Financial Services And Markets Act 2023

Legal background

Revocation of retained EU law

583. The European Union (Withdrawal) Act 2018 (EUWA 2018) repealed the European Communities Act 1972 (ECA 1972) and preserved the existing body of directly applicable EU law, so that it continues to apply. It also preserved UK laws relating to EU membership, such as legislation implementing EU Directives.
584. This body of law is referred to as "retained EU law", as defined by EUWA 2018.
585. Broadly speaking, EU law falls into the following categories:
     1. Direct EU legislation, such as an EU regulation or a Delegated Regulation, which applied directly to the UK as a result of the ECA 1972; this is incorporated into UK law through section 3 of EUWA 2018.
     2. EU obligations, principally those imposed by EU Directives, which were, in part, incorporated into UK law through the powers in section 2(2) of the ECA 1972; this is incorporated into UK law as "EU-derived domestic legislation" in section 2 of the EUWA 2018.
     3. Rights, powers, liabilities, obligations, restrictions, remedies and procedures which stem from retained EU law, and which are saved by section 4 of EUWA 2018.
586. HM Treasury undertook an extensive programme of secondary legislation in order to address deficiencies in retained EU law in financial services under the powers in section 8 of EUWA 2018. Where retained EU law continues to exist, it restricts the ability of the regulators to make rules, even where they already have the power to do so.
587. This Act revokes most types of retained EU law in financial services so that the model of regulation established in FSMA 2000 can be applied across all areas of financial services regulation.
588. It does this by creating the concept of "EU-derived legislation". This concept captures all Direct EU legislation and all EU obligations related to financial services.
589. The Act also sets aside any rights, powers and liabilities in financial services captured by section 4 of EUWA 2018, which exist as a result of EU-derived legislation.
590. EU-derived legislation as defined in this Act, and retained EU law as defined in sections 2, 3, and 4 of EUWA 2018, are not exactly the same, meaning that this Act does not revoke all retained EU law in financial services. In particular, this Act does not generally repeal retained EU law where it has been incorporated into primary legislation. It does not revoke non-legislative provisions such as the regulators rulebooks, where they implemented EU obligations.
591. The Act also revokes some legislation which is not retained EU law. This is because EU-derived legislation also captures associated regulations made under EUWA 2018, and regulations made under this Act which amend retained EU law. When retained EU law in financial services is revoked, these regulations will no longer be needed.

Parts 9C and 9D of FSMA 2000

592. The Financial Services Act 2021 inserted Parts 9C and 9D into FSMA 2000. Both these parts enable the PRA and the FCA to make rules for firms which has previously been subject to retained EU law, and are relevant to the approach taken in this Act.
593. Both Parts 9C and 9D of FSMA 2000 establish "accountability arrangements" for the relevant regulators which govern the making of these prudential rules for some firms. In particular, sections 144C and 143G of FSMA 2000 require the PRA and the FCA to "have regard" to certain matters when making rules. Sections 143C and 143D of FSMA 2000 require the FCA to make certain rules in relation to investment firms. Sections 29, 30, and 31 of this Act insert new powers in FSMA 2000 which provide for HM Treasury to make similar arrangements for other policy areas.
594. Finally, section 144E(3) of FSMA 2000 creates a number of exemptions from the requirement to consult and conduct cost benefit analysis where the PRA makes rules which are materially similar to those in the capital requirements regulation ("the CRR"). Section 6 of this Act applies a similar approach to other parts of retained EU law where the regulators make rules which are materially similar, or revoke rules without replacing them.

Transitional amendments

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

Wholesale capital markets regulation

595. UK capital markets are regulated under the framework that the UK inherited from the EU: the MiFID II framework (with ‘MiFID’ standing for ‘Markets in Financial Instruments Directive’). The MiFID II framework has been, where necessary, brought into UK law and amended to address deficiencies resulting from the UK’s withdrawal from the EU.
596. The cornerstone of the MiFID II framework is an EU Directive known as MiFID II. 1 Being an EU Directive, MiFID II required transposition into national law across EU states. Responsibility for transposition into UK law was essentially divided between HM Treasury and the FCA: the FCA made changes to its Handbook (for example, to introduce new rules on the categorisation of clients of regulated entities), and HM Treasury dealt with the changes that had to be made to UK legislation (for example, it updated the Regulated Activities Order 2 to include new regulated activities). Although MiFID II itself was not brought into UK law, those UK-issued rules and legislation which were used to transpose it still reflect the content of that Directive.
597. The other central piece of legislation in the MiFID II framework is MiFIR. Being an EU Regulation, MIFIR applies directly across EU states. MiFIR is one of the parts of the framework that was brought into UK law; this means there is now a UK version of MiFIR, which is currently treated much like UK primary legislation. In its UK version, MiFIR applies to investment firms, credit institutions and market operators with a registered or head office in the UK. 3 In this UK version, the FCA inherited functions that had belonged to the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) under the EU version.
598. A number of MiFID II and MiFIR provisions had required supplementing via delegated acts or technical standards (including regulatory technical standards (RTS)). Like MiFIR, the resulting Commission Delegated Regulations were brought into UK law but, differently from MiFIR, they are treated much like, respectively, UK subordinate legislation and regulators’ rules.
599. Changes to the regulation of wholesale financial markets will involve amendment of the UK version of MiFIR. Because of the interplay between rules and legislation making up the MiFID II framework, most of these changes will also involve amendment of UK-issued law transposing MiFID II (especially the MiFI Regulations 4 ), FCA and PRA rules, and the UK versions of Commission Delegated Regulations. Many of these additional amendments will be effected other than through the Act: for example, changes to certain Commission Delegated Regulations will be effected by the FCA through powers the FCA already has.

Equity markets

600. The predecessor of MiFID II, which was known as the Markets in Financial Instruments Directive (MiFID), was in force across the EU from 2007 to 2018 (the date from which the majority of the MiFID II framework’s requirements began to apply). MiFID provided for, among others, transparency requirements; this included, for example, how EU states should require investment firms to report on transactions, and rules for admission of financial products to trading.
601. MiFID II, which replaced MiFID, also covered, among other key areas, the regulation of trading venues, with requirements being imposed on both market operators 5 and investment firms operating trading venues; those requirements concerned, for example, best execution, and the suspension and removal of financial instruments from trading. The FCA’s transposition of MiFID II involved the publishing of policy statements 6 introducing instruments to turn MiFID II requirements into FCA rules.
602. In addition to MiFID II requirements brought into UK law and rules, MiFIR (which was directly applicable EU law and the other fundamental component of the MiFID II framework) contains several provisions for the regulation of trading venues, including in respect of transparency. A notable characteristic of the retained version of MiFIR in UK law is its interplay with the regulatory treatment of trading venues under FSMA 2000. Article 2(1)(13A) MiFIR introduces the definition of ‘UK regulated market’, which brings together the MiFID II concept of ‘regulated market’ with FSMA 2000’s ‘recognised investment exchanges’ (RIEs) 7 . RIEs (and therefore some MiFIR ‘regulated markets’) are exempt from the FSMA 2000 general prohibition in respect of any regulated activity which they carry on as part of the exchange’s business as an investment exchange.

Share Trading Obligation (STO)

603. One of the regulatory changes introduced by the MiFID II framework to the regulatory regime established by MiFID was the introduction of a new requirement known as the Share Trading Obligation (STO), which sits at Article 23 MiFIR. Under the STO, no investment firm may execute a trade in shares admitted to trading on a UK RM, or traded on a UK trading venue, unless that trade takes place on a UK RM, MTF, or systematic internaliser, or an equivalent third-country trading venue.
604. Under Part 7 (regulations 197 – 205) of the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, 8 each of the FCA, PRA and Bank of England has a power (the Temporary Transitional Power, or TTP) to make transitional directions to waive or modify obligations imposed on persons where the nature of the obligation has been altered by the exercise of section 8 of EUWA 2018. In December 2020 the FCA exercised its TTP power to modify the requirements imposed on investment firms by the STO : its transitional direction provided that investment firms could trade in shares subject to the STO on or through EU trading venues and systematic internalisers.
605. The Act permanently removes the STO.

Pre-trade transparency waiver regime

606. Articles 3 to 7 MiFIR concern transparency obligations in respect of trading in a wide range of equity and equity-like instruments, comprising shares, depositary receipts, ETFs, certificates and other similar financial instruments. Each of Articles 3 to 7 relates to obligations on market operators and investment firms operating a trading venue9. Of those Articles, the following concern transparency obligations imposed on those persons in a pre-trade context:
     1. Article 3 (Pre-trade transparency requirements for trading venues in respect of shares, depositary receipts, ETFs, certificates and other similar financial instruments). Market operators and investment firms operating a trading venue must make public current bid and offer prices and the depth of trading interests at those prices.
     2. Article 4 (Waivers for equity instruments). The FCA has the power to waive the obligation above in respect of certain types of orders or financial instruments. Article 4(1) MiFIR specifies a number of situations in which the FCA may waive the pre-trade transparency requirements in Article 3(1). These waivers include the Reference price (RP) and the Negotiated trade (NT) waivers. Article 4(5) enables the FCA to withdraw waivers if it considers that the way in which they are being used is inconsistent with the original purpose of the waiver or is circumventing the requirements of Article 4.
     3. Article 5 (Volume cap mechanism). Article 5 introduces what is commonly known as the Double Volume Cap (DVC). The DVC imposes two quantitative constraints on the use of the RP and NT waivers in the trading of equity instruments on trading venues:
     4. that trading on a single venue using those waivers be limited to 4% of the trading of that instrument on all trading venues across the ‘relevant area’ 10 ; and
     5. that trading on all venues using those waivers be limited to 8% of the trading of that instrument on all trading venues across the relevant area.
607. Temporarily, further to Article 5(3A) MiFIR, the requirement at Article 5(2) and (3) for the FCA to suspend use of the RP and NT waivers in the event the 4% and 8% caps are exceeded does not apply; instead the FCA has the discretion to suspend use of the RP or NT waivers for an initial period of six months to ensure that the use of the waivers does not harm price formation (Article 5(3B)).
608. In respect of the waivers regime generally, the Act confers on the FCA the discretion to decide what the waivers should be and the conditions or limitations that should attach to them. In respect, specifically, of the DVC, the Act removes that mechanism and replaces it with an obligation on the FCA to monitor the level of ‘dark’ trading and a power to limit it where there is evidence that it is undermining the efficiency of the price formation process.

Systematic internalisers

609. A systematic internaliser is an investment firm which, on an organised, frequent, systematic and substantial basis, deals on own account when executing client orders outside of an RM, MTF or an OTF, without operating a multilateral system. 11
610. Under MiFIR, systematic internalisers are subject to bespoke pre-trade transparency requirements and, alongside other investment firms, to post-trade disclosure requirements. Before a trade takes place, systematic internalisers must make public the prices they are prepared to buy and/or sell an equity instrument at (see Article 14(1); for the corresponding obligation in respect of non-equities, see Article 18(1)). After a trade has taken place, systematic internalisers (like other investment firms) must make public the price and volume of certain transactions completed (see Article 20(1) for transactions in equities and Article 21(1) for transactions in non-equities). Commission Delegated Regulation (EU) 2017/58712, made under MiFIR, sets out the detail of the pre- and post- trade transparency requirements for trading venues and investment firms (including systematic internalisers).

Definition of a systematic internaliser

611. The definition of systematic internaliser brings together a number of concepts and calculations. In particular, a systematic internaliser will:
     1. be an "investment firm": this is a person whose regular occupation or business is the provision of one or more investment services to third parties or the performance of one or more investment activities on a professional basis; 13
     2. be "dealing on own account": this means that the investment firm (that is, the systematic internaliser) executes trades by trading against the investment firm’s own proprietary capital. Because the systematic internaliser uses its proprietary capital, it is legally considered to be a counterparty of the trade, and to take on risk from that trade; and
     3. operate on an "organised, frequent, systematic and substantial basis": this concept is aimed at excluding from the definition investment firms who, though otherwise operating as systematic internalisers, only do so on an occasional, ad hoc and irregular basis.
612. There are two notable features of the definition of systematic internaliser which concern the "organised, frequent, systematic and substantial basis" limb of the definition:
     1. First, determining whether an investment firm is acting as a systematic internaliser involves looking at each relevant instrument. This is a result of the way in which Article 2(1)(12A) MiFIR provides what this basis is: "[F]requent and systematic" is measured by reference to each financial instrument the firm deals on, and "substantial" is measured by reference to each specific financial instrument the firm deals on. 14
     2. Second, the way to determine what constitutes organised, frequent, systematic and substantial trading in respect of each such instrument is via a combination of quarterly calculations and quantitative thresholds specified in an onshored Commission Delegated Regulation (this Delegated Regulation is often referred to as MiFID Org Regulation) 15
613. The Act removes the inherent requirement on firms to carry out complex calculations by substituting Article 2(1)(12) to (12A) MiFIR with a new definition of systematic internaliser. This definition retains the "organised, frequent, systematic and substantial basis" criterion but removes the role of calculations, in the MiFID Org Regulation or elsewhere, in determining the meaning of this basis, instead empowering the FCA to make this determination via rules.

