Financial Services And Markets Act 2023

Policy background

Revocation of retained EU law

Comprehensive FSMA model for financial services

8. The current model of financial services regulation was introduced by the Financial Services and Markets Act 2000 (FSMA 2000). The FSMA model delegates the setting of regulatory standards to the independent financial services regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), that work within an overall policy framework set by government and Parliament.
9. During the UK’s membership of the European Union (EU), and particularly following the global financial crisis, the majority of new financial services regulation was developed and delivered at an EU level. When the UK left the EU, the body of EU legislation that applied directly in the UK at the point of exit was transferred onto the UK statute book by the European Union (Withdrawal) Act 2018 (EUWA 2018). This is known as retained EU law.
10. HM Treasury undertook a significant programme of secondary legislation to ensure that the body of retained EU law relating to financial services would operate effectively following the UK’s withdrawal from the EU, using powers in EUWA 2018 to make the necessary amendments to address any deficiencies arising as a result of exit at the end of the transition period.
11. This approach provided stability and continuity in the immediate period after EU exit, but it was never intended to provide the optimal, long-term approach for UK regulation of financial services. It has led to a complicated patchwork of regulatory requirements across domestic primary and secondary legislation, retained EU law, and regulator rulebooks. And it means that the regulators are restricted in how they can pursue their statutory objectives through their rules, as they are not able to make changes to rules that are set out directly in retained EU law, except in very limited cases.
12. Financial services regulations need to be updated regularly to take account of new products and markets, and emerging risks and opportunities. The FSMA model supports this by delegating the setting of regulatory requirements to the regulators, working within an overall policy framework set by government and Parliament.
13. The government considers that the FSMA model remains the most appropriate way to regulate financial services in the UK.
14. That means that a large number of detailed regulatory requirements which currently sit in retained EU law should, under a FSMA approach, generally be in the regulators’ rules.
15. The government’s overall policy objective is to establish a comprehensive FSMA model for financial services regulation. That means applying the FSMA model to areas currently covered by retained EU law, so that the government and Parliament establish the framework and objectives for the regulators, and the regulators design the detailed rules that apply to firms.
16. The government published two consultations, in October 2020 and November 2021 , outlining the aim of establishing a comprehensive FSMA model. Respondents demonstrated overwhelming support for the establishment of a comprehensive model of regulation based on FSMA 2000, agreeing that the FSMA model is world-leading.

Revocation of retained EU law

17. Delivering a comprehensive FSMA model of regulation requires the revocation of retained EU law relating to financial services.
18. The Act revokes the following types of retained EU law, which are all captured by Schedule 1 to the Act:
    1. All direct principal EU legislation, such as Regulations;
    2. Secondary legislation made under primary legislation, such as instruments made to implement EU obligations under the European Communities Act 1972, and instruments made under the European Union Withdrawal Act 2018 which addressed deficiencies in EU law;
    3. All EU tertiary legislation, such as Delegated Regulations, Commission Decisions, and Implementing Acts; and
    4. Some parts of primary legislation;
19. The revocation of retained EU law will not extend to Acts of Parliament, except to the parts which are listed in Schedule 1, which are necessary to remove as they will not function effectively when retained EU law is revoked.
20. Where revoked legislation amends domestic legislation, including primary legislation, (for example, where a statutory instrument made under section 2(2) of the European Communities Act 1972 amends FSMA 2000), the amendments to that other legislation will remain in force despite the revocation. This is necessary in order to ensure that domestic legislation continues to function effectively.
21. Retained EU law is a broad category and includes some domestic legislation like the Regulated Activities Order. Some of these domestic instruments which contain elements of retained EU law are an essential part of the FSMA model of regulation that needs to be maintained. Therefore, HM Treasury will have the means to exclude instruments which are not intended to be revoked.
22. Retained EU law which is already part of the regulators’ rulebooks will not be revoked through the Act, because these rules can be updated by the regulators themselves according to their normal processes established in FSMA 2000.
23. The Act commences the revocation of retained EU law in a way which facilitates a smooth transition to a comprehensive FSMA model. This means that where the government feels that it is necessary, the government does not expect to commence the revocation of individual parts of the Schedule unless the regulators have drafted and consulted on rules that are ready to be enforced, where it is appropriate that these provisions are replaced.

Associated powers

24. The Act introduces a number of provisions to allow retained EU law to be replaced in a way that creates a comprehensive FSMA model of regulation.

Restating parts of retained EU law to create a comprehensive FSMA model

25. Under the FSMA model, Parliament through legislation sets the overall approach to financial services regulation including the regulators’ objectives. Parliament also establishes the parameters within which HM Treasury sets the ‘regulatory perimeter’ through secondary legislation, specifying which financial activities should be regulated.
26. There are some elements of retained EU law that carry out similar functions, and will need to be maintained under a comprehensive FSMA model. The Act gives HM Treasury the ability to "restate" any part of retained EU law into either primary or secondary domestic legislation, with any necessary or desirable modifications.
27. Examples of provisions which HM Treasury expects to restate in part include:
    1. Key definitions that make up elements of the financial services regulatory framework and therefore what activities are being regulated. For example, definitions of different types of financial market infrastructure. This will ensure that the government continues to be responsible for determining what activities are regulated.
    2. Existing powers for the regulators to supervise and enforce their rules effectively, and processes concerning competitiveness or other forms of registration or notification.
    3. The ability for HM Treasury to assess whether other jurisdictions have regulatory requirements equivalent to those in the UK, and to give effect to those findings. This is consistent with the government’s responsibility for deference arrangements.

Regulator rule-making

28. To establish a comprehensive FSMA model, the regulators need to have the appropriate powers to make rules when retained EU law is revoked. In many instances, FSMA 2000 already provides the necessary powers, or will do so through the Designated Activities Regime (DAR) which is introduced by section 8 of the Act. There are also additional general rule-making powers for the Bank of England and the FCA, which are covered in the "New Regulatory Powers" section of these Notes.
29. In other instances, the regulators do not have sufficient regulatory rule-making powers to replace the rules that are currently in retained EU law. The restatement power will allow HM Treasury to address this by enabling the:
    1. Restatement into domestic legislation of any existing regulator rule-making powers that are set out in retained EU law;
    2. Modification of existing regulator rule-making powers; and
    3. Creation of new regulator rule-making powers in areas which are currently covered by retained EU law.
30. There are appropriate limitations to this restatement power. For example, the power has not been designed to create entirely new general rule-making powers, such as those in sections 137A and 137G of FSMA 2000.

Modifying retained EU law

31. The government expects that it will take a number of years to complete the process of revoking retained EU law. Therefore, it is likely that some elements or specific provisions within retained EU law will become ineffective or out-of-date before the revocation is commenced.
32. During this transitional period before revocation has fully taken effect, the regulators will be restricted in how they are able to pursue their statutory objectives. For example, a regulator may consider that disclosure requirements should be enhanced to protect consumers against an emerging risk. If the relevant requirements are set out in retained EU law whose revocation has not yet been commenced, however, they may be unable to give effect to this.
33. The Act therefore provides HM Treasury with a power to make targeted modifications to retained EU law during this transitional period.
34. The Act enables HM Treasury to make modifications in relation to the following purposes:
    1. Protecting and enhancing the stability and integrity of the UK financial system;
    2. Promoting the safety and soundness of financial services firms;
    3. Promoting the effective functioning of financial markets;
    4. Promoting effective competition in the interests of consumers;
    5. Facilitating the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term;
    6. Protecting consumers and insurance policy holders, or those who may become policy holders;
    7. Providing for effective rule-making, enforcement, investigation, and supervision;
    8. Providing for the effective arrangements in relation to resolution;
    9. Protecting public funds;
    10. Implementing international standards and practices;
    11. Providing for efficient and effective regulatory, enforcement, investigatory and supervisory arrangements;
    12. Removing provisions that are yet to be commenced or changing the timing of their commencement.
35. These purposes closely relate to the regulators’ statutory objectives and, as described above, while retained EU law remains in force, the regulators will be constrained in how they further these objectives.
36. In addition, the power to amend retained EU law may also be used for technical purposes, such as making retained EU law clearer.
37. An example of where modification might be necessary is to enable provision to ensure the regulators have the right enforcement and supervisory powers in relation to restated law (including fee-raising and information-sharing powers) and the necessary statutory immunities.
38. The Act also gives HM Treasury the power to make modifications to retained EU law when restating it. The purposes for which HM Treasury may modify retained EU when restating it are the same as those set out in paragraph 27. HM Treasury will have the ability to modify any element of retained EU law that has been restated in future. This will ensure that the legislation can remain up-to-date in light of developments in financial markets.

Effective regulator rule-making

39. As set out above, the government envisages that many of the provisions in retained EU law will be replaced by the regulators in their rulebooks, rather than in legislation.
40. When retained EU law is revoked, the regulators will need to replace the regulatory requirements contained in that retained EU law with the appropriate rules, reflecting their objectives. The government expects this to take a number of years and will be a significant programme of work for the financial services regulators.
41. The Act makes a small number of technical changes to ensure that the regulators are able to replace retained EU law effectively, and to generally improve the effectiveness and agility of regulator rule-making

Targeted regulator exemption from complying with certain accountability requirements

42. When deciding what rules to make, the regulators will need to follow their usual process for making rules – including considering how to further their objectives, having regard to the regulatory principles, and any additional "have regards" set by HM Treasury. The regulators are also required to consult publicly on rule changes, and to conduct a cost benefit analysis, unless an exemption applies.
43. The Act introduces some exemptions from the statutory consultation requirements imposed by FSMA in relation to the FCA, the PRA, and the Bank of England, and by the Financial Services (Banking Reform) Act 2013 in relation to the Payment Systems Regulator (PSR). This will give the regulators discretion as to whether to consult, and enable them to take a proportionate approach to consultation when creating rules tailored to the UK to replace EU-derived regulation or EU-derived rules which are already in their rulebooks.
44. The Act introduces an exemption from the regulators’ statutory requirements to consult and conduct cost benefit analysis where the regulator is deleting, without replacing, rules in their rulebooks which contain a retained EU obligation. This will allow the regulators to quickly remove unnecessary rules which they were required to make in order to fulfill EU obligations where the regulator determines that those rules should not be replaced.
45. The Act also enables HM Treasury to specify in regulations parts of retained EU law where the regulators are exempt from the same requirements, in circumstances where the regulators are: restating retained EU law revoked through this Act in their rulebooks without material changes; replacing revoked retained EU law with material changes but the only material effect is to reduce a regulatory burden; or amending their own rules that currently contain retained EU law obligations to make material changes but the only material effect is to reduce a regulatory burden. Where changes also have other material effects, which may include impacts on the regulators’ objectives, for example on market integrity, competition, or consumer protection, it is appropriate to require the regulators to consult, to allow affected parties to participate in a consultation. Therefore, the exemption does not apply where this is the case.
46. This exemption will allow the regulators to more easily replicate in their rules important provisions currently in retained EU law which HM Treasury and the regulators agree work well for the UK and are already familiar to stakeholders. It will also allow the regulators to more easily remove unnecessary regulatory burdens inherited from the EU, and focus time and resource on the areas where reform will unlock the greatest benefits.
47. When making or amending rules in accordance with the provisions of section 6 on the basis that they reduce regulatory burden, the FCA, the PRA and the PSR are required to publish a statement alongside the final rules which explains how any changes are compatible with their duties (for example, their duties in relation to statutory objectives). In relation to the Bank of England, the statement must explain how any changes are compatible with the Bank’s financial stability objective under section s2A of the Bank of England Act 1998.

Modifying and disapplying rules

48. Under Section 138A of FSMA 2000, the FCA and the PRA are able to disapply or modify their rules for individual firms, with the consent of the firm, or at its request, where compliance with the unmodified rules is unduly burdensome or unworkable for a firm.
49. The current process to enable the modification and disapplication of rules is an important tool in regulator rule-making, as it enables rules to be properly calibrated to the firms to which they apply. Retained EU law also contains a number of different provisions that also allow for disapplication or modification of rules for individual firms. Not all of these regimes would currently be possible under FSMA 2000.
50. Therefore, this Act introduces a power for HM Treasury to introduce different modification and disapplication regimes, as well as appropriate procedural requirements surrounding these regimes. This is intended to sit alongside the existing provisions in FSMA 2000, which will continue to apply.

Pre-commencement consultation

51. The Act changes the objectives and other matters that the regulators are required to consider when consulting and making rules, such as "have regards" and obligations. The Act therefore includes a provision which makes it clear that these requirements can be met by consultations made before commencement, to ensure appropriate use of resources and avoid delay to necessary reforms.

Permanent enhancements to FSMA 2000

52. The Act makes enhancements to the FSMA 2000 framework, to ensure that important public policy priorities can continue to be appropriately factored into financial services regulation.
53. While the UK was a member of the EU, and a significant amount of legislation was negotiated in Brussels, the government could ensure that such issues were considered, and EU institutions would also consider these issues. Under the FSMA model, the regulators must act as they consider appropriate to advance their statutory objectives – limiting the extent to which any wider public policy issues, not covered by their statutory objectives, can be considered.

Power to require the regulators to "have regard" to specified matters

54. The Act gives HM Treasury the power to require the regulators to "have regard" to things specified by HM Treasury when they are making rules, and to explain how this has influenced their rules.
55. The regulators must continue to act in a way that furthers their objectives, and must have regard to these additional matters insofar as that is compatible with their objectives, and their existing rule-making powers.
56. The purpose of this power is to enable the government to ensure that more specific public policy priorities can be reflected in regulator rule-making, where it considers that appropriate

Power to obligate the regulators to make rules in specified areas

57. The Act also enables HM Treasury to place obligations on the regulators to make rules in relation to specific areas of regulation. For example, in the Financial Services Act 2021, HM Treasury required that the FCA make rules applying to FCA-regulated investment firms which imposed a variety of prudential requirements, including requirements relating to types and amounts of capital and liquid assets such firms must hold to manage risk.
58. In making rules to comply with any obligations, the regulators must continue to act in a way that furthers their objectives and must comply with these obligations insofar as that is compatible with their objectives, and their existing rule-making powers.

Transitional amendments

Amendments to the Markets in Financial Instruments Regulation (MiFIR) and the European Market Infrastructure Regulation (EMIR)

Wholesale capital markets regulation

59. Wholesale capital markets regulations govern the buying, selling and organised trading of financial instruments, such as shares, bonds and derivatives, between professional investors and companies.
60. Wholesale capital markets are where a range of firms and investors from across the financial services sector come together to raise short- and long-term finance to grow. This includes, but is not limited to, market infrastructure providers and exchanges, data providers and investment firms, such as investment banks and asset managers.
61. Many of the rules that directly govern the buying, selling and organised trading of transferable financial instruments are set out in the Markets in Financial Instruments Regulation (MiFIR). MiFIR is one of two pieces of EU legislation (the other being the second Markets in Financial Instruments Directive (MiFID II)) which together underpin what is referred to as the MiFID II framework. As part of the onshoring process, the MiFID II framework was amended to address deficiencies arising as a result of the UK’s withdrawal from the EU and the end of the Transition Period.
62. The UK played a significant role in designing the MiFID II framework, and the government believes that the resilience and effectiveness of the UK’s capital markets has been significantly strengthened by the post-crisis reforms that it implemented. Although the regime is working well in many areas, the EU approach to regulation - where the same rules apply across member states in order to facilitate a single market in financial services - means that MiFID II framework requirements are not calibrated solely for UK markets. In some areas, it has not delivered its intended benefits, has led to duplication and excessive administrative burdens for firms, or has stifled innovation. Following the UK’s exit from the EU, in July 2021, the government launched the Wholesale Markets Review (WMR) consultation with the aim of creating a simpler and less prescriptive regime that meets the needs of UK markets while maintaining high regulatory standards.
63. The Act delivers the priority measures identified through the WMR consultation and aims to improve competitiveness and increase the flexibility of wholesale markets regulation by making nine sets of changes to the MiFID II framework.

1. Removing the Share Trading Obligation (STO)

64. Shares can be traded over-the-counter (OTC), where contracts are traded directly between two parties, or on a trading venue. Trading venues help to ensure fair and orderly trading as they communicate price information for the instruments that are available to trade on the venue. This helps investors to make well informed decisions and increases market transparency.
65. The MiFID II framework includes two types of trading venues where shares can be traded: regulated markets (RMs) and multilateral trading facilities (MTFs). Both are multilateral systems where multiple third-party buying and selling interests in financial instruments interact in accordance with non-discretionary rules.
66. The onshored Share Trading Obligation (STO) requires firms to trade shares admitted to trading on a UK RM, MTF, systematic internaliser or an overseas venue assessed as equivalent. It had been implemented by the EU with the aim of increasing transparency in share trading, however there is no evidence that it has achieved this. In fact, evidence suggests that it can prevent firms from accessing the most liquid markets and therefore achieving the best price for investors.
67. In December 2020, the FCA announced that it would use its Temporary Transitional Power (TTP) under Part 7 of FSMA 2000 (Amendment) (EU Exit) Regulations 2019 to give a transitional direction modifying the STO. This allows firms to continue trading shares on EU trading venues or systematic internalisers from the end of the implementation period in the absence of an equivalence determination. This approach has allowed firms operating in the UK to continue to access the most liquid markets and get the best outcomes for themselves and their clients when trading European Economic Area (EEA) shares (regardless of the currency they are seeking to trade in).
68. The Act removes the STO so that firms can trade shares on any trading venue in the UK or overseas with any counterparty or on an OTC basis. This is intended to ensure that investors can get the best price for their trade.

2. Replacing the pre-trade transparency waiver regime and removing the Double Volume Cap

69. The MiFID II framework requires trading venues and systematic internalisers to publish details about bids and offers before a trade has been completed. This is known as pre-trade transparency. Pre-trade transparency helps ensure an efficient price discovery process, but in some instances, it can impair liquidity. For example, market participants can use pre-trade information to increase their prices or create a shortage of shares, which can result in false indications of liquidity. This can have a negative impact on price formation.
70. To mitigate this, MiFIR includes four pre-trade transparency waivers for equity and equity-like instruments, which firms can use to avoid publishing offered, executable quotes before a trade has been completed. These are:
    1. the reference price (RP) waiver, which can be used where a trading venue matches orders for an equity instrument based on the midpoint between current bid and offer prices 1 of the trading venue where that instrument was first admitted to trading or the most relevant market in terms of liquidity 2 ;
    2. the negotiated trade (NT) waiver, for transactions that are negotiated bilaterally but are reported on venues;
    3. the large in scale (LIS) waiver, for orders considered large-in-scale against normal market size; and
    4. the order management facilities waiver, for orders held in an order management facility of a trading venue pending disclosure.
71. MiFIR also introduced a mechanism to limit the amount of trading that happens under the reference price and negotiated trade waivers: the Double Volume Cap (DVC).
72. The Act revokes the existing system of waivers from pre-trade transparency requirements and instead gives the FCA new rule-making powers to determine under which circumstances waivers are available and any conditions that are to be attached to their use. This will allow the FCA to make evidence-based decisions about the circumstances in which waivers should apply.
73. As part of this change, the Act removes the DVC from the MiFID II framework.
74. Research on the impact of trading without pre-trade transparency on the integrity and efficiency of markets suggests that the relationship between price formation and execution costs is complex and variable. It also shows that banning trading happening without pre-trade transparency can result in volumes moving into hybrid, trading mechanisms that do not operate under full transparency. When this happens, it is unlikely that volumes will return to transparent public markets. Furthermore, evidence shows that the use of so-called dark pools can reduce the transaction costs of large institutional orders. Removing the DVC will therefore give firms greater choice over where they trade to get the best prices for investors.
75. The FCA will be required to monitor UK markets in order to continue its own research into assessing the impacts of trading with no pre-trade transparency. The FCA can only intervene to limit the availability of a waiver if it considers that market integrity is impacted and must only do so having first consulted with HM Treasury. When considering intervention, the FCA must consider evidence from across the globe as to the impact of trading without pre-trade transparency.

3. Changing the definition of a systematic internaliser

76. Systematic internalisers are investment firms that deal on their own account (i.e., use their own capital) when executing clients’ orders outside of a trading venue on a "organised, frequent, systematic and substantial basis". Because they use proprietary capital rather than that of clients or counterparties, they are considered a counterparty of the trade and therefore take on risk.
77. The scope of the systematic internaliser regime was originally determined on a qualitative basis. Its objective was to ensure that OTC trading in the form of systematic internalisation of order flows by investment firms could contribute to price formation. Internalisation of orders occurs when a firm executes a trade for a client using inventory the firm already has as opposed to going outside of the firm to another firm or a trading venue. The systematic internaliser regime ensured that these ‘internalised’ transactions were made transparent to the market. In 2018 the definition was amended, and a number of quantitative thresholds were introduced. The thresholds are calculated at different levels for each asset class and investment firms are expected to perform calculations for each financial instrument they deal in on a quarterly basis, covering the previous 6-month period, to determine if they are a systematic internaliser. The intention behind moving to a quantitative based regime was to ensure consistency across all EU member states. It has instead resulted in a very burdensome regime and to avoid the calculations, which are costly, many firms simply opt into the regime and comply with the obligations of being a systematic internaliser.
78. The Act therefore reverts to a qualitative definition of systematic internaliser and gives the FCA the power to specify how the new definition should be interpreted. This will ensure that the regime is flexible, better able to account for market evolutions, and that it achieves its aim of increasing transparency and price formation, while removing unnecessary burdens on firms.

4. Removing restrictions on midpoint crossing for trades

79. The tick size regime sets minimum increments ("ticks") by which prices for equity and equity-like instruments can change and limits the ability of trading venues and systematic internalisers to cross at the midpoint (i.e., halfway between the buying and selling prices).
80. A harmonised tick size regime was introduced under the MiFID II framework to reduce the ever-decreasing increments in price seen on different trading venues. Prior to the introduction of the tick size regime under the MiFID II framework venues competed against each other with smaller and smaller price spreads to the detriment of the price formation process.
81. The tick size regime was originally limited to trading venues but was extended to systematic internalisers in 2020 in an attempt to create a fair balance between systematic internalisers and trading venues. It currently prohibits systematic internalisers from crossing orders at the midpoint except for orders that are large in scale (LIS) 3 .
82. The government supports the tick size regime but believes that the extension of the regime to systematic internalisers does not account for the difference between systematic internalisers and trading venues, as systematic internalisers take on counterparty risk. Therefore, limiting systematic internalisers’ ability to cross at the midpoint does not benefit price formation and can in some cases limit firms’ ability to offer the best prices to their clients.
83. The Act removes the restriction on midpoint crossing for systematic internalisers for all trades. As midpoint crossing can offer price improvements for investors, this will allow systematic internalisers to achieve the best outcome for their clients.

5. Aligning the Derivatives Trading Obligation with the EMIR Clearing Obligation

84. The Derivatives Trading Obligation (DTO) requires financial counterparties and some non-financial counterparties (counterparties being entities which take up opposite sides in a financial transaction) to trade certain classes of derivatives on UK authorised trading venues, or overseas trading venues that have been recognised as equivalent.
85. The C learing O bligation (CO) requires certain OTC derivative contracts (as defined in the European Market Infrastructure Regulation (EMIR) ) to be cleared by an authorised central counterparty.
86. The scope of the counterparties which are subject to the CO and DTO were intended to be aligned . I n 2019 EMIR was amended to alter the counterparties in scope of the CO, but the DTO was not updated to reflect that change. This has created unintentional misalignment which has led to uncertainty and complications for firms because the scope of counterparties subject to the DTO references the definition in EMIR. To mitigate this, the FCA has been using a transitional relief to address the issue.
87. Th e Act formally realign s the counterparties (including financial, non-financial and analogous third country entities) in scope of the DTO with those in scope of the CO in EMIR.
88. To ensure that misalignment is not an issue in the future, the scope of the DTO explicitly, and accurately, cross-references EMIR , so that a counterparty is within scope of the DTO if it is subject to CO (or , in the case of non-financial counterparties, if it is subject to the CO in respect of derivative contracts pertaining to the same asset classes).

6. Exempting for post-trade risk reduction services from the DTO

89. Post-trade risk reduction services are types of trades that are made to reduce risks in derivatives portfolios without changing the market risk of those portfolios.
90. For example, portfolio compression is where counterparties simplify derivative portfolios by terminating derivative contracts and replacing them with other derivative contract(s) of equivalent value to reduce exposure and lower costs.
91. Currently, transactions resulting from portfolio compression are exempt from complying with the DTO; the best execution requirement (which obliges firms carrying out investment business to obtain the best possible deal for their clients); transparency obligations; and a requirement in the FCA’s Market Conduct sourcebook about the operation of multilateral systems. Although the last requirements are unrelated to the DTO, they are also contained in Article 31 of MiFIR.
92. Exempting more post-trade risk reduction services from the DTO, and the other obligations that portfolio compression trades are currently exempt from, could encourage their use and help reduce systemic risk. Doing so should not negatively impact price formation, because these trades are non-price forming. The Act therefore expands the exemptions that currently apply to portfolio compression to other risk reduction services. To ensure that the right services are covered by the exemption, the Act gives the FCA a new rule-making power to specify which post-trade risk reduction services can benefit from the exemptions listed above as well as the conditions attached to their use.
93. The Act also gives the Bank of England (the Bank) a similar rule-making power, so that the same types of services can, if appropriate, be exempted from the CO as well. The Bank will be able to specify the post-trade risk reduction services that are to benefit from an exemption from the CO. The Bank and the FCA will be required to consult each other before making changes to their respective exemptions. This change aims to incentivise the uptake of post-trade risk reduction services and is intended to support market stability.

7. Giving the FCA a permanent power to modify or suspend the DTO

94. In December 2020, the FCA announced that it would use its TTP to modify the DTO. The FCA used the TTP to allow UK firms, EU firms using the UK’s temporary permissions regime and branches of overseas firms in the UK to use EU venues when trading with an EU client who does not have access to a venue that both the UK and EU have granted equivalence to. This has limited disruption for market participants and prevented liquidity fragmentation that would have arisen from conflicting UK and EU DTOs after the end of the transition period.
95. The Act gives the FCA a new, permanent power to modify or suspend the DTO, subject to HM Treasury approval, to prevent or mitigate disruption to markets. This power will allow the FCA to make changes to the DTO in respect of which counterparties it is imposed upon; which derivatives come within its scope; and the venues on which transactions must be concluded by counterparties in scope of the DTO.

