly widened the scope of benchmark regulation in the UK. It places requirements on administrators of benchmarks, supervised contributors to benchmarks and supervised entities that use benchmarks. These requirements relate to benchmark methodology, governance and transparency.
  4. Following the end of the Transition Period, the EU Regulation forms part of retained EU law and therefore continues to apply in the UK. In order to ensure that the regime continued to work effectively after the end of the Transition Period, the BMR was amended via the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/657). The EU Regulation as amended and forming part of retained EU law in the UK is referred to as the BMR.

Key Definitions

  1. Under the BMR, a benchmark is defined, broadly speaking, as an index referenced to determine the amount payable under a financial instrument or a financial contract, the value of a financial instrument, or the performance of an investment fund. For the purposes of the BMR, an index is a figure which is published or made available to the public and that is regularly determined through assessment or calculation and based on the value of one or more underlying assets or prices.
  2. The BMR applies to supervised contributors to benchmarks, supervised entities that use benchmarks and benchmark administrators. Generally speaking, a supervised contributor is a supervised entity regulated by the FCA that contributes input data to an administrator located in the UK. For the purposes of the BMR, ‘supervised entities’ covers a wide range of financial service entities as outlined in Article 3(17)(a)-(m).
  3. The definition of "use of a benchmark" is set out in Article 3(7) and covers the use of indices in financial instruments and contracts, including in connection with the issuance of a financial instrument, where a party uses a benchmark to determine the amount payable under a financial instrument or a financial contract or to determine the value of a financial instrument or measure the performance of an investment fund.
  4. A benchmark administrator is a natural or legal person that has control over the provision of a benchmark.

Critical Benchmarks

  1. Title III of the BMR places different requirements on supervised entities that use benchmarks, supervised contributors to benchmarks, and benchmarks administrators based on the classification of a benchmark. Benchmarks which are classified as "critical" are subject to the most stringent regulatory requirements. LIBOR is classified as a critical benchmark.
  2. Under the BMR, a benchmark is deemed critical where it meets certain qualitative and quantitative criteria stipulated in Article 20. Where certain thresholds are met, the benchmark triggers the necessary criteria to be designated a critical benchmark by HM Treasury. Where certain other listed criteria are met, or where a combination of these criteria are met, a benchmark can also be designated as critical if the FCA has recommended that the benchmark is recognised as critical and HM Treasury considers that the FCA’s assessment in this regard complies with Article 20(3). Administrators of critical benchmarks must apply for authorisation by the FCA by 31 December 2021 for their benchmarks to continue to be used by UK supervised entities after this date.

FCA existing supervisory powers for critical benchmarks

  1. Under the BMR, the FCA has an existing set of powers that apply where the administrator intends to cease providing a critical benchmark, or where that benchmark is at risk of becoming unrepresentative of the underlying market or economic reality the benchmark is intended to measure.
  2. Where an administrator of a critical benchmark intends to cease providing the benchmark, the BMR requires the administrator to immediately notify the FCA, and submit an assessment within four weeks as to how the benchmark can either be transitioned to an alternative administrator or cease to be provided. The BMR also requires administrators of all categories of benchmark to publish the actions to be taken by the administrator in the event of changes to, or the cessation of, a benchmark.
  3. Upon receipt of the assessment, the FCA must make its own assessment of how the critical benchmark is to be transitioned to a new administrator or cease to be provided. Following completion of this assessment, the FCA can compel the administrator to continue to publish the benchmark until it has been transitioned to a new administrator, it can be ceased in an orderly fashion or the benchmark is no longer deemed critical.
  4. The FCA can compel the administrator to publish the benchmark for an "appropriate period", not exceeding a term of 12 months, which can be extended in further 12 month increments up to a maximum of five years.
  5. Where a contributor to a critical benchmark intends to withdraw its submissions, the BMR also empowers the FCA to compel mandatory contributions to a critical benchmark, where the majority of contributors to the benchmark are UK supervised entities. If a supervised contributor to a critical benchmark intends to cease its submissions, it must notify the benchmark administrator, which is then required to inform the FCA without delay. The FCA can compel the supervised contributor to continue submitting input data to the benchmark for an initial period of up to four weeks from the date it is notified of the contributor’s intention to withdraw. The benchmark administrator is then required to submit an assessment to the FCA on the capability of the benchmark to measure the underlying market or economic reality it seeks to measure, i.e. its representativeness, within fourteen days of the contributor sharing its intention to withdraw.
  6. Upon receipt of the administrator’s assessment, the FCA must then make its own assessment of the benchmark’s representativeness. If the FCA considers that the representativeness of a critical benchmark is put at risk, it can compel a supervised entity, (including entities that do not contribute to the relevant benchmark), to contribute input data to the administrator for an appropriate period of time not exceeding 12 months, which be extended in further 12 months increments up to a maximum of five years. It can also require the administrator to change the methodology, code of conduct, or other rules of a critical benchmark in order to restore the representativeness of the benchmark where it assesses the benchmark’s representativeness is "at risk." The BMR requires a benchmark administrator to cease providing an unrepresentative benchmark within "a reasonable time period."
  7. Benchmark administrators of one or more critical benchmarks are also required to conduct a review of a critical benchmark’s representativeness every two years and submit this assessment to the FCA. Upon receipt of this assessment, the FCA conducts its own biennial assessment of the critical benchmark. Where the FCA determines that the representativeness of the benchmark is at risk, then it has access to the same powers as described in paragraph 260.
  8. Under Title IV, the BMR also empowers the FCA to suspend or withdraw the authorisation or registration of an administrator under specific circumstances. Where the FCA withdraws or suspends the authorisation of a benchmark administrator, it will update the FCA Benchmarks Register accordingly. UK supervised entities are only permitted to use UK-administered benchmarks in financial contracts or financial instruments, or to measure the performance of an investment fund where that benchmark is listed on the FCA Benchmarks Register, or is provided by an administrator who is listed on the FCA Benchmarks Register and is located in the UK.

