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Financial Services Act 2021

Contents

Commentary on provisions of Act

Part 1: Prudential regulation of credit institutions and investment firms

Section 1: Exclusion of certain investment firms from the Capital Requirements Regulation

  1. This section limits the CRR’s application to credit institutions and PRA-designated investment firms, thereby removing non-designated investment firms from the scope of the CRR, such that they can then be within scope of the IFPR.
  2. The section defines "designated investment firm" and "FCA investment firm". Through its designation procedure, the PRA will continue to be able to bring an FCA investment firm under PRA supervision, to be subject to the CRR. This section however specifies that procedure cannot be used for the categories of firms described in point (2AA) (a)-(c) of Article 4 of the CRR who, from implementation of the IFPR regime, will only therefore be supervised and regulated by the FCA.

Section 2: Prudential regulation of certain investment firms by FCA rules

  1. This section gives effect to Schedule 2 which sets out requirements on the FCA when making rules for the IFPR transitional provisions, and amendments to FSMA.

Section 3: Transfer of certain prudential regulation matters into PRA rules

  1. This section enables HM Treasury to revoke existing prudential regulation contained in the CRR, thereby allowing the PRA to make rules on these matters.
  2. Subsection (1) provides HM Treasury with the power to revoke provisions of the CRR through regulations. This includes the ability to revoke instruments made under the CRR such as EU tertiary legislation and associated UK legislation, to which the necessary changes have been made under the EUWA to ensure that the legislation continues to operate effectively following the end of the Transition Period.
  3. Subsection (2) restricts the extent to which this power to revoke can be exercised, by listing the matters which can be revoked in subsection (2)(a) - (p). This list of matters includes areas of the CRR that need to be updated to reflect the latest Basel reforms (including large sections where the changes stemming from the current Basel standards are substantial).
  4. Subsection (2)(a) relates to Common Equity Tier 1. Common Equity Tier 1 is the highest quality of regulatory capital as it absorbs losses immediately when they occur. It is mainly made up of common shares issued by a credit institution, retained earnings and/or other income and disclosed reserves.
  5. Subsection (2)(b) relates to the Standardised Approach to Credit Risk (SACR). Credit risk is the risk of a loss resulting from a borrower failing to repay a loan or meet contractual obligations. Credit risk accounts for the majority of most credit institutions’ exposure to potential losses, and therefore is usually the largest component of their regulatory capital requirements. SACR is one of the methods that credit institutions can use to calculate credit risk capital requirements. It typically does not require credit institutions to estimate the level of risk associated with an individual exposure – instead, they apply standard risk weightings (i.e. percentages of exposure). The risk weightings in SACR are set out in law for each exposure type (e.g. residential mortgages).
  6. Subsection (2)(c) relates to classification of off-balance sheet items. Off-balance sheet items refer to activities that are effectively assets or liabilities of a credit institution but do not appear on that credit institution’s balance sheet. Annex I of the CRR currently sets out the level of risk that should be associated with different off-balance sheet items. These may need to be revoked to allow the PRA to implement the latest Basel standards for SACR.
  7. Subsection (2)(d) relates to the Internal Ratings Based (IRB) Approach to Credit Risk. The IRB approach allows credit institutions to use their own estimates of risk parameters (e.g. the probability that a borrower may default), for the purpose of calculating credit risk capital requirements. The IRB approach was introduced as part of Basel II, but the global financial crisis highlighted a number of shortcomings in its use, which Basel III and 3.1 seek to address.
  8. Subsection (2)(e) relates to credit risk mitigation (CRM). CRM techniques allow credit institutions to reduce the credit risk of exposures, and therefore reduce the amount of capital required to be maintained against such exposures. Government guarantees supporting Bounce Back Loans are an example of CRM.
  9. Subsection (2)(f) relates to counterparty credit risk. Counterparty credit risk (CCR) is the risk that a counterparty to a transaction might not perform its contractual obligations before the transaction's cash flows are settled. CCR capital requirements cover both current exposures and estimates of potential future exposures on these transactions. Post-financial crisis, the BCBS strengthened its framework for CCR for securities financing transactions (e.g., repos and reverse repos) and derivatives.
  10. Subsection (2)(g) relates to operational risk, which is the risk of loss resulting from inadequate or failed processes, people and systems or from external events. The financial crisis highlighted two main shortcomings with the existing operational risk framework. First, capital requirements for operational risk proved insufficient to cover operational risk losses incurred by some credit institutions. Second, the nature of these losses – covering events such as misconduct, and inadequate systems and controls – highlighted the difficulty associated with using internal models to estimate capital requirements for operational risk. The BCBS has streamlined the operational risk framework to address these shortcomings (which the PRA have previously addressed through additional capital requirements).
  11. Subsection (2)(h) and (i) relates to market risk. Market risk is the possibility of credit institutions experiencing losses due to adverse price movements (e.g. in equity, bond or commodity prices, interest rate moves or exchange rates). Market risk is the third largest contributor to RWAs for a typical commercial bank, after credit risk and operational risk, but is typically a larger contributor of RWA for investment banks and investment firms. Credit institutions are able to use standardised or internal model-based approaches. The BCBS changes address deficiencies in the design and calibration of market risk calculations, which were identified following the financial crisis.
  12. Subsection (2)(j) relates to credit valuation adjustment risk (CVA): the risk of loss on counterparty exposures that occur as a result of a deterioration in the credit worthiness of the counterparty. This was a major source of losses for firms during the global financial crisis, exceeding losses arising from outright defaults in some instances. The initial phase of Basel III reforms introduced a capital requirement for CVA risk. This approach has since been revised by BCBS to enhance its risk sensitivity, strengthen its robustness by removing the use of internal models for this risk, and improve its consistency with approaches used in the revised market risk framework.
  13. Subsection (2)(k) relates to large exposures: these requirements are intended to address concentrated exposures, which could result in credit institutions suffering significant losses caused by the sudden default of a large individual counterparty or a group of connected counterparties. In April 2014, the BCBS published a final standard for measuring and controlling large exposures.
  14. Subsection (2)(l) relates to liquidity requirements: adequate liquidity helps ensure credit institutions are able to meet both short-term and long-term financial obligations when shocks occur. The difficulties experienced by some credit institutions during the global financial crisis arose from failures to observe the basic principles of liquidity risk management. In response, in 2008 the BCBS published Principles for Sound Liquidity Risk Management and Supervision (‘Sound Principles’), which has since been supplemented by specific measures:
    1. the Liquidity Coverage Ratio (LCR) which aims to ensure that credit institutions have sufficiently high-quality liquid assets to survive a significant stress scenario lasting for 30 days; and
    2. the Net Stable Funding Ratio (NSFR) which requires credit institutions to fund their activities with sufficiently stable sources of funding, measured over a one-year timeframe, in order to mitigate the risk of future funding stress.
  15. Subsection (2)(m) relates to the leverage ratio. An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance sheet leverage in the banking system. The ensuing deleveraging process at the height of the crisis created a vicious circle of losses and reduced availability of credit in the real economy. The Basel III framework introduced a simple, transparent, non-risk-based leverage ratio, designed to reduce the risk of such periods of deleveraging in the future (and the damage they inflict on the broader financial system and economy). The leverage ratio supplements the risk-based capital requirements, by acting as a non-risk-based backstop: in essence, the leverage ratio limits a credit institution’s capital to a proportion of its on-balance sheet assets and certain off-balance sheet exposures.
  16. Subsection (2)(n) relates to reporting requirements. Credit institution are required to provide information to the PRA regarding their assets, risks and exposures, enabling it to assess and supervise appropriately, including assessing risks in the credit institutions’ internal models. Basel III and 3.1 include a number of updates to prudential rules, which will flow through to changes in the data/outputs that competent authorities collect from credit institutions, and therefore to reporting requirements.
  17. Subsection (2)(o) relates to disclosure requirements: another core component of the Basel framework is the requirement for credit institutions to publicly disclose relevant financial information, in order to support effective market discipline, often referred to as "Pillar 3". This disclosure of information enhances transparency, thereby acting as an incentive on credit institutions to conduct their business in a safe, sound and efficient manner. Since Basel II, the BCBS have released four updates to the disclosure framework, in 2015, 2017 and two in 2018. These updates are required to align disclosure requirements with the latest Basel standards.
  18. Subsection (2)(p) allows HM Treasury to revoke other matters in the CRR that are contained in the "CRR Basel standards", meaning outstanding Basel standards that have not yet been implemented in the UK, as defined in section 4. This power is subject to specific conditions as set out in subsections (8)-(9). This is designed to safeguard the Government against the small risk that the concepts defined in subsection (2)(a)-(o) do not adequately capture all outstanding elements of the Basel Framework, for example if the BCBS publish new standards which are not listed in section 4.
  19. Subsections (3) and (5) allow HM Treasury to revoke further areas of the CRR if they are connected to the matters listed in subsection (2), where they consider it necessary or desirable to do so in order to maintain or improve the coherence of the prudential regime. This will help HM Treasury and the PRA to minimise the impacts on credit institution having to refer to both retained EU law and the PRA rulebook, by enabling HMT to revoke other Articles of the CRR, which are not strictly the subject of the matters specified in subsection (2), where it would help ensure a more coherent rulebook.
  20. Subsection (4) sets out the conditions required in order for any revocations made in regulations by HM Treasury to become effective. The provisions can be revoked if either a) the provision will be replaced in PRA rules or b) it is appropriate for the provision not to be replaced. This aims to avoid any possibility of a gap in the prudential framework between the application of the deletions and the PRA exercising its general rule-making power.
  21. Subsection (6) enables HM Treasury to make different provision for different purposes, for example different provision in relation to different classes of person or transaction.
  22. Subsection (7) ensures that regulations made by HM Treasury are subject to the affirmative procedure.
  23. Subsection (8) requires HM Treasury to demonstrate to Parliament how revocations that rely on subsection (2)(p) are connected to the CRR Basel standards, which are explained in section 4.
  24. Subsection (9) ensures revocations made under (2)(p) can be made by virtue of the subject matter contained in the CRR Basel Standards, including where the application of that subject matter is an adapted version of the subject matter. This is intended to account for the fact that the BCBS sets standards for internationally active banks but in the UK, prudential requirements stemming from Basel are currently applied to all credit institutions, including e.g. smaller banks and building societies that focus on domestic lending. Therefore, subsection (9) allows for revocations of CRR requirements to be made which apply to firms that are not strictly the subject of Basel, e.g. smaller banks and building societies.
  25. Subsection (10) is self-explanatory
  26. Subsection (11) is self-explanatory.