8. Simplifying the transparency regime for fixed income and derivatives

96. The MiFID II framework includes several requirements for trading venues and systematic internalisers to provide information about pricing and volume before a trade would be completed (this is known as pre-trade transparency) and publicly disclose certain details about executed trades (this is known as post-trade transparency). These requirements apply to bonds, structured finance products, emission allowances and derivatives. An EU-wide transparency regime for fixed income and derivatives markets was only introduced in 2018 and was modelled on the transparency regime for equity markets that existed pre-2018.
97. Although it was amended to accommodate for the specific characteristics of non-equity markets, the way that it is calibrated does not go far enough in accounting for fundamental differences between equity and fixed income and derivatives markets, and the different instruments that make up the latter. This has resulted in a number of bespoke illiquid instruments (where transparency does not always aid price formation and is therefore unnecessarily burdensome) falling within scope of the regime, while some liquid and standardised contracts (where more transparency would aid price formation) are not subject to transparency requirements.
98. The current regime also includes a number of exemptions from post-trade transparency requirements which have made the regime overly complex and costly and resulted in it being difficult for the market to view actual traded prices.
99. The Act aims to reduce the complexity of the current regime and ensure that the right instruments fall within scope by delegating responsibility for calibrating the scope and firm-facing transparency requirements to the FCA.
100. To achieve this, the Act removes the current regime which is set out in primary legislation and gives the FCA new rule-making powers to:
     1. develop a qualitative and quantitative assessment to ensure that the right instruments are in scope of the pre- and post-trade fixed income and derivatives transparency regimes;
     2. specify the circumstances where pre-trade transparency requirements should apply, and what those requirements are; and
     3. develop a post-trade transparency regime.

9. Simplifying the position limits regime

101. Commodity derivatives are derivatives whose value is derived from the price of an underlying commodity (for example, crude oil or metals).
102. The MiFID II framework position limits regime restricts the maximum size of a net position that a person can hold in a commodity derivative contract that is traded on a trading venue, or in economically equivalent OTC contracts. Position limits were introduced with the objective of protecting against market volatility and preventing market abuse. They were intended to align with the G20’s 2011 commitment to give market regulators effective intervention powers to mitigate against market abuse in commodity derivatives markets.
103. MiFID II also requires trading venues to establish and operate their own position management controls (for example, to monitor positions and require a person to terminate or reduce a position, if necessary, to ensure that markets function with integrity).
104. Although the government supports the objective of position limits and remains signed up to the G20 commitment to promote fair and effective commodities markets, it is the government’s position that the scope of the current regime is disproportionate, duplicative, overly complicated, and unnecessarily prevents the build-up of liquidity.
105. To simplify the regime and ensure that position limits apply to the correct contracts, the Act revokes the requirement for the FCA to apply position limits to all commodity derivative contracts that are traded on a trading venue and economically equivalent OTC contracts, and transfers responsibility for setting position limits from the FCA to trading venues.
106. To ensure that appropriate regulatory oversight is maintained, the Act grants the FCA a power to develop a framework to outline how trading venues should apply position limits and position management controls. This will provide guidance on factors that venues should take account of when setting limits and granting exemptions, for example, under which conditions they should review the case for position limits in particular contracts. It also gives the FCA the ability to require trading venues to set position limits on contracts which pose a clear threat to market integrity, and the ability to intervene directly, where absolutely necessary.
107. This approach is similar to the regime that was in place prior to the introduction of strict position limits in MiFID II. These changes will ensure a return to a model under which position limits are set more flexibly, as venues will have full visibility of all market positions and can respond accordingly. This is intended to enable liquidity to develop in these contracts, as well as making it easier for non-financial firms to find counterparties to accept the other side of hedging trades and therefore manage commercial risk. The changes will also ensure that protections which are necessary to protect market integrity can be kept in place, and that there will be a consistent approach to position limits governance across trading venues.

Amendments to the EU Securitisation Regulation 2017

108. Securitisation is the process of pooling various financial exposures (such as mortgages, car loans, or other consumer loans) to create a financial instrument that can be marketed to investors. These financial instruments are ‘tranched’, to reflect the fact that they carry different levels of risk and return to suit the appetite of different investors. This process allows lenders (such as banks) to transfer the risks of loans or other assets to other banks or investors (such as insurance firms or asset managers). This process can help free up lenders’ balance sheets to allow for further lending to the economy.
109. The key entities typically involved in securitisations are an originator and/or sponsor, a securitisation special purpose entity (‘SSPE’), and investors. The originator is responsible for creating or acquiring the exposures (for example, loans or receivables) to be securitised. The sponsor typically establishes and manages a securitisation programme by purchasing exposures from another entity (for example, an original lender) and transferring them to the SSPE. 4 The SSPE purchases the exposures, packages them up, and issues securities in the market for investors to invest in. These securities are backed by payments generated by the underlying exposures.

Simple, Transparent and Standardised (STS) Securitisations

110. Under the UK Securitisation Regulation, certain securitisations can be designated as Simple, Transparent and Standardised (STS). Such STS securitisations are designed to make it easier for investors to understand and assess the risks of a securitisation investment by excluding more complex features. The UK STS framework is in line with international standards for Simple, Transparent, and Comparable (STC) securitisation, set by the Basel Committee on Banking Supervision (BCBS) and International Organization of Securities Commissions (IOSCO).
111. Some firms who invest in securitisations (in particular banks, building societies, investment firms and insurance firms) are subject to prudential regulation. Prudential regulation seeks to ensure that financial institutions have adequate financial resources and risk management processes so they can continue to provide vital services to the real economy throughout economic and financial cycles. Banks, building societies, and PRA-designated investment firms are subject to prudential requirements in the Capital Requirements Regulation and relevant PRA rules (‘CRR firms’), and some insurance firms are subject to prudential requirements under the Solvency II regime (‘Solvency II firms’). These two regimes require firms to hold capital against their exposures, including exposures to securitisations, dependent on the risk attached to them.
112. CRR firms and Solvency II firms who invest in STS securitisations can benefit from preferential capital treatment for these investments, compared to investing in non-STS securitisations. Preferential treatment means they can be eligible for lower capital requirements compared to other securitisations, reflecting their adherence to simple, transparent, and standardised criteria.
113. In order for a securitisation to be designated as STS, the UK Securitisation Regulation currently requires the originator and sponsor of an STS securitisation to be established in the UK. 5 In addition, securitisations designated as STS under the EU Securitisation Regulation (with the originator and sponsor in the EU) before 31 December 2024 are also recognised as STS in the UK for the lifetime of the securitisation. This approach was adopted as part of the process of addressing deficiencies in retained EU law, to ensure that legislation continued to operate effectively at the point at which the UK left the EU.
114. Under the UK Securitisation Regulation, securitisations with originators and sponsors established outside the UK (or the EU until 31 December 2024) cannot be designated as STS. As a result, CRR firms and Solvency II firms cannot get preferential capital treatment for investing in those securitisations originated overseas, even if this is appropriate to reflect their adherence to STS criteria. This limits the availability of STS securitisations for UK investors, which can have a negative impact on their liquidity and on the STS securitisation market as a whole.

Equivalence framework for STS securitisations

115. Article 46 of the UK Securitisation Regulation placed an obligation on HM Treasury to review the functioning of the Regulation. As part of that review, HM Treasury was required to assess whether, in the area of STS securitisations, an equivalence regime could be introduced for overseas originators, sponsors and SSPEs. Industry respondents to HM Treasury’s call for evidence , as part of the review process, were supportive of the creation of such a regime to provide more choice for UK investors.
116. As a result, the Act aims to increase choice for UK investors in the market for STS securitisations, by allowing for STS equivalent non-UK securitisations to be recognised in the UK, with appropriate safeguards, provided they are originated in a jurisdiction that has an equivalent framework for STS securitisations to the UK. Therefore, the Act creates a framework under which HM Treasury can designate other jurisdictions as having an STS securitisation framework equivalent to that of the UK.

Amendments to the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

117. In financial markets, there are various processes that need to be performed to complete each transaction. These processes are performed by several different types of entity, many of which are collectively referred to as financial market infrastructure (FMI).
118. Each type of FMI performs a vital function in supporting financial markets. This ranges from collecting data on financial transactions, to performing unique services to enable firms active in financial markets to meet their regulatory obligations.
119. Central counterparties (CCPs) are a type of financial market infrastructure (FMI) used by firms to reduce certain risks that arise when entering into financial transactions with other parties, such as derivative transactions or buying and selling securities. CCPs sit between the buyers and sellers of financial contracts, providing assurance that the obligations under those contracts will be fulfilled. Instead of holding the contract with each other, the buyer and seller each hold their side of the contract with the CCP. The process of transacting through a CCP is known as "clearing".
120. The European Market Infrastructure Regulation (EMIR) is the core EU legislation relating to CCPs. Following the end of the Transition Period, the EU Regulation forms part of retained EU law and is referred to as UK EMIR.
121. Article 25 of UK EMIR establishes that an overseas CCP may provide clearing services to clearing members (or access trading venues) established in the UK where HM Treasury has made an equivalence decision in relation to the CCP’s home jurisdiction under Article 25(6), and the overseas CCP has been recognised by the Bank of England (the Bank). The Bank can only grant recognition to a CCP if the regulatory and supervisory frameworks of the CCP’s home jurisdiction have been declared, under Article 25(6), to be equivalent to that provided for in EMIR.
122. When the UK left the EU, the Government did not incorporate into domestic UK law the equivalence decisions for CCPs that the EU had made under Article 25 of EMIR. Instead, to enable UK firms to continue to access overseas CCPs whilst equivalence and recognition assessments are taking place, HM Treasury established the Temporary Recognition Regime (TRR).
123. The TRR is accompanied by a ‘run-off regime’, intended to ensure that CCPs that leave the TRR without gaining recognition from the Bank, and can slowly and safely unwind transactions with UK members before exiting the UK market. As it stands, under the run-off regime, the Bank can determine that a CCP that has left the TRR can continue to offer services to UK firms, as if it were recognised, for a period of up to one year.
124. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by this deadline, or applied after the deadline, and have consequently entered the run-off regime. UK firms therefore stood to lose access to these CCPs at the end of June 2023 under the current arrangements.
125. Part 5 of Schedule 2 to this Act allows the Bank to extend the length of a CCP’s run-off period from a maximum period of one year to a maximum period of 3 years and 6 months, and to determine that the run-off period for a CCP that has exited the run-off regime is to be treated as not having expired from the making of the determination onwards. The ability to provide for this extended period is intended to allow CCPs in the run-off regime who wish to apply for recognition to do so, and to ensure that the relevant CCPs can continue to offer services to UK firms during that period.

New regulatory powers

Designated activities regime

The FSMA model and the Regulated Activities Order

126. FSMA 2000 splits responsibilities for financial services policy and regulation across Parliament, HM Treasury, and the regulators as follows:
     1. Parliament, through primary legislation, sets the overall approach and institutional architecture for financial services regulation, including the regulators’ objectives;
     2. Parliament establishes the parameters within which HM Treasury sets the ‘regulatory perimeter’ through secondary legislation, specifying which financial activities should be regulated and the circumstances in which regulation should apply;
     3. The regulators have the statutory responsibility for setting the direct regulatory provisions that apply to firms which carry out regulated activities, using the powers given to them by FSMA 2000, and following the processes established by it;
     4. Parliament, through FSMA 2000, sets the statutory objectives for the regulators, with requirements set in legislation to ensure appropriate accountability to Parliament, HM Treasury, and the general public.
127. FSMA 2000 also establishes a framework whereby any person (whether an individual or firm) can only carry out a regulated activity if that person is authorised by the appropriate regulator (i.e. is an "authorised person") or is exempt (exemptions as specified in FSMA 2000). Under this framework, HM Treasury determines which activities are regulated activities, by specifying activities to be regulated in FSMA 2000 (Regulated Activities) Order 2001 (RAO). Regulated activities include many of the kinds of activities which are carried out exclusively by banks, insurers, and investments firms, and involve providing financial services to the public, such as accepting deposits or offering investment services.
128. Firms wishing to carry out a regulated activity must apply to the appropriate regulator for authorisation to do so, and the regulator must assess applications in line with the requirements established in FSMA 2000, which can include considerations of suitability and business models.
129. FSMA 2000 gives the PRA and the FCA general rule-making powers, which allow them to make rules which apply to authorised persons, for the purpose of advancing one or more of their statutory objectives. The regulators are required to maintain arrangements for supervising authorised persons, and also have powers to monitor and enforce compliance with the rules.
130. Many activities which are currently regulated directly in retained EU law are already regulated activities under FSMA 2000. When retained EU law is revoked, these ‘regulated activities’ will continue to be regulated, in line with the existing FSMA model described above.

The regulation of financial markets

131. Financial markets represent the intersection between financial services firms and the wider economy. Engaging with these markets can include activities like listing a company’s shares on an exchange, entering into a derivative contract, or engaging in market activities such as short selling. These activities are carried out by a wide range of persons, many of whom are not typically considered to be financial services firms, and who are not authorised by the regulators.
132. As an example, a large number and wide range of businesses across the economy enter into derivatives contracts. They are often used by businesses to manage the risk of price fluctuations. These businesses can be complex financial services firms or non-financial businesses operating in the real economy. For example, a car manufacturer may enter into metal derivative contracts as a way of protecting itself against a rise in the price of the metals that it needs to purchase at a later date.
133. Many activities related to financial markets came to be subject to EU law as a response to the global financial crisis. These activities need to continue to be subject to rules when retained EU law has been revoked. Bringing these activities inside the current framework for regulated activities through the RAO would not be appropriate, as it would require all businesses and individuals engaging in those activities to become authorised persons, and to be supervised as if they are offering financial services directly in the way described above. This would be a disproportionate burden on those firms.
134. Therefore, this Act enhances the financial services regulatory framework in FSMA 2000 by ensuring that activities relating to financial markets can continue to be regulated in a manner which is suited to these kinds of activities.

The Designated Activities Regime

135. The Act creates the Designated Activities Regime (DAR) to allow activities related to financial markets to be regulated within a framework which is compatible with a comprehensive FSMA model.
136. The Act:
     1. Establishes a framework within FSMA 2000 which sets the overall structure and powers for regulation and applies the relevant regulatory objectives and principles.
     2. Sets a prohibition against carrying out ‘designated’ activities, or stipulates that they must take place in accordance with the relevant rules;
     3. Provides a power for HM Treasury to designate activities relating to financial markets, exchanges, instruments, products, or investments, in secondary legislation, so that relevant activities can be brought inside this framework. This is modelled on the RAO but this power will also enable HM Treasury to set some requirements directly, and to indicate where the activities must be performed in line with rules made by the FCA;
     4. Provides a rule-making power for the FCA, which will enable them to make rules in relation to designated activities within the accountability and objectives framework for financial services regulators set by Parliament.

Designation of activities

137. The DAR will enable HM Treasury to designate activities related to financial markets exchanges, instruments, products, or investments, in order to bring them into regulation. Where an activity has been designated, anyone conducting that activity will be required to follow the rules for that activity, unless they are exempt.
138. Initially, the government expects most designated activities to be activities which are currently regulated through retained EU law. This is an ongoing power similar to the power to bring activities in the RAO, and so the Act enables HM Treasury to designate any activity that relates, or is connected to, financial markets or exchanges of the United Kingdom, or to financial instruments, financial products, or financial investments issued or, or sold, to persons in the United Kingdom (which can include cryptoassets).
139. When designating an activity, HM Treasury will be able to make regulations relating to the performance of that activity, including prohibiting the activity in its entirety, or setting direct requirements.
140. As part of these regulations, HM Treasury will have the ability to stipulate where the FCA may make rules relating to the performance of a designated activity. Where the FCA is empowered to make rules, the FCA can make rules relating to the designated activity, or to specified matters relating to the designated activity, and not the wider unrelated activities of those carrying out the designated activity. When making rules relating to a designated activity the FCA will be required to do so within a wider overall policy framework set by government and Parliament.
141. This differs from the rule-making powers over authorised persons in section 9A of FSMA 2000, which enables the FCA and the PRA to make any rules over authorised persons, including in relation to activity which is not a regulated activity, provided that they consider this necessary or expedient to advance their objectives.
142. When making designated activity regulations, HM Treasury will also have the power to set the appropriate monitoring and enforcement framework to allow for the effective regulation of each activity. This will include the ability to confer monitoring and enforcement powers on the FCA for each designated activity, including the power to require the supply of information. HM Treasury may make such provision for enforcement by applying the existing provisions of FSMA 2000 (with or without modifications), including any existing criminal offences within FSMA 2000. This includes the ability to widen the scope of such offences.

Financial market infrastructure: general rules and requirements

Financial market infrastructure

143. In financial markets, there are various processes that need to be performed to complete each transaction. These processes are performed by several different types of entity, many of which are collectively referred to as financial market infrastructure (FMI).
144. Each type of FMI performs a vital function in supporting financial markets. This ranges from collecting data on financial transactions, to performing unique services to enable firms active in financial markets to meet their regulatory obligations.
145. These entities are regulated in a way that reflects these unique functions, recognising the significant impact that their failure or malfunction could have on the financial markets that they support. Many of the regulatory frameworks for FMI currently sit, in whole or in part, in retained EU law.

FMI and regulator rule-making

146. In order to establish a comprehensive FSMA model, the regulators need the appropriate powers to make rules when retained EU law is revoked. That includes the ability to make rules for FMI and the appropriate powers to supervise and oversee them.
147. The Act therefore introduces a general rule-making power for the Bank of England (the Bank) in relation to two types of FMI, CCPs and central securities depositories (CSDs), so that it can take on primary responsibility for setting regulatory requirements for these entities.
148. The Act also gives the FCA general rule-making powers over another two types of FMI, Data Reporting Services Providers (DRSPs) and Recognised Investment Exchanges (RIEs).

Regulation of CCPs and CSDs by the Bank of England

149. Firms use CCPs to reduce certain risks that arise when entering into financial transactions with other parties, such as derivative transactions or buying and selling securities. CCPs sit between the buyers and sellers of financial contracts, providing assurance that the obligations under those contracts will be fulfilled. Instead of holding the contract with each other, the buyer and seller each hold their side of the contract with the CCP instead. The process of transacting through a CCP is known as "clearing".
150. CSDs hold financial instruments (securities), such as shares, and play a key role at the center of financial markets by enabling securities to be issued (through creating the record of a security on their ledgers), settled (by updating their records to reflect the transfer of securities between market counterparties) and maintained (performing administrative tasks relating to securities, such as the processing of dividend payments).

Bank of England rule-making powers

151. At present, the Bank has limited powers to set direct regulatory requirements on these firms as these requirements sit in retained EU law. The most relevant pieces of retained EU law in this area are the European Market Infrastructure Regulation (EMIR) and the Central Securities Depositories Regulation (CSDR). These regulations implemented international standards within EU law and set out a comprehensive regime for these entities.
152. The Act introduces a general rule-making power for the Bank over CCPs and CSDs so that it can take on primary responsibility for setting regulatory requirements for these entities. This sits alongside an adjusted set of statutory objectives and principles to ensure that the Bank considers the appropriate public policy objectives when exercising this power. The Act updates the framework that sits around the power in order to strengthen the Bank’s accountability to Parliament, its relationship with HM Treasury and its engagement with stakeholders. The Act also provides the Bank with a power to impose requirements on individual CCPs and CSDs (which is similar to the FCA’s and the PRA’s ability to impose requirements on the firms they regulate under sections 55L and 55M of FSMA 2000).
153. The Act also establishes the concept of a "systemic third country CCP". It enables the Bank to establish whether an overseas CCP is a systemic third country CCP, in accordance with the criteria of general application that HM Treasury has set out in secondary legislation, as well as any detailed provisions that the Bank sets out in a statement of policy which specify further how the HM Treasury criteria will be applied. HM Treasury intends for the criteria it sets out in secondary legislation on what constitutes a systemic third country CCP to be high-level and not more detailed or prescriptive than the current framework set out in Article 25(2a) of UK EMIR. The Bank will then be able to set out more detailed considerations in a statement of policy as it does now. This could include, where appropriate, more detailed quantitative or qualitative criteria. This would allow the Bank to continue to operate its tiering framework as set out in its policy statement of 30 June 2022.
154. Where the Bank has determined a firm to be a systemic third country CCP, the Act provides the Bank with the power to apply its domestic rulebook, in part or entirely, to these firms. These powers allow for the Bank to maintain the effect of the existing framework where certain CCPs headquartered outside the UK may be subject to UK rules if they are deemed systemically important.
155. The Act also allows for HM Treasury to grant the Bank further powers to apply domestic rules to non-systemic overseas CCPs and CSDs, should it deem it necessary in the future.

Regulation of FMI by the Financial Conduct Authority

Data Reporting Service Providers

156. Data Reporting Services Providers (DRSPs) are a type of FMI. They are commercial entities that allow investment firms to fulfil their regulatory reporting obligations. There are three types of DRSPs:
     1. Approved publication arrangements (APAs): APAs publish trade reports on behalf of investment firms, which are required to publish information, such as price and size of executed trades they perform, so that market participants can use such information to make informed investment decisions. They are required to publish this information as near to "real time" as possible. If a trade occurs on a trading venue, then the information is automatically made public. If a trade happens off-exchange, then an investment firm must disclose the trading information themselves or use an APA to do so.
     2. Approved Reporting Mechanisms (ARMs): ARMs report details about transactions to the FCA on behalf of investment firms, for market surveillance purposes. This information is not made public.
     3. Consolidated tape providers (CTPs): CTPs collate trading data for financial instruments from a variety of sources, including APAs and trading venues, and consolidate them into a continuous electronic live data stream. This data stream provides price and volume information for each financial instrument. This data can help market participants to make informed investment decisions.
157. Many of the rules that govern DRSPs are set out in the Data Reporting Services Regulations 2017 (DRSRs), which were introduced to transpose parts of the second Markets in Financial Instruments Directive (MiFID II), an EU Directive, into UK law. The DRSRs include rules that apply directly to the DRSPs themselves, including those relating to authorisation and operating requirements (for example how DRSPs collect and disseminate data, and the need for effective governance procedures). The DRSRs also establish the FCA’s supervision and enforcement powers in relation to DRSPs. As part of the onshoring process, the DRSRs were amended to address deficiencies arising as a result of the UK’s withdrawal from the EU and the end of the transition period.
158. DRSPs currently sit outside of the core FSMA 2000 authorisation regime and the FCA does not have any rule-making powers over them, except for some limited powers in respect of technical standards, which are not sufficient to replace the rules currently in retained EU law.
159. The Act therefore gives the FCA a general rule-making power in relation to DRSPs to enable the FCA to replace the provisions in retained EU law relating to the regulation of DRSPs, and to ensure that the FCA has an effective way of upholding and enhancing standards in the future. This will allow the FCA to act as the market evolves, including through the trading of new types of asset classes and trading that uses new forms of technology.
160. The rule-making power will also help ensure that the FCA has the necessary tools to facilitate the development of a consolidated tape.

Recognised Investment Exchanges

161. A Recognised Investment Exchange (RIE) is a multilateral system which brings together multiple third-party buying and selling interests in financial instruments in accordance with non-discretionary rules. They are managed and/or operated by a market operator.
162. RIEs are one of three types of trading venue. The other types are multilateral trading facilities (MTFs) and organised trading facilities (OTFs)
     1. MTFs: Like RIEs, MTFs are multilateral systems which bring together multiple third-party buying and selling interests in financial instruments via a system with non-discretionary rules. Whereas RIEs are managed and/or operated by a market operator, MTFs can be operated by an investment firm or a market operator.
     2. OTFs: OTFs are also multilateral systems that facilitate the bringing together of multiple third-party buying and selling interests and can also be operated by an investment firm or market operator. Unlike RIEs and MTFs, the execution of orders on an OTF is carried out on a ‘discretionary basis’, where the market operator takes an active role in managing trades.
163. RIEs currently sit outside of the core FSMA 2000 authorisation regime and the FCA has limited rule-making powers over them because, prior to EU exit, the regulations relating to them were largely set at EU level through the Markets in Financial Instruments Regulation (MiFIR). MiFIR is one of two pieces of EU legislation (the other being MiFID II) which together underpin what is sometimes referred to as the MiFID II framework. As outlined above, as part of the onshoring process, the MiFID II framework was amended to address deficiencies arising as a result of the UK’s withdrawal from the EU and the end of the Transition Period.
164. The lack of wider rule-making powers over RIEs is a problem because as part of the Future Regulatory Framework (FRF) Review the government intends, as a general approach and over time, to revoke the direct regulatory requirements in EU-derived regulation that apply to firms to enable the appropriate regulator to set their own rules. This is to ensure that the regime is proportionate and flexible. Without these proposed new powers, it will not be possible for the FCA to adequately replace the regulatory requirements that relate to these entities.
165. This Act therefore gives the FCA a general rule-making power over RIEs to enable the FCA to:
     1. replace the provisions in retained EU law relating to the regulation of RIEs; and
     2. ensure that the FCA has an effective way of upholding and enhancing standards in the future.
166. This is important to future-proof the regime and mitigate risks as the market evolves, including as the market continues to incorporate the trading of new types of asset classes and embrace new forms of technology.