Extension of Transitional Period for benchmarks with non-UK administrators

  1. The EU BMR is a regulatory framework which places requirements on administrators, supervised contributors and supervised users of benchmarks. These requirements relate to benchmark methodology, governance and transparency. Most of the EU BMR has directly applied in the UK since 1 January 2018.
  2. The UK made the necessary amendments under the EUWA to ensure the EU Regulation continued to operate effectively in the UK through the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/657). This legislation made amendments to the EU Regulation to address deficiencies and ensure that the existing regime could continue to operate effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law is referred to as the BMR. The BMR took effect at the end of the Transition Period.
  3. Article 51(5) of the BMR stipulates that benchmarks provided by an administrator located in a third country may not be used in new financial instruments, financial contracts or to measure the performance of an investment fund by UK supervised entities after the expiration of an initial transitional period unless they are approved through equivalence, recognition or endorsement and listed on the UK Benchmarks Register.
  4. In September 2019, HM Treasury amended Article 51(5) to extend the transitional period for third country benchmarks from 31 December 2019 to 31 December 2022 through the Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019 (S.I. 2019/1212). The Government is seeking a further extension to the transitional period for third country benchmarks through primary legislation. The Act will make further amendments to Article 51 to extend the transitional period for third country benchmarks to the end of 2025.

Access to Financial Services Markets

Market access arrangements for financial services between the UK and Gibraltar

  1. Gibraltar is an Overseas Territory with internal self-government. Gibraltar was not a Member State of the EU in its own right. In EU law, Gibraltar was classified as a European Territory, whereby a Member State (the UK) was responsible for its external relations (Article 355(3) of the TFEU). It is through the UK’s responsibility for its external relations that the TFEU applied to Gibraltar. EU law applied to Gibraltar by virtue of Gibraltar’s own European Communities Act 1972 and, under the Withdrawal Agreement, EU law was applicable during the Transition Period. Gibraltar was also part of the EEA by virtue of Article 126 of the EEA Agreement.

Section 409 of FSMA regime under which Gibraltar firms and UK firms exercise deemed passport rights

  1. Section 19 of FSMA prohibits the carrying on of regulated activities in the UK unless a person is an "authorised person" or is exempt. Normally, permission is granted by the FCA or the PRA under Part 4A of FSMA. Section 31(1) of FSMA lists other routes to authorised person status. While the UK was a member of the EU, and during the Transition Period, this included a route for EEA firms qualifying for authorisation under Schedule 3. This route has now been removed following the end of the Transition Period.
  2. The EU passporting rights that Schedule 3 provided for did not apply between the UK and Gibraltar. To accommodate Gibraltar’s unique situation, provision was made in FSMA in the form of section 409 to deal with matters concerning Gibraltar’s status within the EEA.
  3. The Gibraltar Order was subsequently made under the powers conferred on HM Treasury by section 409(1) and section 428(3) of FSMA. It allows certain types of authorised firms in Gibraltar to passport into the UK, as well as allowing the same types of authorised UK firms to passport into Gibraltar.