Section 4: CRR Basel standards

  1. Subsection (1) defines the concept of a "CRR Basel Standard", which means those Basel standards relevant to this Act. Since 2010, the BCBS has published the Basel III framework, as finalised by Basel 3.1. Some of the standards from these publications have been partially implemented in the UK.
  2. The standards in scope of the CRR Basel Standards, and therefore relevant to this Act, are those contained in the publications listed in subsection (2) which have not yet been implemented in the UK.
  3. Subsection (3) ensures that future BCBS publications fall in scope of the CRR Basel standards. Currently, the latest recommended implementation date of the finalised Basel standards is 1 January 2023, which has been postponed by one year. Any forthcoming publications by the BCBS that share this implementation date, or any later implementation date if it is postponed again, are also included in the definition of CRR Basel standards. This would, for example, include publications by the BCBS on the capital treatment of securitisation of non-performing loans, which are expected to be forthcoming.
  4. Subsection (4) explains that a recommended standard is not a CRR Basel standard if it has already been implemented in statute or through PRA rules immediately before the day on which this Schedule comes into force. This contributes to the intention of this Act that it is for the implementation of outstanding Basel standards only.
  5. Subsection (5) is self-explanatory.

Section 5: Prudential regulation of credit institutions etc. by PRA rules

  1. Subsection (1)(a) inserts a new Part 9D into FSMA, which is set out in Part 1 of Schedule 3. More specifically, Part 9D sets out the enhanced accountability framework that the PRA must have regard to when implementing the outstanding elements of the Basel standards in its rules, as well as additional obligations on the PRA. In Schedule 3, HM Treasury also has a specific power to make amendments to primary and secondary legislation that is consequential on the rules made by the PRA.
  2. Subsection (1)(b) deals with amendments to the PRA’s power to make rules over approved holding companies in Part 12B FSMA. Subsection (1)(c) deals with minor and consequential amendments to legislation made in relation to this rule-making power, as set out in Part 3 of Schedule 3.
  3. Subsection (1)(d) deals with the transitional treatment of PRA rules made before these new requirements come into effect (as set out in Part 4 of Schedule 3).
  4. Subsections (2), (3) and (4) support the integration of PRA rules with the CRR and support additional transparency in relation to how revoked provisions relate to PRA rules.
  5. Subsections (5) to (7) are self-explanatory.

Section 6: Power to amend the Credit Rating Agencies Regulation

  1. Subsection (1) provides a specific power to HM Treasury to make regulations to amend Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies (the Credit Rating Agencies Regulation) in order to implement changes to the use and issuance of credit ratings in line with CRR Basel standards, as defined in section 4.
  2. Subsection (2) ensures that regulations may also include consequential amendments.
  3. Subsection (3) applies the affirmative procedure to the regulations.
  4. Subsection (4) is intended to account for the fact that the BCBS sets standards for internationally active banks but, in the UK, prudential requirements stemming from Basel are applied to all credit institution, including e.g. smaller banks and building societies that focus on domestic lending. Therefore, subsection (4) allows for any requirements which may be set as a consequence of amendments to the Credit Rating Agencies Regulation to continue to apply not just to those firms which are the subject of Basel.
  5. Subsection (5) is self-explanatory.

Section 7: Amendments of the Capital Requirements Regulation

  1. This section gives effect to Schedule 4 which makes limited amendments to the CRR relating to requirements contained in the Basel III standards.

Part 2: Benchmarks

Section 8: Review of which benchmarks are critical benchmarks

  1. This Section makes changes to Article 20 (critical benchmarks: conditions and other matters and Article A20 (review of critical benchmarks) of the BMR.
  2. Subsection (1) provides that Article 20 is amended in accordance with subsections (2)-(5).
  3. Subsection (6) makes amendments to Article 20(1) regarding the criteria for determining critical benchmarks. The changes have the effect of enabling the designation of a benchmark as critical where the benchmark has appropriate market-led substitutes, but where it is not reasonably practicable for one or more users of the benchmark to switch onto such appropriate market-led substitutes, and the benchmark also meets the criterion for a critical benchmark established in Article 20(1)(c)(iii). Subsection (6) also contains additional consequential changes.
  4. Subsections (2)-(5) make consequential changes to Article A20, which concerns the review of critical benchmarks which the FCA is required to conduct in line with criteria set out in Article 20.

Section 9: Mandatory administration of a critical benchmark

  1. This section makes changes and introduces new provisions under Article 21(3) of the BMR in relation to the FCA powers to mandate an administrator to continue providing a critical benchmark under certain conditions where the administrator gives notice to cease providing the benchmark.
  2. It amends Article 21(3) to extend the maximum period for which the FCA may compel the administrator to continue to publish the benchmark to 10 years.
  3. It introduces new paragraphs 3A, 3B and 3C under Article 21. These provisions require the FCA to conduct an assessment of the benchmark’s capability to measure the underlying market and economic reality, once the FCA decides to mandate administration of a critical benchmark under Article 21(3). The FCA is required to conduct the assessment and issue a written notice on the outcome of its assessment to the administrator within the time period specified in this paragraph.