Financial market infrastructure: regulatory sandboxes

167. The Act enables HM Treasury to set up one or more Financial Market Infrastructure (FMI) sandboxes, which will enable participating firms to test and adopt new technologies and practices. An FMI sandbox will do this by enabling participating firms to be subject to temporary modifications to legislation, where that legislation does not currently accommodate such activities or is ambiguous as to whether or not it can be accommodated. HM Treasury will also be able to make permanent changes to legislation, via statutory instrument (subject to the affirmative procedure where primary legislation is being changed), on the basis of what is learned in each FMI sandbox, having first reported back to Parliament.
168. FMI play a crucial role at the center of financial markets, providing the platforms, networks and processes that facilitate the trading, clearing, settling, reporting and administration of securities transactions. A number of FMI are considered systemically important, meaning their failure could lead to financial instability and/or disrupt the effective functioning of the market, with subsequent negative impacts on the real economy (for example, if a transaction fails to settle in time, this can add cost and inconvenience to both financial and real economy participants). It is therefore crucial that there is a robust, regulatory framework that ensures risks are properly managed, but that is also able to be flexible in the face of technological change.
169. At the same time, it is important that FMI can innovate and adopt new technologies or practices, which could enable both FMI and the firms which use them to reduce their operating costs and perform in new and more efficient ways. It could also improve the resilience of FMI, to the benefit of financial stability. Effective competition and innovation can enable more agile companies to better meet customer needs and challenge incumbents by providing improved services.
170. A particular example of a new technology is Distributed Ledger Technology (DLT), which is a form of database technology that digitally records transactions across multipleledgers at the same time. The data on these ledgers is replicated simultaneously or in rapid succession, shared and synchronised to achieve a form of decentralised consensus across the network. The ledger is an immutable record of all the transactions that have taken place within the network previously and is therefore capable of providing a high degree of certainty in transactional data, which is a key legal requirement of FMI.
171. Technology, such as DLT, could potentially provide greater efficiency, transparency and overall resilience in the performance of FMI. It could fundamentally change the role of intermediaries operating within the securities trading, clearing, and settlement cycle, for instance, particularly if activities currently performed by separate FMI can all be performed on the same ledger.
172. This may not always have desirable policy outcomes, given that intermediaries provide useful checks and balances that protect investors, maintain regulatory compliance and preserve the resilience of FMI. The benefits and suitability of DLT in financial markets has not yet been proven, particularly when compared to more conventional IT systems. The role of FMI will need to evolve with new technology, like DLT, to safeguard the benefits of the current system, while also ensuring that the potential benefits of innovation are captured.
173. It is not always clear what legislative changes will most effectively support FMI in their safe use of new and developing technologies or practices. In 2021, HM Treasury conducted a Call for Evidence to examine the application of DLT to FMI. A key issue identified in responses to the Call for Evidence was that the UK legislative framework is not designed to support the use of DLT in FMI, and that an-evaluation of the legislative framework would be needed to enable the use of DLT and to realise its potential benefits while ensuring regulatory objectives around their safety and robustness are met. While responses identified many areas of legislation that may need changing in future, it is not fully clear what legislative and regulatory changes are needed and how these should be made. Responses to the Call for Evidence identified a need to experiment with the use of DLT in markets, so that HM Treasury, regulators, and industry can better understand the impacts of emerging technologies, like DLT, to ensure that regulatory objectives are met, and in particular to understand what changes should be made to the FMI legislative framework to support the effective and safe adoption of DLT.
174. The use of sandboxes was highlighted as a key method of doing this. The term "sandbox" has been applied in different ways, both in and outside of financial services. Broadly, it is a term used to refer to a safe space in which to experiment and learn, and in some circumstances test new technology. In 2016, the FCA launched its "Regulatory sandbox", which allows businesses to test new technologies and products in financial markets, in a controlled manner and with close regulatory oversight, within existing legislative frameworks. In addition to helping firms navigate the authorisations process, the FCA provides firms in the sandbox with informal steers to help them understand the potential regulatory implications of their business model.
175. After the Call for Evidence, the government committed in April 2021 that HM Treasury in conjunction with the Bank of England (the Bank) and the FCA would develop an FMI sandbox to allow technology to be trialed by FMI. These measures are intended to allow FMI to test whether and how they can use new technology or new practices to perform specific activities and to test its compatibility within the existing legislative framework in an effective, efficient, and safe way.
176. The Act provides HM Treasury with powers to set up an FMI sandbox for the purposes of testing the carrying on of FMI activities with new technology or practices. FMI entities (i.e., the type of entity allowed to participate in an FMI sandbox) include, for example, existing recognised CSDs, and operators of multilateral trading facilities (MTFs), though it could include other categories of FMI in future. The scope of the FMI sandbox powers is intended to be sufficiently flexible to enable different FMI sandboxes to be established in future to test different technologies and practices for different entities and activities.
177. HM Treasury will be able to temporarily disapply or modify relevant legislation relating to the regulation of FMI (defined as ‘relevant enactments’ in the Act) and to allow FMI entities to innovate, within the scope of the activities they have been authorised to carry out, in an FMI sandbox. The full list of legislation in scope, which can be amended, is included on the face of the Act in section 17(3), and includes retained EU law before it is revoked. This includes:
     1. elements of retained EU law, such as the UK Central Securities Depositories Regulation 2014 (CSDR), the Markets Abuse Regulation 2016 (MAR) and the UK Markets in Financial Instruments Regulation 2014 (UK MiFIR);
     2. legislation implementing UK law, such as the Settlement Finality Regulations 1999 (SFRs); and
     3. other UK legislation, such as the FSMA 2000 and the Uncertificated Securities Regulations 2001 (USRs).
178. HM Treasury will have the ability to add to the legislation in scope of the FMI sandbox using secondary legislation. HM Treasury intends to consult industry on the proposed temporary modifications to legislation which would be tested in the FMI sandbox. FMI entities will be required to apply to the regulators in order to participate in the FMI sandbox, and a limited number of FMI entities would be selected to participate. An FMI sandbox will be created by a statutory instrument, and a full impact assessment will be provided as and when that occurs. It is intended that each statutory instrument will set out:
     1. The relevant legislation to be modified or disapplied.
     2. The activities that FMI are permitted to undertake in an individual FMI sandbox. For example, HM Treasury may choose to include securities issuance, settlement and maintenance in scope of an FMI sandbox, activities currently performed by CSDs. Temporary modifications to legislation could enable participants of an FMI sandbox to perform these activities using DLT. HM Treasury could also allow certain activities that are currently performed by separate FMI to be combined into one entity within an FMI sandbox. For instance, an FMI sandbox could potentially allow a trading venue to perform securities issuance, settlement and maintenance (in addition to trading), while under current legislation these activities may only be performed by a CSD.
     3. Requirements and restrictions for participants in an FMI sandbox. This could include the types of securities that FMI participants will be allowed to issue/trade/settle, and in what quantities.
     4. The role of the regulators in running an FMI sandbox and what enforcement powers they will have.
     5. The duration of an FMI sandbox. The powers enable HM Treasury to set the desired timeline in secondary legislation. HM Treasury will have the power to terminate an FMI sandbox sooner at its discretion and ensure there is a smooth transition for participating firms between being subject to the temporary modifications to relevant enactments within an FMI sandbox and provisions adopted permanently outside an FMI sandbox in general legislation.
     6. What processes participants in an FMI sandbox will have to put in place to either wind-down its activities by the end of a sandbox or what process they will need to put in place to continue their activities outside an FMI sandbox on a permanent basis, to the extent that they are authorised to do so.
179. Aside from where legislation has been modified or disapplied to accommodate new technology and new practices, participants in an FMI sandbox would otherwise be required to comply with all other existing, relevant legislation and regulator rules that apply to the activity they are undertaking.
180. For each FMI sandbox, the regulators will provide information and assistance to enable HM Treasury to produce a report assessing whether technology and practices tested in the sandbox had been successful. The performance of an FMI sandbox will be reported to Parliament and, if deemed successful, HM Treasury may make permanent legislative changes in general law, via statutory instrument subject to the affirmative procedure, to enable FMI to use that new technology or new practices outside of an FMI sandbox. HM Treasury may consider whether further consultation is needed with industry when making legislation permanent. It is possible that permanent legislative changes may be broader or vary from the modified legislation within an FMI sandbox, subject to the technology or practices being tested and assessed as intended.
181. HM Treasury will be able to ensure that transitional arrangements are in place which would allow successful FMI participants, with appropriate authorisation, to transition from an FMI sandbox to providing the same or similar authorised services outside of the FMI sandbox as part of the permanent FMI regulatory framework under general law. This will provide continuity and will prevent the risk that FMI participants would need to stop providing services until permanent legislative changes are made. HM Treasury and the regulators will be able to put in place arrangements to ensure the successful wind-down of a participant, where that participant does not intend to or will not be permitted to operate outside an FMI sandbox.
182. The success of any FMI sandbox will be contingent on a high level of cooperation between the regulators, in large part because an FMI sandbox could entail FMI entities regulated by one regulator engaging in activities that are regulated by another regulator. For example, operators of MTFs proposing to use DLT for settlement, are currently supervised by the FCA but the performance of CSD-type settlement activities within an FMI sandbox are currently supervised by the Bank. Critical to the success of the FMI Sandbox will be ensuring that there is neither duplication nor gaps in the legal and regulatory oversight of FMI entities.
183. The government’s approach to establishing FMI sandboxes is intended to strike a balance between providing a sufficiently flexible, yet secure, environment to identify how emerging technologies (such as DLT) and new practices can operate within a particular framework of legislation. It will enable permanent changes to legislation to be made where appropriate. This measure will also ensure an appropriate level of Parliamentary scrutiny is maintained.

Powers in relation to critical third parties

184. Regulated financial services firms and financial market infrastructures are increasingly outsourcing important services to third parties outside the financial services regulatory perimeter. For example, many firms are frequently using a small number of third parties to provide cloud services. Cloud services are digital platforms infrastructure that are hosted by a third party that firms use to support their own business. Where many firms use the same third party to support services that are important to the economy, failure of this ‘critical’ third party could result in significant negative impacts on the functioning of the financial services sector – for example, by disrupting the ability of businesses and individuals to make payments or withdraw funds. The Bank, the PRA and the FCA have powers that are designed to allow them to mitigate serious risks to the financial services sector, but these powers are largely restricted to regulated financial services firms. The regulators can impose requirements on regulated financial services firms designed to limit their risk of failure or disruption, and improve resilience. However, the regulators have no equivalent powers in relation to critical third parties.
185. The Bank, the PRA and the FCA can impose indirect obligations on third parties, by requiring firms to incorporate resilience requirements in contracts with these entities. But the nature of the relationship between firms and critical third parties mean indirect contractual obligations are often difficult to enforce, as a small number of critical providers are dominant in the market, so firms may find it difficult to influence these providers, or to find an alternative provider that is more resilient. The Bank and the PRA can also impose direct requirements on third parties, but these are insufficient because they only relate to third parties to payment systems.

Designating critical third parties

186. The Act addresses the issue by enabling HM Treasury to designate certain third parties as ‘critical’ and giving the Bank, PRA and FCA the ability to directly oversee critical services provided to regulated firms and financial market infrastructures by designated critical third parties. This will allow the regulators to intervene to raise the resilience of these services and reduce the risk of systemic disruption in the finance sector.
187. The Act enables HM Treasury to designate third parties as critical on the basis of the following criteria:
     1. the materiality of the services which a third party provides to firms; and
     2. the number and type of firms which use a third party.
188. HM Treasury will have to consult the Bank, the PRA or the FCA before designating a critical third party. In practice, designation will generally follow a recommendation from the regulators. Before designating critical third parties, HM Treasury must take representations from potential critical third parties and may consult others with an interest. Designation will itself be made by secondary legislation as the list of critical third parties will change over time.

Oversight by the financial services regulators

189. The Act gives the Bank, the PRA and the FCA powers to make rules, gather information, and take limited enforcement actions in respect of the services that critical third parties provide to regulated finance firms and financial market infrastructures. All three of the Bank, PRA and FCA will be granted these powers because critical third are relevant to each of their objectives. To ensure alignment, the regulators will be required to consult one another before issuing rules, gathering information or taking enforcement action. The Bank, the PRA and the FCA will shortly publish a Discussion Paper setting out how they would exercise these new oversight powers in practice, and how they would make recommendations to HM Treasury on potential critical third parties.
190. The rule-making powers granted to the Bank, the PRA and the FCA will enable them to introduce resilience standards and resilience testing for the services critical third parties provide to regulated finance firms and financial market infrastructure. Resilience standards will enable minimum levels of resilience to be set, and resilience testing will allow the regulators to evaluate whether resilience standards are met in practice. The information-gathering powers granted to the Bank, the PRA and the FCA will enable them to request documents and appoint an independent third party to provide a view on services critical third parties provide to regulated finance firms, as well as to undertake investigations of potential contraventions.
191. The enforcement powers granted to the Bank, the PRA and the FCA under the Act enables them to take action if rules or information-gathering requests are not complied with. The Act provides for a range of enforcement actions appropriate to the nature of this new regime. This will include the ability to direct a critical third party to remediate failings or publish a statement noting the critical third party has failed to comply with requests. As an ultimate sanction, the Bank, the PRA and the FCA will have the disciplinary power to prevent a critical third party from providing new or current services to the financial services sector, or set conditions on the provision of those services, where such action will not harm the UK’s financial stability or any of the regulators’ objectives.

Regulatory gateway for approving financial promotions

192. A financial promotion is a communication that contains an invitation or inducement to engage in a financial product or service. Such communications can take a wide variety of forms, including advertisements placed through print, broadcast or online media; marketing brochures; direct mail; or use of social media. Financial promotions are often consumers’ first contact with an investment opportunity and so can have a significant influence over the financial decisions they make.
193. The financial promotions regulatory regime in the UK seeks to ensure that consumers are provided with clear and accurate information that enables them to make appropriate decisions for their individual circumstances. Under the current regime, financial promotions communicated by unauthorised firms (i.e., firms that are not authorised to carry out a regulated activity by the FCA or the PRA) must be approved by firms that are authorised by the FCA or the PRA, unless the promotion is otherwise subject to an exemption.
194. Authorised firms have a responsibility to ensure that any financial promotions they approve are compliant with relevant FCA rules, helping to protect consumers from potentially harmful promotions.
195. Currently, any authorised firm can approve any financial promotion of an unauthorised firm and there is no specific suitability test or assessment that the authorised firm has to meet in order to do so. This gives rise to three risks:
     1. An authorised firm can approve the financial promotion of another firm operating in an area in which the authorised firm has no specific expertise;
     2. Some authorised firms may approve the financial promotions of unauthorised firms without undertaking sufficient due diligence around the firm or the promotion; and
     3. It acts as an obstacle to the FCA in exercising appropriate regulatory oversight of those firms that are approving the financial promotions of unauthorised firms. For example, firms are not currently required to notify the FCA when they are approving the financial promotions of unauthorised firms. The FCA therefore often only finds out about financial promotions that do not meet its rules via complaints or reports. This means that the FCA often only becomes aware of the potential for harm after it has occurred.
196. These risks can result in significant harm to consumers, including investor loss, re-direction of investment away from more appropriate products, and a loss of consumer confidence in the financial services sector.
197. To address this, the Act establishes a regulatory "gateway", which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms. Any authorised firm wishing to approve the financial promotions of unauthorised firms will first need to obtain the permission of the FCA. The FCA will also be able to place limitations on the types of promotions authorised firms will be able to approve, for example, restricting firms to approving financial promotions in their field of expertise.
198. The regulatory gateway aims to improve the quality of financial promotions communicated by unauthorised firms, by allowing only those authorised firms that the FCA assesses as suitable and with sufficient expertise to approve the promotions of unauthorised firms. It will also give the FCA greater oversight of the approval of financial promotions and reduce the number of authorised firms that are able to undertake such approvals.

Sustainability disclosure in financial services

199. Green finance is an essential part of the government’s vision for the UK financial system and is seen as a fundamental part of the government’s strategy to achieve Net Zero. Mobilising Green Investment: 2023 Green Finance Strategy sets out the government’s policy to strengthen the UK’s position at the forefront of the rapidly growing global green finance market, while driving private investment to deliver our energy security, net zero and environmental objectives.
200. Robust, comparable sustainability information is required to enable informed and efficient capital allocation that can support the UK’s climate and environmental goals. Investors and other stakeholders are demanding more and better information to better assess long term risks and returns, and whether their investments will support their sustainability preferences.
201. Claims about sustainability are made by a growing number and range of financial firms about their products, and many UK companies are making commitments to transition their activities to net-zero. In 2021, 49% of UK assets under management integrated environmental, social and governance (ESG) factors into their investment decisions, up from 37% in 2020. The number of ‘sustainable funds’ available in the UK has grown from under 50 in 2005 to 167 in 2020.
202. This growth, however, has also led to an increased risk of "greenwashing", which is when misleading or unsubstantiated claims about environmental sustainability are made by organisations about their products or activities. Greenwashing and transparency were frequently cited concerns amongst respondents to the 2021 Schroders Institutional Investor Study. 6 This can lead to the wrong products being bought, potentially harming consumers, undermining trust in the market and frustrating investors’ efforts to support the transition to net zero through their investments. It can also undermine the government’s efforts in the public interest to support the transition to a low carbon economy.

Sustainability disclosure requirements

203. In 2020, the government announced in its Interim Report and Roadmap on the UK’s Taskforce on Climate-related Financial Disclosures (TCFD) that the UK intended to introduce mandatory requirements for organisations to disclose information about their climate-related financial risks, in line with the recommendations of the TCFD.
204. Since then, disclosure requirements for organisations have been introduced across the economy:
     1. The FCA introduced requirements for listed companies, asset managers, life insurers and FCA-regulated pension providers;
     2. The Department for Work and Pensions has introduced requirements for occupational pension schemes;
     3. The government laid regulations 12 associated guidance covering UK publicly quoted companies, large private companies and Limited Liability Partnerships; and
     4. Supervisory expectations for banks and insurers on the management of climate-related financial risks also became part of the Bank of England’s supervisory processes in 2022.
205. The government’s approach to Sustainability Disclosure Requirements (SDR) was established in the July 2021 document: ‘Greening Finance: A Roadmap to Sustainable Investing ’ (the Greening Finance Roadmap). This set out the foundations of SDR and an indicative pathway to introducing proportionate sectoral requirements that would be taken forward by the relevant departments and regulators.
206. SDR aims to address the concerns around transparency, comparability, accountability and efficiency of capital allocation by improving the quality and availability of information to enhance business and financial decision making and organisational risk management. This is intended to support businesses and consumers to make decisions in a more sustainable manner.
207. It is also intended to promote financial market integrity by improving transparency about organisations’ sustainability risks, opportunities and impacts, and their approach to managing them. It is designed to reduce the potential harms to investors arising from incomplete or inaccurate information, and help these risks and opportunities to be appropriately priced into markets.

Taking forward SDR in the financial services sector

208. The Greening Finance Roadmap identified the FCA as the main regulator for introducing SDR in the financial services sector. The PRA also requires prudential disclosure in connection with matters relating to sustainability, for example through implementation of any Pillar 3 Disclosure requirements of the Basel Committee on Banking Supervision 7 .
209. The FCA has already begun taking SDR forward for relevant authorised firms under its existing objectives and rulemaking powers, which are sufficiently broad for the purpose, with its consultation on SDR and investment labels CP22/20 which builds on its earlier Discussion Paper DP21/4 . The SDR provisions introduced in the Act will not affect these in-flight FCA consultations.
210. SDR has strong links to wider climate and environmental policy, and so the government has an important role to play in shaping SDR policy.
211. The Act therefore requires the FCA and the PRA to "have regard" to any policy statement on SDR made by HM Treasury when making rules or issuing related guidance on disclosure in connection with matters relating to sustainability.
212. The SDR policy statement may be published by HM Treasury in any manner it considers appropriate, and any published statement must be kept under review.
213. The Act requires HM Treasury to consult the FCA and the PRA, as relevant, ahead of making any such policy statement, and requires the regulators to prepare a report for HM Treasury on any matters in connection with the policy statement if HM Treasury asks for such a report. Any requests made by HM Treasury must be made in writing, and reports from regulators must be submitted within a reasonable period as is specified or agreed. This supports information gathering for HM Treasury, whilst facilitating effective cooperation between the government and the regulators.
214. In addition, the Act requires the FCA and the PRA to report on how they have satisfied the requirement that their relevant rule-making has had regard to the SDR policy statement in their annual reports. This creates an ongoing process of accountability with respect to the SDR policy statement that enhances scrutiny of regulatory action on SDR.

Digital settlement assets

215. Cryptoassets are a digital representation of value or contractual rights that can be transferred, stored or traded electronically, which may (though do not necessarily) utilise cryptography or distributed ledger technology. No internationally agreed definition, taxonomy or classification currently exists.
216. In January 2021, HM Treasury launched a consultation and call for evidence on the UK’s regulatory approach to cryptoassets. This sought views on how the government and regulators can ensure that the UK’s regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, whilst mitigating risks to consumers, market integrity and financial stability.
217. This consultation proposed a staged and proportionate approach to regulation, which is sensitive to risks posed and responsive to new developments in the market. In particular, it highlighted that certain forms of cryptoassets, known as "stablecoins" had the potential to develop into a widespread means of payment, and potentially deliver improvements for payment transactions.
218. HM Treasury’s response to the consultation , published in April 2022, outlined the government’s intention to bring stablecoins, where used as a means of payment, into the regulatory perimeter.

Stablecoins

219. Stablecoins are a form of cryptoasset which aim to maintain a stable value relative to other assets. Design features vary, including how the stablecoin is backed or stabilised (for example, with financial assets or using an algorithm to increase or decrease the supply as needed to maintain a stable price).
220. Stablecoins which reference their value in relation to fiat currencies can be seen as more akin to traditional payment instruments, than other types of cryptoassets such as those used primarily as a means of investment (for example, Bitcoin). Depending on the specific way that they are designed, stablecoins may already be subject to UK financial services regulation, though many currently are not in scope.
221. This Act brings activities facilitating the use of certain stablecoins, where used as a means of payment, into the UK regulatory perimeter primarily by amending the existing electronic-money and payment system regulatory frameworks. Through this approach, the government has sought to reflect the Financial Stability Board’s recommendations on the regulation, supervision and oversight of global stablecoin arrangements, and the CPMI-IOSCO consultation report on the application of the Principles for Financial Market Infrastructures to stablecoin arrangements, and will leave room to update the regulatory framework as international standards are developed.
222. Separately, the government intends to launch a consultation on its regulatory approach to wider cryptoassets beyond stablecoins used for payments, including those primarily used as a means of investment (such as Bitcoin) later in 2022.

Electronic money and payments legislation

223. Electronic money is, broadly, monetary value as represented by a claim on the issuer which is: stored electronically, including magnetically; issued on receipt of funds; and used for the purposes of making payment transactions. Although stablecoins have similar characteristics to electronic money, they often, due to their characteristics, fall outside of scope of the payments regulatory regime. This is out of step with the government’s stated objective of ensuring that activities that involve the same risk have the same regulatory outcome.
224. Electronic money is currently regulated by the FCA under the Electronic Money Regulations 2011 (EMR 2011), which includes authorisation and supervision of the business of electronic money institutions. There are other forms of payment services regulated under the Payments Services Regulations 2017 (PSR 2017), such as money remittance. Together, this legislation provides powers to the FCA to regulate and supervise firms engaged in relevant payment activities. The FCA regulates payment and electronic money institutions, and is responsible both for conduct and prudential regulation of these institutions.
225. The Banking Act 2009 and Financial Services (Banking Reform) Act 2013 (FSBRA 2013) provide the Bank of England (the Bank) with power and responsibility for regulation of systemically important payment systems and service providers to those payment systems, and the Payment Systems Regulator (PSR) with power and responsibility for the economic regulation of payment systems, respectively. In the case of the Banking Act 2009, the Bank regulates and supervises systemic payment systems following a recognition decision made by HM Treasury. Similarly, in the case of the FSBRA 2013, the PSR regulates payment systems following a designation process made by HM Treasury.

Bringing digital settlement assets into the regulatory perimeter

226. This Act gives HM Treasury a power to bring digital settlement assets used for payments into the UK regulatory perimeter. It introduces a definition of "digital settlement asset", a new concept which has not been previously defined in legislation. Given the nascent nature of the cryptoasset market, the Act gives HM Treasury a power to amend this definition in the event that there are changes in the features, underlying technology or usage of these assets, so that the regulation can continue to have effect as intended.
227. As mentioned above, the government’s staged and proportionate approach will begin by focusing on stablecoins which reference their value from fiat currency (such as Pound Sterling), where used as a means of payment, because the government believes that such tokens share characteristics with existing forms of electronic money. This will ensure that fiat-linked stablecoins, where used for payments, are subject to the same requirements and protections as other similar payment methods.
228. A feature of the current design of the UK payments and electronic money legislation is a degree of regulatory overlap between the authorities, where responsibilities are distributed across the regulators and they set requirements and oversee firms pursuant to their differing statutory objectives. By extending the existing frameworks to cover fiat-referenced stablecoins used as a means of payment, further regulatory overlaps will apply between the Bank of England and the FCA for a small number of systemic firms. The Act therefore puts in place a regime that allows for the clear identification of the applicable regulatory requirements (for example, in relation to prudential rules) where a payment system using digital settlement assets or digital settlement asset service provider is recognised as being systemic by HM Treasury.
229. Specifically, the Act:
     1. Provides the power for HM Treasury to establish an FCA authorisation and supervision regime, drawing broadly on existing electronic money and payments regulation, to mitigate conduct, prudential and market integrity risks for issuers of, and payment service providers using, stablecoins.
     2. Enables HM Treasury to recognise the operators of systemic payment systems and systemic service providers using digital settlement assets for regulation by the Bank, subject to meeting relevant thresholds and following HM Treasury’s publication of a recognition order. This will enable the Bank to regulate and supervise systemically important stablecoin payment systems and related service providers to mitigate financial stability risk.
     3. Enables the PSR to regulate payment systems using digital settlement assets, following HM Treasury’s publication of a designation order, to address issues relating to competition innovation, user interests and access.
     4. Enables HM Treasury to apply the Financial Markets Infrastructure Special Administration Regime (FMI SAR), which is a bespoke administration regime for recognised payment and settlement systems and recognised service providers, to stablecoin firms that have been recognised by HM Treasury, with appropriate modifications. This will ensure appropriate tools are in place to mitigate the risks to financial stability associated with a systemic stablecoin firm’s failure.
     5. Amends or disapplies existing FCA or PRA rules in areas relating to financial stability to avoid relevant systemic stablecoin firms being subject to conflicting requirements. HM Treasury intends to establish this mechanism through secondary legislation.