EU withdrawal

  1. The Government made the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019 to protect Gibraltar firms accessing the UK market from suddenly losing their access rights as a result of EU exit.
  2. The preservation of market access rights under the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019 was extended by 12 months by the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1274). These latter Regulations extend the transitional arrangements under Parts 2 and 3 of the 2019 Regulations, which enable specified categories of Gibraltar-based firms to provide financial services in the UK and facilitate the access by similar types of UK-based firms to Gibraltar’s financial services market. The temporary arrangements will be in place until the permanent arrangements are delivered. The GAR is intended to supersede the temporary EU exit arrangements as a new permanent arrangement.

Gibraltar-specific regimes falling outside the Gibraltar Order

  1. Not all Gibraltar-related legislative regimes are captured by the Gibraltar Order. For instance, the market access rights for Gibraltar payment service providers, payment institutions, authorised e-money institutions and registered account information service providers were provided for separately in domestically implemented EU legislation in the UK.
  2. The preservation of Gibraltar-specific rights not captured by the Gibraltar Order was ensured through specific fixes made by a large number of EUWA statutory instruments, and by the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019. Of particular relevance is regulation 11 of this latter instrument, which sets out a ‘general’ or ‘horizontal’ fix by preserving the treatment of Gibraltar-based persons throughout a large number of pieces of legislation as it was at the end of the Transition Period.
  3. Gibraltar-related legislative regimes not captured by the Gibraltar Order will fall outside the scope of the GAR. The Government seeks to deal with them through a delegated power for HM Treasury, which is described in the policy background section and in the commentary on provisions of the Act sections.

Overseas funds regime

  1. Collective investment schemes are defined in section 235 under Part 17 of FSMA, and Part 17 also makes provision for the promotion of collective investment schemes in the UK.
  2. Presently, authorised persons, as defined by section 31 of FSMA, are restricted from promoting participation in a collective investment scheme under section 238 of FSMA unless an exemption applies. There is an exemption for "recognised schemes" which are those overseas collective investment schemes recognised under either section 264 or section 272 of FSMA. Both section 264 of FSMA and section 272 therefore provide the current basis for authorised persons to promote participation in overseas collective investment schemes in the UK.
  3. Section 264 of FSMA implemented the passporting regime under the UCITS Directive so that an EEA UCITS could be recognised to market in the UK, provided that the appropriate notice had been given to the FCA.
  4. With the end of the Transition Period, section 264 of FSMA is repealed by the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 (S.I. 2019/325) (Collective Investment Schemes (EU Exit) Regulations). EEA UCITS recognised under section 264 are no longer recognised schemes and the restriction on promotion under section 238 of FSMA applies.
  5. However, Part 6 of the Collective Investment Schemes (EU Exit) Regulations provides for temporary recognition for EEA UCITS (or sub-funds of EEA UCITS) already marketing in the UK under section 264, including MMFs which use a UCITS structure, which will last for five years from the end of the Transition Period.
  6. Temporary recognition can be granted to EEA UCITS which have given notice to the FCA and that satisfy the applicable conditions. If the applicable conditions are satisfied, an EEA UCITS will be a "recognised scheme" for the purposes of Part 17 of FSMA and therefore the exemption to the restriction on marketing under section 238(4) will continue to apply for the temporary period.
  7. The Act contains a new category of recognised scheme which will be contained within Part 17 of FSMA for overseas collective investment schemes, established in both EEA and non-EEA, countries or territories.
  8. The Act creates a new power for HM Treasury to make regulations approving a country or territory and to specify a description of schemes, subject to certain conditions. Collective investment schemes within those regulations can then apply for recognition to the FCA, following which they will be recognised schemes. The exemption to the restriction in marketing under section 238(4) will apply to these schemes as the definition of ‘recognised schemes’ under section 237(3) will be expanded to include schemes recognised through this new process.
  9. Under the current legislative framework, overseas MMFs, which are a type of collective investment scheme, are not permitted to market in the UK unless the scheme falls within one of the exemptions set out in Article 4(1)(a) to (c) of Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (‘MMFR').
  10. This Act inserts Article 4(1)(aa) into the MMFR to provide an exemption to overseas MMFs from a country or territory that have been approved by HM Treasury under the new Article 4A of the MMFR.
  11. Article 4A sets out the test for equivalence, whereby HM Treasury by regulations under paragraph 1 determines that the law and practice of a country or territory imposes requirements on MMFs which have equivalent effect to the requirements imposed by the MMFR.
  12. An individual MMF that is authorised and supervised in a country or territory that has been approved under Article 4A of the MMFR will be permitted to market in the UK once the financial promotion restriction under section 238 of FSMA has been lifted by recognition under section 271A or 272 or notification under the NPPR.
  13. Section 272 allows the FCA to recognise individual schemes. This Act makes some amendments to the process for collective investment schemes recognised under section 272.