Execution of trades at the midpoint

614. ‘Tick sizes’ set minimum increments (‘ticks’) by which prices for equities can change; in other words, they represent the smallest permitted price fluctuation for any particular equity. ‘Tick size regimes’ restrict so-called ‘midpoint’ trading. Midpoint trading is where a buyer and seller of a security are matched at a price that is half-way between (i.e. at the ‘midpoint’ of), for example, their respective offers to buy and sell. 16 In other words, tick size regimes prohibit or constrain trades happening where the price agreed is set at a fraction of the minimum increment (i.e. at a fraction of the tick size).
615. The current UK tick size regime was introduced by the MiFID II Directive. It provides trading venues (regulated markets, MTFs and OTFs) with an exemption permitting midpoint trading that would otherwise involve a price movement below the tick size where the order is ‘Large In Scale’ (LIS). Whether an order is LIS is determined in accordance with Article 7 of Commission Delegated Regulation 2017/587.
616. Article 63 of the Investment Firms Regulation 17 inserted Article 17a into MiFIR, which provided that systematic internalisers must comply with the tick size regime as well, although giving them the benefit of a similar exemption for midpoint trading on orders that are LIS. Bar this exemption, the prices at which systematic internalisers quote, offer improvements and ultimately enter into transactions must be in multiples of the stipulated tick size.
617. The Act provides for systematic internalisers to be able to trade in equities with their clients at the midpoint in all circumstances, rather than only for orders that are LIS.

Fixed income and derivatives markets

618. The Derivatives Trading Obligation (or DTO) is set out in Article 28 MiFIR. There are three fundamental components to the DTO:
     1. the counterparties on whom the DTO is imposed. The DTO applies to all ‘financial counterparties’ (FCs) and to a subset of ‘non-financial counterparties’ (NFCs). The terms ‘financial counterparty’ and ‘non-financial counterparty’ are taken from another retained EU Regulation, the European Market Infrastructure Regulation or EMIR. 18
     2. the derivatives coming under the scope of the DTO. These are the derivatives within a class that the FCA has declared to be subject to the DTO and listed in a public register.
     3. the venues on which transactions must be concluded by the counterparties under the DTO. The counterparties on whom the DTO is imposed must trade the derivatives coming under the scope of the DTO on a UK authorised trading venue, or overseas trading venue that benefits from an equivalence decision.

Alignment with the EMIR clearing obligation

619. EMIR imposes a number of requirements on counterparties to derivative contracts, central counterparties and trade repositories 19 . What EMIR seeks to tackle is essentially the risk that OTC derivatives (as defined in EMIR 20 ) pose to market stability and increased transparency in the OTC market. One of the key elements of EMIR, aimed at increasing the number of OTC derivatives that are cleared through CCPs 21 , is the Clearing Obligation (CO). The CO is set out at Article 4 EMIR. Like the DTO, the CO applies to (at least some) FCs, NFCs and analogous third-country entities. Where the CO applies, the entities in question must clear the trade through a CCP.
620. The way in which MiFIR frames the scope of the DTO draws heavily on EMIR; indeed, the scope of the DTO and CO were originally aligned. In 2019, EMIR was amended by an EU Regulation commonly referred to as ‘EMIR Refit’. 22 The amendments to EMIR made by EMIR Refit include changes to the scope of the counterparties subject to the CO, namely, the introduction of an exemption from the CO for small FCs, and the modification of the mechanism for determining the obligations of NFCs that are subject to the CO because they exceed certain thresholds. EMIR Refit did not make corresponding changes to Article 28 MiFIR, and so the respective scopes of the CO and DTO stopped being aligned.
621. The Act realigns the scopes of the CO and DTO by amending the DTO so that it only applies to relevant FCs and to relevant NFCs, being those FCs and NFCs that are subject to the CO.
622. In the interest of the realignment between the CO and the DTO, the Act also amends EMIR to introduce an exemption to the CO mirroring the exemption to the DTO. The Act gives the Bank of England a rule-making power to determine which post-trade risk reduction services should benefit from the new exemption to the CO, which power will be analogous to the FCA’s power to determine the application of the exemption from the DTO; in exercising its respective power, each regulator will be required to consult with the other.

Exemptions for post-trade risk reduction services

623. Article 31 MiFIR concerns a post-trade service used in derivatives markets known as ‘portfolio compression’, which MiFIR defines as a risk reduction service in which two or more counterparties wholly or partially terminate some or all of the derivatives submitted by those counterparties for inclusion in the portfolio compression and replace the terminated derivatives with another derivative whose combined notional value is less than the combined notional value of the terminated derivatives. Article 31(1) MiFIR exempts those carrying out portfolio compression from certain requirements, and in particular it exempts the trades that occur as part of portfolio compression from the DTO.
624. The Act makes the exemption from the DTO available to other post-trade risk-reduction services which can perform a similar function by empowering the FCA to set the appropriate scope of the exemption, which would no longer be linked to portfolio compression, and the appropriate conditions that should attach to its use.

FCA power to modify or suspend the DTO

625. The FCA has used the TTP to make a transitional direction modifying the DTO to, in short, allow certain counterparties 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. The Act empowers the FCA to suspend or modify the DTO outside the limited purpose and time limit constraints of the TTP. The Act allows the FCA to direct that the DTO is modified including in respect of any of its three fundamental components, and subject to conditions; the FCA will be able to direct, for example, that, for a certain period, certain persons to whom the DTO would normally apply are not bound by the DTO provided they meet certain conditions laid out in the direction.

Transparency regime for fixed income and derivatives

626. Articles 8 to 11 MiFIR 23 concern transparency obligations in respect of trading in a wide range of fixed income and derivatives instruments, including covered bonds, 24 exchange traded notes (ETNs), 25 exchange traded commodities (ETCs) 26 and emission allowances. Each of Articles 8 to 11 relates to obligations on market operators and investment firms operating a trading venue. In overview:
     1. Article 8 (Pre-trade transparency requirements for trading venues in respect of bonds, structured finance products, 27 emission allowances and derivatives). Market operators and investment firms operating a trading venue must, on a continuous basis during normal trading hours, make public current bid and offer prices and the depth of trading interests at those prices which are advertised through their systems.
     2. Article 9 (Waivers for non-equity instruments). The FCA has the power to waive the obligation above in respect of certain types of orders or financial instruments, for example, orders that are ‘large in scale’ compared with normal market size (this is sometimes referred to as the ‘LIS Waiver’), or financial instruments for which there is not a liquid market. The FCA is empowered, further to Article 9(5)(e) MiFIR, to make or amend technical standards to specify the financial instruments or the classes of financial instruments for which there is not a liquid market where pre-trade disclosure (as required by Article 8(1)) may be waived (under Article 9(1)); Commission Delegated Regulation (EU) 2017/583 , an onshored Delegated Regulation amended by the FCA, fulfils this role.28 Likewise, the same Delegated Regulation provides the methodology for specifying whether there is a liquid market; the FCA then performs the calculations to determine whether a ‘liquid market’ exists, on the basis of information it must collect daily from, in particular, trading venues and APAs.
     3. Article 10 (Post-trade transparency requirements for trading venues in respect of bonds, structured finance products, emission allowances and derivatives). Market operators and investment firms operating a trading venue must, as close to real time as possible (and in any case within five minutes after the execution of the relevant transaction), make public the price, volume and time of the transactions executed on the trading venues they operate. MiFIR empowers the FCA to specify the details of the transactions that must be made available for each class of financial instrument, which details are currently provided by Commission Delegated Regulation (EU) 2017/583.
     4. Article 11 (Authorisation of deferred publication). The FCA has the power to authorise deferred compliance with the obligation above on the basis of the size or type of the transaction, e.g. where transactions are large in scale compared with the normal market size for a given non-equity (this is sometimes referred to as the ‘LIS Deferral’); similarly to the pre-trade transparency regime, there is also a deferral available in respect of fixed income and derivative instruments, or classes of fixed income and derivative instruments, for which there is not a liquid market. FCA authorisation of the proposed arrangements for deferred publication must be obtained in advance, and those arrangements must be clearly disclosed to market participants and the public. The conditions for authorising market operators and investment firms operating a trading venue to provide for deferred publication are specified by the FCA itself further to Article 11(4)(c) MiFIR, and are currently provided by Commission Delegated Regulation (EU) 2017/583. Under Article 11(3) MiFIR, the FCA may do a number of things in conjunction with giving authorisation, including allowing for the omission of the publication of the volume of an individual transaction during an extended time period of deferral of four weeks.
627. Articles 18, 19 and 21 MiFIR similarly concern transparency obligations in respect of trading in fixed income and derivative instruments, but rather than applying to market operators and investment firms operating a trading venue, these apply to systematic internalisers and, in respect of Article 21, investment firms trading over the counter. In overview:
     1. Article 18 (Obligation for systematic internalisers to make public firm quotes in respect of bonds, structured finance products, emission allowances and derivatives). When providing a quote to a client at that client’s request in respect of a non-equity which is traded on a trading venue (ToTV), systematic internalisers must, in a manner which is easily accessible and on a reasonable commercial basis, also make public firm quotes in respect of that instrument. Systematic internalisers must, in addition, undertake to enter into transactions under the published conditions with any other client to whom the quote is made available. There are waivers available which similarly hinge on specifications provided by the FCA under the UK version of Commission Delegated Regulation (EU) 2017/583.
     2. Article 19 (Monitoring by the competent authority). The FCA has a monitoring duty in respect of the application of Article 18, and HM Treasury have the power to specify certain elements of the same article, e.g. what constitutes a ‘reasonable commercial basis’.
     3. Article 21 (Post-trade disclosure by investment firms, including systematic internalisers, in respect of bonds, structured finance products, emission allowances and derivatives). Investment firms (including systematic internalisers) trading away from a trading venue must, on concluding transactions, make public the volume and price of those transactions and the time at which they were concluded via an APA. The FCA has the power to allow investment firms to defer publication of such transaction details or may request the publication of limited details of a transaction or details of several transactions in an aggregated form, or a combination thereof, on similar terms to those provided by transactions caught by Article 11. Like Article 10, Article 21 concerns transactions in fixed income and derivative instruments which are traded on a trading venue.
628. The Act allows for the simplification of both pre- and post-trade transparency requirements by empowering the FCA to provide for the nature, scope and detail of those requirements in rules, including, if desired, with recourse to the ‘liquid market’ and ‘ToTV’ concepts. In respect of pre-trade requirements, the FCA will be able to, for example, determine, or set out a mechanism to determine, which trading systems used by venues, and which fixed income and derivative instruments, would be in scope, and in which circumstances waivers would be available. Similarly, in respect of post-trade requirements, the FCA will be able to, for example, determine, or set out a mechanism to determine, which fixed income and derivative instruments would be in scope and in which circumstances deferrals would be available.
629. In the case of pre-trade transparency requirements on trading venues, and of post-trade transparency requirements, the FCA’s rule-making powers are coupled with an obligation on the FCA to use those powers.

Commodity derivatives

630. Article 2(1)(30) MiFIR provides the legal definition of "commodity derivative", which definition the FCA adopts in its Handbook, and which is also used in the RAO.
631. In addition to providing the definition of "commodity derivative", MiFIR also contains important FCA powers in respect of the setting of position limits which are reflected in Commission Delegated Regulation (EU) 2017/591. The regulation of commodity derivatives as such is not provided for in detail in the UK version of MiFIR, which reflects the EU’s MiFID II framework approach to commodity derivatives. Beyond MiFIR, and the relevant RTS which have been brought into UK law, financial regulation of commodity derivatives exists in UK law and regulation under, among others:
     1. Part 3 of the MiFI Regulations, which concerns key parts of the UK’s onshored regime for commodity derivatives, namely, position limits 29 and position management controls 30 ; and
     2. rules and directions relating to position limits, position management and position reporting at chapter 10 of the FCA’s Market Conduct sourcebook (FCA MAR ), which rules and directions implement Articles 57 and 58 of MiFID II.

Position limits regime

632. MiFID II provided that, in order to prevent market abuse, and to support orderly pricing and settlement conditions (including the prevention of market distorting positions), competent authorities should be empowered to establish position limits, with Article 57 of that Directive stipulating that those competent authorities must set and apply position limits. Today, the obligation on the FCA to establish position limits sits in Part 3 of the MiFI Regulations and catches both venue-traded commodity derivative contracts and economically equivalent over the counter contracts. Note that regulation 19(1) generally requires the FCA to establish position limits using Commission Delegated Regulation (EU) 2017/591 (as amended by the FCA during the onshoring process), which details the methodology for the calculation of position limits on commodity derivatives.
633. Other than position limits, the regulation of commodity derivatives in the UK also involves the application of position management controls. FCA MAR 10.3.3, which, in short, applies to firms operating MTFs or OTFs, imposes requirements in respect of position management controls, the details of which firms must provide to the FCA. Paragraph 7BA of the Schedule to the Recognition Requirements Regulations sets out requirements for position management controls for investment exchanges operating trading venues which are (or wish to be) recognised by the FCA under section 290 of FSMA 2000. These requirements, which substantially mirror the FCA MAR 10.3.3 requirements, cover e.g. the monitoring of open interest positions and the power to require persons to terminate or reduce positions.
634. The Act removes the universal requirement, under Part 3 of the MiFI Regulations, for position limits to be imposed in respect of commodity derivatives, and transfers the principal responsibility for the setting of position limits (and exemptions from those position limits) from the FCA to trading venue operators, while empowering the FCA to develop a framework to support and constrain operators in both setting and applying position limits. The FCA will also retain an exceptional power to impose position limits, or restrict positions, itself. In respect of position management controls, the Act gives the FCA the flexibility to require venues to set and apply position management controls as the FCA considers appropriate.