Implementation of mutual recognition agreements

230. Outside of the EU, the UK is able to negotiate its own international trade agreements, including Mutual Recognition Agreements (MRAs) related to financial services. These MRAs are intended to provide recognition of rules and practices in other jurisdictions to allow both the UK and its MRA partners to defer to each other in respect of the regulation and supervision of both UK and overseas firms undertaking cross border financial services activity. MRAs therefore offer a practical way to promote openness and mutual market access between jurisdictions, supported by regulatory and supervisory cooperation. The UK is in the process of negotiating a financial services MRA with Switzerland. The UK hopes, in the future, to enter into MRAs with other jurisdictions.
231. The UK has a dualist legal system. This means that a treaty ratified by the government does not alter the laws of the State unless and until it is incorporated into domestic law by legislation. As a consequence, international agreements, such as MRAs, must be implemented in domestic law in order to ensure that the UK can meet its international obligations under such agreements. Not all obligations within an MRA will require a change to domestic law, but it is a convention in the UK that an international treaty is not ratified until it has been fully implemented.
232. The Act provides for HM Treasury to make changes to domestic legislation necessary to ensure that MRAs can be fully implemented, using secondary legislation subject to the affirmative procedure. This includes the ability to grant any additional powers to the financial services regulators that are required to give effect to MRAs. It is intended that this provision will be used to implement the MRA on financial services which is currently being negotiated with Switzerland, and any future financial services MRAs.
233. Currently in financial services regulation, market access between the UK and other jurisdictions is generally delivered through the UK’s equivalence framework for financial services, which is operated by HM Treasury as set out in more detail in the guidance document for the UK’s Equivalence Framework for Financial Services, published on 9 November 2020. The equivalence framework provides mechanisms for HM Treasury to determine that, in specific areas of regulation, another jurisdiction’s regulatory and supervisory framework are equivalent to the UK’s. This serves to facilitate cross-border financial services activity in relation to that equivalent jurisdiction by permitting market access and reducing regulatory frictions or costs to firms. These mechanisms are primarily found in retained EU law (by virtue of the European Union (Withdrawal) Act 2018) and were previously operated by the European Commission. The MRAs negotiated by the government may in some cases go further than, or function differently to, these existing equivalence mechanisms. The power that the Act provides to HM Treasury to implement MRAs therefore includes the power to modify the application of existing equivalence mechanisms or create new mechanisms to reflect what has been agreed in the relevant MRA.
234. It may also be appropriate to adjust the powers and functions of the financial services regulators set out primarily in FSMA 2000 in order to ensure that they are equipped to give effect to MRAs, including ensuring that they have appropriate rule-making powers. The regulators must continue to act in a way that furthers their statutory objectives.
235. The MRAs are intended to be "living agreements" such that the scope may evolve or expand over time in accordance with the desire of the parties. This could include amending or expanding their scope to take account of new developments in financial services sectors and possible future legislative changes. Taking account of this possibility, the Act allows for the implementation of any amendments to or extension of the scope of MRAs as and when the UK and its MRA partners agree to such changes.
236. As with most international treaties, any MRAs for financial services made in the future will be subject to parliamentary scrutiny before ratification, as set out in the Constitutional Reform and Governance Act 2010 (CraG). As part of the process, the government will set out in the explanatory memorandum accompanying any MRA how it intends to implement its terms in domestic law. Only once an MRA has both been scrutinised by Parliament pursuant to the CraG process and all necessary domestic implementation has been completed will an MRA be ratified and enter into force.

New objectives and regulatory principles

237. Having left the EU, the government wants to ensure that the framework of objectives and principles that guide the regulators’ actions, particularly given their additional rule-making responsibilities, continues to set the right strategic considerations.
238. As set out in the strategy document published alongside the Chancellor’s Mansion House speech in July 2021, the UK will continue to remain a global leader in promoting high international standards. Alongside this commitment, the government’s intention is to ensure that the financial services sector is delivering for businesses and consumers across the UK.
239. The government considers that the regulators’ current objectives are each important in helping to deliver these outcomes. Robust regulatory standards encouraged by these objectives are the cornerstone of the UK market’s attractiveness, and the stability and soundness of the UK’s market remains an important priority for the government.
240. The government therefore considers that the regulators’ existing objectives set broadly the right strategic considerations and wants to maintain the regulators’ focus on these objectives.

New international competitiveness and growth secondary objectives

241. The government recognises that the financial services sector is not just an industry in its own right but an engine of growth for the wider economy. As the regulators take on responsibility for setting detailed rules in areas currently covered by retained EU law, the government considers that it is right that the regulators’ objectives reflect the need to support the competitiveness and medium to long-term growth of the UK economy, including the financial services sector.
242. The Act introduces a new secondary objective for the FCA and the PRA to provide greater focus on international competitiveness and medium to long-term growth. The government wants to ensure that giving the regulators a legal basis for advancing international competitiveness and medium to long-term growth and does not detract from their existing objectives of: ensuring that UK firms remain safe and sound; that the UK’s markets function well; that there is healthy competition in the interests of consumers, and, that consumers and users of financial services receive an appropriate degree of protection.
243. The Act enables the FCA and the PRA to act only in a way which facilitates international competitiveness and growth and in the medium to long-term. The government does not want the PRA and the FCA to act in a way which benefits short-term competitiveness at the cost of long-term growth.
244. The government is committed to maintaining high regulatory standards in the UK so the new objectives provide for the regulators to facilitate competitiveness and medium to long-term growth subject to aligning with relevant international standards.
245. International standards are set by standard setting bodies, such as the Basel Committee on Banking Supervision. These standards are typically endorsed at a political level through international fora such as the G7 and G20. However, given the need to enable implementation across multiple jurisdictions, in some cases, the standards may not fully take account of the law or market of individual countries. National governments or regulators are then responsible for deciding how best to implement these standards in their jurisdictions.
246. Since the UK left the EU, the regulators have been generally responsible for making the judgment on how best to align with relevant standards when making detailed rules that apply to firms. The Financial Services Act 2021 also followed this approach in relation to the UK's implementation of Basel standards for bank regulation and of the UK’s Investment Firms Prudential Regime. This approach is consistent with the overarching approach set out in the two Future Regulatory Framework Review consultations, which delegates the setting of regulatory standards to operationally independent regulators that work within an overall policy framework set by government and Parliament. 
247. When making judgements on how to implement standards, the regulators will consider how best to advance their statutory objectives. In future, this will include the new secondary competitiveness and growth objectives. The wording in the secondary objectives therefore provides flexibility for the regulators to tailor international standards appropriately to UK markets to facilitate growth and international competitiveness, whilst demonstrating the government’s ongoing commitment for the UK to remain a global leader in promoting high international standards.
248. Financial Services regulation is a reserved matter. As such, the new objectives for the PRA and the FCA are designed to advance the competitiveness and medium to long-term growth and of the entire UK economy, including the devolved nations and English regions.
249. No changes are made to the statutory objectives of the PSR, which is an economic regulator with specific and differing objectives to the financial services regulators.

Reporting requirements in relation to the new international competitiveness and growth secondary objectives

250. Section 25 introduces new secondary objectives for the FCA and the PRA to facilitate the international competitiveness and growth of the UK economy in the medium to long-term.
251. The government expects that there will be a step-change in the regulators’ approach to growth and competitiveness following the introduction of the new objectives, while maintaining high regulatory standards. It will therefore be important to have detailed information available to scrutinise how the regulators embed their new objectives.
252. Section 26 therefore requires the FCA and the PRA to produce a report within 12 months and a second report within 24 months of the new objectives coming into force. This does not preclude the regulators from including information on actions taken prior to the objectives coming into force as they consider appropriate.
253. These reports must, in particular, explain the action taken by the regulators to ensure the new objectives have been embedded in their operations, processes and decision making, and how any rules and guidance made by the regulators have advanced the new objectives.

New regulatory principle that the regulators must have regard to the UK net zero emissions target and environmental targets

254. The government wants to further strengthen the UK’s regulatory regime relating to climate and the environment. Therefore, alongside the new secondary objectives, the government will embed consideration of the UK’s climate and environmental targets across the full breadth of the regulators’ general functions on a statutory basis.
255. The government consulted on strengthening the UK’s regulatory regime relating to the climate target in its November 2021 consultation on the FRF Review and received significant support from respondents.
256. The regulatory principles set out in FSMA 2000 aim to promote regulatory good practice across the range of the regulators’ policymaking. The November 2021 consultation proposed amending the regulators’ existing sustainable growth regulatory principle to incorporate the UK’s statutory climate target. Following feedback to the consultation, and given that the FCA and the PRA will have new secondary objectives to facilitate international competitiveness and growth in the medium to long-term, the Act removes the existing sustainable growth principle for the FCA and the PRA from the regulatory framework to avoid unnecessary duplication.
257. The Act therefore introduces a new regulatory principle for the FCA and the PRA. The principle will require the regulators, when discharging their general functions to have regard to the need to contribute towards achieving compliance by the Secretary of State with section 1 of the Climate Change Act 2008 (UK net zero emissions target) and section 5 of the Environment Act 2021 (environmental targets), where each regulator considers the exercise of its functions to be relevant to the making of such a contribution. This regulatory principle seeks to cement the government’s long-term commitment to transform the economy in line with its target to reach net zero by 2050 , and to make progress towards the government’s long-term environmental goals, by ensuring the regulators must have regard to the government’s commitment to achieve these targets when discharging their functions.
258. The PSR has a similar set of regulatory principles to the FCA and the PRA (including sustainable growth). As the PSR’s objectives are not changing, the PSR’s existing sustainable growth principle will be maintained, and the climate and environmental targets will be incorporated into its sustainable growth principle. This will be done in a way that ensures that the achievement of the net zero and environmental targets should be understood as being only one element of the sustainable growth principle.

Exercise of Bank of England regulatory powers

Objectives and principles

259. The additional regulatory powers over CCPs and CSDs granted to the Bank of England by this Act are set out elsewhere in these Notes. Alongside this expansion of the Bank’s responsibilities and powers, the Act puts in place a framework to ensure that the Bank is set the right overall public policy objectives and is fully accountable and transparent in pursuing them.
260. The Bank’s function as regulator and supervisor of CCPs and CSDs is currently subject to its Financial Stability Objective as set out in section 2A of the Bank of England Act 1998, which is as follows:

2A Financial Stability Objective

(1) An objective of the Bank shall be to protect and enhance the stability of the financial system of the United Kingdom (the "Financial Stability Objective").

(2) In pursuing the Financial Stability Objective the Bank shall aim to work with other relevant bodies (including HM Treasury and the Financial Conduct Authority).

261. This financial stability objective will remain the sole primary objective for the Bank in its regulation of CCPs and CSDs. The Act specifies that when the Bank acts to advance this objective, it should also have regard to: 
     1. The effects generally that its regulation of CCPs and CSDs will or may have on the financial stability of countries or territories (other than the UK) where CCPs and CSDs are established or provide services. 
     2. Regulating CCPs and CSDs in a manner that is not determined by whether the users of their services are located in the UK or elsewhere. 
262. The Act introduces a secondary objective for the Bank so that as it advances its primary objective for financial stability it must, so far as is reasonably possible, facilitate innovation in the clearing and settlement services provided by the CCPs and CSDs it regulates with a view to improving the quality, efficiency and economy of the services they provide.
263. The Act also introduces regulatory principles for the Bank, similar to those set out in FSMA 2000 for the PRA and the FCA. This includes a sustainable growth principle incorporating the government’s commitment to achieving net zero emissions by 2050 and to meeting the environmental targets provided for in the Environment Act 2021. The Act introduces a new regulatory principle for the Bank to have regard to the desirability of facilitating fair and reasonable access to services provided by CCPs and CSDs. 

Internal decision-making processes

264. Currently, the Bank largely undertakes its decision-making for its regulation of CCPs and CSDs through its FMI Board. This is an internal, non-statutory executive committee constituted by the Governor of the Bank of England to exercise the Bank’s powers in relation to the FMI it regulates. It is chaired by the Deputy Governor for Financial Stability and includes senior Bank executives, as well as three external members. The Governor has reserved limited decisions to himself; the Governor can also be consulted on important decisions that would otherwise fall within the Board’s remit (and resolve to take such decisions himself). The Board can also delegate matters to Bank officials if it deems it appropriate to do so.
265. The Act places the Bank’s decision-making processes for CCPs and CSDs onto a statutory footing by creating a new FMI Committee. The intention of this is to increase transparency and accountability around the Bank’s internal decision-making processes as it exercises its new rule-making power for CCPs and CSDs. The constitution of this Committee will be left largely to the Bank’s judgment; but the Act specifies that there should be at least three independent members on the Committee, and that the Committee should be chaired by either the Governor or a Deputy Governor of the Bank. The Act allows the FMI Committee to, as it sees fit, arrange for any of its functions to be carried out by the Governor or after consultation with the Governor. It also continues to provide for matters to be delegated within the Bank where appropriate, with the exception of its rule-making functions.
266. The Act leaves the Committee’s procedures largely to the judgment of the Bank. The Bank will be required to publish a statement on a number of matters relating to the Committee. This includes its membership, arrangements for meetings, voting and decision taking procedures, arrangements for any decisions to be taken by, or in consultation with, the Governor and arrangements for matters to be delegated within the Bank. 

Accountability of regulators

Regulator engagement with HM Treasury, external stakeholders, and Parliament

Regulators’ relationship with HM Treasury

267. As the regulators will receive new responsibilities following the revocation of retained EU law, it is important that the mechanisms underpinning the regulators’ relationship with HM Treasury are strengthened. This will ensure there continues to be appropriate democratic input into, and public oversight of, the regulators’ activities.
268. There are already many provisions in the UK’s domestic framework for HM Treasury to hold the regulators to account. HM Treasury ministers have overall responsibility for the UK’s financial services regulatory framework and the continued effective operation of the financial services regulators as part of that framework.
269. Existing domestic legislation already provides for a number of formal accountability mechanisms between the regulators and HM Treasury in specific circumstances, including:
     1. HM Treasury appoints the Chair and Chief Executive of the FCA, as well as members of the FCA board and Prudential Regulation Committee (the governing committee of the PRA).
     2. The Governor and Deputy Governors of the Bank of England are appointed by the Crown. HM Treasury is responsible for advising the Prime Minister who makes a recommendation to the Crown.
     3. HM Treasury may appoint an independent person to conduct a review of the economy, efficiency and effectiveness of the PRA’s and the FCA’s use of resources.
     4. HM Treasury may direct the PRA or the FCA to carry out investigations into specific events if that is in the public interest (under section 77 of the Financial Services Act 2012).
     5. HM Treasury may direct the PRA or the FCA to take action, or refrain from taking action, in relation to specified matters in order to ensure that the UK meets its international obligations.
270. In addition, FSMA 2000 provides HM Treasury with the ability to make recommendations to the regulators through open ‘recommendations letters’ on issues related to matters of economic policy which the regulators should take into account when exercising their general duties. The most recent recommendations for both the PRA and the FCA were issued on 23 March 2021 and supplemented by a further update issued on 7 April 2022.
271. When the UK was a member of the EU, the government, through ministerial engagement in the European Council and via MEPs in the European Parliament, had a formal role in the EU system of regulatory policymaking. Following the revocation of retained EU law, the regulators will have greater responsibility to set the regulatory requirements which apply to firms in areas previously covered by retained EU law.
272. The government considers that the existing mechanisms governing the regulators’ relationship with HM Treasury are effective. The government considers that the greater responsibility being given to the regulators should be balanced with effective policy input from, and appropriate accountability to, government. The government consulted in November 2021 on proposals to strengthen the engagement mechanisms between HM Treasury and the regulators. These proposals were broadly supported by respondents.
273. The Act creates analogous provisions to the above in relation to the PSR, where these do not exist already, namely the ability for HM Treasury to send letters of recommendation. The approach set out here will also apply to the Bank of England in its regulation of CCPs and CSDs.

Requirement of the regulators to respond to HM Treasury recommendations

274. The Act introduces a requirement for the regulators to respond annually to the recommendations made by HM Treasury in the recommendation letters under existing provisions in FSMA 2000. The regulator’s response should outline the action the regulator has taken or intends to take, or the reasons the regulator has not taken and does not intend to take action on the basis of the recommendations. The response will be laid before Parliament by HM Treasury. This is intended to increase HM Treasury’s and wider stakeholders’ ability to understand how the regulators have taken into account the recommendations. An analogous provision is made for the PSR, inserted into FSBRA 2013.
275. In future, to ensure that it is clear which recommendations are in force, and so need to be included in the response, HM Treasury will make clear in its recommendations letters whether the recommendations replace previous recommendations or are in addition to them

Regulators’ review of their rules

276. It is important to review policy interventions after implementation to ensure they remain appropriate and have had the desired effect. This can range from monitoring to wider evaluation of the impact of a rule after a certain period.
277. There is currently no formal requirement for the regulators to conduct reviews of their existing rules. The Act introduces a requirement for the regulators to keep their rules under review. The government expects this would cover all approaches to assessing the effect of rules, from monitoring to wider evaluation.
278. This requirement to keep rules under review is intended to provide for more effective regulation by ensuring there is a legislative duty for the regulators to review their rules. In addition, more systematic reviews should improve regulation, as potentially outdated rules will be removed or revised more consistently.
279. Alongside this requirement, the Act requires the regulators to publish a statement of policy for how they conduct rule reviews. The requirement for the regulators to publish a statement of policy is to provide clarity and transparency for stakeholders on how and when rules are reviewed. This should allow stakeholders to be confident that reviews are happening in a consistent manner, increasing confidence in regulation.
280. The statement of policy must provide information about how stakeholders, including the regulators’ statutory panels, can make representations to the regulator to review its rules. The statement of policy must also set out how these representations will be considered by the regulators.
281. The government expects that the statements of policy would, additionally, cover at least the following aspects of review:
     1. The different methods of reviews regulators may conduct, including any differences in purpose and scope between them.
     2. The process for determining the methods of review to be applied.
     3. The process for determining the timing of different methods of review.

Power of HM Treasury to require a rule review by the regulator

282. There is currently no formal mechanism for HM Treasury, or anyone else, to require the regulators to conduct reviews of their existing rules. This power is intended to provide for more effective regulation by ensuring there is such a mechanism for the regulator to review its rules where HM Treasury considers it is in the public interest.
283. In general, HM Treasury expects that it may be in the public interest to exercise the power to direct the regulator to review its rules where:
     1. significant developments in the relevant markets give rise to the possibility that the current rules may no longer be appropriate; or
     2. substantial evidence gives rise to the possibility that the rules are not achieving their purpose, considering:
     3. in relation to the FCA, its explanation of how the rules were compatible with its strategic objective and advanced one or more of its operational objectives when the rules were made;
     4. in relation to the PRA, its explanation of how the rules advanced one or more of its objectives when the rules were made;
     5. in relation to the PSR, its explanation of how the requirements advanced one or more of its payment systems objectives;
     6. in relation to the Bank as it exercises its FMI functions, its explanation of how the rules advanced its Financial Stability Objective when the rules were made.
284. HM Treasury is required to consult the regulator before directing a review under this section. Matters to be consulted on may include:
     1. the regulator’s current plans for review
     2. the quality of the evidence on which a direction is being considered
     3. the timing of a review; and
     4. whether an independent reviewer is necessary.
285. There may be situations where it would not be appropriate for the regulator itself to conduct the review. In such a situation, HM Treasury would expect to include in its direction that the regulator should appoint an independent reviewer.

Power for HM Treasury to direct the regulator to report on performance

286. FSMA 2000 and the Financial Services (Banking Reform) Act 2013 establish multiple ways for the regulators to report on their performance to support scrutiny and accountability. These include a requirement for the regulators to report annually, setting out, amongst other things, how they have advanced and acted compatibly with their objectives and had regard to the regulatory principles. Within their annual reports, HM Treasury may also direct the FCA and the PRA to include ‘such other matters’ as HM Treasury considers appropriate.
287. In addition, on a voluntary basis, the FCA annually publishes ‘operating service metrics.’ These are metrics relating to how the FCA carries out routine customer service functions, including authorisations, timeliness of responses to stakeholders, and regulatory permissions requests. In April 2022 the FCA published a comprehensive set of Outcomes and Metrics which it will use to measure and publicly report on its performance. The PRA also annually publishes data on its performance of authorisation processes.
288. On 1 December 2022, the government published an exchange of letters setting out its commitment to ensuring the UK has world-leading levels of regulatory operational effectiveness. In response, the regulators have committed to publishing more detailed performance data in relation to authorisation processes on a quarterly basis in future. Given the regulators’ new responsibilities following the repeal of retained EU law, and the introduction of new growth and competitiveness objectives for the FCA and the PRA, the government considers that there is an increased need for the regulators to publish further information about their performance, to support their scrutiny by Parliament and government and engagement with stakeholders.
289. The Act introduces a power of direction for HM Treasury to direct the regulator to publish a report on such matters, at specific intervals, as HM Treasury considers necessary to support scrutiny of their performance in discharging their general functions. This will enable HM Treasury to direct the regulators to publish additional information to support the review and scrutiny of their discharge of their general functions. This includes how the regulators have acted compatibly with and advanced their objectives, and had regard to the regulatory principles, as well as wider operational effectiveness. HM Treasury will be required to lay any direction in Parliament, to notify it of the use of the power.
290. HM Treasury expects that this power will only be used in exceptional circumstances, in cases where existing forms of engagement have been exhausted. It provides a backstop to ensure that the regulators can be directed to provide further information on their performance where required while respecting their operational independence and expertise. This will support their accountability to Parliament and the public.
291. HM Treasury will only be able to exercise the power where it has determined that:
     1. publication of the information is necessary for scrutiny of the regulator’s discharge of its functions; and
     2. that any information already published is insufficient for effective scrutiny.
292. HM Treasury will not be able to issue a direction that would require publication of the relevant information more than once a quarter. Given the requirement for information to relate to the discharge of the regulator’s functions, HM Treasury expects that directions will only relate to matters within the regulator’s remit.
293. HM Treasury will be required to consult the regulator before exercising this power. This will allow for HM Treasury and the regulator to consider factors such as whether the information can reasonably be collected, recorded, and published by the regulator, ahead of the direction being issued. HM Treasury will also be required to have regard to the desirability of minimising adverse effects on the regulators’ other functions when exercising the power.
294. This power cannot be used to require the regulator to publish information that is confidential for the purposes of Part 23 of FSMA 2000 in relation to the FCA and the PRA, section 91(2) of FSBRA in relation to the PSR and Part 23 of FSMA 2000 as it applies in relation to the Bank of England.
295. The regulator will be required to publish the report. However, there is an exemption from publishing information where doing so would be against the public interest in the regulator’s opinion.
296. This power will apply to the FCA, the PRA, the PSR, and the Bank of England in its regulation of certain financial market infrastructure.

Mechanism to require the regulators to notify HM Treasury of actions affecting deference decisions

297. Deference, as it is applied to financial services, is a process endorsed by the Group of Twenty (G20) where jurisdictions defer to each other when it is justified by the quality of their respective regulatory, supervisory and enforcement regimes. 8 Deference provides for preferential treatment for market participants conducting cross border activity; however, the form of preferential treatment varies across deference provisions. For example, some provisions allow overseas firms to export financial services into the UK, and others remove duplicative requirements on cross-border business. Within the UK’s system, equivalence, which is an autonomous form of deference, is assessed on an outcomes basis, and (where applicable) in compliance with internationally agreed standards. These assessments generally focus on whether the overseas jurisdiction’s regulatory, supervisory and enforcement framework provides an equivalent outcome to the corresponding UK legal framework.
298. Deference serves to facilitate cross border financial services activity by permitting market access and reducing regulatory frictions/costs to firms. Deference is, therefore, an important policy tool for promoting the UK as a global financial centre. The government is responsible for managing, granting, and (where relevant) agreeing deference arrangements with overseas jurisdictions. This includes nearly all of the EU equivalence decisions for overseas jurisdictions that were incorporated into UK law at the end of the implementation period. 9 The government also intends to agree deference arrangements as part of Mutual Recognition Agreements with our overseas partners. In fulfilling this function, the government will monitor these arrangements and keep them under review such that it would be aware if the relevant regulatory and supervisory frameworks are no longer equivalent.
299. As noted earlier, once the UK moves to a comprehensive FSMA model of regulation, the UK’s financial services regulators will set the direct regulatory requirements which apply to firms in their rulebooks. This will have a bearing on HM Treasury’s responsibilities in managing the UK’s deference framework. For example, if new firm facing rules made by the regulators mean that overseas jurisdictions may no longer be regarded as equivalent on an outcomes basis, HM Treasury may launch a review of the relevant existing deference decision and ultimately revoke that decision.
300. Sections 144C(3) and (4) of FSMA 2000 require the PRA to consider and consult HM Treasury on the impact on relevant equivalence decisions when making rules relating to the Capital Requirements Regulation (CRR) or CRR Basel standards. Sections 143G (3) and (4) of FSMA 2000, contain a similar requirement for the FCA when making rules relating to the prudential regulation of investment firms regulated by the FCA. However, beyond considering the impact on deference when making rules in these areas, there is no statutory requirement for the regulators to consider the impact of their rule changes on the remainder of HM Treasury’s deference framework nor to consult HM Treasury on these impacts. The provisions of this mechanism are intended to improve the quality of information available to regulators when exercising their regulatory powers.
301. The Act places a statutory requirement on the PRA and the FCA to consider, when setting rules or supervisory policies and practices, the effect of their proposed action on notified deference decisions (HM Treasury will notify certain deference decisions to the PRA and the FCA as relevant to this requirement). Only actions where there is a duty to carry out a public consultation will trigger this requirement. If, following that consideration, the PRA or the FCA consider that there is a material risk that their actions are incompatible with a notified deference decision, then the PRA or the FCA must consult HM Treasury prior to their public consultation.
302. This mechanism will also apply to the Bank of England in relation to its regulation of CCPs and CSDs. This will ensure consistency with the changes taken forward in the Act regarding the Bank of England’s regulation of FMI following the FRF Review.