Section 10: Prohibition on new use where administrator to cease providing critical benchmark

  1. This section introduces new Article 21A of the BMR. It gives the FCA power to prohibit "new use" of a critical benchmark where the FCA has completed its assessment of the administrator’s plans to cease providing the benchmark under Article 21(2).
  2. The FCA may, by publishing a notice, prohibit some, or all new use of the benchmark by supervised entities. Paragraph (2) defines what constitutes "new use". What constitutes "new use" is different for different categories of use of the benchmark. Broadly however, "new use" consists of creating new financial instruments or contracts that reference the benchmark after the date of the prohibition, or using the benchmark in existing contracts, instruments or funds after the date of the prohibition where the contract, instrument or fund did not reference the benchmark before the date of the prohibition.
  3. Paragraph (3) requires that the FCA can only exercise this power if it advances either or both of its statutory objectives of consumer protection and market integrity. Paragraph (4) allows the FCA to consider the effect the exercise of this power outside the UK (among other things).
  4. Paragraphs (5)-(9) set out requirements for the content and publication of the FCA’s notice. The FCA will need to give reasons for the prohibition in the notice and may make different provisions for different purposes. The FCA is also required to publish its notice in the way best calculated to bring it to the attention of supervised entities and the public. Paragraph (8)(b) also permits the FCA to charge a reasonable fee for providing a person with a copy of a notice published under this Article.

Section 11: Assessment of representativeness of critical benchmarks

  1. This section introduces new definitions and provisions in the BMR. Subsection (1) introduces new definitions to Article 3. Subsection (2) introduces two new provisions: Article 22A and Article 22B, which relate to the assessments of critical benchmarks conducted by the administrator and the FCA respectively.
  2. Article 3 provides definitions for the purpose of the BMR. This includes the definition of a ‘supervised entity’. Subsection (1) of this section introduces two new definitions, ‘supervised third country contributor’ and ‘supervised third country entity’. These definitions capture specified kinds of third country contributors and entities. They are then brought within the scope of certain BMR provisions.
  3. Subsection (2) of this section introduces new Article 22A. This sets out requirements which apply to administrators to assess the representativeness of certain kinds of critical benchmarks (which are not Article 23A benchmarks as provided for in section 14 in certain circumstances as specified in Article 22A).
  4. Article 23 of the BMR contains provisions relating to the assessment of the representativeness of critical benchmarks by administrators and the FCA. Article 23 applies to critical benchmarks which are based on submissions from contributors, the majority of which are supervised entities. New Article 22A largely replicates Article 23 (with some amendments) and introduces new provisions. It requires the administrator of a critical benchmark based on contributions from supervised entities or supervised third country entities (and which is not an Article 23A benchmark) to conduct an assessment of the representativeness of the benchmark at least biennially; upon written notice from the FCA (where the FCA have concerns with the representativeness of the benchmark); and where a supervised contributor or a supervised third country contributor gives notice of its intention to cease contributing input data. The period between a contributor providing notice and ceasing to contribute input data should be no less than 15 weeks. The administrator will need to submit its assessment to the FCA within a time period specified in Article 22A, if the assessment is triggered by a contributor’s notice to cease contribution.
  5. Article 22A(9) requires that during the assessment period (as defined), the administrator must not change the market or economic reality intended to be measured by the benchmark, unless the FCA gives its written permission to do so.
  6. Subsection (2) of this section also introduces new Article 22B, which sets out requirements which apply to the FCA, to assess the representativeness of critical benchmarks in the circumstances specified in this Article.
  7. Article 22B replicates and amends relevant provisions in Article 23 as well as introducing new provisions. It requires the FCA to conduct its own assessment upon receiving the administrator’s assessment under Article 22A and to issue a written notice to the administrator setting out the outcome of its assessment. The FCA may conduct its own assessment if it does not receive the administrator’s assessment within the time period specified under Article 22A. In the circumstances where a supervised contributor gives notice of its intention to cease contributing input data under Article 22A, the FCA must complete its assessment, and issue a notice to the administrator within a time period specified under Article 22B(4).

Section 12: Mandatory contribution to critical benchmarks

  1. This section makes several amendments to Article 23 of the BMR regarding the mandatory contribution to critical benchmarks.
  2. Subsection (2) omits those provisions under existing Article 23 that are replicated, with amendments, in section 11 (assessment of representativeness of critical benchmarks).
  3. Subsection (3) introduces new paragraphs 5A and 5B under Article 23. Paragraph 5A clarifies that a contributor which gives notice to cease contributing under Article 22A may not cease contribution until the end of its notice period (which is a minimum of 15 weeks) unless the FCA gives its written permission to do so. Paragraph 5B clarifies that the imposition of the notice period does not require the relevant contributor to trade or commit to do so during the notice period.
  4. Subsections (4)-(9) amend existing Article 23(6) and introduce new provisions. Subsection (4) clarifies that the FCA may use its existing compulsion power under Article 23(6) over contributors if the FCA gives a notice to the administrator of a critical benchmark under Article 21(3B)(a) or Article 22B(3)(a). Subsection (7) introduces new paragraph 6A which clarifies that, in exercising its power to mandate contribution to a critical benchmark under Article 23(6), the FCA may only do so in order to maintain, restore or improve the representativeness of the benchmark. These amendments also provide that the FCA can exercise its compulsion power over a supervised third country entity. Subsection (10) introduces new paragraph 9A under Article 23. It clarifies that once a benchmark is designated by the FCA as an Article 23A benchmark, contributors to that benchmark are no longer subject to the FCA’s compulsion power under Article 23(6) in order to restore the representativeness of the benchmark.
  5. Subsection (11) clarifies the calculation of the five-year period under Article 23, which is the maximum period that the FCA can mandate contribution to a critical benchmark.

Section 13: Designation of certain critical benchmarks

  1. This section gives the FCA the power to designate a critical benchmark under new Article 23A of the BMR, where the FCA has given notice to an administrator under Article 21(3B)(a) or Article 22B(3)(a) that the benchmark is unrepresentative, or its representativeness is at risk. The FCA may not designate a benchmark as an Article 23A benchmark if the conditions specified in paragraph 2 of Article 23A are met.
  2. Paragraph 3 of new Article 23A requires the FCA’s notice of its intention to designate a benchmark under this Article to set out the reasons for its decision, and to give the administrator the option to make representations. The administrator may make representations to the FCA within a time period specified in this paragraph.
  3. Paragraph 4 requires the FCA to give written notice to an administrator once it decides to designate a benchmark under Article 23A. Paragraph 5 sets out what the notice must contain. These include the reasons for the designation and when the designation takes effect.
  4. Paragraph 6-7 allow the FCA to change the date that the designation takes effect to a later date, provided that the designation has not come into force, and what information the FCA must provide by way of notice if it decides to change the date of the designation.
  5. Paragraph 8 allows the FCA to withdraw the designation notice issued under paragraph 5 if the designation has not come into effect and the FCA wishes to issue another designation notice. Paragraph 9 sets out what the FCA’s notice of withdrawal of designation must include.
  6. Paragraph 10 provides that the FCA may take into account different processes, including that of the Upper Tribunal, when determining the effective date of the designation. It also requires the FCA to publish its designation notice before it comes into effect. Paragraph 11 requires the FCA to provide a copy of its notice to HM Treasury, and permits the FCA to charge a reasonable fee for providing a person with a copy of a notice published under this Article.
  7. Paragraph 12 allows the administrator to refer the FCA’s designation decision under paragraph 4 to the Upper Tribunal. Paragraph 14 clarifies what the reference to an ‘Article 23A benchmark’ means in the BMR.