Amendments to the EU Securitisation Regulation 2017

635. Regulation (EU) 2017/2402 (‘the EU Securitisation Regulation’), laid down a general framework for securitisation and created a specific framework for designating certain securitisations as STS. It applied in the UK and EU from 1 January 2019. The EU Securitisation Regulation was accompanied by the Securitisation Regulations 2018 SI 2018/1288 (‘the 2018 Regulations’), which amended UK law to ensure that the EU Securitisation Regulation was fully effective and enforceable in the UK.
636. The Securitisation (Amendment) (EU Exit) Regulations 2019, SI 2019/660 (‘the Securitisation Exit SI’) addressed deficiencies in the EU Securitisation Regulation and the 2018 Regulations that arose from the withdrawal of the UK from the EU. These changes, which took effect at the end of the EU Exit transition period, were made to ensure that the securitisation framework continued to operate effectively after the UK left the EU. This legislative approach, which was taken across government, is known in financial services as ‘onshoring’. Amendments to the onshoring arrangements for securitisation (extending the duration of the transitional arrangements for EU STS securitisations) were made by the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022, SI 2022/1080 and the Financial Services (Miscellaneous Amendments) Regulations 2022, SI 2022/1223. The onshored EU Securitisation Regulation is referred to as the UK Securitisation Regulation.
637. The UK Securitisation Regulation aims to strengthen the legislative framework for securitisations and revive high-quality securitisation markets after the Global Financial Crisis. It seeks to do this in two ways:
638. First, it sets out provisions in relation to all securitisations which are within its scope, consolidating and adding to the rules that previously applied to particular types of regulated entities. These provisions include requirements for SSPEs, investors’ due diligence, risk retention and transparency obligations, credit-granting standards, and a ban on re-securitisation, as well as a supervisory and enforcement framework for these requirements.
639. Secondly, it sets out a regulatory, supervisory, and enforcement framework for STS securitisations. The framework for STS securitisations is designed to make it easier for investors to understand and assess the risks of a securitisation investment.
640. Through this Act, the UK Securitisation Regulation is being amended to add new Chapter 4A, which creates the regime for STS equivalent non-UK securitisations.

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

641. The UK’s regulatory regime for CCPs is outlined in Part 18 of FSMA 2000. Amongst other provisions, Part 18 of FSMA 2000 grants an exemption for the purposes of the general prohibition (which provides that no person may carry on a regulated activity in the UK unless they are authorised or exempt), under which CCPs that have been recognised by the Bank are able to carry on a regulated activity in the UK without being authorised under FSMA 2000.
642. As with other areas of financial services, the regulation and supervision of CCPs has also been heavily influenced by the UK’s membership of the EU. EMIR is the core EU legislation relating to CCPs. It came into effect on 16 August 2012, and lays down rules on OTC derivatives, central counterparties, and trade repositories. Following the end of the Transition Period, the EU Regulation forms part of retained EU law, by virtue of the European Union (Withdrawal) Act 2018 (EUWA 2018) and as amended by regulations made under section 8 of EUWA 2018, which ensure that EMIR continues to function appropriately and effectively in the UK. The EU Regulation as amended and forming part of retained EU law is referred to as UK EMIR.
643. The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (the "CCP Regulations") is one of the statutory instruments that amended UK EMIR in order to deal with deficiencies arising from the withdrawal of the UK from the EU. Regulations 11 to 26 provide for the TRR.
644. There have been several other instruments made under section 8 of EUWA 2018 which have made amendments to UK EMIR to ensure it works in a UK context after EU withdrawal. This includes The Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, which amended the CCP Regulations in order to establish a ‘run-off’ regime for overseas CCPs. Regulations 19A to 19D of the CCP Regulations provide for the run-off regime. The run-off regime was established to allow UK firms time to wind down relevant contracts and business with non-UK CCPs that did not enter the TRR or are removed from it without the necessary permissions to provide services in the UK.
645. This Act amends Regulation 19B of the CCP Regulations in two ways:
     1. extending the maximum length of the run-off period from one year to 3 years and 6 months and providing that the length of a CCP’s run-off period may be varied; and
     2. giving the Bank a time-limited power where a non-UK CCP has exited the run-off regime before Royal Assent. This would enable the Bank to determine that the run-off period for that CCP (in spite of its expiry) is to be treated, as from the making of the determination, as not having expired and allow the Bank to use its power to vary the run-off period. The purpose of this was to ensure that UK firms would have had a sound legal footing to access the relevant CCPs in a scenario where the Act was passed after 30 June 2023.

New regulatory powers

Designated activities regime

Replacement of revoked Retained EU law

646. Section 1 of the Act revokes the retained EU law relating to financial services listed in Schedule 1. When that retained EU law is revoked, which will take place over several years, where appropriate the activities previously regulated in retained EU law can be designated by HM Treasury under the new designated activities regime in new Part 5A of FSMA, inserted by section 8 of this Act. HM Treasury will be able to provide, by way of regulations, for an activity to be a designated activity under this new regime. These "designated activity regulations" will be made under new section 71K of FSMA 2000. Under new section 71N(2) of FSMA 2000 the designated activity regulations will also be able to provide for the FCA to make rules in relation to designated activities or in relation to specified matters relating to designated activities.

Powers of the FCA under FSMA 2000

647. Section of 1B of FSMA 2000 requires the FCA to comply with a number of requirements when discharging its "general functions" under FSMA 2000. This includes acting in a way that is compatible with its strategic objectives and advancing one or more of its operational objectives. The FCA must also have regard to the regulatory principles in section 3B of FSMA 2000. The FCA’s general functions, specified in subsection (6) include the making of rules. Section 22 of FSMA 2000 provides for HM Treasury to specify in regulations activities where the person conducting them requires to be authorised by the FCA.
648. Schedule 2 to FSMA 2000 sets out a non-exclusive list of examples of activities which require authorisation, which are set out in more detail in the Financial Services and Markets Act 2000 (Regulated Activities) Order SI 2001/544 ("the Regulated Activities Order"). There are many pieces of retained EU law which set the rules for a kind of activity, product, or conduct which are not FSMA 2000 regulated activities, and which apply to a broader range of entities than persons. As a result, the general rule-making powers of the FCA in relation to authorised persons under FSMA 2000 do not currently apply. When those areas of retained EU law are revoked under section 1 of the Act, the FCA would not, therefore, have a power to make rules in relation to those activities, in the absence of the provisions of the Act. FSMA 2000 also provides the FCA with a range of information-gathering and enforcement powers, again linked to the FCA’s general functions (see for example, Parts 11 and 14 of FSMA 2000).
649. Where these powers are currently available for matters contained in retained EU law, this is sometimes enabled through statutory instruments specific to the particular matter, and sometimes through the Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 31 (QUEPO). The QUEPO applies provisions of FSMA 2000 to retained EU law files listed within it. When an area of regulated activity becomes subject to designated activity regulations the corresponding retained EU law will be revoked, through commencing the revocation of section 1 of the Act in relation to the specific pieces of retained EU law, and the powers applied under the QUEPO no longer apply. The FCA would not, therefore, have access to those powers in relation to matters designated by HM Treasury under the new Part 5A of FSMA 2000, without the provisions for HM Treasury to enable powers of information-gathering and enforcement under the Act.

Financial Market Infrastructure: general rules and requirements

Regulation of FMI by the Bank of England

The existing statutory framework for the Bank’s regulation of CCPs and CSDs

650. The Bank was incorporated by Royal Charter in 1694. As a chartered corporation, it is an entirely statutory entity, with its powers determined by reference to the 1694 Charter, subsequent Charters and various pieces of primary and secondary legislation. In particular, the Bank of England Act 1946 brought the Bank of England’s capital stock into public ownership and made provision concerning the relationship between the Bank, HM Treasury and other banks, and the Bank of England Act 1998 (as amended over time, in particular by the Banking Act 2009, Financial Services Act 2012 and the Bank of England and Financial Services Act 2016) makes more detailed provision about the constitution, regulation, financial arrangements and functions of the Bank. Section 2A of the Bank of England Act 1998 contains the Bank’s Financial Stability Objective, which applies to the Bank in its regulation of CCPs and CSDs, as in its other responsibilities. This objective requires the Bank to protect and enhance the stability of the financial system of the United Kingdom. 
651. Part 18 of FSMA 2000 establishes a recognition regime for certain types of financial market infrastructure, including CCPs and CSDs that are established in the UK. The recognition regime for CCPs and CSDs is operated by the Bank, and recognised firms are subject to supervision by the Bank. Firms that are recognised are exempt from the general prohibition in FSMA 2000 in respect of the regulated activities they carry out, and hence are exempt from the requirement to obtain permission to carry on regulated activities under Part 4A of that Act.
652. The requirements of the recognition regime are set out in Part 18 of FSMA 2000 and supplemented by Schedule 17A to that Act which applies various provisions to the FCA and the PRA to the Bank when performing functions under Part 18. In particular, Part 18 and Schedule 17A give the Bank limited powers to make rules which apply to CCPs and CSDs, at section 166(9) (applied by paragraph 12 Sch 17A), section 286(4F) and section 293. Paragraph 10 of Schedule 17A applies a number of provisions in Part 9A of FSMA 2000 to rules made by the Bank, including the requirement to notify rules to HM Treasury and to publish them, and to consult before making rules. 
653. Paragraph 33 of Schedule 17A requires the Bank to make a report to HM Treasury at least once a year, based on the requirements for the PRA’s report under Schedule 1ZB to FSMA 2000. 

Current regulation of CCPs and CSDs

654. The key regulatory requirements for CCPs in the UK are currently contained in the following instruments: 
     1. Titles III and IV of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR"), which forms part of retained EU law and therefore continues to apply in the United Kingdom as amended by regulations made under the European Union (Withdrawal) Act 2018;
     2. Part 18 of and Schedule 17A to FSMA 2000; 
     3. secondary legislation made in order to implement EMIR and under Part 18 of FSMA 2000; 
     4. technical standards made under EMIR. 
655. The key regulatory requirements for CSDs in the UK are currently contained in the following instruments:
     1. Titles III and IV of Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 in improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (the "CSDR"), which forms part of retained EU law and therefore continues to apply in the United Kingdom as amended by regulations made under the European Union (Withdrawal) Act 2018; 
     2. Part 18 of and Schedule 17A to FSMA 2000; 
     3. secondary legislation implementing the CSDR; 
     4. technical standards made under the CSDR.

Regulation of FMIs by the Financial Conduct Authority

Data Reporting Service Providers

656. Data Reporting Service Providers (DRSPs) are currently regulated through:
     1. the Data Reporting Services Regulations 2017 (SI 2017/699) (DRSRs)
     2. chapter 9 of the FCA’s Market Conduct sourcebook (MAR 9), relating to data reporting services
     3. the UK version of the Markets in Financial Instruments Regulation (UK MiFIR)
     4. Regulation 2017/565; and
     5. onshored technical standards such as Commission Delegated Regulation 2017/571.
657. DRSPs are not authorised persons under FSMA 2000.
658. The DRSRs impose a prohibition on the provision of data reporting services in the course of business unless that person is authorised to do so under the DRSRs or is verified by the FCA. The FCA has the power to authorise a person to carry out data reporting services only where the applicant satisfies certain conditions as set out in regulation 10 of the DRSRs. The FCA may provide verification only where an applicant fulfils the requirements set out at regulation 8 of the DRSRs.
659. Operational requirements on DRSPs arise under the DRSRs and retained EU law, namely Regulation 2017/571 and Regulation 2017/565. Information requirements are set out across the DRSRs and UK MiFIR and vary depending on the type of DRSP.
660. Whilst the FCA does not have any rule-making powers over DRSPs (except for the limited power in respect of technical standards), it does have a significant role in the regulation of DRSPs. The function of the FCA in respect of DRSPs is set out at regulation 17 of the DRSRs. In exercising its function, the FCA must cooperate with other persons with a regulatory role under the DRSR including, in certain situations, the Bank of England (see regulation 19 of the DRSRs).
661. Under regulation 18, the FCA must maintain arrangements to monitor and enforce the provisions of the DRSRs. They may also give guidance, as it considers appropriate, and may direct DRSPs as to how information should be provided to them.
662. Where the FCA considers that a DRSP has contravened its requirements under the DRSRs, it may:
     1. impose restrictions on that entity (regulation 22),
     2. publish a statement to that effect (regulation 23), and/or
     3. impose financial penalties (regulation 24).
663. The DRSRs create the offences of:
     1. misleading the FCA (regulation 29); and
     2. breaching the prohibition on providing a data reporting service, without authorisation or an exemption (regulation 30).
664. A person found guilty of an offence under the DRSR would be liable:
     1. on summary conviction
     2. in England and Wales, to a fine; or
     3. in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum; or
     4. on conviction on indictment, to a fine.

Recognised Investment Exchanges

665. The legislation and rules which currently regulate Recognised Investment Exchanges (RIEs) include:
     1. Part 18 of FSMA 2000 (Recognised Investment Exchanges, Clearing Houses and Central Securities Depositories) Regulation;
     2. secondary legislation, including FSMA 2000 (Recognition Requirements for Investment Exchanges, Clearing Houses and Central Securities Depositories) Regulations 2001 (SI 2001/995) (the recognition requirements regulations);
     3. Part 7 of the the Companies Act 1989 (Financial Markets and Insolvency);
     4. UK MiFIR;
     5. the FCA’s specialist sourcebook relating to RIEs (REC); and
     6. technical standards, such as Commission Delegated Regulation 2017/587, Commission Delegated Regulation 2017/583. Commission Delegated Regulation 2017/584, Commission Delegated Regulation 2017/588.
666. Section 285(2) of FSMA 2000 provides that an RIE is exempt from the general prohibition in respect of any regulated activity carried on as part of the exchange's business as an investment exchange, or which is carried on for the purposes of, or in connection with, the provision by the exchange of services designed to facilitate the provision of clearing services by another person. RIEs are outside of the FCA's "authorisation regime" and therefore not within scope of the FCA's general rule-making power under section 137A of FSMA 2000.
667. The FCA has the power to grant a 'recognition order' under section 290 of FSMA 2000 only where the applicant satisfies the recognition requirements. These recognition requirements include requirements contained in any retained direct EU legislation stemming from any EU regulation originally made under MiFID, from any EU regulation originally made under MiFIR, and any subordinate legislation made under MiFIR. The FCA's position on what is accepted in satisfaction of these requirements is set out at REC2 of the FCA Handbook. Regulation 11 of the recognition requirements regulations confers power on the FCA to make rules for the purpose of these regulations, although to date this has not been used.
668. Sections 293 to 300 of FSMA 2000 include provisions regarding the supervision of RIEs and other recognised bodies. These include notification and information requirements. Under section 296, the FCA has limited powers to direct an RIE which has failed, or is likely to fail, to satisfy the recognition requirements, or has failed any other obligation imposed on it under FSMA 2000. In doing so, the FCA must comply with the procedure under section 298. The FCA has limited powers under s. 294 to waive or modify certain rules regarding notification under FSMA 2000.
669. UK MiFIR provides the framework for exchanges and markets in the UK, and imposes a number of information requirements on market operators and investment firms that operate trading venues. Almost all of the relevant Articles of MiFID II and UK MiFIR are subject to further specification under level 2 measures (regulatory technical standards (RTS); Implementing Technical Standards (ITS); and delegated acts).