Markets in Financial Instruments Regulation

  1. In 2018, the UK implemented Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments ("MiFID II"), which came into effect alongside MiFIR. MiFID II replaced Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, and together with MiFIR established a new framework for the regulation of investment firms and trading venues.
  2. MiFIR Title 8 contains a market access regime, which enables investment firms from equivalent jurisdictions to provide cross-border services to per se professional clients and eligible counterparties.
  3. Following the end of the Transition Period, MiFIR forms part of retained EU law and therefore continues to apply in the UK. HM Treasury has made the necessary changes under the EUWA to ensure that Title 8 continues to operate effectively following the end of the Transition Period in regulation 33 of the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1403). Under Title 8, HM Treasury is empowered to make an equivalence determination in favour of a third country. Following this determination, once certain other criteria have been met, firms from that third country which register with the FCA are permitted to provide investment services to per se professional clients and eligible counterparties in the UK without needing to be authorised to provide those investment services under Part 4A of FSMA.

Cancellation of permission to carry on regulated activity

Changes to the FCA’s deauthorisation procedure

  1. Firms are granted authorisation by the FCA to carry out a range of financial services activities through Part 4A of FSMA. The grounds for the FCA to cancel a firm’s authorisation are set out in section 55J(1) of FSMA. This measure will add a new section 55JA of FSMA which introduces a new Schedule 6A, with the effect of providing the FCA with a new power to cancel or vary an authorisation.

Rules about the level of care provided by authorised persons

FCA rules about the level of care provided to consumers by authorised persons

  1. The FCA has the power to make general rules applying to authorised persons. Under section 137A of FSMA the FCA may make such rules as appear to it to be necessary or expedient for the purpose of advancing one or more of its operational objectives.
  2. In connection with these powers the Act requires the FCA to consult on the extent to which a duty of care, or other provision, would advance the FCA’s consumer protection objective. The FCA’s consumer protection objective, set out in section 1C of FSMA, is one of the FCA’s three operational objectives. The consumer protection objective is defined as securing an appropriate degree of protection for consumers.
  3. Other relevant provisions of FSMA are section 138D (action for damages) and section 206 (financial penalties).

Insider dealing and money laundering etc.

Amendments to the Market Abuse Regulation

  1. The EU MAR is an EU regulation which came into effect on 3 July 2016, repealing and replacing Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse). The EU MAR broadened the scope of instruments covered by the market abuse framework, strengthening in particular the regime for commodity and related derivative markets. It explicitly bans the manipulation of benchmarks (such as the LIBOR) and reinforces the investigative and sanctioning powers of regulators.
  2. Following the end of the Transition Period the EU Regulation forms part of retained EU law, by operation of the EUWA (opens in new window) . The Market Abuse (Amendment) (EU Exit) Regulations 2019 (opens in new window) (S.I. 2019/310) deliver the necessary amendments to ensure that the EU Regulation continues to function appropriately and effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law is referred to as the Market Abuse Regulation (‘MAR’).
  3. The Act makes amendments to MAR. These mirror some of the changes the EU has made in EU Regulation (EU) 2019/2115 of the European Parliament and of the Council of 27 November 2019 amending Directive 2014/65/EU and Regulations (EU) No 596/2014 and (EU) 2017/1129 as regards the promotion of the use of SME growth markets (known as the SME Growth Markets Regulation (opens in new window) ). The relevant changes took effect in EU law on 1 January 2021.
  4. Article 18 of MAR contains the requirements on the preparation and maintenance of insider lists. The Act amends Article 18 to make clear that both issuers and any person acting on their behalf or on their account (such as advisers) are required to maintain their own insider lists.
  5. Article 19 of MAR regulates transactions by persons discharging managerial responsibilities and those closely associated with them. The Act amends Article 19 to change the deadline by which issuers have to publicly disclose such transactions. The deadline will now be two working days after those transactions have been notified to the issuer, rather than three business days after the transaction itself.