Section 14: Use of Article 23A benchmarks

  1. This section introduces two new provisions in the BMR, Articles 23B and 23C, which relate to the use of a benchmark once it is designated as an Article 23A benchmark.
  2. Paragraph 1 of Article 23B provides that all use by supervised entities of an Article 23A benchmark will be prohibited, except where the FCA makes exemptions under paragraph 2 of Article 23B(2) or Article 23C.
  3. Paragraph 2 requires the FCA to publish a notice before the Article 23A designation takes effect, if it intends to delay the prohibition in paragraph 1 until a specified date. The specified date must be before the end of the period of four months beginning with the day on which the Article 23A designation takes effect.
  4. Paragraph 4 requires that the FCA must publish the notice in a way that is best calculated to bring it to the attention of supervised entities, as well as the public.
  5. Paragraph 5 permits the FCA to charge a reasonable fee for providing a person with a copy of a notice published under this Article.
  6. Article 23C paragraphs 1-3 grant the FCA the power to specify and permit certain legacy use by supervised entities of an Article 23A benchmark. The FCA may alter or withdraw its permission by issuing a notice.
  7. Paragraph 4 requires that the FCA may only give, alter or withdraw permission for legacy use if it advances either or both of its statutory objectives of consumer protection and market integrity. The FCA may also consider the likely effect outside the UK of the exercise of the power, as per paragraph 5.
  8. Paragraphs 6-9 sets out requirements regarding the content and publication of the notice. Paragraph 10 defines what "legacy use" is, which is use of the benchmark that is not "new use", which has the same meaning as under Article 21A(2), in connection with a prohibition that has been imposed under Article 23B.
  9. Article 23C(9)(b) also permits the FCA to charge a reasonable fee for providing a person with a copy of a notice published under this Article.

Section 15: Orderly cessation of Article 23A benchmarks

  1. This section introduces a new provision, Article 23D of the BMR, which gives the FCA the powers to wind down a critical benchmark in an orderly fashion once it has been designated as an Article 23A benchmark. This section also introduces a new provision Annex 4 which gives the FCA the power to modify certain provisions of the BMR as they apply to the administrator of an Article 23A benchmark once it has been designated as such.
  2. Paragraph 2 of Article 23D sets out that the FCA may, by issuing a notice, require the administrator to change how a critical benchmark is determined, including in relation to input data and the rules of the benchmark. Paragraph 8 further clarifies that the administrator may not change anything described in paragraph 2 unless it is required or permitted to do so by the FCA.
  3. Paragraph 3 sets out the conditions under which the FCA may exercise its powers under paragraph 2. The FCA may only exercise its powers if the FCA considers it appropriate to do so, having regard to the desire to secure an orderly wind-down of a critical benchmark and if it advances one or both of the FCA’s statutory objectives of consumer protection and market integrity. Paragraph 4 allows the FCA to consider the likely effect of the FCA’s exercise of the power outside the UK.
  4. Paragraph 5 further specifies the scope of the FCA’s powers under paragraph 2. This includes a power to vary or withdraw a requirement on the administrator from time to time.
  5. Paragraph 6 makes clear that the FCA’s powers under paragraph 2 are not limited by the market or economic reality that was intended to be measured by the benchmark immediately before it became an Article 23A benchmark, but the FCA may have regard to that when exercising its powers.
  6. Paragraphs 7, 9 and 10 set out requirements for the content and publication of the notice under paragraph 2 and permits the FCA to charge a reasonable fee for providing a person with a copy of a notice. The notice must give reasons for the FCA’s decision to exercise its Article 23D(2) power and how the FCA will exercise its power.
  7. Paragraph 11 provides that the BMR applies to Article 23A benchmarks with modifications referred to in Annex 4.
  8. Annex 4, paragraph 2, specifies how Article 11(1) regarding input data and Article 27(1) regarding the content of the benchmark statement will be modified for the purposes of administrators of Article 23A benchmarks.
  9. Annex 4, paragraph 3, grants the FCA the power to apply the BMR to an Article 23A benchmark (with further, specific modifications) where it considers it appropriate to do so having regard to the effects of the designation under Article 23A, or the FCA’s exercise of its powers under Article 23D(2) (or both).
  10. Annex 4, paragraph 4, requires the FCA to inform the administrator by written notice of any modifications it proposes to apply. Paragraph 5 sets out requirement for the notice. It must allow the administrator to make representations to the FCA within the time period specified in paragraph 5.
  11. Annex 4, paragraph 6, requires the FCA to issue a written notice to the administrator regarding its final decision to apply any modifications, having engaged with the administrator, as provided under paragraph 5. Paragraphs 7-9 set out requirements as to the content and publication of the FCA notice as required under paragraph 6.
  12. Annex 4, paragraph 9(b) also permits the FCA to charge a reasonable fee for providing a person with a copy of a notice published under this Article.
  13. Annex 4, paragraph 10 clarifies that paragraphs 11 – 13 apply where the FCA gives the administrator of an Article 23A benchmark a notice under Article 23D(2) or (8)(b).
  14. Annex 4, paragraph 11, requires the FCA to consider whether to use its power under Annex 4, paragraph 3, within a specified time period after receiving a notice as described in paragraph 10. During the ‘interim period’ as defined by paragraph 13, the administrator is required under paragraph 12 to comply with the BMR to the extent that it remains reasonably practicable to do so.

Section 16: Review of exercise of powers under Article 23D

  1. This section introduces new provision Article 23E of the BMR which requires the FCA to conduct a biennial review of its exercise of powers under Article 23D(2) and publish a report on its findings.
  2. Paragraph 2 clarifies the calculation of the two-year review period. Paragraphs 3-4 require the FCA to publish a report as soon as reasonably practicable setting out the outcome of its review.
  3. Paragraphs 5-8 set out further requirements for the review and the publication of the FCA’s report on its findings. The FCA must consider in its review whether the exercise of its powers has advanced or is likely to advance its statutory objectives of consumer protection and market integrity. It must also take into account the statements of policy as set out in new Article 23F as introduced by section 18.
  4. Paragraph 9(b) permits the FCA to charge a reasonable fee for providing a person with a copy of a report published under this Article.

Section 17: Policy statements relating to critical benchmarks

  1. Subsection (1) introduces a new provision, Article 23F of the BMR, which places an obligation on the FCA to publish statements of policy and have regard to them when deciding to exercise certain powers.
  2. These are in relation to the FCA’s exercise of powers under:
    1. new Article 21A where the FCA prohibits new use of a critical benchmark where the administrator has notified the FCA of its intention to cease providing the critical benchmark;
    2. new Article 23A where the FCA determines that the representativeness of a critical benchmark cannot be restored or maintained and whether it is to be designed as an Article 23A benchmark;
    3. new Article 23C where the FCA exercises the power to permit certain legacy use of an Article 23A benchmark by supervised entities;
    4. new Article 23D where the FCA imposes requirements on administrators to change the methodology for determining a critical benchmark, or specify the relevant rules of the benchmark and the code of conduct once the benchmark is designated as an Article 23A benchmark.
  3. Article 23F allows the FCA to alter or replace a statement of policy and publish an altered or replacement statement. It also requires the FCA to publish statements of policy in a way that is best calculated to bring them to the attention of the public.
  4. Article 23F paragraph 4(b) permits the FCA to charge a reasonable fee for providing a person with a copy of a statement published under this Article.
  5. Subsection (2) provides that the FCA can satisfy its duty to prepare and publish statements under Article 23F by way of publishing such statements either before or after the requirement to produce such statements under new Article 23F(1) comes into force.

Section 18: Critical benchmarks provided in different currencies etc.

  1. This section introduces new Article 23G and new paragraph 2A under Article 49 of the BMR.
  2. Article 23G clarifies how the FCA may apply certain powers to a version of a critical benchmark that is provided in different currencies or for different maturities or tenors, known as ‘umbrella benchmarks.’ Article 23G(2) defines what constitutes a ‘version’ of an umbrella benchmark.
  3. Paragraph 3 sets out the relevant provisions of the BMR that apply in relation to the umbrella benchmark. The relevant provisions are to apply as if each version of the benchmark were a separate critical benchmark and intended to measure the market or economic reality defined in the benchmark statement for the umbrella benchmark (or its versions), subject to the modifications set out in paragraph 4.
  4. Paragraph 6 further clarifies that the FCA may exercise certain powers as specified in this paragraph in different ways in relation to different versions of the umbrella benchmark.
  5. Paragraph 8 provides HM Treasury with the power to make further regulations about the operation of the BMR in relation to umbrella benchmarks including provision amending or revoking provisions of Article 23G. New paragraph 2A is inserted into Article 49 of the BMR to make consequential changes reflecting HM Treasury’s power to make regulations under Article 23G(8).