Financial market infrastructure: regulatory sandboxes

670. Financial services are currently tightly structured and highly intermediated with a number of participating FMIs being governed by different regulatory and legal frameworks. For example, a form of FMI is a CSD. It is regulated by the Bank of England (the Bank) and its main regulatory framework is principally based on the Central Securities Depositories Regulation 2014 (CSDR), Uncertificated Securities Regulations 2001 (USRs), and Settlement Finality Regulations 1999 (SFRs). A second form of FMI is a multilateral trading facility (MTF). It is operated by an investment firm or a recognised investment exchange (RIE). The operation of MTFs by RIEs or investment firms is supervised by the FCA, and the main regulatory framework includes (without limitation) the UK MIFIR, FSMA 2000, related secondary legislation, technical standards and rules.
671. FMI legislation is intended to be ‘technology neutral’. Inevitably, FMI legislation is based on and in some cases heavily tailored to the technology of the day. This potentially creates obstacles for FMI using new technology where the legislative requirements are heavily based on how existing technology works. What is unclear is whether emerging technology, such as distributed ledger technology (DLT), can always be accommodated within this existing FMI legislative framework or whether there will be legal ambiguity and a risk of inconsistencies as to whether the legislation is compatible with a particular emerging technology. An FMI sandbox is an opportunity to review the existing legislative framework in a technologically neutral way, that allows for the appropriate regulatory outcomes to be achieved.
672. For example, provisions in CSDR may prevent FMI from undertaking certain activities and practices when using emerging technology such DLT. HM Treasury’s Call for Evidence to examine the application of DLT to FMI identified that operators of multilateral trading facilities (MTFs) could look to use their own DLT arrangements to settle tokenised securities traded on their market. A key obstacle to this was identified by industry in CSDR Article 3(2), which requires transferable securities traded on a UK trading venue to be "recorded in book entry form in a CSD or third-country CSD". This means that an operator of an MTF is prevented from being able to use its own settlement arrangements to settle transactions on its market.
673. The CSDR includes other definitions and obligations that are based on how current FMI IT legacy systems function, which may raise questions about their application to DLT arrangements. For example, DLT coordinates the simultaneous updating of records held by multiple ‘nodes’ in a decentralised network- in this context, doubts have been raised around the compatibility of this with CSDR definitions and requirements in relation to ‘securities accounts’ or ‘book entry form’, which reflect the settlement of securities transactions being reflected by double or multiple book entry keeping on securities accounts at CSDs. Modifications to legislation may therefore provide clarity within CSDR around accommodating the functioning of DLT, in a way that meets the same regulatory outcomes but in a different way.
674. Another example is the Companies Act 2006 (CA 2006), which is the main piece of legislation that governs UK company law. It seeks to modify, consolidate, and simplify company laws which, among other things, protect shareholder rights and simplifies certain formalities and administrative burdens imposed on UK companies.
675. There is provision in the CA 2006 that certain formalities are complied with in the recording and registration of shares and access to shareholder information in a prescribed way that is intended to protect shareholders and creditors. The CA 2006 defines "company records" and specifies the form in which they are to be available for public inspection and how they are disseminated.
676. The operation of technology, such as DLT, is not necessarily incompatible with the overall obligations identified above in the CA 2006, though there is a greater risk that DLT is incompatible with the existing means and mechanisms of delivering these obligations. Temporary modifications to the CA 2006 for the duration of a FMI sandbox may ensure that key provisions, such as shareholder and creditors rights and overall company transparency are preserved, as intended by the legislation, but in a way that ensures that emerging technologies, such as DLT, operate in a way that is compatible with the legislation.
677. A further example is the USRs, which are intended to allow for title in securities to be transferred without the need for a written instrument – in what is described as "dematerialised" form. It has been highlighted by industry that the USRs are not drafted in such a way that contemplates DLT. The regulations are premised on the operation of centralised registers that are maintained by an operator using a "Relevant System" – colloquially described as providing the "golden record" – which maintains control over the maintenance and verification of records. This approach differs from how DLT is used. It is premised on a de-centralised operating system, with a number of the transactional functions, currently performed by system operators, being performed automatically within the architecture of the DLT framework concerned.
678. The examples given above are not intended to provide a legal commentary on the application of UK law with regard to DLT systems. Rather they are cited because they have been flagged as potential obstacles by industry (and as legislation that may need to be modified within the context of an FMI sandbox relating to DLT). Absent any express amendments to legislation, such as those outlined above, it is possible that this form of technology could be interpreted as compatible with parts of existing legislation, but possibly in a way that strains the existing language and therefore risks causing ambiguity, particularly as different types of technology, with different characteristics, emerge and are applied to the legislation over time. As noted, in some other cases, the introduction of new technology and practices, may be clearly incompatible with existing legislation and therefore unambiguously in need of modification if the new technologies and practices are to be integrated into the operations of FMI.

Variation from the affirmative SI procedure

679. The Act enables HM Treasury and the regulators to modify relevant enactments (including primary legislation, secondary legislation, and technical standards and rules) by applying the negative statutory instrument procedure, in place of the more standard affirmative procedure. The approach, in the context of these clauses, is reasonable because the modifications are temporary in nature and will be available to a limited number of entities that have been approved by the regulators to participate in a particular FMI sandbox. Limitations may be placed on the amount and values of instruments permitted for an FMI activity in an FMI sandbox. FMI entities will be carefully monitored by the regulators for the duration of the FMI Sandbox and the regulators will be permitted to suspend or terminate an FMI entity for breaching the terms of an FMI sandbox or the legislative requirements. If this occurs, the general law, as it exists outside of an FMI sandbox, would then apply once more.
680. The negative statutory instrument procedure will be limited to the modification of legislation that appears as a relevant enactment on face of the Act at section 17(3). Any additions to this list of legislation are intended to be approved by affirmative statutory instrument procedure.
681. A report will be made to Parliament outlining the performance of an FMI Sandbox, in advance of any proposed permanent changes to legislation which will be subject to the affirmative statutory instrument procedure where primary legislation is amended, otherwise the negative procedure will apply. This is intended to ensure that Parliament is afforded an appropriate level of scrutiny.
682. It is possible that certain enabling legislation will fall to the rule-making powers of regulators, where the powers within the proposed future regulatory framework are to be implemented. As a result, in future the functioning of the FMI Sandbox may evolve with the regulators, rather than HM Treasury, being responsible for making the majority of legislative changes to be tested in a FMI sandbox

Powers in relation to critical third parties

683. The Bank, the PRA and the FCA’s indirect power over third parties results from their direct powers over the firms they authorise and regulate under the Banking Act 2009 (for the Bank) and FSMA 2000 (for the PRA and the FCA). Under section 180-191 of the Banking Act 2009, the Bank has the power to establish principles, codes of practice and requirements for operators of recognised payments systems. Under section 137A of FSMA 2000, the FCA has the power to ‘make such rules applying to authorised persons’ with respect to their carrying out any activities, regardless of whether these are regulated or not. The PRA has a similar power under section S137G of FSMA 2000 in respect of PRA-authorised persons.
684. The Bank, the PRA and the FCA have used these powers to attempt to mitigate risks from third parties. In 2021, for example, the Bank, the PRA and the FCA introduced new rules on operational resilience . In addition, the PRA introduced modern expectations on outsourcing and third party risk management .
685. In comparison to their powers over authorised entities, the Bank, the PRA and the FCA have very limited direct powers over unrelated third party service providers to authorised firms.
686. The Bank can have direct regulatory power over a service provider to a recognised payments system but only if HM Treasury has specified that service provider in an order made under S206A of the Banking Act 2009. HM Treasury has to date specified only one such service provider.
687. The PRA has power under section 165A of FSMA 2000 to obtain information or documents from certain third parties, including service providers to PRA- and FCA-authorised firms, where the information or documents are relevant to the stability of the UK financial system or reasonably required by the Bank in connection with the exercise of its functions in pursuit of its financial stability objective. Exercise of the section 165A power is subject to significant procedural safeguards.

Regulatory gateway for financial promotions

688. Section 21 of FSMA 2000 provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity or to engage in claims management activity (referred to as a ‘"financial promotion"), unless they are an authorised firm, the communication is approved by an authorised firm, or there is an applicable exemption under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 ("FPO"). An authorised firm is primarily a person that has permission from the FCA or the PRA to carry on one or more regulated activities, in accordance with section 31 of FSMA 2000 (referred to as "Part 4A permission"). Engaging in investment activity is defined in section 21(8) of FSMA 2000 as relating to either a controlled activity or a controlled investment, which are further defined in Schedule 1 to FPO. The exemptions to the restriction in section 21 of FSMA 2000 are also set out in the FPO.
689. Under section 25 of FSMA 2000 it is a criminal offence for an unauthorised firm to communicate a financial promotion in breach of section 21 of FSMA 2000. Firms that commit such an offence can be liable to a fine and/or up to two years’ imprisonment. In addition, agreements entered into as a result of a financial promotion that contravenes section 21(1) of FSMA 2000 are, among other things, unenforceable against any customer (section 30 of FSMA 2000).
690. The Act inserts section 21(2A) of FSMA 2000 which provides that an authorised firm can only approve a financial promotion within the scope of a permission granted by the FCA or within an exemption. The Act provides HM Treasury with a power to specify the relevant exemptions from the requirement for FCA permission to approve promotions. The Act also inserts section 55NA of FSMA 2000 which provides the FCA with powers to grant permission and to vary or cancel that permission, either on the application of the authorised firm or on the FCA’s own initiative. The FCA’s powers are exercisable primarily by reference to its operational objectives.

Sustainability disclosure in financial services

691. The FCA and the PRA have wide powers in FSMA 2000 to impose sustainability disclosure requirements on authorised firms in pursuance of their statutory objectives. The FCA consulted in October 2022 (CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels ) with regard to enhancing its ESG Sourcebook and introducing investment labels in order to better protect consumers from "greenwashing".

Digital settlement assets

692. As noted in the policy background to these Notes, the current legislation applicable to the UK payments regime is contained in various pieces of existing legislation.
693. A new category of "digital settlement asset", which includes stablecoins and other cryptoassets which meet the definition, will be created to bring all such instruments within the regulatory reach of the existing payment and electronic money landscape. Initially, digital settlement assets will be defined (in section 23(2) of this Act and new section 182(4A) of the Banking Act 2009, which will be inserted by Schedule 6 to this Act) as a digital representation of value or rights, whether or not cryptographically secured, that-
     1. Can be used for the settlement of payment obligations,
     2. Can be transferred, stored or traded electronically, and
     3. Uses technology supporting the recording or storage of data (which may include distributed ledger technology).

The Banking Act 2009

694. The Act expands Part 5 of the Banking Act 2009. This Part of that Act provides for the Bank’s oversight and supervisory powers once a payment system is "recognised" by HM Treasury upon fulfilling the designation criteria set in section 185 of the Act. In recognising a payment system using digital settlement assets or a digital settlement asset service provider, HM Treasury will consider whether an entity is likely to threaten the stability of, or confidence in the UK financial system; or have serious consequences for business or other interests throughout the UK, and if so, they will be considered for recognition. There are currently nine payment systems recognised by HM Treasury, all of whom are within the Bank’s supervision. Once recognised, the Bank will have oversight of the operators of digital settlement asset recognised payment systems and will be able to, for example, issue principles (under section 188 of the Banking Act 2009) and codes of practice (under section 189 of that Act), give directions (under section 191 of that Act), take enforcement action against recognised payment systems or service providers using digital settlement asset and expect compliance with information requests.
695. Through the expansion of Part 5 of the Banking Act 2009, recognised payment systems and service providers using digital settlement assets may also be subject to the same sanctions and criminal offences that existing payment systems will be subject to in the event of a compliance failure. For example, if the Bank thinks that a compliance failure threatens the stability of, or confidence in, the UK financial system, or has serious consequences for business or other interests throughout the UK, it may give that operator of the digital settlement asset payment system a "closure order" such that all payment activities or specified activities to cease. A person in breach of a closure order is guilty of an offence, liable on summary conviction, to a fine not exceeding the statutory maximum, or on conviction on indictment, to a fine. Under section 200, the Bank may also issue a management disqualification against a person holding an office or position for making management decisions for a recognised digital settlement asset payment system or service provider. A person who breaches a disqualification order is guilty of an offence under section 200(3) punishable by a fine, on summary conviction, to a fine not exceeding the statutory maximum, or on conviction on indictment.