Extending the maximum criminal sentence for market abuse

  1. The criminal regime for insider dealing is in Part 5 of the Criminal Justice Act 1993. It contains three separate offences relating to (a) dealing in price-affected securities, (b) encouraging another to deal in price-affected securities, and (c) unlawful disclosure of inside information.
  2. The penalty for conviction on indictment for the above insider dealing offences is set out at section 61(1)(b) of the Criminal Justice Act 1993. Each offence can be tried summarily or by indictment. Currently, the maximum sentence following conviction on indictment is seven years; the Act amends this to ten years.
  3. The criminal regime for market manipulation is in sections 89-91 of the Financial Services Act 2012 (opens in new window) . It also contains three separate offences related to (a) making false or misleading statements, (b) creating false or misleading impressions, and (c) making false or misleading statements or creating a false or misleading impression in relation to specified benchmarks.
  4. The penalty for conviction on indictment for the above market manipulation offences is set out at section 92(1)(b) of the Financial Services Act 2012. Each offence can be tried summarily or by indictment. Currently, the maximum sentence following conviction on indictment is seven years; the Act amends this to ten years.

Amendments to the Proceeds of Crime Act 2002 and Anti-Terrorism, Crime and Security Act 2001: Payment and E-Money Institutions

  1. POCA provides the statutory basis for money laundering offences in the UK as well as the statutory basis for asset freezing, confiscation and civil recovery in the context of criminal finance. In regard to asset freezing and forfeiture, ATCSA provides for equivalent regimes in the context of terrorism financing.
  2. The Act amends Part 7 of POCA to extend the threshold amount provisions to payment and e-money institutions. This will allow payment and e-money institutions in certain circumstances to continue to operate accounts by executing transactions below the threshold amount in certain circumstances without the need to seek consent in each case and without committing a principal money laundering offence.
  3. The Act also amends POCA and ATCSA to ensure that accounts maintained by payment and e-money institutions are subject to the account freezing and forfeiture powers in Chapter 3B of Part 5 of POCA (in England and Wales and Scotland) and Part 4B of Schedule 1 to ATCSA (across the UK).

Amendments to the Sanctions and Anti-Money Laundering Act 2018

  1. Section 49 of SAMLA has replaced section 2(2) of the ECA as the statutory power that will be used to impose and make changes to requirements in the UK’s regulations on money laundering. This Act amends paragraph 22 of Schedule 2 to SAMLA to ensure that section 49 of SAMLA can be used to make regulations that relate to conduct by certain overseas trustees.

Debt Respite Scheme

Statutory debt repayment plan

  1. Provision for the creation of a debt respite scheme (including Breathing Space and the Statutory Debt Repayment Plan (SDRP)) was made through sections 6 and 7 of the Financial Guidance and Claims Act 2018 (FGCA). Regulations to deliver the SDRP will be made under the FGCA.
  2. The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 deliver the Breathing Space part of the scheme. These regulations came into force on 4 May 2021.

Help-to-Save

Successors accounts for Help-to-Save

  1. The Help-to-Save scheme was established under the Savings (Government Contributions) Act 2017. Further details of the operation of Help-to-Save accounts, eligibility for an account and other matters were set out in the Help–to–Save Accounts Regulations 2018 (S.I. 2018/87) and in arrangements made between HM Treasury and HMRC, and the Director of Savings as the account provider.
  2. Section 36 provides for HM Treasury to make regulations which set out the arrangements for successor accounts to matured Help-to-Save accounts. It specifies that the successor account can be a new or existing account, and sets out certain rights that Help-to-Save account holders will have in relation to the Director of Savings’ power to transfer the balance in their matured Help-to-Save account to a successor account.