Mechanism to require the regulators to notify HM Treasury on actions affecting international trade obligations

303. Following the UK’s withdrawal from the EU, the UK has assumed responsibility for its own trade policy. This includes negotiating and entering into new international trade agreements and ensuring the compatibility of domestic policies and rules with our obligations in international trade agreements. Previously, the EU was responsible for managing any claims made by trading partners under trade agreement dispute settlement mechanisms. The UK government is now responsible for managing dispute settlement with trading partners and must therefore ensure that it has appropriate visibility over the regulators’ setting of domestic financial services policies and rules to fulfil this duty.
304. As noted earlier, moving to a comprehensive FSMA model of regulation will give the regulators significant new rule-making responsibilities. These rule-making responsibilities interact with obligations in the UK’s trade agreements in a number of ways, such as the need to ensure that regulatory rules and supervisory policy are not discriminatory and that they are consulted upon and published in a transparent manner. As the extent of the regulators’ rule-making responsibilities expands, the number of interactions with the UK’s international trade agreements is also likely to increase.
305. Currently, HM Treasury and the regulators work together closely to ensure that the rules and supervisory policy overseen by the regulators are compliant with obligations in the proposed trade agreements when they come into force. This mechanism seeks to ensure that, in the years following the conclusion of each international trade agreement, regulatory rules and supervisory policy/practice remain consistent with the UK’s obligations arising from those agreements.
306. The Act introduces a statutory requirement to require the regulators to consider, when setting rules or supervisory policies and practices, the effect of their proposed action on international trade obligations. The regulators need only consider those international trade obligations which relate to financial services and markets. Where the regulators see a material risk of incompatibility between their action and international trade obligations, they must notify HM Treasury. Where there is a duty to consult in relation to the action, the regulator must notify HM Treasury prior to their public consultation.
307. This mechanism is intended to sit alongside existing HM Treasury powers in Section 410 of FSMA 2000, that allows HM Treasury to direct the FCA, the PRA and the Bank in exercising certain functions to take action (or refrain from taking action) in order to ensure that the UK meets its international obligations. While this power will remain the means by which HM Treasury could ultimately ensure UK compliance with its obligations in trade agreements, this mechanism seeks to ensure earlier, proactive consideration by the regulators of how their actions interact with the UK’s international trade obligations.
308. This mechanism will also apply to the Bank of England in relation to its regulation of CCPs and CSDs. This is to be consistent with the scope of the wider FRF Review changes taken forward in the Act regarding the regulation of FMI by the Bank.
309. A separate analogous mechanism will also apply to the PSR by amendment to the Financial Services (Banking Reform) Act 2013 (see paragraph 8 of Schedule 7).

Engagement with stakeholders

310. It is vital that there are opportunities for consumers, relevant stakeholders and firms to engage with and scrutinise the development of regulatory proposals.
311. Engagement with stakeholders is embedded in the regulators’ policymaking process through the application of statutory requirements and public law principles. The PRA and the FCA are subject to statutory requirements in FSMA 2000 which, in general, require them to consult with the public on draft rules. These PRA and FCA consultations are generally open for three months, though this can change depending on the issue. The PSR’s consultation obligations are largely derived from those of the FCA.
312. As part of these consultation requirements, the regulators must explain why making the proposed rules advances, and is compatible with, their objectives as set by Parliament in legislation. The regulators must also explain how the proposals are compatible with their obligation to have regard to the regulatory principles. They must also produce a cost-benefit analysis (CBA) of the draft rules unless an exemption applies
313. The government considers that this statutory general requirement for the regulators to consult on proposals remains fit for purpose and the key mechanism for stakeholder engagement.
314. In addition to the duty to consult publicly on proposals, the FCA has a general duty to "make and maintain effective arrangements for consulting practitioners and consumers." The PRA has a similar general duty to "make and maintain effective arrangements for consulting PRA-authorised persons or, where appropriate, persons appearing to the PRA to represent the interests of such persons", on the extent to which the PRA’s general policies and practices are consistent with its general duties. The PSR has a similar general duty to "make and maintain effective arrangements for consulting relevant persons" on the extent to which its general policies and practices are consistent with its general duties, and how its payment systems objectives may best be achieved. As part of these duties, the regulators are required to maintain stakeholder panels.
315. The regulators have regular meetings and discussions with the stakeholder panels, in which most major policy and regulatory proposals are presented for comment at an early stage. The panels’ contributions to policy development as part of this process are confidential to ensure both the regulator and panel members can share ideas and feedback openly. This confidentiality allows the regulators to engage the panels when policy is in the early stages of development ahead of public consultation. The panels publish annual reports on a voluntary basis, dealing with their work and their views on the regulators’ work.
316. Greater rule-making responsibilities will increase the opportunities for the regulators to consult the panels from the outset of policy and regulatory development in more policy areas, which was not possible to the same extent while the UK was a member of the EU. The government and the regulators consider this will strengthen the panels’ important ability to provide stakeholder input into the development of policy and regulation.
317. The government’s November 2021 consultation proposed a number of measures that seek to ensure that there is appropriate transparency of regulators’ operations for stakeholders to be confident in them; and that there is appropriate systematisation of important practices relating to the regulators’ statutory panels, the production of CBA, and the regulators’ review of rules. Respondents to the November 2021 consultation were broadly supportive of these proposals. These measures will apply to the PRA, the FCA and the PSR.

Strengthening the role of statutory panels

Placing the Listing Authority Advisory Panel and the PRA Practitioner Panel’s insurance sub-committee on a statutory footing

318. The Act puts the FCA’s Listing Authority Advisory Panel and the PRA Practitioner Panel’s insurance sub-committee on a statutory footing. This is intended to ensure consistency across all panels and seeks to provide confidence for stakeholders that the currently voluntary practices of operating these panels will endure. The Act also seeks to clarify that the minimum requirements for the regulators in relation to both of these panels will be the same as for other statutory panels, including the appointment of a chair and the appointment of members.

Requirement for regulators to publish information on their engagement with stakeholder panels

319. The Act introduces a new statutory requirement for the regulators to publish clear and consistent public communication on how they have engaged with the panels across all of the regulators’ work. This seeks to increase transparency of the regulators’ operations, improving the ability of Parliament to scrutinise them, and of stakeholders to comment on them.
320. The statutory requirement will require the regulators:
     1. to provide information in their annual reports on their engagement with the statutory panels over the reporting period
     2. to provide information on how their appointment of panel members has complied with their statement of policy on panel appointments, in relation to the processes for making appointments and the matters considered
     3. to provide, as part of public consultation, information on any engagement with panels before the consultation.
321. The form and detail of the information provided will be for the regulators (working with the panels as appropriate) to decide. This seeks to ensure the regulators can find the appropriate balance between transparency and the confidentiality crucial to ensure an open exchange of views as part of the policymaking process, which is fundamental to the panels’ role as a ‘critical friend’.

Requirement for regulators to publish a statement of policy on the processes they use to appoint members to their stakeholder panels

322. Ensuring the right membership of the panels is crucial to their success in providing challenge, a range of expertise, and differing perspectives to the regulator. Panels that have members from diverse backgrounds, with wide-ranging expertise and a variety of different perspectives will be better placed to ensure the regulators receive the most comprehensive appraisal of their policy. In order to ensure that the membership of panels represents the full diversity of stakeholders, both amongst practitioners and amongst consumers, there should be a clear and transparent process for appointing members.
323. The FCA has recognised the importance of improving diversity in the membership of the panels and is already undertaking a review to identify ways to improve diversity so the composition of the panels appropriately reflects the range of practitioners and stakeholders in financial services. The government welcomes the work the regulators are doing to move recruitment of panel membership in this direction and expects the regulators will take this opportunity to commit to open and fair recruitment practices to ensure a diverse range of qualified candidates are appointed to panels.
324. Building on this work, and to improve transparency, the Act introduces a requirement for the regulators to each maintain statements on their processes for appointing members to panels. The regulators will need to consult HM Treasury on the statement before it is published. This measure seeks to increase transparency of regulator operations which will improve the ability of Parliament to scrutinise them, and of stakeholders to comment on them.
325. The government also recognises that consultation respondents raised concerns regarding the composition of panel membership. These included suggestions that there may be a bias towards large firms and established sectors, and suggestions that there may be a lack of representation of some groups; for example, vulnerable consumers.
326. As part of their ongoing work to improve the diversity of panels, the regulators should also continue to consider the diversity of the sectoral composition of membership. In the context of emerging technologies, changing business models, and evolving consumer choices (for example, the transition towards digital payments), it is particularly important that a representative balance of stakeholder types and views are included.

Treasury power to require annual reports by statutory panels

327. There has been significant interest in increasing the visibility of the work of the statutory panels. The panels already produce annual reports on their work on a voluntary basis, but given the important role the panels play as a "critical friend" to the regulators, it is important that these reports continue to be produced and are available to Parliament to support their scrutiny of the regulators.
328. Section 47 therefore provides a power for HM Treasury, by regulations, to require the panels to produce annual reports; and to make provision about the content of the reports. HM Treasury will then be required to lay these reports in Parliament. HM Treasury is not able to require the panel to report on issues outside of their work.
329. In the first instance, HM Treasury intends to exercise the power to require the FCA’s Consumer Panel and the new Cost Benefit Analysis panels for the FCA and the PRA to produce annual reports.

Regulators’ cost-benefit analysis process

Requirement for the regulators to publish a statement of policy for their approach to cost-benefit analysis (CBA)

330. The Act seeks to provide transparency of the regulators’ CBA processes going forward and support robust regulatory policymaking by introducing a requirement for the regulators to publish a statement of policy detailing their approach to CBA. A clear and publicly available description of the regulators’ CBA processes will provide further assurance to stakeholders that the regulators are seeking to understand the effect of their regulatory policymaking. This will also support stakeholders in considering effectively whether the regulators’ CBA assessments are accurate.

Requirement for the regulators to establish CBA panels

331. In response to the October 2020 FRF Review consultation, several respondents expressed support for enhanced external challenge as a way to improve the quality of the regulators’ CBA. The regulators’ existing panels can be, and are, asked for early, qualitative comment on the policy aims and CBA.
332. The Act requires the PRA and the FCA to establish new statutory panels dedicated to supporting the development of the regulators’ CBAs. The PRA’s CBA panel will also be used by the Bank of England (for CCP and CSD supervision) and the FCA’s CBA panel will be used by the PSR. The creation of the CBA Panel seeks to improve the overall quality of rule-making by improving the CBA underpinning it. The government also considers that it can increase stakeholders’ confidence that there is regular, independent input into the regulators’ CBA.
333. The CBA panels are intended to support the regulators’ development of CBAs. Each regulator must seek the CBA panel’s input as part of the development of CBA before they publish a CBA as part of a public consultation. The government recognises there may be instances where it is disproportionate for a regulator to consult with the CBA Panel before it publishes a consultation. The regulators will be required to publish a CBA framework, which will specify, amongst other things, when the CBA Panel does not need to be consulted before publication of an individual consultation.
334. This measure also seeks to ensure that the CBA panels can periodically review the regulators’ CBA methodology and processes by examining a collection of past CBAs following implementation of rule changes. This seeks to enable the CBA panels to provide recommendations for how the regulators can improve their overall methodology and approach to CBA. Where appropriate, these recommendations may form the basis for updating the regulators’ statement of policy on their approach to CBA.
335. It is important that CBA reflects, as accurately as possible, the costs and benefits to firms and consumers of implementing and following regulation. In assessing this, the experience of regulated firms themselves is vital. The Act therefore requires that at least two members of the FCA’s CBA panel and the PRA’s CBA panel must be from firms authorised by the respective regulator. The regulators will be responsible for putting in place appropriate policies to manage conflicts where required.

Appointment of external persons to statutory panels

336. The Act introduces a requirement for the FCA, PRA and PSR, when appointing persons to their statutory panels, to ensure all members are external to the FCA, the PRA, the PSR, the Bank of England, or HM Treasury. The legislation describes ‘external’ as those who do not receive remuneration from the regulators or HM Treasury.
337. This requirement is intended to maintain the practice that the regulators’ statutory panels are comprised entirely of external members, which is crucial to each panel’s success in providing challenge, expertise, differing perspectives and fulfilling their role as a ‘critical friend’ to the regulator.
338. This requirement will be applied to all the existing regulator statutory panels and new panels created or placed on a statutory footing by the Act, save for where HM Treasury provides exemptions via regulations.
339. In some cases, while remaining external, it is appropriate for panel members to receive remuneration. For example, to ensure that the panels continue to attract a diverse range of experts, it may be appropriate for panel members to receive remunerations for their work on the panel or other ad hoc work on specific projects. Therefore, the Act provides for HM Treasury to make regulations specifying exemptions to this condition, where appropriate.
340. This requirement does not disqualify someone who is serving on a statutory panel from receiving expenses.
341. This requirement is intended to maintain the general practice that the regulators’ statutory panels are comprised entirely of external members, which is crucial to each panel’s success in providing challenge, expertise, differing perspectives and fulfilling their role as a ‘critical friend’ to the regulator.
342. This requirement will be applied to all the existing regulator statutory panels and new panels created or placed on a statutory footing by the Act, save for where HM Treasury provides exemptions via regulations.
343. The FCA statutory panels in scope of this requirement will be: the FCA’s Practitioner Panel, the Smaller Business Practitioner Panel, the Markets Practitioner Panel, the Consumer Panel, the Listing Authority Advisory Panel and the Cost Benefit Analysis Panel.
344. The PRA statutory panels in scope will be: the PRA Practitioner Panel, the Insurance Practitioner Panel, and the Cost Benefit Analysis Panel.
345. The PSR statutory panel in scope will be the Payment Systems Regulator Panel.
346. The Bank of England (the Bank) does not maintain statutory panels for the exercise of its FMI functions, so this requirement does not apply to them.

Publication of consultation respondents

347. This measure applies to the FCA, PRA, PSR, and the Bank in its regulation of certain financial market infrastructures.
348. The scope of this measure is limited to the financial services regulators, reflecting the existing specific requirements in FSMA 2000 and the Financial Services (Banking Reform) Act 2013 in relation to how they must conduct consultations.
349. The Act introduces a new statutory requirement for the regulators to include a list of respondents to their public consultations as part of their response to the consultation. This requirement is intended to enhance transparency around who responded to the consultation, and whose views the regulators have taken into account when making new rules. This is expected to enable more effective scrutiny of the regulators’ operations.
350. Respondents will be required to opt-in to having their name published. This maintains the ability for individual respondents to respond confidentially if they wish to, so as not to deter potential respondents.

Accountability to Parliament

Engagement with Parliamentary Committees

351. Revoking retained EU law in order to move to a comprehensive FSMA model of regulation, where the independent regulators set the direct regulatory requirements which apply to firms in their rulebooks, will give the regulators significant new rule-making responsibilities.
352. Given these new responsibilities, it is important that the mechanisms by which Parliament holds the regulators to account are strengthened. This will ensure there continues to be appropriate democratic input into, and oversight of, the regulators’ activities.
353. As Parliament sets the regulators’ objectives and gives them the powers to pursue those objectives, Parliament has a unique and special role in relation to the scrutiny and oversight of the financial services regulators.
354. The system of Parliamentary select committees is particularly important in financial services policy and in relation to the scrutiny of the work of the regulators. Relevant select committees, and the Treasury Select Committee (TSC) in particular, provide scrutiny of financial services policy in the following ways:
     1. Select committee inquiries: Committees choose their own subjects of inquiry and decide the duration and approach that will be used for each inquiry. The committees have the power to send for "persons, papers and records" which they decide will be relevant, as per the House of Commons Standing Order No. 152. Other committees, such as the former House of Lords EU Financial Affairs Sub Committee and the House of Commons European Scrutiny Committee, have also played a key role in scrutinising financial services policy.
     2. Regular hearings to scrutinise the work of the financial services regulators: the TSC routinely examines the regulators’ approaches to policy and administration.
     3. Pre-commencement hearings: Parliament, through the TSC, conducts pre-commencement hearings following the appointment of the Chair and Chief Executive of the FCA and the Chief Executive of the PRA.
355. There are also long-established scrutiny arrangements in place for Parliament to hold Ministers of the Crown accountable for the work of HM Treasury and the UK’s financial services regulators. These arrangements include:
     1. Government ministers regularly responding to oral and written questions in both Houses of Parliament.
     2. Government policy being scrutinised through a range of Parliamentary debates.
     3. Legislation is debated and scrutinised according to the procedures for primary and secondary legislation.
     4. Both Houses of Parliament being kept informed of policy and regulatory initiatives through the making of ministerial statements and by the laying of important documents before Parliament, including the annual reports of the financial services regulators.
356. The FRF Review proposed two measures building on these existing arrangements that seek to ensure that Parliament has the appropriate tools to conduct scrutiny of regulators’ rule-making and other functions in the manner that Parliament sees fit. The requirements introduced by the Act are set out below. The measures will apply to the FCA, the PRA and the PSR, as well as the Bank in its regulation of central counterparties and central securities depositories.

Requirement for the regulators to notify the relevant select committees when they publish a consultation

357. The Act requires the regulators to notify the relevant select committees when they publish a consultation. The measure aims to ensure that the relevant select committees have access to the information needed to best scrutinise the work of the regulators. This is intended to support more effective accountability and scrutiny of the regulators by Parliament.
358. The relevant select committees are the Treasury Select Committee, a committee of the House of Lords that has been charged with responsibility for being notified by the regulator when a relevant consultation is issued, and any joint committee that has also been charged with this responsibility.
359. The obligation to notify the relevant select committees will apply when the regulators consult publicly on proposed rules (or, in the case of the PSR, generally applicable requirements that they impose on regulated entities); when the regulators publish proposals about how they exercise any of their general regulatory functions; or if the regulators publish proposals under a duty imposed by legislation.
360. This measure includes a requirement for the regulator to draw the relevant select committees’ attention to the section of its consultation dealing with how the proposals advance its objectives. The regulator will also need to draw attention to the section of their consultation which deals with how they have had regard to their regulatory principles and any other relevant considerations that the regulators must have regard to, including in the recommendation letters from HM Treasury.

Requirement for the regulators to respond to Parliament

361. The regulators will be required to respond in writing to formal responses to relevant consultations from Parliamentary committees. This will formalise an approach that is currently taken informally and seeks to ensure that there are clear expectations for how the regulators must respond to any representations from Parliamentary committees. The measure has been designed to support more effective accountability and scrutiny of the regulators by Parliament.
362. The government considers that such an approach is appropriate due to the unique circumstances of the financial services regulators’ wide remits, and their position as independent public bodies which are accountable to Parliament. Parliament therefore plays a unique role, alongside government, setting the policy framework within which the regulators operate.
363. There can often be a significant period of time between an initial consultation and final rules being published. Therefore, section 53 also requires the regulators to explain, when making final rules, how they have considered representations by Parliamentary committees. This ensures that the regulators provide a public explanation for how the views of Parliamentary committees have been considered. Where a committee has made an explicit recommendation in its representation, the government expects that the regulator would explain its response to that recommendation.

Relationship of the Bank of England with HM Treasury, Parliament and external stakeholders

364. Currently, the Bank is subject to several mechanisms which promote accountability and transparency in its regulation of CCPs and CSDs. These include notifying HM Treasury if it makes, alters or revokes any rules, and undertaking consultation and cost-benefit analysis prior to introducing any changes. The current mechanisms are appropriate for the Bank’s limited existing rule-making powers.
365. The Act introduces a range of measures designed to strengthen the Bank’s relationship with HM Treasury, accountability to Parliament and stakeholder engagement to ensure these aspects are appropriate for the new general rule-making power. These mechanisms are very similar to the measures being introduced in the Act for the PRA and the FCA, and in many cases the Act simply applies those measures directly to the Bank. 
366. There are two measures in the Act which are slightly different to those the Act introduces for the PRA and the FCA. Firstly, the Act introduces the ability for HM Treasury to make recommendations to the Bank about matters to which it should have regard when advancing its objectives and principles for its new rule-making power. The Act sets out that HM Treasury must do so at least once every Parliament, publish the recommendations, and lay them before Parliament. This measure aligns the Bank with the existing ability for HM Treasury to make recommendations to the PRA and the FCA. The Act also applies the new requirement for the PRA and the FCA to respond to recommendations made by HM Treasury to the Bank.
367. Secondly, the Act introduces a requirement for the Bank to report annually on the efforts it has made to engage with industry stakeholders aside from those that it directly regulates (i.e. the CCPs and CSDs themselves) and to give a summary of that engagement. This measure is intended to increase transparency around the Bank’s engagement with the wider market such as the firms who use CCP and CSD services. The Act does not specify exactly how the Bank should conduct this engagement, the exact stakeholders it should engage with or the frequency of the engagement, leaving these aspects to the Bank’s judgment.

Financial Ombudsman Service, FCA and FSCS co-operation on wider implications issues

368. The FCA is the conduct regulator for the financial services sector. A key part of its role is to set rules that financial services firms must adhere to. It is responsible for the conduct of around 51,000 financial services firms, the prudential regulator for 49,000, and sets specific standards for 18,000 in the UK.
369. The Financial Ombudsman Service is an alternative dispute resolution service for financial services complainants such as consumers and smaller businesses which have a complaint about a financial services firm or claims management company – it is provided free to complainants at the point of use. Its statutory purpose is to provide for the resolution of disputes quickly and with minimum formality by an independent person.
370. The Financial Services Compensation Scheme (FSCS) exists to provide protection for eligible customers of financial services firms authorised by the FCA. It protects consumers that incur financial losses when authorised firms are unable, or likely to be unable, to pay claims against them.
371. Whilst the FCA, the Financial Ombudsman Service and the FSCS have distinct roles, the work of each organisation will often be relevant to, or have implications for, the other. Given this, the FCA and the Financial Ombudsman Service are subject to a statutory requirement to take such steps as they consider appropriate to co-operate with each other in the exercise of their functions. The FCA and the Financial Ombudsman Service are required by statute to maintain a memorandum of understanding (MoU) describing how they intend to comply with this requirement to cooperate. The FSCS and the FCA are also subject to a statutory requirement to cooperate with each other and maintain an MoU describing how they do so.
372. In some cases, issues being considered by the Financial Ombudsman Service, the FCA or the FSCS will have significant implications for the other, and/or for the wider financial services sector. For example, if the Financial Ombudsman Service receives complaints from a large number of consumers in relation to potential wide-spread misconduct (e.g. mis-selling) this may have implications for the FCA’s regulation or supervision of those financial services firms, or may lead to claims for FSCS compensation in the event that firms fail. The FCA, the Financial Ombudsman Service and the FSCS may need to cooperate to determine the optimal way of delivering redress to the affected consumers. Similarly, the development of new regulatory rules by the FCA could have implications for the number and nature of complaints brought to the Financial Ombudsman Service, for example if they impose significant new requirements on firms. When issues with wider implications emerge, it is beneficial for the organisations to work together to ensure timely, collaborative discussions to determine the most appropriate approach to managing such issues.
373. To promote effective cooperation on wider implications issues, the FCA, the Financial Ombudsman Service and the FSCS (together with the Money and Pensions Service and the Pensions Regulator) voluntarily operate a Wider Implications Framework , which was formally launched in January 2022. This framework provides a transparent structure for collaboration between these organisations, and ensures appropriate information is shared with stakeholders through the publication of minutes of meetings, an annual report and a central log of the issues identified. The Terms of Reference for the Wider Implications Framework are published on the Financial Ombudsman Service’s website.
374. The Act makes it a statutory requirement for the FCA, the Financial Ombudsman Service and the FSCS to cooperate on issues with wider implications, to ensure that these existing arrangements will endure over time. Requiring the FCA, the Financial Ombudsman Service and the FSCS to maintain arrangements to cooperate in respect of these issues seeks to ensure increased coordination on wider implications issues to support better outcomes for financial services firms and consumers.
375. In addition, the Act requires the FCA, the Financial Ombudsman Service and the FSCS to publish a statement of policy setting out how they will comply with this duty to cooperate on wider implications issues. It also requires them to put in place arrangements for stakeholders to provide representations on their compliance with the duty, and requires the publication of an annual report on compliance with the duty including any representations received from stakeholders.

Chair of the Payment Systems Regulator as member of FCA Board

376. The FCA is the conduct regulator for financial services in the UK. The FCA Board is the governing body of the FCA. The composition of the FCA Board is set out in FSMA 2000 and consists of:
     1. A chair appointed by HM Treasury (the FCA Chair);
     2. A chief executive appointed by HM Treasury;
     3. The Bank’s Deputy Governor for prudential regulation;
     4. Two members jointly appointed by the Secretary of State and HM Treasury;
     5. At least one other member appointed by HM Treasury.
377. The PSR is the economic regulator for payment systems in the UK. It is an independent subsidiary of the FCA, and the FCA is responsible for appointing the chair of the PSR Board (the PSR Chair), with the approval of HM Treasury.
378. From the establishment of the PSR in 2014 until May 2022, the same individual was appointed to the offices of FCA Chair and PSR Chair. As a result, the PSR Chair was effectively a member of the FCA Board, without being expressly referred to in the legislation as a member of that board.
379. Following the resignation of the previous FCA Chair, HM Treasury decoupled the FCA Chair and PSR Chair roles to have them performed by separate individuals.
380. Continued effective cooperation between the FCA and the PSR is important given that the PSR’s powers apply to users of payment systems, many of which are firms regulated by the FCA. In addition, the FCA is responsible for the regulation of payment services. The PSR is also subject to a statutory duty to coordinate the exercise of its functions with the FCA. Given these respective roles, duties and the link between the UK payments sector and the wider financial services sector, the government considers it is important that the PSR Chair continues to be represented on the FCA Board, now that the PSR Chair and FCA Chair are held by separate individuals.
381. The Act ensures the PSR Chair is included in the FCA Board as an ex-officio member, by providing a statutory basis for the PSR Chair to join the FCA Board.
382. In addition, the Act ensures the existing FSMA 2000 provisions which apply to the Bank’s Deputy Governor for prudential regulation will also apply to the PSR Chair. This includes providing for the FCA to pay them expenses and prohibiting them from taking part in Board discussions on the FCA’s exercise of its powers in relation to a particular firm or person.