Section 19: Changes to and cessation of a benchmark

  1. Subsections (1)-(2) of this section make amendments to Article 28 of the BMR to require that a benchmark administrator must publish a robust procedure outlining the actions it will take in the event of changes to, or the cessation of, a benchmark.
  2. Subsection (3) inserts new paragraphs 1A-1E into Article 28. These provisions set out requirements on administrators with regard to procedures for making changes to or the cessation of critical benchmarks. The FCA is required to approve the content of, and any updates to, the change and cessation procedures for critical benchmarks.

Section 20: Extension of transitional period for benchmarks with non-UK administrators

  1. This section amends Article 51(5) of the BMR. The section extends the expiration of the transitional period for third country benchmarks from 31 December 2022 to 31 December 2025. It also extends the provision which permits continued legacy use of a third country benchmark beyond 31 December 2025 where that benchmark is used in an existing contract or financial instrument on or before 31 December 2025. UK supervised entities will only be permitted to use third country benchmarks which have demonstrated compliance with UK law on and after 1 January 2026.

Section 21: Benchmarks: minor and consequential amendments

  1. This section inserts Schedule 5 to set out minor and consequential amendments to the BMR.

Part 3: Access to Financial Services Markets

Section 22: Regulated activities and Gibraltar

  1. This section amends Part 3 of FSMA to reflect the new authorisation regime for Gibraltar-based persons wishing to operate in the UK and makes provision for outbound UK-based persons wishing to operate in Gibraltar.
  2. Section 31 of FSMA sets out the categories of persons who are authorised persons for that Act. Subsection (2) of this section inserts a new paragraph into section 31(1) of FSMA providing that a Gibraltar-based person with a Schedule 2A permission to carry on one or more regulated activities is an authorised person for the purposes of that Act.
  3. Subsection (3) inserts a new section 32A after section 32 of FSMA. Section 32A provides that HM Treasury must carry out a review of the operation of Schedule 2A, within two years of the Financial Services Act having come into force and then within each subsequent reporting period of two years. The review will address in particular the continued fulfilment in the reporting period of the three conditions for the access of Gibraltar-based persons to the UK financial markets: the objectives set out in paragraph 7; the alignment of law and practice enshrined in paragraph 8, and cooperation in paragraph 9. HM Treasury will be under a duty to consult the FCA and PRA during the preparation of this report. Upon completion of the review, the relevant Minister must lay a copy of the report before Parliament.
  4. Subsection (4) of this section inserts a new section 36A into FSMA to make provision for new Schedule 2B in relation to the carrying on by UK-based persons of activities in Gibraltar. While the right to carry on these activities in Gibraltar will be subject to the law of Gibraltar, Schedule 2B provides for the conditions that UK-based persons must meet under UK law in order to carry on activities in Gibraltar.
  5. Subsections (5) to (7) insert Schedules 6 to 8. Schedule 6 inserts Schedule 2A to FSMA and Schedule 7 inserts Schedule 2B to FSMA. Schedule 8 to this Act contains minor and consequential amendments.
  6. Subsections (8) to (10) confer a power on HM Treasury to amend Parts 7 and 18A of FSMA and make further provision in other enactments as regards EEA firms that are Gibraltar-based persons. This is in addition to the general power under the Act to make consequential amendments, and it ensures that the relevant legislation continues to operate effectively in relation to cases involving a Gibraltar-based person and that the relevant provisions are consistent with the new regime.
  7. Subsection (11) defines the concept of a "Gibraltar-based person" to be given the same meaning as in Schedule 2A.

Section 23: Power to make provision about Gibraltar

  1. This section delegates to HM Treasury certain powers to deliver the Government’s commitment to preserve the rights of Gibraltar-based persons in UK markets and of UK-based persons in Gibraltar markets in relation to legal regimes falling outside the Gibraltar Order, and which are thus not captured by the regimes set out in Schedules 2A and 2B to FSMA. Subsections (2)-(4) and (13) set out the scope of these powers, defining the meaning of ‘relevant Gibraltar provisions.’
  2. Subsections (2)-(4) and (13) provide that the scope of the powers delegated to HM Treasury can be exercised:
    1. in relation to a ‘Gibraltar’ provision, i.e. a provision or set of provisions in an enactment relating to (i) the carrying on of activities in the UK by persons based in Gibraltar; (ii) the carrying on of activities in Gibraltar by persons based in the UK, or (iii) interaction of any other kind between the UK and Gibraltar, whether relating to persons, activities, financial instruments, other property or other matters;
    2. when the provision is a ‘relevant’ provision, i.e. (i) it is a provision of, or applied or modified by, regulations listed in the following subsection (3); (ii) it was inserted, amended or otherwise modified by regulations listed in the following subsection (4); (iii) it is, or is the subject of, saving provision included in regulations listed in the following subsection (4); or (iv) in the case of a set of provisions, it includes provision falling within the previous sub-paragraph (ii) or (iii), and was made by regulations under the powers set out in subsection (1)(b), (c) or (d) or, in the case of a set of provisions, it includes provision made under those powers;
    3. the regulations referred to in subsection (2)(b)(i) are the following, as amended from time to time-
      1. the Electronic Money Regulations 2011 (S.I. 2011/99);
      2. the Payment Services Regulations 2017 (S.I. 2017/752);
      3. the Data Reporting Services Regulations 2017 (S.I. 2017/699).
    4. the enactments referred to in subsection (2)(b)(ii) and (iii) are the following, as amended from time to time-
      1. the Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 (S.I. 2019/680);
      2. regulation 3 of the Building Societies Legislation (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1187);
      3. Parts 2 and 3 of the Credit Transfers and Direct Debits in Euros (Amendment) (EU Exit) Regulations 2018 (S.I. 2018/1199);
      4. Part 2 of the Greenhouse Gas Emissions Trading Scheme (Amendment) (EU Exit) Regulations 2019 (S.I. 2019/107);
      5. Chapters 1 and 2 of Part 2 of the Alternative Investment Fund Managers (Amendment etc) (EU Exit) Regulations 2019 (S.I. 2019/328).
  3. Subsection (1) confers on HM Treasury the following powers to do the following by regulation:
    1. repeal or revoke relevant Gibraltar provision and make the changes set out in subsection (5) (subsection (1)(a)), i.e. to provide that the same provision is made in connection with Gibraltar as is made in connection with most or all other countries or territories outside the UK;
    2. make provision with the same effect as relevant Gibraltar provision repealed or revoked under the powers described immediately above (subsection (1)(b)). Subsection (9) provides, in case of repeal or revocation of relevant Gibraltar provisions under subsection (1)(a), the power under subsection (1)(b) includes power to make provision with the same effect as the provision that was the subject of the saving or modification, read with the saving or modification;
    3. amend relevant Gibraltar provisions restoring any aspect of the effect the provision had immediately before the end of the Transition Period (subsection (1)(c));
    4. when exercising the power in subsection (1)(d) (replace or supplement relevant Gibraltar provision with provision substantially similar to, or to a provision of, section 32A of, or Schedule 2A or 2B to, the Financial Services and Markets Act 2000 (inserted by section 22 of, and Schedules 6 and 7 to, this Act respectively) the power to make provisions applying the mentioned provisions with or without modifications.. This will ensure a coherent regulation of Gibraltar-related activities in the UK markets. This power is complemented by the further provision that HM Treasury may apply the existing mechanisms and principles of the new section 32A of, or Schedule 2A or 2B to, FSMA to the relevant Gibraltar provisions, with or without modifications (subsection (10));
    5. when exercising the powers under subsections (1)(b) to (d), make such modifications as HM Treasury consider appropriate having regard to changes in the law of any part of the UK since the relevant regulations listed in subsections (3) and (4) were made (subsection (8)(a)). HM Treasury is also delegated the power to restate relevant Gibraltar provision in a clearer or more accessible way (subsection (8)(b)). A power similar to this latter one is found in paragraph 21(b) of Schedule 7 to EUWA;
    6. make different provision in relation to different cases; amend, revoke, repeal or otherwise modify an enactment; make consequential, incidental, supplementary, transitional, transitory, or saving provision; confer functions on a person, including functions involving the exercise of a discretion (subsection (11).
  4. The power of HM Treasury to make regulations is limited:
    1. in scope, by the definition of ‘relevant Gibraltar provision’ in subsections (2)–(4) and (13) in relation to which HM Treasury may exercise their powers in subsection (1);
    2. by the pre-condition to the making of the regulations in the exercise of these powers that the regulations made in the exercise of this power are compatible with the objectives set out in subsection (6);
    3. procedurally, as the regulations made by HM Treasury in the exercise of the powers in this section will be subject to the affirmative procedure (subsection (12));
    4. also procedurally, in relation to the powers to make regulations applying certain mechanisms of section 32A of, and Schedules 2A and 2B to, FSMA (subsection 1(d)), by the duty of HM Treasury to consult the FCA, the PRA, and the Government of Gibraltar before exercising that power (subsection (7)).