Miscellaneous

Regulated activities and application of Consumer Credit Act 1974

  1. Prior to the transfer of consumer credit regulation to the FCA, consumer credit activities were subject to a licensing regime under the Consumer Credit Act 1974, and so required a licence from the Office of Fair Trading unless the activities were exempt.
  2. When consumer credit was transferred to the FCA, a power was conferred on HM Treasury by section 107(6) of the Financial Services Act 2012 to allow the consumer protection regime imposed under the Consumer Credit Act to be amended to "fit" with the new regime under FSMA. This power is available in relation to activities for which a licence from the Office of Fair Trading was required under the previous regime, or those which were subject to a limited set of exemptions.
  3. While this power is therefore available in relation to the vast majority of consumer credit activities currently regulated by the FCA, it is not currently available in relation to activities which were exempt under other provisions of the Consumer Credit Act 1974.
  4. Section 37 modifies this power to extend it, and gives HM Treasury power to exclude provisions of the Consumer Credit Act 1974 from applying to activities which currently fall within the relevant exemptions in the Regulated Activities Order, either when they are brought within the scope of regulation or at any point thereafter.
  5. The provisions of the Consumer Credit Act 1974 would otherwise apply to such activities, once brought within the scope of regulation, by virtue of section 8 of that Act (which defines consumer credit agreements by reference to those credit agreements regulated by the FCA as set out in Chapter 14A of Part 2 of the Regulated Activities Order).

Amendments to the PRIIPS Regulations

  1. The EU PRIIPs Regulation is an EU Regulation that, where not directly applicable, was implemented into UK law by the Packaged Retail and Insurance-based Investment Products Regulations 2017 which entered into force on 1 January 2018. Following the end of the Transition Period, the PRIIPs Regulation forms part of retained EU law in the UK. The Government made the necessary amendments to ensure that the Regulation continues to operate effectively in the UK, in the Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019, using powers under the EUWA (opens in new window) .
  2. The PRIIPs Regulation is supplemented by Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents. Following the end of the Transition Period, the FCA is empowered to update and amend the regulatory technical standards.

Retention of personal data under the Market Abuse Regulation

  1. The legal background relevant to MAR more broadly is explained in paragraphs 296 and 297.
  2. Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (‘EU GDPR’) is an EU regulation which came into effect from 25 May 2018, repealing and replacing Directive 95/46/EC of the European Parliament and of the Council of 24 October 2005 (General Data Protection Regulation). The EU GDPR set out the key principles, rights and obligations for most processing of personal data in the EU.
  3. Following the end of the Transition Period the EU GDPR forms part of retained EU law, by operation of the EUWA. The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019 (S.I. 2019/419) deliver the necessary amendments to ensure that the EU Regulation continues to function appropriately and effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law is referred to as the GDPR.
  4. Alongside the GDPR, the DPA 2018 sets out the data protection framework in the UK. It contains three separate data protection regimes: a general processing regime (the GDPR); a separate regime for law enforcement authorities; and a separate regime for the three intelligence services.
  5. The Act amends Article 28 of MAR. Article 28 of MAR appears in Chapter Four of MAR, which makes provision for co-operation, professional secrecy and data protection by the FCA. Article 28 provides that nothing in MAR authorises the FCA to disclose personal data in a way that would contravene any provision of the GDPR or theDPA2018.
  6. In particular, Article 5(1)(c) of the GDPR requires that personal data must be adequate, relevant and limited to what is necessary in relation to the purposes for which they are processed: this is known as the principle of ‘data minimisation’.
  7. Personal data is not defined in MAR, but the Government considers that the correct definition of personal data for these purposes is that contained within the GDPR Article 4(1), that is "any information relating to an identified or identifiable natural person (‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person".