Access to cash

383. Access to cash remains important to the daily lives of many people across the UK. In its Financial Lives 2020 survey , the FCA found that there are an estimated 5.4 million adults (10%) who report as reliant on cash to a very great or great extent in their day-to-day lives. Meanwhile the use of alternatives, such as cards and digital payments, is not yet a realistic option in some situations or for many people who still rely on notes and coins.
384. The use of cash by individuals and businesses is enabled through access to suitable cash withdrawal and deposit facilities. Examples of these may include, but are not limited to, a cash withdrawal from an ATM or cash machine, cashback, or an over-the-counter cash withdrawal or deposit at a bank branch or Post Office. Therefore, the government wants to ensure that the provision of cash access facilities continues to provide appropriate coverage across the UK to meet the cash needs of consumers and businesses.
385. To date, the market has provided sufficient cash access to support people’s use of cash. Over the past decade the UK has witnessed a decline in the use of cash towards card and other digital payment methods. This has made it relatively more expensive for firms to maintain the existing infrastructure needed for current levels of access to cash to continue. In response, firms have consolidated their cash facilities in recent years.
386. Whilst the current level of access to cash coverage across the UK is extensive, the government considers the decline in cash usage and the number of cash facilities to pose risks to the future provision of access to cash.
387. At present, there is no existing substantive legislative framework relating to minimum or reasonable levels of access to cash, and no single authority has overall responsibility for overseeing the maintenance of a well-functioning UK cash system for the benefit of customers. Furthermore, no regulator currently has express powers to ensure that a cash withdrawal or deposit facility is in place to support access to cash.
388. At Budget 2020, the government committed to introduce a legislative framework to protect access to cash for those who need it. The government issued a Call for Evidence in October 2020 on the key considerations associated with cash access, including deposit and withdrawal facilities, cash acceptance, and regulatory oversight of the cash system. On 1st July 2021, the government published its response to the Call for Evidence alongside a consultation which sought views on legislative proposals to protect access to cash.
389. On 19 May 2022, the government published a summary of responses to the consultation confirming its approach to legislating. This set out the government’s intention to establish the Financial Conduct Authority (FCA) as the lead regulator for retail cash access and provide it with appropriate powers for ensuring that specified firms, i.e. banks and building societies as designated by HM Treasury, continue to ensure the reasonable provision of deposit and withdrawal facilities across the UK. The FCA’s powers will allow it to address cash access issues at both a national and local level.
390. Since the government’s consultation, significant steps have been taken by industry to improve coordinated efforts by firms to meet cash access needs. In December 2021, the financial services sector announced that it had developed a voluntary industry model for the provision of cash access facilities, including initiatives to provide shared services. Under the model, an industry coordination body assesses the cash needs of local communities with a view to ensuring appropriate cash services are in place. In light of these developments, and the significant role that such coordination arrangements may play in the future of cash provision, the summary of responses to the consultation also set out the government’s intention to also enable HM Treasury to designate the operators of such arrangements for FCA oversight.

Cash access services

391. The Act intends to protect access to cash by ensuring the reasonable provision of cash withdrawal and deposit facilities.
392. The Act appoints the FCA as the lead regulator for access to cash. HM Treasury will be empowered to designate firms to be subject to FCA oversight for the purpose of ensuring the reasonable provision of cash access (i.e., cash withdrawal and deposit) services across the UK, or parts of the UK. HM Treasury will consider the following factors for designation decisions: a firm’s geographic coverage; distribution of customers; and market share. On the basis of these criteria HM Treasury expects the firms it will designate will be larger banks and building societies. HM Treasury will also be empowered to designate operators of cash coordination arrangements for FCA oversight.
393. The FCA will be granted monitoring, supervision and enforcement powers to regulate the provision of cash facilities by designated banks and building societies. These powers will also apply to any designated operators of cash coordination arrangements. Organisations that are involved in the provision of cash facilities but are not designated by HM Treasury will be subject to FCA powers relating to obtaining information only.
394. The FCA’s powers will equip it with the ability to address cash access at both a national and local level. This includes seeking to ensure there is reasonable provision of free cash access services for relevant personal current accounts. The Act provides the FCA with the ability to impose requirements (including both rules and directions) on one or multiple designated banks and building societies, or designated operators of cash coordination arrangements, to require them to take such action as needed to ensure that there is reasonable provision of cash access services (including free access to relevant personal current accounts). This is in order to support the ongoing use of cash. The Act enables the FCA to take account of the impact on persons, even where there is no relationship between the designated firm and the person. By way of example, it does not make FCA activity dependent upon whether a designated firm has customers residing in any given area, in recognition of factors such as that customers may access cash as they travel or change provider. The actions that the FCA requires firms to take may include refraining from the closure of a cash access service where there is no suitable alternative.
395. The Act requires HM Treasury to prepare a policy statement on cash access services(to include policies concerning free cash access services for holders of relevant personal current accounts,)] and enables HM Treasury to structure its policy statement on the basis of baselines for withdrawal and deposit facilities, rural and urban areas, and for different types of current account such as those for personal and non-personal customers. The FCA will be required to have regard to the policy statement in carrying out its functions. The Act also allows the FCA to take other matters that it thinks appropriate into account. This could include, for example: the type of service, and associated factors such as hours of availability; where the services should be provided; and cost, both in terms of provision and charges to end users.

Wholesale cash distribution

396. To support continued access to cash, a sustainable and resilient wholesale cash system is needed. This is the UK’s infrastructure, including a system of cash centres, that is integral to the sorting, storing and distribution of coins and notes.
397. The wholesale cash industry purchases banknotes from the Bank of England (the Bank) and coins from the Mint at face value. Wholesale Cash in Transit (CiT) providers then move cash from where it has been printed or minted to cash centres for distribution. Cash centres then receive, store and prepare cash for circulation to the public.
398. The wholesale cash network is split across a number of cash centre operators. The decline in the transactional use of cash has put pressure on the business models of the wholesale cash network. While some operators have rationalised their cash centre estates and closed cash centres, utilisation of cash centres nevertheless remains low in some parts of the UK and there is little ability to reduce the fixed costs associated with running cash centres on an individual basis. 
399. None of the current operators within the wholesale cash industry are currently considered to be systemic, as others are able to step in, in the event of a failure of one of the networks. The government expects the industry will transition to a smaller overall network in the coming years. This transition could be through rationalisation of the existing networks, or consolidation of the number of networks and operators. If this restructuring happens in a disorderly way it could pose a potentially significant risk to the wholesale cash infrastructure’s effectiveness and sustainability, and consequently its ability to supply cash as and when required to the retail network across the UK. These risks need to be managed and it is the government’s view that it is not possible to do that through voluntary arrangements alone. 

Ensuring an effective, resilient and sustainable wholesale cash infrastructure

400. HM Treasury’s principal policy aim is to support access to cash through ensuring that the wholesale cash infrastructure is effective, resilient, and sustainable in the long-term. In this respect sustainability means viability of the system over time. Furthermore, this policy also seeks to ensure that risks to financial stability and/or confidence in the UK financial system that would arise through the creation of a systemic entity in the event of a failure or wider disruption in the wholesale cash network are effectively managed. The government has also designed the regime so that it can accommodate commercial solutions to the challenges faced by the industry, as these emerge over time, whilst protecting the effectiveness, resilience, and sustainability of the wholesale cash distribution system.
401. The Act provides the Bank with the powers to oversee the wholesale cash industry. There are two levels to the regime. Firstly, the Bank will be enabled to regulate the market activities of the wholesale cash industry (the market oversight regime) to ensure it remains effective, resilient and sustainable. Secondly, the Bank will have the ability to prudentially regulate a systemic entity in the market, should one form in the future (the prudential regime). HM Treasury, after consultation with the Bank and the industry, would designate entities as within scope of either or both parts of the regime. HM Treasury will also have a similar power to un-designate entities if required. HM Treasury may only recognise an entity as having systemic significance, and therefore being in scope of the prudential regime, if they are satisfied that a deficiency or disruption to their wholesale cash distribution activities would threaten the stability of or confidence in the UK financial system.
402. For the market oversight regime, all entities which provide wholesale cash activities or provide financial support in relation to these activities, could be brought under the regime. HM Treasury will also have the power to designate a service provider to the industry under the regime, if required.
403. Under the market oversight regime, the Bank will be given the power to require the provision of information. This is for the purpose of allowing the Bank to form an aggregate picture of the overall health of the industry and identify emerging risks. The Bank would also have the power to give directions to designated firms. This would be to require or prohibit taking of actions or to set standards firms must meet. There would also be powers given to the Bank to enable them to publish principles and codes of practice industry must follow. The Bank would also be given powers of inspection, powers to enforce the regime, and would be enabled to levy fees for the operation of the scheme and to levy penalties for non-compliance. For the fees, these must relate to a scale of fees approved by HM Treasury and Parliament. Industry will be consulted on the development of this fee scale.
404. In relation to prudential regulation, the Bank would exercise the same powers used in the market oversight regime, but towards the objective of managing risks to financial stability, and to maintain confidence in the UK financial system. The failure of a systemic entity could threaten the stability or confidence in the financial system through a loss or severe reduction of access to cash as a means of payment for consumers as well as a potential loss of confidence in cash as a payment method. Therefore, the Bank would have the power to mitigate such a failure by applying an appropriate Special Administrative Regime (SAR) to the entity in the event of its failure or impending failure.
405. Given the nature of governance and financial support for wholly owned state entities, there is a power for HM Treasury to either not apply or apply with modifications any of the regulatory and enforcement provisions in relation to companies wholly owned by the Crown. Wholly owned state entities would also not be in scope of the prudential regime.
406. The Bank will publish a statement on its regulatory approach before exercising its powers. This will set out how the Bank intends to use its powers. The Bank will consult with industry on the development of its regulatory approach and this statement.

Performance of functions relating to financial market infrastructure

407. As noted earlier, CCPs and CSDs provide critically important functions which underpin the safe and effective functioning of global financial markets. These critically important functions mean that disruption at, or failure of, any of these entities could threaten the financial stability of the UK or cause significant disruption to the wider UK economy and to consumers. As such, encouraging effective governance and incentivising good behaviour within these entities supports the effective functioning of UK markets, and protects consumers and the economy.
408. The existing regulatory regime for CCPs and CSDs makes very limited provision for the oversight of individual conduct within these firms, as most supervisory and enforcement powers are focused on the entity itself. The Act addresses this by introducing a senior managers and certification regime (SM&CR) which can be applied to CCPs and CSDs. The key features of the SM&CR for CCPs and CSDs are similar to the existing SM&CR for banks, insurers and other authorised persons, which is set out in Part 5 of FSMA 2000.
409. The Act also provides HM Treasury with a power to apply the regime to two other systemically important types of firms that promote market integrity, should the government determine that is appropriate following consultation with industry. These are Credit Rating Agencies (CRAs) and Recognised Investment Exchanges (RIEs). CRAs perform an integral role within global financial markets by providing judgments on the creditworthiness of a wide variety of financial instruments. RIEs are marketplaces where equities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange. By providing that the regime can be applied to CRAs and RIEs, the Act aims to deliver greater regulatory consistency across the financial services sector.
410. CCPs and CSDs are regulated by the Bank, whilst RIEs and CRAs are regulated by the FCA. The Bank or the FCA (as appropriate) will make rules that will apply to these entities within the SM&CR.
411. The government will be able to decide when to apply the regime to any one of the entities within scope of the regime. The Act also allows the government to tailor the regime to each type of firm. For example, CRAs are subject to a stand-alone regulatory regime separate to the Part 18 of FSMA 2000 regime for CCPs, CSDs and RIEs and the regime will need to account for those differences.
412. The Act provides supervisory, disciplinary and other powers for the Bank and the FCA, including the power to impose financial penalties, to take action against misconduct, and to make prohibition orders. The Act includes further provisions to ensure that the SM&CR can be introduced as intended, and the relevant regulators (Bank or FCA) can regulate and supervise these entities effectively.

Proposed Senior Managers & Certification Regime

413. The key features of the SM&CR are similar to the existing SM&CR for banks, insurers and other authorised persons, which is set out in Part 5 of FSMA 2000. Upon HM Treasury applying the regime to a particular type of firm, the relevant regulator will be granted new powers to implement, supervise and enforce the following:
     1. A Senior Managers Regime. This gives the regulators the power to determine whether individuals who perform roles that pose a potential risk to the firm or to business or other interests in the UK have the appropriate competence, expertise and personal characteristics (such as integrity) to carry out their roles.
     2. A Certification Regime. This requires firms to certify as fit and proper any employee (including contractors and secondees) who performs a "specified function" that could cause significant harm to the entity or its consumers.
     3. Conduct rules. These apply to all employees (including contractors and secondees), and set minimum, high-level requirements regarding the conduct of individuals at these systemically important entities.
414. The Bank and the FCA will have the power to impose penalties where an individual performs a senior management function without approval, and the individual knew, or could reasonably be expected to have known, that they were doing do so without approval. The Bank and the FCA would also have the power to take action against an individual for misconduct.
415. As a complement to the SM&CR, the Bank and the FCA will have the power to make prohibition orders, analogous to the existing powers that the FCA and the PRA have to make prohibition orders under Part 5 of FSMA 2000. If it appears to the Bank or the FCA that an individual is not a fit and proper person to perform a function in relation to an activity carried out by a type of firm that they regulate and which is within scope of this SM&CR, they will be able to make an order prohibiting that individual from performing any function in a particular firm, type of firm or any firm covered by the new SM&CR. The Bank and the FCA can also, where appropriate, make provision under this section preventing an individual from performing regulated activities at an authorised person, exempt person, or person to whom the general prohibition does not apply as a result of Part 20 of FSMA 2000. This will allow, for example, the Bank to issue a prohibition order that prevents an individual not only from performing functions in respect of activities carried out by a CCP, CSD, RIE or CRA, but also within any other type of entity subject to the SM&CR in Part 5 of FSMA 2000.
416. The Act makes it a criminal offence for an individual to perform a function in breach of a prohibition order. Other criminal offences that already apply to individuals in these firms under existing legislation would also be extended to encompass the SM&CR. For example, individuals would be guilty of an offence if they knowingly or recklessly provide false or misleading information to the regulator in relation to the regime.

Senior Managers Regime

417. The Act sets out a senior managers regime for these entities, which will, in essence, be very similar to the regime that already applies to banks, insurers and other authorised persons. It will place obligations on firms as well as the people who carry out senior management functions. The firm must ensure that senior management functions are only carried out by people who have been approved by the relevant regulator, and individuals have an obligation not to perform senior management functions without approval.
418. The Act also provides powers for the Bank and the FCA to make rules and directions relating to a number of elements of the regime, including:
     1. specifying which functions are to be considered "designated senior management functions", and therefore require approval;
     2. the form in which applicants may be required to submit and verify information; and
     3. defining the types of characteristics, qualifications and competencies that the entity must consider before making an application.

Certification Regime

419. The Certification Regime applies to employees performing "specified functions", meaning those who are not carrying out senior management functions, but whose roles have been deemed capable of causing significant harm to the firm or its consumers. The Act provides that firms must take reasonable care to ensure that specified functions are only performed by a person if they have a valid certificate issued by the regulated firm. The purpose of the certificate is to confirm that the person is considered to be a "fit and proper" person to carry out the function.
420. The Act provides power for the Bank and the FCA to define specific functions within the entity for which a person must be certified by the entity to be "fit and proper" to perform the role. The types of roles that fall in scope of the Certification Regime would be determined by the relevant regulator, following public consultation.

Conduct Rules

421. Conduct Rules set minimum, high-level expectations regarding the conduct of individuals and provide a framework against which firms and regulators can form judgements about an individual’s behaviour and actions.
422. The Act provides powers for the Bank and the FCA to make conduct rules which apply to all employees of the entity, as well as to require firms to ensure that all employees understand how those rules apply in relation to them. Conduct rules would be determined by the regulators following public consultation.

Central counterparties in financial difficulties

423. Central counterparties (CCPs) are institutions that sit between the buyers and sellers of financial contracts, providing assurance that the obligations under those contracts will be fulfilled. This reduces risks to the financial system associated with counterparty default. The process of transacting through a CCP is known as "clearing". Firms can access CCPs’ clearing services either by becoming a "clearing member" of a CCP, or a client of a clearing member. Clearing members are typically large international institutions, such as banks, who can then offer clearing services to individual clients. Clients tend to be medium and large sized financial and non-financial firms.
424. Following the global financial crisis starting in 2007, the "clearing obligation" was introduced to increase the use of CCPs for clearing and reduce the overall counterparty risk in the market. Firms subject to the clearing obligation are legally required to access clearing services for certain transactions. Since the introduction of this requirement, the volume of clearing at CCPs, both in the UK and abroad, has increased significantly. UK CCPs have consistently shown resilience during times of market stress but, due to the systemic nature of CCPs and the interconnectivity and increased volume of trades cleared through them, the government considers that it is important to ensure that the UK has a robust regime to manage the failure of a CCP in the event that it did occur, in a way that minimises risks to the wider financial system, the economy, and public funds.
425. The UK’s existing resolution regime for CCPs was introduced in 2014. It provides the Bank with a limited set of powers which allow it to transfer the property or ownership of a CCP. After the use of these powers, the Bank remains reliant on the powers available under the CCP’s own rulebook to allocate losses and ensure the continued operation of the CCP.
426. CCPs have various resources, tools and plans in place to help mitigate against the risk of a clearing member defaulting. In order to clear through a CCP, clearing members must provide collateral to cover their transactions, known as initial margin (IM), which the CCP will use to meet payment obligations to the other side of the contract in the event that a clearing member defaults. How much IM a clearing member is required to provide is calculated based on a number of factors, including the riskiness of the clearing member’s portfolio.
427. All clearing members are also required to contribute to a further mutualised pool of financial resources, known as the default fund. In the event that a defaulting clearing member’s initial margin is insufficient to cover the loss resulting from their default, then the default fund is used to absorb the loss. The defaulter’s own contribution is exposed first, followed by part of the CCP’s own capital (known as "skin in the game"), and then default fund contributions from other clearing members are used.
428. In 2017 the Financial Stability Board (FSB) published guidance for recovery and resolution of CCPs. The FSB is an international body that promotes international financial stability and works towards developing strong regulatory, supervisory and other financial sector policies. The guidance sets out the tools and powers that should be provided to resolution authorities. As the UK’s current regime was introduced in 2014, it is not aligned with the FSB’s most recent guidance. The Act therefore brings the UK in line with the most recent FSB guidance, which seeks to ensure that resolution authorities have the appropriate flexibility needed to a resolve a CCP in the most effective way.

Failure of a CCP

429. UK CCPs must calibrate their IM and default fund requirements such that they are large enough to cover the losses resulting from the default of two of their largest clearing members. If a default loss exceeds this amount, the CCP has recourse to a number of tools and powers in its rulebook, which sets out the contractual agreements the CCP has with its clearing members, to mitigate against the loss. If a CCP began to experience a deterioration in its financial situation as a result of clearing member default, the CCP would use these tools to stop it from failing. These are known as "recovery actions". If the CCP is unable to cover the loss using these recovery actions, it may have to close the clearing service and allocate outstanding losses to clearing members.
430. The continuity of critical clearing services may also be threatened as a result of the CCP experiencing a loss which arises not as a result of a clearing member default (e.g. as a result of a cyber-attack). This is known as a "non-default loss".
431. The closure of a CCP’s critical clearing services, either because of a default loss or non-default loss scenario, would constitute the failure of a CCP. Typically, when a financial institution fails, it would be subject to normal or modified insolvency proceedings. In the case of CCPs, due to their systemic importance, this approach would be likely to have a significant negative impact on financial stability, disrupting the provision of critical clearing and settlement functions to the economy, and having severe knock-on effects on other market participants. The failure of a CCP could cause considerable disruption to the markets it serves, with these markets potentially needing to close, which could expose market participants to significant losses. The scale of the losses and impact on financial markets could be similar to that of a financial system-wide crisis, or even cause such a crisis. The failure of a CCP could therefore undermine the stability of the entire financial system.
432. Given this, the use of normal or modified insolvency procedures are generally not considered appropriate for managing the failure of a CCP, and alternative arrangements are needed.

Resolution

433. A resolution regime exists for circumstances where a CCP’s recovery actions are either not successful or are deemed unlikely to be successful, or where continued recovery actions are considered inappropriate (for example, where continuing with those actions could itself have significant adverse impacts on financial markets). It provides a resolution authority with legal powers to intervene in advance of the CCP entering into insolvency, either to restore it to health or to manage its failure in an orderly way.
434. The objectives of the existing CCP resolution regime include:
     1. Maintaining the critical clearing services of a CCP
     2. Protecting public confidence in the UK's financial system
     3. Avoiding interference with property rights
     4. Limiting contagion to wider markets, and more broadly, protecting financial stability
     5. Protecting public funds.
435. A resolution regime requires a resolution authority which is responsible for planning for and executing a resolution. This resolution authority creates ‘resolution plans’ which consider the scenarios in which a market participant may fail, and set out the preferred strategy and powers and tools that the resolution authority will use in resolution. The UK’s resolution authority is the Bank of England (the Bank), which is also the authority responsible for protecting and enhancing the resilience of the UK financial system. The Resolution Directorate at the Bank which would oversee any CCP resolution is organisationally distinct from the part of the Bank responsible for the ongoing regulation and supervision of CCPs (which has oversight of CCP recovery). The FRF Review measures within this Act which look to reform the Bank’s role as CCP regulator will not apply to the Bank in its capacity as resolution authority.

Expanding the UK regime

436. The expanded resolution regime implemented by the Act seeks to provide the Bank, as the UK resolution authority, with the necessary powers to stabilise a CCP, so that it can continue to provide its critical clearing services, preventing contagion spreading across the financial system; whilst ensuring CCPs and clearing members bear the losses arising from the failure, thereby protecting public funds.
437. The Act provides the Bank of England with the following powers, to successfully perform a resolution:
     1. Removal of material impediments to resolvability. This power would enable the Bank to require a CCP to make changes to remove potential barriers to its resolvability identified by the Bank;
     2. Conditions and timing for entry into resolution and engagement between authorities. The Act sets the conditions that must be assessed before a CCP can be placed into resolution. This includes the power to enable the Bank to place a CCP into resolution before the CCP’s own recovery measures have been exhausted, on the condition that continued recovery actions by the CCP would likely ‘compromise financial stability’. The Bank will be required to consult HM Treasury on whether this new resolution condition is met;
     3. Lockdown or deferral on the payment of dividends, buybacks or variable remuneration. This power would enable the Bank to temporarily restrict or prohibit any remuneration of equity for CCP shareholders or variable remuneration for the CCP’s senior staff in severe circumstances, including if there is a rapid deterioration in the financial situation of the CCP, and it was therefore at risk of failing. It would be available as an early intervention measure, but also after the CCP has entered resolution to ensure that all resources are directed to compensation payments and replenishing public funds where these have been used as a last resort, should either be necessary;
     4. Power to suspend termination rights. This power would give the Bank the ability to temporarily stop any right to early termination of participation by a clearing member that arises as a result of a CCP being placed in resolution. This would help stabilise the clearing services offered by the CCP and ensure that the Bank has access to the largest possible pool of resources for loss absorbency, thereby limiting risks to public funds;
     5. Power to take control of the CCP. This power would enable the Bank to take control of a CCP without having to rely on its existing property or share transfer powers. This would allow the Bank to enforce the CCP’s rulebook more easily to stabilise the CCP and ensure continuity of the critical clearing service in resolution without the legal and operational risk of conducting a property or ownership transfer;
     6. Power to remove and replace directors. This would provide the Bank with the power to direct a CCP to remove or replace directors and senior managers and appoint temporary managers in severe circumstances, as the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) are already able to do for other types of financial services firms. Pre-resolution, it would only be used subject to a number of conditions, including if there was a rapid deterioration in the financial situation of the CCP and it was at risk of failing, or if there was a regulatory infringement by the directors or senior managers at the CCP;
     7. Power to return the CCP to a matched book. The Bank will have the power to return a failing CCP to a ‘matched book’ to ensure that it does not continue to be exposed to losses generated by the positions of the defaulting clearing member(s)10. The Bank would have the flexibility to perform a full or partial termination of contracts, depending on the scenario and the potential wider impacts on financial stability. To provide clearing members and end users with greater certainty of how these powers would work in practice, the Bank will be required to set out how it intends to use these powers in the event of a CCP failure;
     8. Power to perform variation margin gains haircutting (VMGH). This gives the Bank the ability to reduce (potentially to zero) the payments that a CCP would otherwise be required to make to clearing members whose positions have gained value. It will allow the Bank to go beyond what is permitted by the CCP’s own rulebook when doing this. This tool would only be available for use where the CCP’s losses are caused by clearing member default;
     9. Further powers to generate additional loss absorbing capacity and replenish a CCP’s resources. The Bank will be given powers to write down unsecured liabilities (which can only be used in the case of non-default scenarios) and a statutory cash call power which enables the Bank to collect contributions from clearing members (in the case of both default loss and non-default loss scenarios). The Bank will be able to allocate losses and replenish a CCP’s resources through the mechanism that it judges least disruptive. There will be safeguards to stop the Bank writing down certain liabilities (e.g. initial margin) when using its write-down power. To enable clearing members to be aware of the level of resources that they might have to pay under the cash call power, the Act confers powers on HM Treasury to cap an individual clearing member’s contribution. The government currently envisage this cap to be at two times an individual member’s prefunded contribution to the default fund in a default-loss scenario, and three times in a non-default loss scenario;
     10. Power to delay enforcement of a clearing member’s obligation in resolution. The Act confers a power on HM Treasury to make regulations enabling the Bank to delay enforcement of a clearing member’s obligations in resolution should such enforcement during the resolution of a CCP present a risk to financial stability. It is expected that the Bank would have the ability to enforce outstanding obligations resulting from a delay in enforcement at any time up to 18 months after the resolution, if at the relevant time the reasons for refraining from their enforcement no longer exist. If the Bank does not enforce an outstanding obligation within this 18-month period, the obligation will lapse at the end of it;
     11. The Act also provides for a "no creditor worse off" (NCWO) safeguard. This safeguard ensures that creditors of the CCP have the right to compensation should they be worse off in resolution than they would have been in the absence of resolution action had the CCP entered insolvency.
438. As part of their prefunded resources, UK CCPs are already required to hold a ring-fenced tranche of their own capital often referred to as "skin in the game" (SITG). HM Treasury intends for the Bank to be able to require CCPs to hold a second tranche of SITG sitting after the prefunded default fund, which would mean CCPs holding a greater amount of their own capital for loss absorption. The new powers granted to the Bank and HM Treasury under this Act could be used to introduce such a requirement.
439. Together, the proposed powers and tools are intended to provide the Bank with a set of options to resolve a CCP in the most effective way, limiting risks to financial stability and public funds.