Financial Services (Banking Reform) Act 2013

696. The Act expands the application of FSBRA 2013 so that its regulatory regime includes those systems using digital settlement assets in a similar manner to current payment system designation orders under section 43(1) of FSBRA 2013. Once a payment system has been designated as a regulated system by HM Treasury, the PSR will have regulatory powers over participants in that system to ensure that relevant stablecoin-based payment systems are subject to appropriate economic and competition regulation.
697. Thereafter the PSR will have powers over digital settlement assets to issue directions (under section 54 of FSBRA 2013), system rules (under section 55), conduct investigations into regulatory failures (sections 83-93) and have enforcement powers to maintain competition scrutiny. As in the application of offences and sanction under the Banking Act 2009, the same would be the case for the application of FSBRA 2013 criminal offences to digital settlement asset payment systems. For example, under regulation 83 of FSBRA 2013, the Payment Systems Regulator may appoint an "officer" to conduct investigations on a regulated payment in furtherance of its payment systems objectives. In connection with that investigation, digital settlement assets will risk committing criminal offences under the Act and they will be liable to a term of imprisonment, or fine, or both.

Special Administration Regimes

698. The Act gives HM Treasury powers to amend insolvency and administration procedures as they apply to the operators of recognised (under Part 5 of the Banking Act 2009) payment systems and recognised service providers that use digital settlement. This will allow HM Treasury to amend existing Special Administration Regimes (SARs) by way of secondary legislation, as they apply to such firms, to prepare for their possible failure. SARs provide for bespoke insolvency provision where the general administration process is not considered to be in the public interest. The Financial Market Infrastructure (FMI) SAR (provided for in Part 6 of FSBRA 2013 imposes an objective on administrators to ensure that a failed payment system in scope of the regime continues to be maintained and operated as an efficient and effective system, effectively prioritising this ahead of the interests of its creditors. Initially, HM Treasury intends to develop and bring forward a statutory instrument to amend the FMI SAR to ensure it can effectively be applied to digital settlement.

Implementation of mutual recognition agreements

699. The relevant legal background is explained in the policy background section of these Notes.

New objectives and regulatory principles

FCA and PRA objectives and regulatory principles

700. The statutory framework for the Financial Conduct Authority (FCA) is set out in Chapter 1 of Part 1A of, and Schedule 1ZA to, FSMA 2000. This Part sets out the FCA’s general functions which consist of making rules, making technical standards in certain circumstances, issuing codes and guidance and determining its general policy and principles by reference to which it performs particular functions under FSMA 2000. Part 1A also sets out the FCA’s strategic objective, three operational objectives and the regulatory principles which the FCA must advance and have regard to, respectively, when discharging its general functions.
701. The statutory framework for the Prudential Regulation Authority (PRA) is set out in Chapter 2 of Part 1A of, and Schedule 1ZB to, FSMA 2000. This Part sets out the PRA’s general functions which consist of making rules, making technical standards in certain circumstances, issuing codes and determining the general policy and principles by reference to which it performs certain functions under FSMA 2000. Part 1B also sets out the PRA’s general objective, insurance objective and secondary competition objective together with the regulatory principles which the PRA must promote and have regard to, respective, when discharging its general functions.
702. When discharging its general functions, the FCA must, so far as is reasonably possible act in a way which is compatible with its strategic objective and advances its three operational objectives. The three operational objectives are detailed in sections 1C, 1D and 1E of FSMA 2000. The FCA’s operational objectives are concerned with consumer protection, protecting the integrity of the UK financial system and promoting effective competition. The FCA’s strategic objective is to ensure that relevant markets function well.
703. The Act inserts into FSMA 2000 a new secondary objective for the FCA which requires it, so far as is reasonably possible, when discharging its general functions in a way that advances its objectives, to act in a way which advances the international competitiveness of the economy of the United Kingdom and its growth in the medium to long term.
704. The Act creates a new requirement for the FCA to make two reports to HM Treasury on how it has complied with its duty to advance the secondary competitiveness and growth objective.
705. When discharging its general functions the PRA must, so far as is reasonably possible, act in a way which advances its general objective. The PRA has a general objective, an insurance objective and a secondary competition objective.
706. The PRA’s general objective is to promote the safety and soundness of PRA-authorised persons. The insurance objective is to contribute, so far as is reasonably possible, to the securing of an appropriate degree of protection for those who are or may become policyholders. This applies where the PRA is discharging its general functions so far as relating to a PRA-regulated activity relating to the effecting or carrying out of contracts of insurance. The secondary competition objective requires the PRA, when discharging its general functions in a way that advances its objectives must, so far as is reasonably possible, act in a way which facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities.
707. The Act inserts an additional secondary objective in FSMA 2000 for the PRA which requires it, when discharging its general functions in a way that advances its objectives, to act in a way which facilitates the international competitiveness of the economy of the United Kingdom in the medium to long term.
708. The Act creates a new requirement for the PRA to make two reports to HM Treasury on how it has complied with its duty to advance the secondary competitiveness and growth objective.
709. Section 1B(5)(a) of FSMA 2000 requires the FCA to have regard to the regulatory principles in section 3B of FSMA 2000 when discharging its general functions. Section 2H(2) of FSMA 2000 requires the same of the PRA. Section 3B of FSMA 2000 sets out eight regulatory principles which apply to the FCA and the PRA.
710. The regulatory principle in section 3B(1)(c) of FSMA 2000 requires the FCA and the PRA to have regard to the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term ("the sustainable growth principle").
711. The Act removes the existing sustainable growth principle and introduces a new regulatory principle which refers explicitly to section 1 of the Climate Change Act 2008 and section 5 of the Environment Act 2021. The new regulatory principle will be engaged where the relevant regulator considers the exercise of its functions to be relevant to the need to contribute towards achieving compliance by the Secretary of State to the referenced targets.
712. The Act makes consequential amendments to Part 9C of FSMA 2000 to take account of the new principle in section 3B(1)(c) of FSMA 2000.
713. The statutory framework for the PSR is set out in Part 5 of FSBRA 2013. This Part establishes the PSR as the authority responsible for exercising functions in relation to payment systems; makes provision in relation to designating payment systems as a regulated payment system; and contains provisions about the general duties of the PSR, its regulatory and competition functions. Part 5 includes the ability of the PSR to make directions, which is the PSR’s principal regulatory tool, and encompasses the regulatory principles and objectives which underpin the creation of the authority.
714. The statutory principle in section 53(c) of FSBRA 2013 requires the PSR to have regard to the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term ("the sustainable growth principle").
715. The Act amends the PSR’s sustainable growth principle so that it refers to section 1 of the Climate Change Act 2008 and section 5 of the Environment Act 2021. The amended regulatory principle will be engaged where the PSR considers the exercise of its functions to be relevant to the need to contribute towards achieving compliance by the Secretary of State to the referenced targets.

Regulator engagement with HM Treasury, external stakeholders, and Parliament

Regulators’ relationship with HM Treasury

716. Section 1JA of FSMA 2000 provides that HM Treasury may make recommendations, by notice in writing, to the FCA about aspects of economic policy of His Majesty’s government to which the FCA should have regard when considering certain matters. These are, how to act in a way which is compatible with its strategic objective, how to advance one or more of its operational objectives, the application of its regulatory principles and the importance of taking action to minimise the extent to which it is possible for a business to be used for a purpose connected with financial crime (in section 1B(5)(b) of FSMA 2000).
717. Section 30B of the Bank of England Act 1998 provides that HM Treasury may make recommendations, by notice in writing, to the Prudential Regulation Committee ("PRC") about aspects of economic policy of His Majesty’s Government to which the PRC should have regard to when considering how to advance the PRA’s objectives and when considering the application of the regulatory principles in section 3B of FSMA 2000.
718. HM Treasury is required to make recommendations to the FCA and the PRA at least once in each Parliament.
719. The Act inserts a new provision in FSMA 2000 that requires the FCA and the PRA to respond to each recommendation made by HM Treasury in writing before the end of 12 months beginning with the date the notice containing the recommendation was given. The new provision places an ongoing requirement, to be exercised every 12 months, on the FCA and the PRA to update HM Treasury on its responses to the recommendations.
720. The FCA’s rule-making powers are set out in Parts 5, 6, 8A, 9A, 9B, 9C, 12A, 15, 15A, 16, 17, 17A, 20, 22 of, and Schedules 1ZA and 1A to, FSMA 2000. This includes the power to make ‘general rules’ in section 137A. In addition, the FCA has rule-making powers under the Payment Services Regulations 2017 32 and the Electronic Money Regulations 2011 33 .
721. The PRA’s rule-making powers are set out in Parts 5, 9A, 9B, 9D, 11, 12A, 12B, 15A, 19 of, and Schedule 1ZB to, FSMA 2000.
722. The Act inserts in FSMA 2000 a general duty on the FCA and the PRA to keep their rules under review and to issue and maintain a statement of policy setting out how the FCA and the PRA will review their rules. The provision provides that the statement of policy must provide information about how representations, including by a statutory panel, can be made to the FCA and the PRA with respect to the duty to review rules and the arrangements to ensure that those representations are considered. The new provision gives HM Treasury the power to direct the FCA and the PRA to carry out a review of rules that the FCA or the PRA have made where HM Treasury believes it is in the public interest to do so. Where HM Treasury has directed the FCA or the PRA to undertake a review of certain rules, the new provision also requires the FCA and the PRA to make a written report to HM Treasury detailing the findings of its review. HM Treasury must then publish this report and lay it before Parliament. Schedule 7 amends FSBRA 2013 to include new sections imposing equivalent requirements on the PSR.
723. 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, contain a similar requirement for the FCA when making rules relating to the prudential regulation of investment firms regulated by the FCA.
724. The Act inserts section 409A in FSMA 2000 to specify the circumstances in which the regulators must consult with HM Treasury in relation to the effect of certain actions on deference decisions.
725. The Act inserts section 409B in FSMA 2000 to specify the circumstances in which the regulators must notify HM Treasury in relation to compatibility of certain actions with international trade obligations.
726. Section 138L of FSMA 2000 sets out general exemptions to the regulator’s duty to consult the public. These (and any other exemption from a duty to consult) are relevant to determining whether and when the regulators must consult / notify HM Treasury under Sections 409A and 409B. This is because the obligation to consult/notify HM Treasury will only generally only apply where the regulators are under a duty to consult in respect of the action that they propose to take (though section 409B also contains obligations which apply in the absence of a duty to consult).
727. Section 138M of FSMA 2000 sets out an exemption to the FCA’s duty to consult the public in relation to temporary product intervention rules. The application of section 138M to sections 409A and 409B has been modified by the Act. The modified section 138M is relevant to determining whether and when the regulators must consult/ notify HM Treasury under sections 409A and 409B.
728. Section 410 of FSMA 2000 allows HM Treasury to direct the FCA, the PRA and the Bank of England in exercising certain functions to take action (or refrain from taking action) in order to ensure that the UK meets its international obligations. Obligations arising from international trade agreements fall within this section. Section 410 of FSMA 2000 does not apply to the PSR.
729. Section 9S of the Bank of England Act 1998 requires the Financial Policy Committee to prepare an explanation of how the use of powers in section 9H (directions to the FCA or the PRA requiring macro-prudential measures) and section 9Q (recommendations to the FCA and the PRA) is compatible with duties under section 9F (other general duties). Section 9F sets out that the Financial Policy Committee must have regard to the international obligations of the UK. Sections 409A and 409B of FSMA 2000 accordingly omit overlaps with the provisions in the Bank of England Act.
730. Part 2 of Schedule 17A to FSMA 2000 applies certain provisions of FSMA 2000 in relation to the Bank of England. By amendments under section 450 of this Act, sections 409A and 409B of FSMA 2000 are applied with modification to the Bank in exercise of its FMI functions.
731. FSBRA 2013 establishes the PSR as the authority responsible for exercising functions in relation to payment systems. Schedule 7 amends FSBRA 2013 to include a new section 107A on international trade obligations. This works analogously to section 409B to specify the circumstances in which the PSR must notify HM Treasury in relation to compatibility of their actions with international trade obligations. Unlike the other regulators, the PSR does not have a rule-making function, and instead imposes generally applicable requirements. Accordingly, new section 107A applies to proposals to impose generally applicable requirements, or changes to the PSR’s general policies and practices).

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

732. Paragraph 11(1) of Schedule 1ZA to FSMA 2000 requires the FCA to make a report to HM Treasury annually. Paragraph 11(1) of Schedule 1ZA details the information which the FCA must include in the annual report. Paragraph 11(1)(j) of Schedule 1ZA provides a power for HM Treasury to specify information which the FCA must include in the annual report.
733. Paragraph 19(1) of Schedule 1ZB to FSMA 2000 requires the PRA to make a report to the Chancellor annually. Paragraphs 19(1) and 19(1A) of Schedule 1ZA detail the information which the PRA must include in the annual report. Paragraph 19(1)(g) of Schedule 1ZB provides a power for HM Treasury to specify information which the PRA must include in the annual report.
734. Paragraph 33 of Schedule 17A to FSMA 2000 applies paragraph 19 of Schedule 1ZB to FSMA 2000 to the Bank of England when acting as a regulator for CCPs and CSDs.
735. Paragraph 7(1) of Schedule 4 to FSBRA requires the PSR to make a report to the FCA annually. Paragraph 7(2) of Schedule 4 details the information which must be included in the annual report.
736. The Act provides a new power to HM Treasury, in addition its power to direct the FCA, PRA and the Bank in its function as a regulator for CCPs and CSDs to include specified information in their annual reports. The new power, in paragraph 11A of Schedule 1ZA, paragraph 21A of Schedule 1ZB to FSMA 2000 and paragraph 7A of Schedule 4 to FSBRA permits HM Treasury to direct the FCA, PRA, Bank and PSR to report on such matters as specified by HM Treasury where the information is reasonably necessary for the purpose of reviewing and scrutinising the discharge of the regulators’ functions and only where other information available is not sufficient.
737. The new provisions for each of the regulators state that a direction by HM Treasury may not require the publication of information that is confidential information for the purposes of Part 23 of FSMA. "Confidential information" is defined in section 348(2) of FSMA 2000 and section 91(2) of FSBRA.