Section 24: Collective investment schemes authorised in approved countries

  1. Subsection (1) amends the definition of a "recognised scheme" in section 237(3) of FSMA so that it includes schemes recognised under section 271A of FSMA and refers to section 271S, which sets out (amongst other things) that the definition in section 237(3) also includes a part of a scheme recognised under section 271A.
  2. Subsection (2)(a) introduces Schedule 9 which inserts sections 271A to 271S (the "OFR provisions") into Chapter 5 of Part 17 of FSMA. Subsection (2)(b) then sets out that Part 2 of the Schedule is related to minor and consequential amendments arising from the new OFR provisions.

Section 25: Individually recognised overseas collective investment schemes

  1. This section makes amendments to FSMA. Sections (3) to (5) set out amendments to Chapter 5 of Part 17, which relate to the process for recognising overseas schemes under section 272 of FSMA.
  2. Section 272 will be available for individual overseas schemes that do not have the benefit of recognition under section 271A. This may be because a scheme is authorised in a country or territory that is not subject to an equivalence determination for retail investment schemes or is not a specific category of scheme that has been described in such an equivalence determination.
  3. The following amendments to section 272 are made:
    1. amending section 272(1) of FSMA so that schemes that are capable of being recognised under section 271A of the OFR cannot be recognised under section 272 of FSMA. section 272(1A) has then been added to define a scheme having ‘the benefit of section 271A’ as a scheme that is authorised in a country or territory approved by, and falling within the descriptions set out in, regulations made under section 271A of FSMA;
    2. section 272(5) of FSMA required the FCA to consider any rule of law and any matters which are or could be the subject of rules, in relation to UK authorised schemes, when assessing an application from an overseas scheme to be recognised under section 272. Section 272(5)(b) is amended so that the FCA will only need to consider what is currently the subject of rules, not what could be the subject of rules.
  4. The following amendments to section 277 are made:
    1. amending section 277(1) of FSMA so that for FCA approval, scheme operators no longer have to provide written notice for all changes to the scheme’s operation or management. Instead, they only have to provide notice for changes which would be a material alteration. The FCA may make rules specifying when a proposed alteration is a material alteration;
    2. amending section 277(3) of FSMA to remove the requirement for a scheme operator to provide written notice to the FCA at least one month prior to any replacement of the operator, trustee or depositary. Section 277(3A) has then been added so that, instead, the scheme operator has to tell the FCA at least one month before the replacement, or if that is not possible, it must tell the FCA as soon as possible in the period of one month before the replacement is made. Section 277(3B) has also been added so that the scheme operator must give written notice of any changes to the name or address of the scheme operator or representative of the operator in the UK, the name and address of any trustee or depository of the scheme, and the address of a place in the UK for the service of notices or other documents which need to be served under FSMA.
  5. The following amendments are made:
    1. an addition of section 282A is made, which states the obligations on the operator if the scheme’s recognition is revoked or suspended. This states that, if the FCA gives a decision notice that a scheme is revoked, or a direction that the scheme is suspended, then the scheme operator must notify such persons as the FCA may direct. The form and manner of this notification may be decided by the FCA and must contain such information as the FCA directs;
    2. an addition is made to create section 282B on public censure. This section states that if the FCA believes any rules and requirements set out in subsection (1)(a)-(c) have been contravened, then it may publish a statement to that effect. If the FCA proposes to publish such a statement, it must give the scheme operator a warning notice. If the FCA then decides to publish the statement, it must also give a decision notice, which will set out that the operator has the right to refer the matter to the Upper Tribunal;
    3. an addition is made to create section 282C, which clarifies that recognition under section 272(1) applies to parts of collective investment schemes (also called ‘sub-funds’) as it does to schemes. Subsection (2) makes it clear that the definition of a ‘recognised scheme’ in Part 17 of FSMA includes a part of a scheme recognised under section 272, and that other references in or made under Part 17 to schemes recognised under section 272 include parts of schemes. Subsection (3) sets out that provisions made under or of Part 17 have effect in relation to parts of schemes recognised, or seeking recognition under section 272 with appropriate modifications, and subsection (4)(a) allows HM Treasury to make provision by way of regulations as to what are, or what are not such appropriate modifications. Subsections (4)(b) and (c) also give HM Treasury powers to make, by regulations, provision so that relevant enactments have effect with appropriate modifications, or do not have effect, in relation to parts of schemes recognised or seeking recognition under section 272. Relevant enactments are defined as any legislation relating to schemes recognised or seeking recognition under section 272, which were passed or made before the day on which section 282C(1) comes into force. In making regulations under, and for the purposes set out in subsections (4)(b) and (c), HM Treasury can amend, repeal or revoke legislation. Subsection (8) then inserts 282C in the list in section 429(2), so that HM Treasury’s power under 282C is exercisable by the affirmative procedure.

Section 26: Money market funds authorised in approved countries or territories

  1. This section makes the following amendments to Article 4 of the MMFR, which sets out the regulations for MMFs in the UK:
    1. sub-paragraph (aa) is added to paragraph 1 in Article 4 (authorisation of MMFs). This sets out that an MMF may be marketed in the UK if it is authorised and supervised in a country or territory that is approved under Article 4A and meets the conditions in paragraph 1ZA;
    2. paragraphs 1ZA,1ZB and 1ZC are added, which set out the condition that needs to be satisfied for an MMF to be marketed in the UK. This condition is that the FCA must have received a written notification that the MMF intends to be marketed in the UK. This notification must be made by such a person and in such a form and manner as the FCA directs. The FCA may also direct what information is contained in or accompanied by the notification.
  2. After Article 4, a new ‘Article 4A – Approval of country or territory’ is inserted:
    1. this Article gives HM Treasury the power to make regulations approving a country or territory as being equivalent in respect of MMFs. In order to do this, HM Treasury may not make such regulations unless it is satisfied that the law and practice of the country or territory imposes requirements on its MMFs that have an equivalent effect to the requirements under the MMFR. In making such regulations, HM Treasury may also have regard to any matter they consider relevant;
    2. paragraph 4 sets out that HM Treasury may request the FCA to prepare a report on the law and practice of the country or territory in question, when it is considering whether to make, vary or revoke an approval of its MMFs. This request must be made in writing. If HM Treasury asks for a report, the FCA must provide the report.
  3. In Article 6(1) (aa) is inserted after point (a). This allows UCITS or AIFs, which are authorised and supervised in a country or territory approved by regulations under the new Article 4A, to be designated as an MMF.