Insurers in financial difficulties

440. A company is insolvent when it can no longer meet its financial obligations to those parties to whom it owes money (known as its ‘creditors’). 11 When a company is insolvent, or in danger of becoming insolvent, the law sets out the procedures available for managing the company’s affairs with a view to rescuing the company or, if the company ceases to trade, establishing how the company’s assets will be realised and divided between its creditors. These procedures, and the rules surrounding their use, can broadly be referred to as a jurisdiction’s insolvency arrangements.
441. The UK’s insolvency arrangements for insurers are a modified version of the UK’s standard corporate insolvency arrangements, augmented in some places with bespoke provisions. This framework is primarily contained in the Insolvency Act 1986, FSMA 2000, and associated secondary legislation.
442. Insurer insolvency is rare, with only 11 UK insurers having become insolvent since the year 2000. 12 When it does occur, it can be detrimental both for individual policyholders (who may rely on life insurance policies for a primary source of income), and for businesses left unable to operate without insurance cover. As such, robust insolvency arrangements that promote good outcomes for policyholders and other creditors are essential. While the current arrangements have generally been effective, some elements have become outdated as related international standards have developed. This creates shortcomings that could increase the risk of adverse outcomes for policyholders and other creditors when an insurer becomes insolvent.
443. The Act makes a series of targeted amendments to the existing arrangements, in order to clarify certain elements, and to expand the protections available to an insurer and its policyholders where an insurer is undergoing insolvency or write-down procedures. The government consulted on these amendments in 2021, and published a response in April 2022. These amendments cover three broad areas.

Section 377 of the Financial Services and Markets Act 2000

444. Section 377 of FSMA 2000 currently provides a power for the court to reduce the value of one or more of the contracts of an insurer which has been ‘proved to be unable to pay its debts,’ as an alternative to making a winding-up order (which would place the insurer into liquidation). This reduction is referred to as a ‘write-down’ of liabilities. The power in FSMA 2000 has never been used, and is only described at a high level in legislation. 13 As such, significant uncertainties around its application exist, and may limit its usability, even where it could provide a better outcome for the creditors and policyholders of an insurer in financial distress; for example, by ensuring continuity of cover. The Act clarifies aspects of this power, including:
     1. The liabilities in scope. Broadly, all unsecured liabilities will be in scope, including liabilities to policyholders. The Act creates a number of exemptions, including debts to employees and pension schemes, and sums owed in respect of financial contracts.
     2. The parties eligible to apply to the court for use of the power; and
     3. The test the court must apply when considering such applications.
445. The Act also makes the power available when an insurer is, or is likely to become, unable to pay its debts, rather than solely in the event that it is proved unable to pay its debts. 14
446. The Act introduces a new position of ‘write-down manager’, an officer of the court tasked with monitoring a court-ordered write down. In practice, we expect the write-down manager will help design the write-down order. Unlike an insolvency practitioner, a write-down manager would not be ‘in possession’ of an insurer, as managers will retain control of the firm. The write-down manager will be empowered to make recommendations to the insurer’s directors, and there is provision for the write-down manager to apply to the court for orders and directions. The role of write-down manager continues until a write-down is terminated or the insurer is wound-up.
447. The Act also makes provision for the rules relating to the Financial Services Compensation Scheme (FSCS) to require the FSCS to make payments in relation to protected policyholders whose payments are reduced under a write-down. 15 Currently, while protected policyholders would be eligible for FSCS compensation in the event that their insurer became insolvent, they would not be eligible for FSCS compensation in the event of a write-down under section 377 of FSMA 2000. This mismatch in available protection creates a situation in which protected policyholders may be better off if their insurer fails (given that FSCS protection would apply) than if the court orders a write-down under section 377 of FSMA 2000 to avoid that failure (whereby FSCS protection would not currently apply). The government’s intent is to align the protection available following a write-down with the protection available in insolvency, to better protect policyholders. As the FSCS operates within rules set by the Prudential Regulation Authority (PRA), in its Rulebook , the Act establishes a legislative framework to ensure the PRA is able to make rules facilitating the protection described above.
448. The Act also empowers the court to (partially or fully) reverse a write-down if an insurer’s financial position improves, and it is deemed able to pay a greater proportion of its debts. This would result in the value of the insurer’s liabilities being increased.
449. The Act additionally sets out that written-down liabilities (and the potential for a future reversal of the write-down) will be disregarded for the purposes of section 123 of the Insolvency Act 1986 (to ensure that an insurer cannot be deemed ‘unable to pay its debts’ on the basis of liabilities which have been written-down), and for the of purposes of Art. 11 of the Solvency 2 Regulation (Recognition of contingent liabilities) and purposes of the PRA’s prudential rules governing insurers. This is to ensure that written-down liabilities are treated as extinguished for these purposes, for so long as the write-down is in force. Without this, an insurer could still meet the statutory test for insolvency following its liabilities being written-down or have the potential for a future reversal of the write-down reflected on its balance sheet as a contingent liability, contrary to the intended effect of the write-down which is to restore an insurer’s balance sheet. The Act gives HM Treasury a power to amend the provisions for which purposes written-down liabilities are disregarded (through statutory instrument under the draft affirmative procedure) (Paragraph 9(3) of new Schedule 19B to FSMA 2000). This power allows HM Treasury to keep the list of provisions in paragraph 9(2) of that Schedule up-to-date, ensuring HM Treasury can address potential future changes in prudential rules and insolvency legislation.
450. In addition, the Act introduces a statutory moratorium on certain types of legal action taken against an insurer which is undergoing a write-down. While the moratorium is in place, creditors will not be able to take legal action to recover their debts or to enforce security. 16 In this way, the new moratorium has similarities to the moratorium which currently applies while a firm is in administration. The Act sets out that certain processes, including any actions taken by the PRA or Financial Conduct Authority (FCA), actions to enforce financial awards made by the Financial Ombudsman Service (FOS), and employment tribunals, will be exempt from the effect of the moratorium. Certain arrangements in financial contracts are also excluded from the moratorium to protect parties’ risk management practices. The Act gives HM Treasury a power to alter these exclusions by regulation made by statutory instrument under the draft affirmative procedure (Paragraph 3(4) of Schedule 19B to FSMA 2000). Other types of legal action against the firm or its assets will still be available with the permission of the court. The Act also introduces certain restrictions on an insurer subject to a write-down disposing of its assets without consent from the PRA.

Contractual Termination Rights

451. Insurers will typically hold both supply contracts (contracts to supply the firm with goods or services), and financial contracts, such as bank loans. Both types of contracts can include ‘ipso facto’ clauses, which allow counterparties to terminate the contract if the insurer enters insolvency, restructuring or similar proceedings, or otherwise comes under financial distress, even if the insurer continues to meet its obligations to that counterparty (such as making payments on time).17 Entry into the write-down process (or other procedures that are likely to be under consideration around the same time, such as administration or winding-up) may thus allow a firm’s suppliers and financial counterparties to terminate contracts. Early termination of supply contracts could disrupt the ongoing viability of a struggling insurer, hindering attempts to avoid a disorderly failure. Early termination of financial contracts could suddenly expose an insurer to significant risks, leading to further financial deterioration. In both cases, these termination rights could increase the risk of adverse outcomes for an insurer’s policyholders and other creditors.
452. The Act introduces a new ‘moratorium’ which will temporarily prevent suppliers and some financial contract counterparties from using this type of termination clause, while an insurer is undergoing certain insolvency or write-down procedures. The moratorium will apply during administration, during a write-down process under the new provisions replacing section 377 of FSMA 2000 (for an initial six-month period, with the possibility of extensions by the court), and while there is an outstanding petition for winding-up in relation to the insurer (but not once a winding-up order is granted by the court). In the write-down context, the moratorium will not prevent counterparties terminating for non-performance (e.g., where the insurer fails to make payments or meet any of its other obligations under the contract). The scope of the write-down is also designed to ensure that financial counterparties are generally not written-down at all, and suppliers are not written-down in respect of ongoing supplies, ensuring that parties ‘locked-in’ by the moratorium are generally able to expect payment and ongoing performance from the firm. The Act also empowers the court to grant exemptions from the effect of the moratorium where it would otherwise be likely to cause hardship for affected parties.
453. The moratorium will apply by default to all supply contracts and most financial contracts; certain arrangements in financial contracts will be excluded to protect parties’ risk management practices. In particular, the moratorium will not affect ‘protected arrangements’ as defined in section 48P Banking Act 2009. In individual cases, the court will be able to narrow the scope of the moratorium, to remove contracts from its scope where the court is satisfied that not doing so will cause hardship, or where to do so will lead to a better outcome for creditors (or, where relevant, promote the purpose of administration). The Act also gives HM Treasury a power to alter the scope of the moratorium by regulation made by statutory instrument under the draft affirmative procedure (Paragraph 12 of Schedule 19C to FSMA 2000). This will allow the government to update the scope of the moratorium as needed, in response to market practice and any corresponding developments in insolvency law.

Policyholder Surrender Rights

454. Certain life insurance policies include an investment element and accrue cash value over time. These policies typically include ‘surrender’ clauses allowing policyholders to terminate their contract early in return for a proportion of its cash value. Examples include unit-linked policies and with-profits policies, which are economically similar to managed funds. Unit linked insurance policies offer both insurance coverage and investment exposure (usually to equities, bonds or an index), allowing policyholders to make regular premium payments which build up additional units. In effect, these products act as a savings/investment vehicle for policyholders. With-profit policies serve a similar purpose, but rather than policyholders buying units representing specific underlying assets (or asset classes/indexes), policyholders share in the overall profits and losses of a firm’s with-profits fund. This allows the insurer to ‘smooth’ investment returns to with-profits policyholders.
455. In both cases (unit-linked and with-profits), the policies have a surrender value which policyholders are generally able to convert to cash at will, or switch between different funds in order to reduce investment exposure. When a life insurer is known to be in financial distress, policyholders may choose to surrender their contracts over concern that they will lose value, creating a situation similar in motivation and effect to a ‘run’ on a bank. Widespread policy surrenders could make it more difficult to estimate an insurer’s liabilities or force an insurer to rapidly sell assets in order to meet demands for payment. This could exacerbate an insurer’s financial difficulties, potentially leading to worse outcomes for its policyholders and other creditors.
456. The Act introduces a temporary moratorium on life insurance policyholder surrender and switching rights, which will apply in the same circumstance as the moratorium on contractual termination rights described above. The stay will last for an initial 6-month period, with the possibility of extension if granted by the court (or the period the insurer is in administration or a winding up petition has been presented but not withdrawn or determined). The stay will prevent life insurance policyholders from surrendering their policies, although small withdrawals (or ‘partial surrenders’), of up to 5% of the value of the policy in any 12-month period, will still be allowed. The Act also provides HM Treasury with a power to amend this percentage limit through statutory instrument under the draft affirmative procedure (Paragraph 12 of new Schedule 19C to FSMA 2000). As with the moratorium described above, the Act makes available hardship exemptions where the stay would otherwise be likely to cause hardship to policyholders. Such hardship exemptions can be granted by certain parties, including the write-down manager (as well as by the court), making the process less expensive and more rapid, whilst protecting the firm from widespread surrenders.

Miscellaneous

Disciplinary action against formerly authorised persons

457. Firms performing regulated financial services activities in the UK must generally be authorised by the FCA, or where relevant, the PRA. A firm must apply to obtain authorisation and once authorised, must comply with the relevant rules and requirements set out by the regulators.
458. The FCA and the PRA have a broad range of powers to supervise firms and enforce rules and regulatory requirements. For example, they can carry out investigations, and where a firm fails to adhere to a requirement or rule, the FCA and the PRA have the ability to take disciplinary action against the firm. These disciplinary actions include the publication of a statement detailing the misconduct (‘public censure’) or the issuing of fines.
459. Except in some specific circumstances, the FCA and the PRA are unable to take disciplinary action against firms which are no longer authorised, if they committed misconduct whilst they were authorised.
460. The Act allows the FCA and the PRA to take action against firms that are no longer authorised (provided they become unauthorised on or after the introduction of this Act), for misconduct while they were authorised. This will enable the regulators to appoint a person to carry out an investigation into potential misconduct, issue a public censure, issue a financial penalty, and require the payment of compensation to victims of misconduct. This will ensure that any firms committing misconduct are held to account, and that they cannot escape appropriate disciplinary action by applying to cancel their authorisation before their misconduct is identified by the regulators.

Financial Services Compensation Scheme

461. The Financial Services Compensation Scheme (‘FSCS’) is the scheme for compensating persons, such as consumers, in cases where authorised financial services firms are unable, or likely to be unable, to satisfy claims. The FSCS is administered by the ‘FSCS manager’, a body corporate established under FSMA 2000.
462. The Office for National Statistics (‘ONS’) is responsible for compiling the National Accounts – core accounts for the UK economy as a whole that describe production, income, consumption, accumulation and wealth across different parts of the economy. In order to provide accurate National Accounts, the ONS classifies the entities making up the UK’s economy by reference to certain sectors and subsectors.
463. The FSCS manager was classified by the ONS in 2020 as a ‘supervisory authority’ and part of the ‘public financial auxiliaries’ subsector within the broader ‘public financial corporations’ sector which means it is not part of central government nor an Arm’s Length Body (ALB) of HM Treasury. This decision was based on its view that the FSCS manager carries out supervisory actions with regard to paying compensation and is able to freely take decisions to ensure it has sufficient resources.
464. The decision has the following implications:
     1. the FSCS manager’s new status as a ‘public financial auxiliary’ for ONS purposes means that it is now treated by the ONS in a similar way to the PRA and the FCA; and
     2. given the FSCS manager is no longer regarded as an ALB of HM Treasury, its accounts will no longer be consolidated within HM Treasury accounts.
465. The Act makes two changes to the legislative framework as set out in FSMA 2000 to ensure that it properly reflects the FSCS manager’s new status.
466. Firstly, the Act removes the requirement that the FSCS manager has an accounting officer. Retaining the accounting officer requirement for the FSCS manager would not be appropriate given the level of independence of bodies classified as public financial auxiliaries. Requirements in FSMA 2000 that the FSCS manager must ensure efficiency and effectiveness in the discharge of its functions and minimise public expenditure attributable to financial assistance will be retained to ensure that Parliament’s interests, including the FSCS manager’s use of public funds, continue to be protected.
467. Second, the Act removes HM Treasury’s power to require certain information from the FSCS Manager in connection with accounts. Since the FSCS manager accounts are no longer consolidated within HM Treasury accounts, the information sharing requirement is unnecessary.

The Ombudsman scheme

468. The Financial Ombudsman Service (FOS) was established by FSMA 2000 to provide for the proportionate, prompt and informal resolution of disputes between consumers or small businesses and financial services firms regulated by the FCA. The FOS offers a cost-free service for consumers, which is fundamental to its purpose.
469. The FOS is able to charge case fees to "respondents", meaning firms which are subject to a complaint, and is responsible for making case fees rules. This may include when firms should be charged, for example from the first case or after a certain number of cases. Changes to these rules are subject to approval by the FCA.
470. Claims management companies (CMCs) and other professional representatives bring complaints to the FOS on behalf of eligible complainants, including consumers. As these firms are acting on behalf of complainants, they are not classified as respondents and cannot be charged fees by the FOS under the current arrangements. However, CMCs and other professional representatives are not themselves eligible complainants, and are able to gain financially from bringing cases to the FOS as they charge eligible complainants for their services. There is currently minimal financial risk to CMCs in bringing large numbers of complaints to the FOS, regardless of the merits of those cases.
471. Section 63 enables HM Treasury, by regulations, to add further categories of persons to the list of those to whom the FOS can charge case fees. HM Treasury intends to amend the list to allow the FOS to charge case fees to CMCs and other professional representatives engaged in claims management activities relating to the FOS.
472. By specifying who can be charged by the FOS in regulations, the government intends to ensure that the full range of claims management models can be effectively captured. It also provides flexibility to amend this list if different models emerge in future, to maintain the original policy intent. It will also allow government to ensure that bodies which play a valuable role in offering support to vulnerable people – for example charities and law centres – will not be charged case fees by the FOS.
473. This new power cannot be used by HM Treasury to add eligible complainants to the list of those to whom the FOS can charge case fees. This will ensure that the FOS remains a free service for consumers.
474. Regulations made under this power will be subject to the affirmative procedure and HM Treasury has a duty to consult the FOS prior to making regulations. The FOS is required by legislation to consult on changes it makes to its case fee rules, which are also subject to approval by the FCA.

Unauthorised Co-ownership alternative investment funds (AIFs)

475. Since March 2020, the government has been conducting a review of the UK’s funds regime to identify options to make the UK a more attractive location to set up funds and to support a wider range of more efficient investments that are better suited to investor needs. This review encompasses the fund structures available in the UK, their legal form, their regulation and their taxation.
476. In January 2021, the government sought stakeholder views on the wider components of the review by publishing Review of the UK funds regime: A call for input ("Call for Input"). The Call for Input set out the objectives and scope of the review and requested feedback on which reforms should be taken forward and how they should be prioritised.
477. Prior to the launch of the Call for Input, the asset management sector had made representations to the government pointing out that there is a gap in the range of fund structures offered by the UK for which FCA authorisation is not required. Stakeholders argued that there is demand for a flexible, tax-efficient, unauthorised fund structure that can invest in asset classes other than stocks and bonds ("alternative asset classes") , aimed only at professional investors. These funds cannot currently be set up in the UK. The government sought views on this potential gap as part of its Call for Input.
478. A significant proportion of the respondents to the Call for Input on these areas called for the creation of a new fund structure: the unauthorised contractual scheme. The unauthorised contractual scheme was proposed to be a contractual scheme, as per section 235A of FSMA 2000, that is: unauthorised, unlisted, closed-ended 18 , only available to professional investors, unconstrained in terms of investment approach, tax transparent for income 19 , and has tradeable units.
479. In February 2022, the government published Review of the UK funds regime: a call for input - Summary of responses ("Summary of Responses"). This publication summarised the responses the government received following the Call for Input, set out the government’s response to respondents’ feedback, and the next steps the government proposed to take to ensure that the UK funds regime review delivers on its objectives. In the Summary of Responses, the government committed to further explore options for the introduction of the unauthorised contractual scheme.
480. At present, the rights and liabilities of participants under sections 261M to 261O and section 261P(1) and (2) of FSMA 2000 only applies to a contractual scheme, that is structured as a co-ownership scheme and which benefits from an authorisation order (typically abbreviated to CoACS). As a result, if a new investment vehicle that is similar to the unauthorised contractual scheme was introduced in statute, it would not benefit from the same provisions in relation to the contracts in the scheme, statutory rights and limitation and segregation of liability as a CoACS does. The absence of these provisions means that if an unauthorised contractual scheme was introduced in statute it is unlikely to be commercially viable and may present inappropriate risk to participants.
481. The Act provides HM Treasury with a power to essentially apply relevant rights and liabilities that a CoACS would already benefit from, to the proposed unauthorised contractual scheme in order to ensure its commercial viability (in the event that such an investment vehicle were to be introduced).
482. Before making the unauthorised contractual scheme available in the UK, the government must ensure that it is subject to the appropriate legal, regulatory and tax treatment. That work continues, however it is clear that this scheme will not be a commercially viable product without having the appropriate rights and liabilities in place, especially for participants. Therefore, the government is legislating for this power now to ensure that – should it decide to proceed with this fund structure in the future – it can do so successfully.

Control over authorised persons

483. Where a person ("controller") decides to acquire control of a UK authorised firm (defined as taking an ownership stake of 10% or more), the proposed controller will need to seek approval from the relevant regulator before the interest is acquired. This is done by the means of giving notice in line with section 178 of FSMA 2000. The regulators will then make a decision about whether to approve or reject the change in control based on a number of criteria:
     1. The reputation of the section 178 notice-giver;
     2. The reputation and experience of any person who will direct the business;
     3. The overall financial soundness of the section 178 notice-giver;
     4. Whether the UK financial services firm will be able to comply with its prudential requirements (including the threshold conditions – the minimum requirements for the financial services firm to be authorised and stay authorised - in relation to its regulated activities);
     5. Whether, if the UK financial services firm is to become part of a group as a result of the acquisition, that group has a structure which makes it possible to exercise effective supervision, exchange information among regulators and determine the allocation of responsibly among regulators.
     6. Whether there are reasonable grounds to suspect that the new controller is connected with money laundering or terrorist financing or that the risk of this activity could increase.
484. In making an assessment, the appropriate regulator must disregard the economic needs of the market.
485. Currently, the PRA and the FCA can approve or reject an application for a change in control, and they can also impose conditions, but only where they would otherwise reject the application. This limit to the scenarios where the regulators can impose conditions was introduced through the EU Acquisitions Directive (2007/44/AC).
486. There are some situations where the evidence may not reach the "reasonable grounds" threshold needed to reject a decision, but the relevant regulator still has significant concerns. For example, an investigation may be ongoing while the change-in-control process is taking place and may conclude in due course in a finding that adversely impacts the reputation of the new controller. This situation may therefore warrant a condition on a change-in-control.
487. The Act provides for the regulators to apply conditions to new controllers where they have concerns which affect their ability to advance the regulators’ objectives, rather than in the narrower set of existing circumstances.

Liability of payment service providers for fraudulent transactions

488. The value and volume of "authorised push payment" (APP) scams has increased significantly in recent years. An APP scam occurs when someone is tricked into making a payment to a fraudster under false pretences, for example, where someone is deceived into authorising a payment to a person for something they believe at the time is a legitimate purchase.
489. APP scams are different to unauthorised payment fraud, where money is taken from someone’s account without their knowledge or consent. Victims of unauthorised payment fraud are protected by legislation, with statutory requirements on payment service providers (for instance, a payer’s bank) to reimburse victims for the losses they incur under such circumstances.
490. Although no statutory reimbursement requirement exists for APP scams, some payment service providers have made voluntary commitments to reimburse APP scam victims in certain circumstances, including by signing up to a voluntary contingent reimbursement model code that sets a framework for how liability should be apportioned when a scam occurs. The varying approaches to reimbursement by payment service providers have led to inconsistent levels of protection for APP scam victims, based on which payment service provider they use, and how the payment service provider interprets any voluntary commitments to a customer when an APP scam occurs.
491. The Payment Systems Regulator (PSR) regulates designated payment systems and their participants (including banks and other payment service providers). In 2021, the PSR published a Call for Views , and subsequent Consultation , on APP scams. In these documents, the PSR proposed options to address the problem, including requiring participants in the Faster Payments Service to reimburse APP scam victims. The vast majority of APP scams occur over the Faster Payments Service, as it is the principal payment system which payers use to make instant credit transfers.
492. The PSR has stated that there is at present a legislative barrier in the Payment Services Regulations 2017 preventing it from using its regulatory powers to implement mandatory reimbursement. Specifically, regulation 90(1) of the Payment Services Regulations 2017 provides that where a payment service provider (for example, a bank) has executed a payment in accordance with the unique identifier (for example, the sort code and account number) provided by the payer, then the payment is deemed to have been correctly executed, and so the payment service provider cannot be liable for defective execution.
493. In November 2021, the Economic Secretary to HM Treasury made a statement that the government would legislate to address any barriers to regulatory action on this matter. In May 2022, the government published a policy statement setting out further detail on this policy approach.
494. This Act amends the Payment Services Regulations to clarify that nothing in regulation 90 affects the liability of a payment service provider where the PSR has exercised its regulatory powers in relation to APP scams. This will enable the PSR to use its regulatory powers (whether in relation to payment system operators, payment service providers, or in combination), to require mandatory reimbursement by payment service providers in cases of APP scams.
495. The Act also places a duty on the PSR to take regulatory action on APP scam reimbursement by participants in the Faster Payments Service, by requiring the regulator to consult on a draft regulatory requirement, and impose a regulatory requirement, within two and six months respectively of the legislation coming into force.

Cryptoassets

496. The government’s view is that cryptoasset technologies could have a profound impact across the financial services sector. At present most cryptoasset activities in the UK are not subject to comprehensive financial services regulation. This gives rise to a range of risks, including to consumers, market integrity and potentially to financial stability. It may also prevent UK firms and consumers from realising the possible benefits of cryptoasset technologies, including new products and services.
497. The government has proposed a staged approach to regulation, which is sensitive to risks posed and responsive to new developments in the market. HM Treasury’s response to its consultation , published in April 2022, outlined the government’s intention to bring stablecoins, where used as a means of payment, into the regulatory perimeter. Alongside, the government confirmed that the market has developed sufficiently to move ahead with regulating a broader set of cryptoasset activities.
498. Section 69, alongside new section 71K(7) of FSMA 2000 as inserted by section 8 of this Act, clarifies that HM Treasury has the necessary powers to regulate a range of cryptoasset activities, particularly those relating to the trading and investment of cryptoasset tokens.
499. In due course and ahead of using these powers, HM Treasury will consult on an approach which enables firms to innovate, while maintaining financial stability and clear regulatory standards so that people can use new technologies both reliably and safely.

Cryptoassets: amendments to the FSMA 2000

500. Section 69 ensures that cryptoassets are within scope of sections 21 and 22 of FSMA 2000 relating to regulated activities, and inserts a definition of "cryptoassets" which may be amended by HM Treasury.
501. The changes complement section 71K(7) of FSMA 2000, as inserted by section 8 of this Act, which clarifies that cryptoassets are within scope of the designated activities regime. It also complements changes introduced by sections 22 and 23, and Schedule 6 of this Act to enable the regulation of cryptoassets used for payments, including so-called stablecoins (amongst any other digital assets used for payments, where these are within scope of the new concept of "digital settlement asset").
502. The combined effect of sections 8 and 69 is to ensure that cryptoassets may be regulated within the framework established by FSMA 2000 (as extended by this Act).
503. This will ensure that HM Treasury is equipped to respond to developments in cryptoassets more quickly, and deliver regulation in an agile, risk-based way consistent with our approach to the broader financial services sector. For instance, HM Treasury’s ability to amend the definition of "cryptoasset" by regulation allows HM Treasury to respond quickly to developments in the technology that underlies these cryptoassets.
504. Given the fast-moving nature of the sector it is vital that the government has the flexibility to introduce regulation in an agile way using secondary legislation. This is an existing feature of the FSMA framework, in which HM Treasury sets the regulatory perimeter through secondary legislation.
505. This section will also ensure that HM Treasury and the regulators can update the cryptoasset regulation as international standards are developed. For example, the government’s proposals will take account of the Financial Stability Board’s consultative proposals for the Regulation, Supervision and Oversight of Crypto-Asset Activities and Markets published in October 2022.