Engagement with stakeholders

738. Part 1A of FSMA 2000 details the statutory panels which the FCA must establish and maintain. The FCA Practitioner Panel represents the interests of practitioners, the Smaller Business Practitioner Panel represents the interests of eligible practitioners, the Markets Practitioner Panel represents the interests of practitioners who are likely to be affected by the exercise of the FCA of its functions relating to markets and the Consumer Panel represents the interests of consumers.
739. The FCA is required to consult the statutory panels and consider representations that are made by the panels. Where appropriate, the FCA must publish the representations it receives from the panels.
740. The FCA appoints the members of the statutory panels. HM Treasury’s approval is required for the appointment and dismissal of the chair of the statutory panels. The Act inserts a new provision in FSMA 2000 that requires the FCA to prepare and publish a statement of policy detailing the process adopted for making appointments and the matters considered in determining who is appointed.
741. The Act also inserts a provision in FSMA 2000 that requires the FCA to establish and maintain a panel called the Listing Authority Advisory Panel to represent the interests of practitioners who are likely to be affected by the exercise by the FCA of its functions relating to the listing, issue or trading of products on recognised investment exchanges and other markets the operation of which is regulated by the FCA.
742. Section 2L of FSMA 2000 places a duty on the PRA to make and maintain effective arrangements for consulting PRA-authorised persons or persons appearing to the PRA to represent the interests of such persons. This includes a requirement to make and maintain the PRA Practitioner Panel (see section 2M of FSMA 2000).
743. The PRA is required to consider representations that are made by the PRA Practitioner Panel. Where appropriate, the FCA must publish the representations it receives from the panel.
744. The PRA appoints members of its statutory panel. HM Treasury’s approval is required for the appointment and dismissal of the chair. The Act inserts in FSMA 2000 a provision that requires the PRA to prepare and publish a statement of policy detailing the process adopted for making appointments and the matters considered in determining who is appointed.
745. The Act also inserts a new provision in FSMA 2000 that requires the PRA to establish and maintain a panel called the Insurance Practitioner Panel to represent the interests of practitioners involved in the carrying on of the activity of effecting or carrying out contracts of insurance.
746. Paragraph 11 of Schedule 1ZA to FSMA 2000 requires the FCA to make a report to HM Treasury at least once a year on a number of matters including the discharge of its functions, the extent to which it has acted compatibly with its strategic objective and the extent to which its operational objectives have been advanced. The existing requirement in relation to the FCA’s operational objective will also capture the FCA’s new secondary competitiveness and growth objective. The Act inserts new provisions into Schedule 1ZA to FSMA 2000 that requires the FCA to include in its annual report any engagement it has had with the statutory panels of the FCA, the PRA or the PSR and how it has complied with the statement of policy on panel appointments in section 1RA of FSMA 2000.
747. Paragraph 19 of Schedule 1ZB to FSMA 2000 requires the PRA to make a report to the Chancellor of the Exchequer at least once a year on a number of matters including the discharge of its functions, the extent to which, in the PRA’s opinion, it has advanced its objectives. The existing provision in paragraph 19 in relation to the PRA’s objectives will also capture the PRA’s new competitiveness and growth objective. The Act inserts new provisions into Schedule 1ZB to FSMA 2000 that require the PRA to include in its annual report any engagement it has had with the statutory panels of the PRA, the FCA or the PSR and how the PRA has complied with the statement of policy on panel appointments in section 2NA of FSMA 2000.
748. The Act inserts new provisions in FSMA 2000 that require the FCA and the PRA to each publish a CBA statement of policy which applies when the regulator is proposing to make new rules or amend existing rules. The statement of policy will make reference to the methodology of the CBA, the application of existing exemptions to carry out a cost benefit analysis, how the regulator considers section 138I(8) of FSMA 2000 (whether the costs and benefits can be reasonably estimated), how any representations made by stakeholders at the consultation stage are considered and the criteria for when the regulator does not need to consult with the cost benefit analysis panel in relation to the development of cost benefit analysis.
749. Section 138J(2)(a) of FSMA 2000 requires the PRA to undertake and publish a CBA alongside a draft of any proposed rules. "Cost benefit analysis" is defined in section 138J(7) of FSMA 2000.
750. The Act inserts a new provision in FSMA 2000 that requires the PRA to establish and maintain a statutory panel which is dedicated to supporting the development of the PRA’s cost benefit analyses for the purposes of section 138J. The Act requires the PRA to appoint two members to this panel who are employed by persons authorized, for the purposes of FSMA 2000, by the PRA.
751. Section 138I(2)(a) of FSMA 2000 requires the FCA to undertake and publish a CBA alongside a draft of any proposed rules. "Cost benefit analysis" is defined in subsection (7).
752. The Act inserts a provision in FSMA 2000 that requires the FCA to establish and maintain a statutory panel to provide advice in relation to cost benefit analyses for the purpose of section 138I of FSMA 2000. The Act requires the FCA to appoint two members of this panel who are employed by persons authorized, for the purposes of FSMA 2000, by the FCA.
753. Section 103 of FSBRA 2013 sets out the PSR’s 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 under section 49, and how its payment systems objectives may best be achieved. Section 103(3) confirms that these arrangements must include the establishment and maintenance of one or more panels of persons to represent the interests of relevant persons.
754. The PSR appoints the members of the statutory panel. HM Treasury’s approval is required for the appointment and dismissal of the chair of the statutory panel. The Act inserts a new provision in FSBRA 2013 that requires the PSR to prepare and publish a statement of policy detailing the process adopted for making appointments and the matters considered in determining who is appointed.
755. Section 104 of FSBRA 2013 states that before imposing a generally applicable requirement, the PSR must publish a draft of the proposed requirement, accompanied by a cost benefit analysis (defined in subsection (7)).
756. The Act inserts a provision in FSBRA 2013 requiring the PSR to consult the FCA’s Cost Benefit Analysis Panel about the preparation of CBAs under section 104. It also places requirements on the FCA Cost Benefit Analysis Panel in relation to the PSR’s duties in connection with CBAs. It also requires the PSR to publish a statement of policy in relation to the preparation of CBAs for the purposes of section 104 FSBRA 2013 and include in its annual report, published in accordance with paragraph 7 of Schedule 4 to FSBRA, how it has complied with this statement.

Appointment of external persons to statutory panels

757. Section 1M of FSMA 2000 requires the FCA to make and maintain effective arrangements for consulting practitioners and consumers on the extent to which its general policies and practices are consistent with its general duties. In order to satisfy this requirement, the FCA has the following statutory panels:
     1. The FCA Practitioner Panel (set out in section 1N of FSMA);
     2. The Smaller Business Practitioner Panel (set out in section 1O of FSMA);
     3. The Markets Practitioner Panel (set out in section 1P of FSMA);
     4. The Consumer Panel (set out in section 1Q of FSMA);
     5. The Listing Authority Advisory Panel (new section 1QA of FSMA, inserted by section 41 of the Act); and
     6. FCA Cost Benefit Analysis Panel (new section 138IA of FSMA, inserted by section 43(2) of the Act).
758. The members of the panels listed above are appointed by the FCA. The Act introduces a provision (new section 1MA of FSMA) which means that persons who receive remuneration from the FCA, PRA, the Bank, PSR or HM Treasury are disqualified from being appointed as a member of a statutory panel. This will capture anyone who is completing work for the regulators or HM Treasury but will not capture those who only receive expenses.
759. "Remuneration" is not defined in this new section because the default position in other legislation is that a reference to "remuneration" does not include expenses – see for example, paragraph 7 of Schedule 1 to the Advanced Research and Invention Agency Act 2022.
760. The Act provides HM Treasury with a power to make regulations to exempt a panel generally or in relation to such descriptions of persons or cases as the regulations may specify. These regulations will be subject to the negative procedure.
761. Section 2L of FSMA 2000 requires the PRA to make and maintain effective arrangements for consulting PRA-authorised persons, or persons who represent the interest of such persons, on the extent to which its general policies and practices are consistent with its general duties. In order to satisfy this requirement, the PRA has the following statutory panels:
     1. The PRA Practitioner Panel (set out in section 2M of FSMA);
     2. The Insurance Practitioner Panel (new section 2MA of FSMA inserted by section 42 of this Act); and
     3. PRA Cost Benefit Analysis Panel (new section 138JA of FSMA inserted by section 43(3) of this Act).
762. The members of the panels listed above are appointed by the PRA. The Act introduces a provision (new section 2LA of FSMA) which means that persons who receive remuneration from the FCA, PRA, the Bank, PSR or HM Treasury are disqualified from being appointed as a member of a statutory panel. This will capture anyone who is completing work for the regulators or HM Treasury but will not capture those who only receive expenses.
763. "Remuneration" is not defined in this new section because the default position in other legislation is that a reference to "remuneration" does not include expenses – see for example, paragraph 7 of Schedule 1 to the Advanced Research and Invention Agency Act 2022.
764. The Act provides HM Treasury with a power to make regulations to exempt a panel generally or in relation to such descriptions of persons or cases as the regulations may specify. These regulations will be subject to the negative procedure.
765. Section 103(1) of FSBRA 2013 requires the PSR to make and maintain effective arrangements for consulting relevant persons on certain specified areas.
766. Section 103(3) of FSBRA requires the PSR to establish and maintain one or more panels to represent the interests of relevant persons. In order to satisfy this requirement, the PSR has established the Payment Systems Regulator Panel.
767. The members of the Payment Systems Regulator Panel are appointed by the PSR. The Act introduces a new provision in section 103 which means that persons who receive remuneration from the FCA, PRA, the Bank, PSR or HM Treasury are disqualified from being appointed as a member of a statutory panel. This will capture anyone who is completing work for the regulators or HM Treasury but will not capture those who only receive expenses.
768. "Remuneration" is not defined in this section because the default position in other legislation is that a reference to "remuneration" does not include expenses – see for example, paragraph 7 of Schedule 1 to the Advanced Research and Invention Agency Act 2022.
769. The Act provides HM Treasury with a power to make regulations to exempt a panel generally or in relation to such descriptions of persons or cases as the regulations may specify. These regulations will be subject to the negative procedure.

Publication of consultation respondents

770. Section 138I(1)(b) of FSMA 2000 requires the FCA to, before making any rules, and after consulting the PRA, consult publicly on the proposed rules. Section 138I(2) of FSMA 2000 sets out what must accompany the consultation. Section 138I(4) of FSMA 2000 requires the FCA to publish an account of the representations that have been made to it in response to the consultation and its response to these representations.
771. The Act inserts new provisions into section 138I of FSMA 2000. New sections 138I(4A) to (4C) require the FCA to publish the names of respondents to a consultation published under section 138I(1)(b) as part of its response in accordance with section 138I(4). This requirement only applies where a respondent has explicitly provided their consent to the FCA that their response can be published. New section 138I(4D) requires the FCA to describe how it has considered representations made by a Committee of the House of Commons, House of Lords or a Joint Committee of both Houses in accordance with section 138I(2)(e).
772. Section 138J(1)(b) of FSMA 2000 requires the PRA, before making any rules, and after consulting the FCA, to consult publicly on the proposed rules. Section 138J(2) of FSMA 2000 sets out what must accompany the consultation. Section 138J(4) of FSMA 2000 requires the PRA to publish an account of the representations that have been made to it in response to the consultation and its response to these representations.
773. The Act inserts a new provision into section 138J of FSMA 2000. New sections 138J(4A) to (4C) require the PRA to publish the names of respondents to a consultation published under section 138J(1)(b) as part of its response in accordance with section 138J(4). This requirement only applies where a respondent has explicitly provided their consent to the PRA that their response can be published. New section 138J(4D) requires the FCA to describe how it has considered representations made by a Committee of the House of Commons, House of Lords or a Joint Committee of both Houses in accordance with section 138J(2)(e).
774. Paragraph 10(1)(i) of Schedule 17A to FSMA 2000 applies section 138J of FSMA 2000 and the provision inserted by the Act to the Bank of England in respect of its functions in relation to CCPs and CSDs.
775. The Act inserts a new paragraph into Schedule 17A to FSMA 2000 (paragraph 10A) which applies section 138J of FSMA 2000 and the provision inserted by the Act to the Bank of England in relation to rules made by the Bank of England under section 312M of FSMA 2000.
776. Section 104(2)(b) of FSBRA 2013 requires the PSR to, before imposing generally applicable requirements, and after consulting the Bank of England, the FCA and the PRA, consult publicly on the proposed rules. Section 104(3) of FSBRA 2013 sets out what must accompany the consultation. Section 104(5) of FSBRA requires the PSR to publish an account of the representations that have been made to it in response to the consultation and its response to these representations.
777. The Act inserts a new provision into section 104 of FSBRA 2013. Sections 104(5A) to (5C) require the PSR to publish the names of respondents to a consultation published under section 104(2)(b) as part of its response in accordance with section 104(5). This requirement only applies where a respondent has explicitly provided their consent to the PSR that their response can be published. New section 104(5D) requires the PSR to describe how it has considered representations made by a Committee of the House of Commons, House of Lords or a Joint Committee of both Houses in accordance with section 104(5).

Treasury power to require annual reports by statutory panels

778. The Act provides a power for HM Treasury to, by regulations subject to the negative procedure, require specified statutory panels of the FCA, PRA and PSR to produce an annual report on their work and to provide that report to HM Treasury to lay before Parliament.