Section 27: Provision of investment services etc. in the UK

  1. This section introduces Schedule 10 which amends the mechanism under which the UK may assess third countries to be equivalent for the purposes of Article 47(1) of MiFIR.
  2. It is consistent with the intention of the Act that the validity, meaning or effect of the Title 8 Regime (as amended by the Act) is to be interpreted in accordance with any retained case law and any retained general principles of EU law, as provided for in section 6(3) of the EUWA.

Part 4: Cancellation of permission to carry on regulated activity

Section 28: Part 4A permissions: cancellation on initiative of FCA

  1. This section introduces Schedule 11 which amends Part 4A of FSMA by inserting section 55JA and a new Schedule 6A to FSMA.

Part 5: Rules about level of care provided by authorised persons

Section 29: FCA rules about level of care provided to consumers by authorised persons

  1. Subsection (1) requires the FCA to carry out a public consultation about whether it should make rules providing that authorised persons owe a duty of care to consumers.
  2. Subsection (2) details three considerations that this consultation must include. First, the consultation should consider the introduction of other provisions in the FCA’s rules on the level of care that must be provided to consumers by firms, either instead of or in addition to a duty of care. Second, the consultation should consider whether a duty of care or other provision in its rules should apply to all consumers or to particular classes of consumer. Third, the consultation should consider the extent to which a duty of care, or other provision, would advance the FCA’s consumer protection objective.
  3. Subsection (3) requires the FCA to carry out this consultation, and publish its analysis of responses, before 1 January 2022. It also requires the FCA to make general rules about the level of care provided to consumers following this consultation before 1 August 2022, having regard to its analysis of the consultation’s responses.
  4. Subsection (4) provides that the requirement to consult may be satisfied by a consultation, undertaken by the FCA, that is carried out between 1 January 2021 and the commencement date for this section (as well as consultations which are carried out after the section’s commencement date).
  5. Subsection (5) specifies the meaning of the terms ‘authorised person’, ‘consumer’, and ‘general rules’ according to the definitions given in FSMA.

Part 6: Insider dealing and money laundering etc

Section 30: Insider lists and managers’ transactions

  1. This section amends Article 18 of the MAR to make clear that both issuers and any person acting on their behalf or on their account (such as advisers) are required to maintain their own insider lists. It also clarifies that if an issuer asks someone else to prepare or update their insider list (on their behalf), the issuer remains fully responsible for complying with the requirements under Article 18.
  2. This section also amends Article 19 of the MAR to change the deadline by which issuers have to publicly disclose transactions notified to them by senior managers and persons closely associated with senior managers. The deadline will now be two working days after those transactions have been notified to the issuer, rather than three business days after the transaction itself. The period for calculating the deadline is now counted in "working days" rather than "business days", to ensure a consistent term is used throughout MAR. The section adds a definition of "working day" – any day not a Saturday, Sunday, Good Friday, Christmas Day, or a bank holiday in England and Wales – to Article 19.

Section 31: Maximum sentences for insider dealing and financial services offences

  1. This section amends section 61(1)(b) of the Criminal Justice Act 1993 and section 92(1)(b) of the Financial Service Act 2012. The effect of the amendment is to increase from seven to ten years the maximum sentence for conviction on indictment for insider dealing offences under sections 52(1), 52(2)(a) and 52(2)(b) of the Criminal Justice Act 1993, and market manipulation offences under sections 89, 90 and 91 of the Financial Services Act 2012.
  2. The Section provides that this higher maximum will not apply to offences committed before the amendment takes effect, including offences committed over a period of time which began before the amendment takes effect.

Section 32: Money laundering offences: electronic money institutions, payment institutions and deposit-taking bodies

  1. Section 32 amends Part 7 of POCA, sections 327 to 329, 339A, 340 and 459 to bring payment and e-money institutions within the threshold amount provisions. Where the value of criminal property falls below the threshold amount, a payment or e-money institution will be able to do certain specified acts in relation to that property when operating an account maintained by it, without committing an offence. Subsection (6) of section 32 also defines, for the purposes of POCA, e-money institutions to have ‘the same meaning as in the Electronic Money Regulations 2011 (S.I. 2011/99) (see regulation 2 of those Regulations)’ and payment institutions as an ‘authorised payment institution or a small payment institution (each as defined in regulation 2 of the Payment Services Regulations 2017 (S.I. 2017/752))’.

Section 33: Forfeiture of money: electronic money institutions and payment institutions

  1. Section 33 introduces Schedule 12 which amends ATCSA and POCA provisions about the forfeiture of money so they apply to money held in accounts maintained with electronic money and payment institutions. It provides for the amendments in the Schedule to have retrospective effect, except for the amendments to Part 5 of POCA as it extends to Northern Ireland, as the relevant provisions of that Part are not yet in force there.

Section 34: Application of money laundering regulations to overseas trustees

  1. This section amends SAMLA. It will ensure the continued ability of the Government to enforce and continue to make changes to regulations with extra-territorial application to overseas trustees of trusts with links to the UK.

Part 7: Debt Respite Scheme

Section 35: Debt Respite Scheme

  1. This section amends sections 6 and 7 of the FGCA. These amendments are self-explanatory. They will allow regulations to be made which can:
    1. compel creditors to accept amended repayment terms;
    2. provide for a charging mechanism through which creditors will contribute to the cost of running the scheme and repayment plans; and
    3. include debts owed to central government departments.
  2. Section 35(1), (2) and (4) (debt respite scheme) extend to England and Wales only and section 35(3) extends to England and Wales and Northern Ireland only. Regulations under section 7 of the FGCA will need to be laid before and approved by a motion of Senedd Cymru in order for them to apply in Wales and the Northern Ireland Assembly in order for them to apply in Northern Ireland.

Part 8: Help-to-Save

Section 36: Successor accounts for Help-to-Save savers

  1. This section inserts a new paragraph 13A into Schedule 2 to the Savings (Government Contributions) Act 2017. Paragraph 13A provides the powers for the making of regulations which allow for the balance in a matured Help-to-Save account, at the end of the four-year term when it ceases to be a Help-to-Save account, to be transferred to an alternative savings account (the successor account) in the National Savings Bank. This would occur in instances where the account holder has not provided instructions to the Director of Savings to inform them where the balance should be paid.
  2. Sub-paragraph (4) restricts the regulation-making powers where instructions have been received from the account holder. The Director of Savings may not transfer a balance from a Help-to-Save account to a successor account in instances where the account holder, or a person acting on their behalf, has provided instructions to the Director of Savings to transfer the balance to another account and those instructions are received in sufficient time for them to be acted on.
  3. Sub-paragraph (5) permits the regulations to make provision for balances in existing accounts, opened prior to the regulations being made.
  4. Sub-paragraph (6) specifies that the successor account may be a new or existing account and that the transfer of a Help-to-Save balance to a successor account will not result in a charge to the account holder. There are currently no fees charged to account holders for holding money with NS&I, including the existing savings account product currently planned to be used for the intended successor account.

Part 9: Miscellaneous

Section 37: Regulated activities and application of Consumer Credit Act 1974

  1. Section 37 extends an existing power in section 107(6) of the Financial Services Act 2012, which provides that HM Treasury may disapply provisions of the Consumer Credit Act 1974 in relation to an activity previously licensed under the Consumer Credit Act 1974, or exempted under specified provisions of that Act, where the activity has become a regulated activity for the purposes of FSMA. Subsection (2) effects this extension.
  2. Subsection (3) defines the types of activity to which the extension of the power in section 107(6), effected by subsection (2), applies.

Section 38: Amendments of the PRIIPs Regulation etc.