Clarifying the scope of the Financial Promotions Order (FPO)

506. Section 69(2) amends the definition of "investment" contained in section 21(14) of FSMA. The existing definition is ‘"investment" includes any asset, right or interest.’ Section 69(2) ensures that this includes where an asset, right or interest is, or comprises or represents, a cryptoasset.

Clarifying the scope of the Regulated Activities Order (RAO)

507. Under the FSMA framework, HM Treasury determines which activities are regulated activities, by specifying activities to be regulated in the RAO.
508. Section 69(3) amends the definition of "investment" contained in section 22(4) of FSMA 2000 to clarify that this includes where an asset, right or interest is, or comprises or represents, a cryptoasset.

Bank of England Levy

Background to the CRD scheme

509. The Cash Ratio Deposit (CRD) scheme funds the Bank of England’s (the Bank’s) monetary policy and financial stability functions. Under the scheme, deposit-taking institutions (i.e., banks and building societies) with eligible liabilities above a minimum threshold are required to place non-interest bearing deposits at the Bank. The Bank invests these deposits into interest bearing assets (currently only UK gilts), with the income generated used to fund the Bank’s monetary policy and financial stability operations.
510. The Bank’s expenditure on policy functions, as currently funded by the CRD scheme, includes Monetary Analysis and the Monetary Policy Committee (MPC), Markets and Banking, Research and statistics, Financial Stability Strategy and Risk, Resolution, International policy, the elements of FMI supervision not funded by the FMI levy and elements of PRA activity not funded by the PRA levy.
511. The CRD scheme does not fund the following functions of the Bank:
     1. its remunerated activities - including its banking services, services to HM Treasury (such as the management of the note issue and the Exchange Equalisation Account) and lending operations for the Bank’s own account,
     2. its operations acting as the PRA, which are funded by the PRA levy, and
     3. its FMI supervision, which is funded by the FMI levy.
512. The CRD scheme runs in five-year cycles. The scheme was last calibrated in 2018 to deliver for the 2018-23 period a fixed income target of £169 million per annum. In 2018, an indexation-based approach was introduced to make the CRD scheme responsive to changes in gilt yields and to provide a smoother income profile. In effect, this means that when gilt yields decrease, participants are required to increase their deposits at the Bank, so that the Bank can invest in more gilts, in an attempt to meet the income target. As of June 2021, the overall size of the cash ratio deposits were £12.1 billion. The largest 20 institutions accounted for 83% of the total deposits, eight of which each contributed more than £200 million in deposits under the scheme.

Rationale for replacing the CRD scheme

513. The CRD scheme has resulted in cash ratio deposit sizes significantly higher than originally forecast and a lack of predictability for CRD payers as the required cash ratio deposit sizes change in line with gilt yields, which have been lower than anticipated since the 2018 review. This has resulted in the CRD scheme not being able to generate its target income from the investment of deposits and therefore failing to fully fund the Bank’s policy functions. The shortfall to date has been funded from the Bank’s capital and reserves.
514. Since the introduction of the indexation approach, gilt yields have persistently fallen below the Bank’s downside scenario. The CRD scheme in its current form has resulted in significant volatility in cash ratio deposit sizes and a lack of predictability for CRD payers as their required contribution changes in line with gilt yields, which have been lower than anticipated since CRD was last reviewed in 2018.
515. Consistent with global trends, the market expects the low returns on UK gilts to persist. If CRD is unchanged and low UK gilt yields were to persist, then the CRD scheme’s income would continue to not meet the costs of the Bank’s policy functions and the Bank would have to continue to fund the income shortfall through its own capital and reserves. This would inhibit the Bank from discharging its functions in pursuit of its statutory objectives in respect of monetary policy and financial stability. For the eligible institutions within the CRD scheme, keeping the CRD scheme in its current form would mean that the CRD balances would remain elevated and volatile, resulting in an ongoing lack of predictability for those institutions. Recalibration of the current CRD scheme would require either leaving the Bank exposed to under-recovery of costs in low yield conditions, or making the CRD scheme more volatile and imposing additional uncertainty and cost on CRD payers.
516. In 2021, HM Treasury ran a public consultation on the CRD scheme and proposals for an alternative funding arrangement. This confirmed that stakeholders are overall supportive of the proposal to replace the CRD scheme with a new Bank of England levy.

Bank of England levy

517. The Act repeals the provisions in the Bank of England Act 1998 that provide for the CRD scheme and replace these with a new levy on eligible financial institutions. Replacing the CRD scheme with a levy is intended to ensure that the Bank receives income in line with its forecast policy expenditure and conserve its current capital position. In line with the intention of the existing CRD scheme, the levy will cover the costs of the Bank’s monetary policy and financial stability functions. It is also intended to give payers greater certainty over the size of their annual contribution as, unlike the CRD scheme, the levy will not change in line with gilt yields. The overall objective of financial institutions funding the Bank’s policy functions will not change, however the method by which this happens will.
518. Under the new levy, the Bank will determine the total policy levy annually to match expected expenditure on policy functions. The Bank’s policy costs to be recovered through the levy will be approved by the Bank’s Court of Directors as part of the annual budget setting processes. This will be discussed with HM Treasury as part of the existing arrangements for engagement on the Bank’s annual budgets and financial performance as agreed in the Memorandum of Understanding on the Financial Relationship between HM Treasury and the Bank. Each year, before applying the levy, the Bank will notify industry on its plans for the levy. Financial gains or losses from policy operations – for example in relation to profits or losses from trading activities or counterparty losses – would not be covered by the scheme.
519. In line with the existing CRD scheme, the levy will apply to eligible institutions, which are defined as deposit-takers whose eligible liabilities are above a defined threshold. It is intended that secondary legislation will provide that the Bank will allocate the expenditure total across the eligible firms, for each institution and proportionate to their eligible liability base. This will allow each firm’s contribution to be proportional to their exposure to liquidity risk. It is proposed that the levy would apply to all eligible firms with eligible liabilities of at least £600 million.
520. HM Treasury will be able to set out how the Bank calculates the levy and allocates the charge to eligible institutions in secondary legislation, subject to the affirmative procedure. The intention is for the policy costs payable by an eligible institution to be proportional to an eligible institution’s liability base above a threshold.
521. As happens with other cost recovery schemes, a mechanism would exist for adjusting subsequent years’ levies to take account of under or overspends, following the finalisation of accounts. The Bank would publish a detailed breakdown of its costs for the year, deviations from budget and income from the levy in its annual report and accounts and/or the annual notification.
522. The government will continue to monitor the effectiveness of the funding model used to meet the Bank’s policy costs and will conduct a further formal review within at least five years of secondary legislation being introduced and publish a report in respect of that review. As part of HM Treasury’s five-yearly review of the levy, consideration of the Bank's approach to levying policy costs, including its approach to setting the annual aggregate costs will be included.

Credit unions

523. Credit unions are small financial co-operatives owned by their members. Most credit unions in Great Britain have less than £5m in assets. The largest credit union has around £210m in assets and 55,000 members.
524. In Great Britain, credit unions are governed under the Credit Unions Act 1979 (the 1979 Act). The 1979 Act is restrictive in that it sets out the purpose of a credit union and specifies the products and services that credit unions can provide. It lists four "objects"20 which sets out their purpose. These are:
     1. The promotion of thrift among the members of the society by the accumulation of their savings;
     2. The creation of sources of credit for the benefit of the members of the society at a fair and reasonable rate of interest;
     3. The use and control of the members’ savings for their mutual benefit; and
     4. The training and education of the members in the wise use of money and in the management of their financial affairs.
525. In addition to this, credit unions have a set of rules, agreed by members, which set out their relationship with members and their governance structures. For example, credit unions set out their mandatory objects, as well as broader restrictions around topics such as membership, minimum shareholding requirements, or if the credit union should allow corporate members.
526. The current content of the 1979 Act has meant that credit unions primarily offer savings accounts and loans to their members, with some offering a slightly wider range of products and services such as mortgages. In the 2020 Budget , the Chancellor committed to bringing "forward legislation to allow credit unions to offer a wider range of products and services to their members, supporting their vital role in financial inclusion."
527. The Association of British Credit Unions Limited (ABCUL) ran a sector-wide consultation in 2019 named "Vision 2025". The consultation highlighted that credit unions were interested in offering other products and services beyond those allowed under the 1979 Act. There was strong interest from credit unions in being able to offer car finance (70%) and insurance distribution (49%).
528. The Act gives credit unions in Great Britain the ability to offer hire purchase and conditional sale agreements to their members, for example as a form of car finance agreement.
529. Hire purchase agreements and conditional sale agreements have different structures but are similar in that members of the credit union will be able to choose a product and pay a deposit to a credit union. The credit union will then buy and own the asset while the member uses it and makes payments to the credit union until it is paid off. The member will typically repay the credit union the value of the item plus interest in instalments or periodic payments. The agreements usually include the condition that the goods do not belong to the member until they have paid the final instalment and the credit union may be able to repossess the goods if the member falls behind with payments.
530. Specifically, a conditional sale agreement is an agreement where a credit union purchases a good on behalf of a member and the member then pays the credit union in instalments as agreed for the product until it is paid off. The credit union retains ownership of the good, but the member uses it during the period of repayment.
531. Hire purchase agreements are agreements where the credit union purchases the good on behalf of the member, and the member makes periodic payments on the good until it is owned by the member, often based on compliance with payments and full repayment.
532. Hire purchase agreements and conditional sale agreements will be subject to credit unions obtaining permission from the appropriate regulator in the same way as other providers, and secure approval from their members. The Act caps the interest a credit union can charge on the outstanding balance due under these finance agreements at 3% interest per month but gives the government the power to raise this cap to provide flexibility for credit unions. This interest rate is in line with what credit unions can charge for loans and mirrors the power HM Treasury already has for setting the interest rate cap for loans in the 1979 Act. Additionally, the Act allows credit unions to offer these agreements to corporate members. This is subject to this being set out in a credit union’s rules, which requires member agreement at a general meeting. The legislation also requires that no more than 10% of the total outstanding balances due to be repaid under these agreements can be owed by corporate members. The Act also ensures that the 10% limit can be amended via statutory instrument.
533. The Act enables credit unions to offer insurance distribution services to their members. This means, subject to receiving permission from the appropriate regulator to carry out any regulated activities, a credit union will be able to help its members take out insurance policies with partner insurance firms and charge the partner insurance firm for their services.
534. The Act gives HM Treasury the power to add further services to the 1979 Act in the future via secondary legislation, subject to the affirmative procedure, i.e., the approval of both Houses of Parliament. HM Treasury will be required to consult with relevant stakeholders before exercising this power. Given that the 1979 Act is prescriptive, as described above, this power provides HM Treasury with greater flexibility to support the credit union model to adapt more quickly to changing demands in product offerings, remain competitive as a sector, and continue to serve their members effectively, while still maintaining the lighter-touch regulatory benefits of the prescriptive regime by ensuring there is still scrutiny over which products and services may be offered.
535. The Act introduces two additional changes to the 1979 Act, following engagement with the Financial Conduct Authority and the Prudential Regulatory Authority. Firstly, it introduces a legislative requirement for credit unions to submit annual returns to the Financial Conduct Authority, and adopt year of account provisions in the Co-operative and Community Benefit Societies Act 2014 to specify the accounting period, to reinforce good governance practices in credit unions and bring credit unions in line with other societies registered under the Co-operative and Community Benefit Societies Act 2014. Credit unions in Great Britain are currently required to submit a copy of their audited accounts to the FCA in accordance with the FCA’s rules, rather than under legislation.
536. Secondly, the legislation also clarifies the ability of credit unions to lend to/borrow from other credit unions, even when there is no membership link, to provide legal certainty over this activity. Credit unions are already able to undertake this lending and borrowing, and the legislation previously made explicit reference to temporarily borrowing from another credit union under the original drafting of section 10 of the 1979 Act . This new amendment provides further legislative clarity over this practice.
537. The Act also ensures that the new legislative changes do not retrospectively apply to the practices of lending to and borrowing from other credit unions, or to submitting annual accounts to the FCA, and adopting year of account provisions before the Act comes into force.

Reinsurance for acts of terrorism

538. In some instances, HM Treasury intervenes in the (re)insurance market to support the provision of insurance for certain systemic risks. This is when the risks would not otherwise be covered by the market because the potential financial losses are deemed too great by commercial (re)insurers. In cases of terrorism, HM Treasury has agreements with reinsurers under which it offers an unlimited guarantee (in the form of an unlimited loan) should they exhaust their funds in the event of pay-outs pursuant to a terrorist attack.
539. Under the Reinsurance (Acts of Terrorism) Act 1993 ("the 1993 Act"), HM Treasury has Parliamentary approval to pay out funds in line with these agreements. This enables the widespread provision of terrorism insurance in Great Britain. The 1993 Act was introduced when, following a number of terrorist attacks in Great Britain, (re)insurers withdrew from the terrorism (re)insurance markets. The 1993 Act enables the government to act as the reinsurer of last resort for reinsurance companies offering terrorism cover.
540. In accordance with its current practice, the Office for National Statistics ("ONS") is likely to classify a company that enjoys the benefit of a guarantee under the 1993 Act as a public sector body. Such classifications are likely to be retrospective to the date that the company started to enjoy the benefit of a guarantee under the 1993 Act.
541. The consequences of a company being classified as a public sector body include a requirement that its accounts are consolidated into its sponsor department’s departmental accounts (as required by the Government Resources and Accounts Act 2000), and it becomes subject to necessary and appropriate controls, standards and processes expected of a public sector (which may include central government) body, in line with government policy and the expectations of Parliament on the use of funds on the public account. This could include, for example, Managing Public Money ("MPM") guidance.
542. In order to secure compliance with the requirements associated with classification as a public sector body, sponsor government departments generally put in place Framework Documents with entities subject to this classification. Framework Documents are not legally enforceable. HM Treasury therefore needs to ensure that any entity classified as a public body that benefits from an arrangement under the 1993 Act, will comply with necessary controls so that money on the public accounts is managed appropriately.
543. This provision in this Act amends the 1993 Act to give HM Treasury the power to issue directions to any public sector body which benefits from an arrangement under the 1993 Act. The provision also provides HM Treasury with the ability to issue a direction to the group undertakings (within the meaning of section 1161 of the Companies Act 2006) of public sector bodies which benefit from an arrangement under the 1993 Act. HM Treasury may issue a direction if it considers it necessary for the purpose of ensuring compliance with any requirements associated with classification as a public sector body. Directions may include provision about compliance with relevant requirements relating to auditing, accounting, budgeting, arm’s length bodies or public sector bodies. There is also a specific power to direct such bodies to appoint an accounting officer. This will enable HM Treasury to ensure that any public sector body that benefits from a guarantee has sufficient oversight of its requirements as a public sector body.

Requirements

544. The Act ensures that any public sector bodies that benefit from an arrangement under the 1993 Act can be obliged to comply with any requirements associated with their public sector classification and/or to appoint an accounting officer. The requirements may include matters relating to:
     1. Auditing - for example, MPM which sets out the main principles for the management of resources in UK public sector organisations.
     2. Accounting - for example, Government Financial Reporting Manual (FReM) standards, which are the public sector accounting standards.
     3. Budgeting - for example, MPM and the Consolidated Budgeting Guidance, which is the budgeting framework that applies for expenditure control.
     4. Arm’s length bodies – for example, MPM.
     5. Public sector bodies - for example, MPM and public sector pay guidance.

Banking Act 2009: miscellaneous amendments

545. The Banking Act 2009 provides for a special resolution regime (SRR), providing the Bank of England, the PRA, the FCA and HM Treasury with tools to protect financial stability by effectively resolving banks, building societies, investment firms, banking group companies and central counterparties that are failing, while protecting depositors, client assets, taxpayers and the wider economy.
546. Since its introduction, the Act has undergone further amendment to keep up with international developments and maintain its usability. Most notably during the implementation of two EU directives (the original Bank Recovery and Resolution Directive in 2014 and the update to the Bank Recovery and Resolution Directive in 2019) and the onshoring process by which EU financial services legislation was preserved in the UK statute book and amended to ensure that it worked in a UK-only context.
547. The government is committed to maintaining the workability of the legislation and has identified five minor but necessary technical amendments across the Act.
548. The Act makes a technical correction in relation to a requirement on the Bank of England, when directing firms to issue eligible liabilities (equity and debt that can be bailed-in during a resolution), to consult the FCA and the PRA as well as to have regard to:
     1. The wider UK financial services market;
     2. the impact on the institution in question;
     3. and the UK’s financial stability.
     4. This correction also establishes explicitly a similar requirement on the Bank when it is directing institutions with regard to altering maturity profiles of these eligible liabilities. This represents a reversion to the approach established in the original Act which was inadvertently removed during the transposition of the update to the Bank Recovery and Resolution Directive in 2020.
549. The Act also makes two further corrections which clarify the existing legislation by deleting extraneous text and correcting a cross reference between two sections of the Act.
550. Additionally, this provision clarifies the application of the power to recognise a payment system as systemic, for the purposes of engaging the Bank’s regulatory powers under Part 5 of the Banking Act 2009. The clarification ensures that a payment system can be recognised before it has commenced operating within the UK.
551. Finally, section 75 also includes an amendment specifying that the Bank’s existing immunity from damages will extend to new functions conferred by or under this Act.

Arrangements for the investigation of complaints

552. The Financial Services Act (FSA) 2012 requires the FCA, the PRA and the Bank to establish a complaints scheme to investigate complaints against them, as opposed to complaints against the firms they regulate. Prior to Royal Assent of this Act, FSA 2012 also required the regulators to appoint an independent person, known as the Complaints Commissioner, to be responsible for the investigation of complaints against the regulators in accordance with that scheme, with the appointment and dismissal of the Complaints Commissioner requiring approval from HM Treasury.
553. The role of the Complaints Commissioner is governed by the framework set out in Part 6 of the FSA 2012 and in the regulators’ complaints scheme. The Complaints Commissioner has powers to recommend that the regulators provide redress where a complaint about the regulators is upheld, including recommending the payment of compensation.

Appointment of the Complaints Commissioner

554. To add a further layer of independence to the role of the Complaints Commissioner, section 76 of the Act amends the FSA 2012 to make HM Treasury responsible for the appointment of the Complaints Commissioner, rather than the regulators.
555. HM Treasury will be responsible for setting the terms and conditions of the appointment of the Complaints Commissioner, including term limits. In doing so, HM Treasury must ensure that these terms and conditions are reasonably designed to ensure that the investigator will be free at all times to act independently of the regulators, and that complaints will be investigated under the complaints scheme impartially, without favouring the regulators.

Complaints Commissioner: annual report

556. The Act also strengthens the current reporting arrangements contained in the FSA 2012, to increase the transparency of regulator responses to Complaints Commissioner recommendations.
557. The Complaints Commissioner is required by the FSA 2012 to prepare an annual report on its investigations under the complaints scheme, which is subsequently published and sent to the regulators and HM Treasury. The report must set out various matters including information about trends in complaints, recommendations for how the regulators can improve, and a review of the effectiveness of the regulators’ complaints processes.
558. Section 76 requires the FCA, the PRA and the Bank to respond to any recommendations or criticisms relating to them in the Complaints Commissioner’s annual report and to publish their responses, and send copies to the Complaints Commissioner and HM Treasury. HM Treasury is required to lay the annual report and, and the regulators’ responses, before Parliament.
559. The Act gives HM Treasury a power to direct the Complaints Commissioner to include additional matters which are relevant to the complaints scheme in their annual report. This is similar to the existing powers of HM Treasury under FSMA 2000, which allow it to direct the FCA and the PRA to include specified matters in their annual reports.
560. This is intended to ensure that the Complaints Commissioner’s annual report can be required to include emerging policy issues that the government believes are important to support scrutiny of the regulators.
561. The Act also requires the regulators to include a summary of where they have decided not to comply with Complaints Commissioner recommendations on individual cases during the previous year as part of their response to the Complaints Commissioner’s annual report. This is intended to drive greater overall accountability of the regulators, along with other measures introduced by the Act, by increasing transparency around the regulators’ decisions and actions.

Politically exposed persons: money laundering and terrorist financing

562. The Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) are an important part of the UK’s anti-money laundering regime, requiring regulated businesses, such as banks and lawyers, to identify and verify the identity of their customers to ensure their services are not abused for illicit purposes such as money laundering or corruption. They derive from international standards, for example from the Financial Action Task Force (FATF) or the UN Convention on Corruption, and are in line with those applied by most other G7 countries.
563. The MLRs define Politically Exposed Persons (PEPs) as those who hold prominent public functions, including all MPs and Peers. Regulated businesses must carry out enhanced due diligence (EDD) checks on PEPs, their family members and known close associates, owing to their increased risk of being targeted for criminal purposes, for example by serious organised criminals or hostile state actors. EDD measures include seeking additional assurance of a customer’s identity and information on their sources of wealth.
564. To ensure firms were prepared to meet the obligation to apply EDD to domestic PEPs in a proportionate manner, the FCA issued guidance in 2017 on the treatment of PEPs by financial institutions. This guidance is clear that domestic PEPs should be treated as lower risk than non-domestic PEPs unless other risk factors are present, and that firms should simplify their EDD measures accordingly, for example by relying on existing or publicly available information rather than making new requests.
565. A number of Parliamentarians raised concerns about disproportionate treatment from banks and financial institutions due to their status as PEPs, linked to burdensome requests for additional information and in some instances themselves or family members being denied accounts.
566. The Act introduces two provisions to ensure the distinction between domestic and overseas PEPs is clear in law and that financial institutions are adhering to the approach set out in the FCA’s guidance.

Amendment to the Money Laundering Regulations

567. The MLRs set out requirements for regulated firms (such as banks, lawyers and accountants) to implement when providing regulated services to any PEP and known close associates and family members of PEPs. They require all firms to take a risk-based approach to their compliance with regard the requirements of the Regulations, assessing the risk of their customers and implementing proportionate policies, controls and procedures.
568. The guidance on the treatment of PEPs, published by the FCA in 2017, provides support to firms in applying a risk-based approach to PEPs, including specific risk indicators which firms may use to inform their anti-money laundering controls. The guidance is clear that PEPs who are entrusted with a prominent public function in the UK should be treated as low risk, unless a firm has assessed that other risk factors not linked to their position as a PEP mean they pose a higher risk.
569. Section 77 requires HM Treasury to amend the MLRs within twelve months of Royal Assent to recognise the distinction between the general risk of domestic and non-domestic PEPs in law. This will ensure additional clarity on the approach firms should take when their customer is a domestic PEP or the family member or known close associate of a domestic PEP.
570. HM Treasury is also required to, within six months of Royal Assent, lay before Parliament a statement setting out what progress has been made towards making the regulations amending the MLRs.

Politically exposed persons: review of guidance

571. As noted above, the FCA guidance on the treatment of PEPs is an important tool for regulated firms when ensuring they take appropriate and proportionate measures to meet their obligations under the MLRs. Poor adherence to the guidance by firms, particularly by banks and other financial institutions, could result in the seemingly disproportionate treatment reported by some PEPs if firms apply their fullest extent of enhanced due diligence.
572. Section 78 requires the FCA to conduct a review of the adherence of regulated firms to its guidance, to identify if there is a systemic issue which is causing unnecessary burdens of domestic PEPs and their family members and known close associates. The review must be completed within twelve months of Royal Assent, and the FCA will be required to consider if the findings of the review necessitate updating its guidance. If the FCA does conclude the guidance requires updating, it must also publish draft guidance alongside the publication of the review’s findings.
573. Along with the amendments to the MLRs, the review is intended to help address the problems currently experienced by some domestic PEPs.
574. The FCA is required to publish an update on its plan for the review within three months of Royal Assent.

Forest risk commodities

575. At the UN Climate Change Conference in 2021 (COP26), over 140 countries including the UK – representing 90% of the world’s forests – signed the Glasgow Leaders’ Declaration on Forests and Land Use. Signatories committed to work collectively to halt and reverse forest loss and land degradation by 2030, while delivering sustainable development and promoting inclusive rural transformation.
576. The government launched the forest and climate leaders’ partnership at COP27, and also funds the partnership for forests, which has channelled more than £1 billion of private investment into forests and sustainable land use and brought more than 4 million hectares of critical landscapes under sustainable land use.
577. A coherent international approach on disclosure and management of nature-related risks and impact is necessary to support effective action against deforestation-linked financing. The government is therefore committed to exploring how best the final Taskforce for Nature-related Financial Disclosures (TNFD) framework should be incorporated into the UK policy and legislative architecture.
578. Work is also underway to address due diligence to combat illegal deforestation using the Environment Act 2021. The most relevant UK businesses that use forest-risk commodities or products derived from them will be required to ensure those products are produced in compliance with relevant local laws. The government will work with UK financial institutions, starting with a series of roundtables in 2023, to further tackle deforestation-linked finance. The policy considerations for tackling the financing of forest risk commodities are complex and further work is required to ensure that the regulatory framework can adequately address this issue.

Financing of forest risk commodities: review

579. Section 79 introduces a requirement for HM Treasury to review the adequacy of the regulation of the UK financial system for the purpose of eliminating the financing of the use of prohibited forest risk commodities. This is intended to help identify any practical steps that can be taken through the financial services regulatory framework to help tackle the financing of illegal deforestation.
580. The UK financial system is defined in section 1I of FSMA 2000. Prohibited forest risk commodities are those to be defined in Schedule 17 to the Environment Act 2021 and subsequent regulations (which have not been made at the time of this Act achieving Royal Assent).
581. HM Treasury is required to undertake this review within nine months of the Secretary of State making the first set of regulations under paragraph 1 of Schedule 17 to the Environment Act 2021. This will enable HM Treasury to consider those regulations in the review, and ensure a joined-up and effective approach.
582. HM Treasury is obliged to publish a report on the conclusions of the review and the steps it considers appropriate to take to improve the effectiveness of the regulation of the UK financial system for the purpose of eliminating the financing of the use of prohibited forest risk commodities.