Accountability to Parliament

779. The Act inserts a new provision in Schedules 1ZA and 1ZB to FSMA 2000 that requires the FCA and the PRA to notify the chairs of relevant Parliamentary Committees that a relevant consultation has been issued. For the PSR, an equivalent amendment is made via a new provision in Schedule 4 to the Financial Services (Banking Reform) Act 2013 (FSBRA 2013).
780. Where the FCA or the PRA issue a public consultation and a Committee of the House of Commons or the House of Lords or a joint Committee of both Houses has provided to the FCA or the PRA representations in response to the consultation, the new provision in Schedules 1ZA and 1ZB requires the FCA and the PRA to respond in writing to the representations. For the PSR, an equivalent obligation to respond to Parliament is created in the new provision of Schedule 4 to FSBRA 2013.

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

781. The Financial Ombudsman Service is set up under Part 16 and Schedule 17 to FSMA 2000 and referred to in that legislation as "the ombudsman scheme". The ombudsman scheme's statutory purpose is to provide for the resolution of certain disputes "quickly and with minimum formality by an independent person" (section 225(1) of FSMA 2000) based on what is, in the ombudsman’s opinion, fair and reasonable in all the circumstances of the case. The Financial Ombudsman Service is administered by the Financial Ombudsman Service Limited, a company limited by guarantee, which is the "body corporate" established by the Financial Services Authority (now the FCA) under paragraph 2(1) of Schedule 17 to FSMA 2000 (as originally enacted). Financial Ombudsman Service Limited is the "scheme operator" for the purposes of FSMA 2000 (see section 225(2) FSMA 2000).
782. The Financial Ombudsman Service is operationally independent from the FCA, but the FCA has a duty to make the rules which govern the Financial Ombudsman Service’s operation (including matters such as the scope of the Financial Ombudsman Service’s jurisdiction and the eligibility of complainants). These rules are in the FCA’s Dispute Resolution: Complaints Sourcebook (DISP).
783. The FSCS is a scheme set up under Part 15 of FSMA 2000 to provide for the payment of compensation, up to certain limits, to eligible customers of financial services firms that are unable, or likely to be unable, to pay claims against them. Technically, the FSCS consists of the rules establishing the "compensation scheme" that have been made by the FCA and the Prudential Regulation Authority (PRA) under Part 15 of FSMA 2000. "FSCS" is also used as an abbreviation for the Financial Services Compensation Scheme Ltd, the company limited by guarantee which administers the compensation scheme and which is defined as the "scheme manager" in FSMA 2000 (see section 212(1) of FSMA 2000).
784. Like the Financial Ombudsman Service, the FSCS is operationally independent from the FCA, but the FCA and the PRA are responsible under section 212(2) FSMA 2000 for ensuring that the scheme manager is at all times capable of exercising its functions under parts 15 and 15A of FSMA 2000. The FCA’s rules governing the FSCS are in its Compensation Sourcebook (COMP).
785. Paragraph 3A of Schedule 17 to FSMA 2000 (Relationship with FCA) requires the Financial Ombudsman Service and the FCA to "take such steps as [they] consider appropriate to cooperate with each other in the exercise of their functions" and requires them to prepare (and publish) a memorandum describing how they intend to comply with that obligation. 
786. The FCA and the Financial Ombudsman Service have a Memorandum of Understanding in place which was entered into in December 2015 to comply with their duty under paragraph 3A of Schedule 17 of FSMA 2000. This document provides "a framework for the FCA and the Financial Ombudsman Service Limited to cooperate and communicate constructively to carry out their independent roles and separate functions" (paragraph 2). This "is particularly important where the FCA is taking supervisory or regulatory action and, at the same time, the Financial Ombudsman Service Limited’s ombudsman scheme is receiving a significant number of cases concerning the same issue" (paragraph 4). Paragraph 14(d) of the memorandum requires the Financial Ombudsman Service and FCA to "consult one another at an early stage on any issues that might have significant implications for the other organization", and paragraph 14(e) requires them to "share (for comment) at an early stage, draft documents (such as consultation papers and briefings) that affect the other’s functions.".
787. Section 232A of FSMA 2000 provides that the Financial Ombudsman Service must disclose to FCA any information which "would or might be of assistance to the FCA in advancing one or more of FCA’s operational objectives". In addition to this obligation, the memorandum makes further provision about voluntary information sharing between the Financial Ombudsman Service and FCA, and provides that the Financial Ombudsman Service and FCA may each disclose information to the other for the purpose of assisting either party in discharging their functions.
788. The FSCS and the FCA are subject to an equivalent duty to take appropriate steps to cooperate with each other and to prepare, maintain and publish a memorandum describing how they intend to do so, under section 217A of FSMA 2000 (Co-operation). Accordingly, the FCA and the FSCS also have a Memorandum of Understanding in place, which provides at paragraph 19 that the FCA "will seek advice from the FSCS in relation to domestic or international policy making initiatives that might have a material effect on the FSCS’s ability to administer those schemes effectively now or in the future". This memorandum also states that: the FCA and FSCS "undertake to share information to allow them to fulfil their respective responsibilities" (paragraph 11); the FSCS "will keep the FCA informed in relation to issues concerning the interpretation of rules, the eligibility of claims, and its contingency and scenario planning, where appropriate" (paragraph 12); the FCA "agrees to keep the FSCS informed of any regulatory or market developments that may affect the planning or operation of the FSCS - both in general terms and in relation to the likelihood of a specific firm failing" (paragraph 13); and the FSCS "will keep the FCA informed on the effectiveness of the rules for the compensation scheme".
789. The Financial Ombudsman Service and the FSCS are not subject to a bilateral duty of cooperation akin to the duties in paragraph 3A of Schedule 17 to, and section 217A of, FSMA 2000.

Chair of the Payment Systems Regulator as member of FCA Board

790. The PSR is a body corporate which was established by the FCA under Part 5 of the Financial Services (Banking Reform) Act 2013 (FSBRA 2013), to exercise regulatory functions in relation to payment systems. Under paragraph 2(2)(a) of Schedule 4 to FSBRA 2013, the FCA is responsible for appointing a member to chair the board of the PSR (the PSR Chair), with the approval of HM Treasury.
791. The "governing body" of the FCA (the FCA Board) is formed in accordance with paragraph 2 of Schedule 1ZA to FSMA 2000. Under paragraph 2(2)(a), HM Treasury is responsible for appointing a chair to that board (the FCA Chair). Under paragraph 2(3), certain members of the FCA Board are non-executive members.
792. Until 1 May 2022, the same individual was appointed to the offices of FCA Chair and PSR Chair. Therefore, the PSR Chair was effectively a member of the FCA Board. However, the PSR Chair is no longer the same person as the FCA Chair, and the PSR Chair is not currently listed as a member of the FCA Board in paragraph 2(2) of Schedule 1ZA to FSMA 2000.
793. The Act adds the PSR Chair to that list, so that the PSR Chair will become a member of the FCA Board in their own right. It also amends paragraph 2(3) to specify that the PSR Chair is to be a non-executive member.
794. The Act also ensures that the following provisions in Schedule 1ZA FSMA 2000 will be extended to apply to the PSR Chair as member of the FCA Board:
     1. Paragraph 3(6), which provides that an employee of the PRA cannot be an "appointed member" of the FCA Board.
     2. Paragraph 3(7), which allows the FCA to pay expenses to the Bank’s Deputy Governor for prudential regulation for service as a member of the FCA Board.
     3. Paragraph 6, which prohibits the Bank’s Deputy Governor for prudential regulation from taking part in discussions about the exercise of the FCA’s powers in relation to particular persons.

Access to cash

Cash access services

795. The Act inserts new Part 8B, titled "Cash Access Services", into FSMA 2000. Part 8B applies to credit institutions which are authorised under Part 4A. The FCA therefore already regulates the carrying on of regulated activities by these credit institutions. In September 2020, the FCA issued guidance setting out considerations that these firms should take into account when planning the closure of a branch or ATM, or conversion of a free-to-use ATM to pay-to-use. This guidance was underpinned by Principles 6 and 7 of the FCA’s "Principles for Business."
796. The new Part 8B of FSMA 2000 provides the FCA with a bespoke rule making and directions power to further advance the aim of protecting access to cash for UK customers, through seeking to ensure the continued reasonable provision of cash withdrawal and deposit facilities; this includes reasonable provision of free cash access services for relevant personal current accounts.

Wholesale cash distribution

797. There currently exists no statutory regime relating to the wholesale cash distribution network and the Bank has no statutory powers of oversight. The Act establishes a new statutory oversight regime of wholesale cash distribution. In particular, it confers on the Bank a formal role of oversight over the wholesale cash distribution network.

Performance of functions relating to financial market infrastructure

798. The key features of the senior managers and certification regime (SM&CR) introduced by the Act for relevant recognised bodies will be similar to those of the existing SM&CR for banks, insurers and other authorised persons, which is set out in Part 5 of FSMA 2000.
799. The existing SM&CR replaced the Approved Persons Regime (APR) between March 2016 and December 2019. The APR, which was introduced in 2001 and was set out in sections 59 to 71 of FSMA 2000, required the pre-approval by a regulator of certain individuals within financial institutions before they could carry out one or more activities. The global financial crisis in 2007-08 and the Libor scandal in 2012 exposed the shortcomings of the APR, and made clear that there was a need for more effective regulation of the conduct of individuals working in the financial services industry.
800. This was achieved by amending FSMA 2000 to augment the APR with the SM&CR for certain types of financial institutions. The SM&CR was introduced with the aim of reducing harm to consumers and strengthening market integrity by changing behaviours and culture within firms. The Financial Services (Banking Reform) Act 2013 created two regimes within sections 59 to 71 of FSMA 2000. The new SM&CR would apply to ‘relevant authorised persons’ (i.e., banks, building societies, credit unions and PRA-regulated investment firms), and the APR would continue to apply to all other authorised persons. SM&CR was subsequently extended to all authorised persons. As a result of the amendments to sections 59 to 71 of FSMA 2000, the existing SM&CR can be viewed as an enhanced version of the APR.
801. The SM&CR set out in Part 5 of FSMA 2000 has five key elements: the Senior Managers Regime (sections 59 to 63ZE and 71 of FSMA 2000); the Certification Regime (sections 63E and 63F of FSMA 2000); conduct rules for individuals (sections 64A to 64C of FSMA 2000); disciplinary powers (sections 56 to 58, 63A to 63D and 66 to 71 of FSMA 2000); and criminal offences (sections 56(4) and 398 of FSMA 2000).
802. Whilst the new regime implemented by the Act will be broadly similar to the SM&CR set out in Part 5, it will sit separately to the existing regime, and will be set out in Part 18 of FSMA 2000.
803. In order to implement the regime, the Bank and the FCA would rely on both their general rule-making powers as well as bespoke rule-making powers and duties. This Act introduces a new general rule-making power for the Bank over CCPs and CSDs which will be inserted as section 300F of FSMA 2000 (see section 9), and a new general rule-making power for the FCA over RIEs and data reporting service providers (DRSPs) which will be inserted as section 300H of FSMA 2000 (see section 11). Regulation 3 of The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019 34 grants the FCA an existing general rule-making power over CRAs.
804. The UK’s regulatory regime for CCPs, CSDs and RIEs is outlined in Part 18 of FSMA 2000. Amongst other provisions, Part 18 of FSMA 2000 grants an exemption for the purposes of the general prohibition (which provides that no person may carry on a regulated activity in the UK unless they are authorised or exempt), under which RIEs, CCPs and CSDs that have been recognised by the regulator are able to carry on a regulated activity in the UK without being authorised under FSMA 2000. It also provides for the recognition and supervisory powers of the relevant regulators – the FCA in respect of RIEs and the Bank in respect of CCPs and CSDs. As with other areas of financial services, the regulation and supervision of UK CCPs, CSDs and RIEs has also been heavily influenced by the UK’s membership of the EU. The core EU legislation relating to each of these bodies is set out below.
805. The European Market Infrastructure Regulation (EMIR) 35 is the core EU legislation relating to CCPs. It came into effect on 16 August 2012, and lays down rules on OTC derivatives, central counterparties, and trade repositories. Following the end of the Transition Period, the EU Regulation forms part of retained EU law, by operation of the European Union (Withdrawal) Act 2018 (EUWA 2018) and as amended by regulations made under section 8 of EUWA 2018, which ensure that EMIR continues to function appropriately and effectively in the UK. The EU Regulation as amended and forming part of retained EU law is referred to as UK EMIR.
806. The Central Securities Depositories Regulation (CSDR) 36 is the core EU legislation relating to CSDs, and it came into effect on 17 September 2014. The aim of CSDR is to harmonise certain aspects of the settlement cycle and settlement discipline and to provide a set of common requirements for CSDs operating securities settlement systems across the EU. Following the end of the Transition Period, the EU Regulation forms part of retained EU law, by operation of EUWA 2018, and as amended by regulations made under section 8 of EUWA 2018, which ensure that CSDR continues to function appropriately and effectively in the UK. The EU Regulation as amended and forming part of retained EU law is referred to as UK CSDR.
807. The Markets in Financial Instruments Directive (MiFID II) 37 and the Markets in Financial Instruments Regulation (MiFIR) 38 form the MiFID II framework, which is the core EU legislation relating to RIEs. The MiFID II framework came into effect on 3 January 2018. The framework strengthens investor protection and improves the functioning of financial markets, making them more efficient, resilient and transparent. Following the end of the Transition Period, the MiFID II framework forms part of retained EU law, by operation of EUWA 2018. The EU MiFID II framework was transposed and implemented in the UK by a combination of FCA and PRA Handbook rules, HM Treasury legislation (such as the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018), and directly applicable EU regulations, which delivered the necessary amendments to ensure that the framework was implemented and continues to function appropriately and effectively following the end of the Transition Period. MiFID II and MiFIR as amended and forming part of retained EU law are referred to together as the UK MiFID II framework.
808. The Credit Rating Agencies Regulation (the EU CRAR) 39 is the core EU legislation relating to CRAs and credit ratings. It was developed to address issues relating to CRAs that became apparent in the financial crisis of 2007/08. The EU CRAR was subsequently amended by Regulation (EU) 513/2011 (OJ L 145/30) (EU CRA II Regulation) and Regulation (EU) 462/2013 (OJ L 146/1) (EU CRA III Regulation). The EU Regulation now forms part of retained EU law, by operation of EUWA 2018. The Credit Rating Agencies (Amendment, etc.) (EU Exit) Regulations 2019 40 delivered the necessary amendments to ensure that the EU Regulation continues to function appropriately and effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law is referred to as the UK CRAR.
809. As set out in the FRF Review consultation, it is proposed that, as a general approach, the direct regulatory requirements that apply to firms in retained EU law be revoked, so that, for the most part, the regulators can determine them in their rulebooks. There are also a number of provisions in retained EU law which do not set direct regulatory requirements on firms. These may be amended and/or retained in domestic legislation. The core EU legislation mentioned above will therefore be revoked, with most firm-facing requirements replaced by regulators’ rules, and other requirements retained and restated in legislation.