  1. This section delegates a power to the FCA to clarify the scope of PRIIPs through their rule-making powers in Part 9A of FSMA. A new Article 4A will be inserted into the PRIIPs Regulation which will allow the FCA to make rules specifying whether particular products or categories of products fall within the scope of the definition of a PRIIP.
  2. The new Article 4A applies modified sections 137T as to the FCA’s general supplementary powers, 138F as to the requirement to give notice of rules to HM Treasury, 138G regarding rule-making instruments, 138I and 138L as to FCA consultation and 141A regarding the power for HM Treasury to make consequential amendments.
  3. This will enable the FCA to address existing, and potentially future, ambiguities in relation to certain types of investment product. The definition of a PRIIP will remain unchanged.
  4. The PRIIPs Regulation obliges PRIIPs manufacturers to include performance scenarios in the KID. The methodology for calculating these scenarios is set out in the PRIIPs RTS.
  5. Subsection (4) amends Article 8(3) of the PRIIPs Regulation to replace the term ‘performance scenarios and the assumptions made to produce them’ with ‘appropriate information on performance’. The FCA will then be able to amend the RTS to clarify what information should be provided in the KID by virtue of the power given by the Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019, in accordance with Chapter 2A of Part 9A of FSMA.
  6. This information will not necessarily take the form of performance scenarios.
  7. Subsections (5) and (6) allow HM Treasury to extend the UCITS exemption, in regulation 32(1) of the PRIIPs Regulation, to a date no later than 31 December 2026.
  8. UCITS Retail schemes are currently exempted from the requirements of the PRIIPs Regulation until 31 December 2021. Instead, UCITS funds must produce a Key Investor Information Document under requirements of the UCITS Directive which were implemented via FCA rules. At present the Government considers that the current rules for UCITS disclosure are satisfactory.
  9. Subsections (5) and (6) contain an amendment which delegates a power to HM Treasury to further extend the exemption for UCITS if required, up to a maximum of five years. This will enable HM Treasury to make regulations at a later date to amend the exemption date in the PRIIPs Regulation, if necessary. This amendment will enable HM Treasury to consider the most appropriate timing for the transition of UCITS funds into the PRIIPs regime, or any domestic successor that may result from the planned review of the UK framework for investment product disclosure. It will also allow HM Treasury to provide both UK and EEA UCITS with a transitional period to comply with the PRIIPs Regulation requirements, as amended by subsections (5) and (6) of the measure.

Section 39: Retention of personal data under the Market Abuse Regulation

  1. This section removes a provision in Article 28 of MAR which restricts the FCA from holding personal data collected for the purposes of MAR for more than five years.
  2. By removing the provision requiring the FCA to delete MAR personal data after five years, MAR personal data must be held in general compliance with the GDPR personal data retention standards, which requires personal data to be held only as long as is necessary. In some circumstances this could mean that the FCA holds the data for a period of longer than five years. This will allow the FCA to investigate and prosecute cases of complex market abuse which span more than five years.
  3. This section relates only to the FCA. It does not affect the position for businesses performing other functions under MAR.

Section 40: Over the counter derivatives: clearing and procedures for reporting

  1. This section inserts two new provisions into EMIR.
  2. Subsection (2) sets out an obligation for providers of clearing services to provide their services under FRANDT commercial terms and empowers the FCA to make rules to specify the content of those terms.
  3. Subsection (3) provides that Trade Repositories must establish procedures and policies to enhance data quality on OTC transactions and empowers the FCA to determine further detail through rules.
  4. Subsection (4) defines the rule-making powers of the FCA for the implementation of the FRANDT and TR measures described above.
  5. Subsection (5) allows the FCA to consult on the proposed implementing rules before the Act received Royal Assent.

Section 41: Regulations about financial collateral arrangements

  1. This section relates to the legal basis for the FCARs and also amends the Banking Act 2009.
  2. Subsections (1) and (2) confirm that the FCARs as originally made, including all amendments, and any financial collateral arrangements entered into which rely on them, are effective regardless of any question about the scope of the powers available to HM Treasury under the ECA, when the FCARs were originally made. This underpins the legal effect of the FCARs, without taking the more disruptive course of revoking and remaking them. The section has retrospective effect.
  3. Subsection (3) amends the Banking Act 2009 in accordance with subsections (4) to (6), which amend the power to make secondary legislation in relation to financial collateral arrangements, contained in section 256 of the Banking Act 2009. This provision makes such secondary legislation subject to the draft affirmative procedure as opposed to the made affirmative procedure, given that the made affirmative procedure is more appropriate for urgent legislation. Amending this power will still allow HM Treasury to make amendments to the FCARs through appropriate secondary legislation.

Section 42: Appointment of Chief Executive of FCA

  1. This section makes an amendment to Schedule 1ZA to FSMA to insert a provision to make the appointee to the role of the FCA Chief Executive subject to a fixed, once renewable five-year term.

Section 43: Subordinate legislation made under retained direct EU legislation

  1. This section makes two amendments to FSMA in respect of powers to make subordinate legislation under retained direct EU legislation.
  2. Subsection (2) amends the definition of "qualifying provision" in section 425C of FSMA to include regulations made by HM Treasury and rules made by the regulators under new powers contained in retained direct EU legislation. This will allow HM Treasury to specify such regulations or rules for the purposes of other provisions in FSMA, so that various regulatory powers and functions under FSMA apply to provision made in those regulations or rules. This is consistent with the treatment of the equivalent regulation-making and technical standards powers which HM Treasury and the regulators will have under retained direct EU legislation as a result of the EUWA.
  3. Subsection (3) amends the definition of "legislative function" in paragraph 8 of Schedule 1ZA to FSMA. It adds the rule-making powers which the Act’s amendments to retained direct EU legislation will confer on the FCA to the existing list of legislative functions. This, in turn, will require the FCA to discharge those powers through its governing body. This is consistent with the treatment of existing FCA rule-making powers under FSMA and FCA powers to make technical standards as a result of the EUWA.

Section 44: Payment services and the provision of cash

  1. This section inserts a new paragraph 3 into Schedule 1 to the PSRs. Paragraph 3 introduces the provision of cash, in certain circumstances, where there is no corresponding purchase of goods and services into the list of activities that do not constitute a payment service under those Regulations.
  2. Sub-paragraph (1) specifies that the activity does not include the provision of cash through an automatic teller machine. Sub-paragraph (1)(a) sets out that the provision of cash must be accompanied by a transfer of corresponding amount from a payment account, as defined by the PSRs, held by the recipient of the cash to a relevant person. Sub-paragraph (1)(b) sets out that where cash is being provided by a relevant person, that person cannot also be the one who provides the recipient’s payment account from which the transfer in sub-paragraph (1)(a) is being made.
  3. Sub-paragraph (2) specifies that the relevant person may be a person acting on their own behalf, for example a shop, or through other persons acting on behalf of the relevant person, such as a shop providing cash on behalf of a third-party provider.
  4. Sub-paragraph (3) confirms that the execution of the transfer specified in sub-paragraph (1), and other services enabling that transfer, are not excluded from the meaning of payment services by the new section. They will therefore continue to constitute a payment service for the purpose of Part 1 of Schedule 1 to the PSRs.

Part 10: General

Section 45: Power to make consequential provision

  1. This section gives HM Treasury power to make regulations making provision consequential on the provisions of the Act and the Secretary of State power to make regulations consequential on sections 31 and 32 and Schedule 12. Regulations making consequential amendments are to be subject to the negative procedure, except where they amend primary legislation of a sort listed in subsection (4). In that case, the regulations are to be subject to the affirmative procedure.

Section 46: Regulations

  1. This section makes provision about the procedure which is to apply in respect of powers to make regulations conferred by the Act.

Section 47: Interpretation

  1. This section explains key terms for the purposes of this Act.

Section 48: Extent

  1. This section sets out the territorial extent of the Act.

Section 49: Commencement and transitional provision

  1. This section sets out that the provisions of the Act, other than those listed in subsections (1) to (4), will commence on the day appointed by HM Treasury by regulations. Subsection (1) lists provisions which will commence on Royal Assent and subsection (2) lists provisions which will commence two months after Royal Assent. Subsection (4) makes provision for section 34 to be commenced on the day appointed by either HM Treasury or the Secretary of State by regulations.

Section 50: Short title

  1. This section provides that the Act may be cited as the Financial Services Act 2021.

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