Over the counter derivatives: clearing and procedures for reporting

  1. EMIR, as amended by Regulation (EU) 2019/834 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 648/2012 as regards the clearing obligation, the suspension of the clearing obligation, the reporting requirements, the risk-mitigation techniques for OTC derivative contracts not cleared by a central counterparty, the registration and supervision of trade repositories and the requirements for trade repositories (EMIR REFIT (opens in new window) ) and Regulation (EU) 2019/2099 of the European Parliament and of the Council of 23 October 2019 amending Regulation (EU) No 648/2012 as regards the procedures and authorities involved for the authorisation of CCPs and requirements for the recognition of third-country CCPs (EMIR 2.2 (opens in new window) ), is the main measure regulating the OTC derivatives market. EMIR is further implemented through technical standards.
  2. EMIR was in most part a directly applicable piece of EU legislation in UK law. Where not directly applicable, EMIR was implemented in UK law through primary and secondary legislation. The main pieces of UK legislation implementing EMIR are the FSMA, the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) Regulations 2013 and the Financial Services and Markets Act 2000 (Over the Counter Derivatives, Central Counterparties and Trade Repositories) (No. 2) Regulations 2013. By operation of the EUWA, following the UK’s withdrawal from the EU, and at the end of the Transition Period, EMIR formed part of retained EU law. Five main statutory instruments made under the EUWA have further addressed deficiencies in EMIR arising from the UK’s withdrawal from the EU (the Central Counterparties (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 (S.I. 2018/1184); the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 (S.I. 2019/1318); the Over the Counter Derivatives; Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019 (S.I. 2019/335); The Securitisation (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/660); the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) (No. 2) Regulations 2019 (S.I. 2019/1416)).
  3. These include passing the whole of the supervision and regulation of EMIR-regulated entities to the UK regulators, which are also delegated the power to adopt technical standards implementing the EMIR framework whose adoption is delegated in EMIR to the European Commission (see Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 (S.I. 2018/1115) and Chapter 2A of Part 9A of FSMA). The Act measure adds to the EMIR framework by introducing two technical improvements. The FCA is empowered to adopt implementing rules for both provisions.

Regulations about financial collateral arrangements

  1. HM Treasury made the FCARs in order to implement FCAD. Such regulations were made using the powers in section 2(2) of the ECA. HM Treasury applied the FCARs to a broader class of persons than FCAD.
  2. The question of the ability of HM Treasury to make the FCARs in the way it did has been raised in litigation on two occasions: R(on the application of Cukurova Finance International Limited and Cukurova Holding AS) v HM Treasury and Alfa Telecom Turkey Limited [2008] EWHC 2567 (Admin) (29 September 2008) and The United States of America v Nolan [2015] UKSC 63. This raised the prospect of a UK Court determining that HM Treasury had exceeded its powers under section 2(2)(b) of the ECA when making the FCARs. Such a decision would put in question the lawfulness of the FCARs and in turn the validity of certain financial collateral arrangements made in reliance on the FCARs.
  3. Section 38 confirms the validity of the FCARs and the financial collateral arrangements made in reliance on them. By confirming the validity of the legislation in this way, Parliament will remove any question around the lawfulness of the FCARs and such financial collateral arrangements. This retrospective effect removes doubt for existing contracts which were outside the scope of FCAD.
  4. A secondary part of the Section looks at the Parliamentary procedure for making future regulations in this area. At present, such regulations would be made pursuant to section 256 of the Banking Act 2009. This requires that the "made affirmative" procedure is used. This means that any regulations would be legally in force once made but would require approval by both Houses of Parliament within 28 days of the making of the regulations, to keep them in force. This procedure is usually associated with urgent legislation. Accordingly, this section will amend the procedure to the more common "draft affirmative" procedure, which means any regulations will be in force once approved by resolution of both Houses of Parliament.

Appointment of the Chief Executive of the FCA

  1. Currently, the statute law governing regulatory appointments does not state a fixed term period for the FCA Chief Executive. Paragraph 2(2) of Schedule 1ZA to FSMA provides that the FCA Board shall be comprised of various persons, including at sub-paragraph (2)(b) "a chief executive appointed by HM Treasury."
  2. Paragraph 3(1) of Schedule 1ZA provides that the terms of service of the "appointed members" – including, courtesy of paragraph 2(6), the FCA Chief Executive – are to be determined by HM Treasury. Paragraph 3(1) provides HM Treasury with clear express power to specify a term length for the chief executive.
  3. Section 39 makes an amendment to Schedule 1ZA to insert a provision to make the appointee to the role of the FCA Chief Executive subject to a fixed five-year term.
  4. The provision makes express that the term may be renewed, but not more than once (so that an appointee may be in role for a maximum of 10 years).

Payment services and the provision of cash

  1. Part 1 of Schedule 1 to the PSRs sets out the activities that constitute payment services for the purposes of those regulations, when carried out as a regular occupation or business activity. This includes services enabling cash withdrawals from a payment account and all of the operations required for operating a payment account. Cashback without purchase is therefore a payment service under these regulations.
  2. Part 2 of Schedule 1 to the PSRs sets out activities which do not constitute payment activities for the purposes of those regulations. This includes services where cash is provided by the payee to the payer as part of a payment transaction for the purchase of goods and services. This is commonly known as ‘cashback with a purchase’.

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