Central counterparties in financial difficulties

810. As explained above, the UK has an existing recovery and resolution regime for central counterparties (CCPs), which came into force in 2014. This regime comprises Part 1 of the Banking Act 2009, as modified and extended to CCPs by section 102 of the Financial Services Act 2012, and secondary legislation made under the Banking Act 2009.
811. Section 102 of the Financial Services Act 2012 inserted sections 89B to 89G into Part 1 of the Banking Act 2009, with section 89B setting out the modifications of Part 1 in its application to CCPs.
812. Part 1 of the Banking Act 2009 has since been amended by the Bank Recovery and Resolution Order 2014, the Bank Recovery and Resolution Order 2016, and the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020. None of these amendments affected the regime as it applies to CCPs, and section 89B(1ZA) disregards amendments made by these enactments for the purposes of the CCP regime.
813. The existing resolution regime for CCPs is therefore based on the text of Part 1 of the Banking Act 2009, as amended in accordance with any amendments not disregarded under section 89B, as modified under section 89B 41 .

Miscellaneous

Disciplinary action against formerly authorised persons

814. Under section 168(3) and (5) of FSMA 2000, the FCA and the PRA may appoint one or more competent persons to conduct an investigation on their behalf. Section 168(1) to (2) sets out the circumstances in which a regulator can exercise its power under section 168(3). Section 168(4) specifies the circumstances in which a regulator can exercise its power under section 168(5). The powers in section 168 can be used against a range of persons, including authorised persons under FSMA 2000.
815. Part 14 of FSMA 2000 gives the FCA and the PRA certain disciplinary powers. In particular, if a regulator considers that an authorised person has contravened a relevant requirement, it may publish a statement to that effect under section 205, or impose a financial penalty, under section 206(1) of FSMA 2000. By virtue of section 404C of FSMA 2000, these powers can also be used against formerly authorised persons to enforce rules made under section 404.
816. Under section 384(5), the FCA or the PRA can require an authorised person to pay profits unlawfully accrued or an amount for the loss the person caused if the regulator is satisfied that the conditions set out in subsection (1) are met.
817. The powers described above cannot be used against formerly authorised persons (except in the circumstances set out in section 404C). "Authorised person" under section 31 of FSMA 2000 means a person with a current permission to carry on one or more regulated activities in the UK.

Financial Services Compensation Scheme

818. Part 15 of FSMA 2000 makes provision in connection with the FSCS. The FSCS is administered by the FSCS manager established under section 212 of FSMA 2000. The FCA and the PRA are responsible for appointing and removing the FSCS manager’s chairperson, chief executive and directors. The appointment and the removal of the chairperson and chief executive require HM Treasury’s approval.
819. Section 212(3)(aa) of FSMA 2000 requires the chief executive to be the accounting officer of the FSCS manager. This requirement reflects the principle that the permanent heads of ALBs are usually appointed as the accounting officers for those bodies.
820. Under section 218B of FSMA 2000, HM Treasury can require the FSCS manager to provide information reasonably required in connection with HM Treasury’s duties under the Government Resources and Accounts Act 2000.

The Ombudsman scheme

821. The FOS is an alternative dispute resolution scheme set up under Part XVI of, and Schedule 17 to FSMA 2000 and is referred to in that legislation as "the ombudsman scheme". The ombudsman scheme's statutory purpose is to provide for the resolution of certain disputes "quickly and with minimum formality by an independent person" section 225(1) of FSMA 2000 at no financial cost to the complainant based on what is, in the ombudsman’s opinion, fair and reasonable in all the circumstances of the case.
822. The FOS is administered by the Financial Ombudsman Service Limited, a company limited by guarantee, which is the "body corporate" established by the Financial Services Authority (now the FCA) under paragraph 2(1) of Schedule 17 to FSMA 2000 (as originally enacted). FOS Ltd is the "scheme operator" for the purposes of FSMA 2000 (see section 2).
823. Section 63 amends paragraph 15 of Schedule 17 to FSMA 2000 to enable HM Treasury to make regulations to add further categories of persons to the list of those to whom the FOS can charge case fees. This amendment prevents HM Treasury from adding eligible complainants (those bringing their own cases to the FOS) to the categories of persons to whom the FOS can charge case fees.

Unauthorised Co-ownership AIFs

824. The concept and definition of a "contractual scheme" is set out at section 235A of FMSA 2000. Contractual schemes are a form of collective investment scheme as per section 235A(2) and section 235A(5) of FSMA 2000. They can be established as a co-ownership scheme (section 235A(2) to (4) of FSMA 2000), or as a partnership scheme (section 235A(5) to (7) of FSMA 2000). If the contractual scheme is established as a co-ownership scheme it is not prevented from being established as an umbrella structure 42 (section 235(4) of FSMA 2000).
825. A contractual scheme can apply to the FCA for authorisation, per sections 261C to 261D of FSMA 2000, and therefore become an authorised contractual scheme, by virtue of an authorisation order under section 261D(1) of FSMA 2000. If it is structured as a co-ownership scheme, it will therefore be a CoACS.
826. Sections 261M to 261P of FSMA 2000 sets out the rights and liabilities of participants in CoACS. These provisions afford CoACS with the following:
     1. section 261M of FSMA 2000 makes provision about the contracts in the scheme;
     2. section 261N of FSMA 2000 limits an investor’s rights and liabilities - to which they are entitled or subject under, or in connection with, contracts in the scheme - to the period that they are a participant;
     3. section 261O of FSMA 2000 limits an investor’s liability for debts incurred under, or in connection with, contracts which the operator is authorised to enter on their behalf; and
     4. section 261P of FSMA 2000 provides for the segregation of liabilities of participants in sub-funds, where a co-ownership scheme is constituted as an umbrella fund.
827. These provisions (sections 261M to 261P of FSMA 2000) do not apply to a co-ownership scheme that does not benefit from an authorisation order and therefore would not apply to a new investment vehicle, like the unauthorised contractual scheme, that is structured as an unauthorised co-ownership AIF with a corresponding tax treatment, if such a vehicle was introduced into statute.
828. The power taken in this measure enables HM Treasury to essentially apply, as relevant, the effects of sections 261M to 261O and section 261P(1) and (2) of FSMA 2000 to a contractual scheme, that is a co-ownership scheme, but which does not benefit from an authorisation order (noting that of section 261P of FSMA 2000, only section 261P(1) and (2) of FSMA 2000 would be relevant for the unauthorised contractual scheme in any event). Any such scheme would likely be an alternative investment fund ("AIF"), as per section 417(1) of FSMA 2000 and so the power is scoped to only apply to AIFs (hence the term, "unauthorised co-ownership AIF" within the measure). The likely exercise of this power will therefore be to make provision that corresponds or is similar to sections 261M to 261O and section 261P(1) and (2) of FSMA 2000, for a new investment vehicle that benefits from a corresponding tax treatment and is structured as an unauthorised co-ownership AIF. This is in the event that such a vehicle was introduced into statute, like the unauthorised contractual scheme.
829. Separately, this measure also amends section 261E of FSMA 2000, to clarify that section 261E of FSMA 2000 is relevant for the purposes of authorised contractual schemes with regards to section 261D(1)(a) of FSMA 2000, reflecting the title of the section.

Control over authorised persons

830. The change in control regime is contained in Part 12 of FSMA 2000. This sets out the full process for all applications for a change in control.
831. Section 187 which sets out the circumstances where conditions can be imposed:
     (2) The appropriate regulator may only impose conditions where–
     (a) if it did not impose those conditions, it would propose to object to the acquisition, or
     (b) it is required to do so by a direction under section 187A(3)(b) or section 187B(3)
832. The Act adds an additional limb to this section to enable the regulators to impose conditions where it is appropriate to do so in order to advance any of that regulator’s objectives.

Cryptoassets

833. Section 69 amends FSMA 2000. It amends the definitions of "investment" for the purposes of section 21 of FSMA 2000, which allows HM Treasury to prohibit unauthorised persons from issuing financial promotions, and section 22 of FSMA 2000, which allows HM Treasury to make provision as to the classes of regulated activity and types of investment that are regulated under FSMA 2000. In doing so, it ensures that HM Treasury’s powers under sections 21 and 22 of FSMA 2000 can be used to regulate cryptoassets.
834. Section 69(4)(a) inserts a new definition of "cryptoasset" to section 417 of FSMA 2000. Per sections (4)(b) and (5), HM Treasury may amend this definition by SI subject to the affirmative Parliamentary procedure.

Bank of England levy

835. The Cash Ratio Deposit scheme is provided for by section 6 of, and Schedule 2 to, the Bank of England Act 1998. Certain aspects of the scheme, such as the value bands and the ratio applicable to each value band used for calculating how much a financial institution must deposit, are set out in secondary legislation made under paragraphs 2 and 5 of Schedule 2 to the Bank of England Act 1998. The Act repeals all these provisions and, in its place, make provision for a levy to be imposed.

Liability of payment service providers for fraudulent transactions

The Financial Services (Banking Reform) Act 2013

836. FSBRA 2013 specifically Part 5, as supplemented by Schedule 4, established the PSR, and specifies the entities it regulates (namely designated payment systems and their participants), provides for the PSR’s objectives and powers in relation to those regulated entities, and how those powers are to be exercised.
837. Under section 43 of FSBRA 2013, HM Treasury may by order designate a payment system and its participants for regulation by the PSR, provided certain criteria (in section 44 of that Act) are met.
838. The PSR’s objectives, in summary, include: to promote effective competition in the markets for payment systems and services - between operators, payment service providers (PSPs) and infrastructure providers (the "competition objective"; section 50 of FSBRA 2013); to promote the development of and innovation in payment systems, in particular the infrastructure used to operate those systems (the "innovation objective"; section 51 of FSBRA 2013) and to ensure that payment systems are operated and developed in a way that considers and promotes the interests of all the businesses and consumers that use them (the "service-user objective"; section 52 of FSBRA 2013).
839. In order to achieve these objectives, the PSR may give direction to regulated participants (section 54 of FSBRA 2013), and/or require payment system rule changes (section 55 of FSBRA 2013).

The Payment Services Regulations 2017

840. The Payment Services Regulations 2017 are the main domestic legislation governing payment services in the UK, establishing the rights and obligations of payment service users (including payers and payees) and PSPs - including banks and certain other authorised entities - in relation to payment services. The Payment Services Regulations implemented the requirements of the Second Payment Services Directive and were made under powers in section 2(2) of the European Communities Act 1972. The Payment Services Regulations were amended by the Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018 (2018/1201) using powers under the European Union (Withdrawal) Act 2018 to fix deficiencies arising as a result of the UK’s exit from the European Union.
841. Regulation 90(1) of the Payment Services Regulations provides that where a payment order is executed in accordance with the "unique identifier" (defined in regulation 2 of the Payment Services Regulations) provided by the payment service user, the payment order is deemed to have been correctly executed by each PSP involved in executing the payment order, and the PSP is not obliged to provide reimbursement.
842. The Financial Conduct Authority (FCA) remains the competent authority for the purposes of monitoring and enforcing regulation 90.

Credit unions

843. The relevant legal background is explained in the policy background section of these Notes.

Reinsurance for acts of terrorism

844. The relevant legal background is explained in the policy background section of these Notes.

Banking Act 2009: miscellaneous amendments

845. Section 7A(1) of the Banking Act 2009 requires the Bank of England, where it is considering the imposition of a requirement under certain direction-making powers in section 3A of that Act, to consult the PRA and the FCA, and to have regard to certain potential impacts of those directions. When section 3A was amended in December 2020 to implement an update of the EU Bank Recovery and Resolution Directive, the cross-reference made to section 3A in section 7A(1) was not updated to reflect that amendment. This provision updates that cross-reference in section 7A(1). This restores the obligation for the Bank of England to consult other regulators (and have regard to specific impacts) in relation to the amended parts of section 3A.
846. Section 83ZD of the Banking Act 2009 allows the Bank of England to appoint persons to conduct an investigation where there are circumstances suggesting that a person may have failed to comply with any requirement imposed by the Bank of England under Part 1 of the Banking Act. An exception to this is where the requirement is imposed by the Bank in relation to regulatory sanctions. This provision corrects the cross-reference to the provision related to regulatory sanctions.
847. Section 89H of the Banking Act 2009 provides for the recognition by the Bank of England of resolution actions undertaken in a country or territory outside the United Kingdom. This provision provides for the removal of certain words used in subsection (7) which have no legal effect and may reduce clarity of the recognition process.
848. Part 5 of the Banking Act 2009 provides the Bank of England with regulatory powers over payment systems that may pose financial stability risks to the UK. For those powers to be engaged, the payment system must be recognised by HM Treasury as suitable for such regulation, under section 182 of that Act.
849. Section 244 of the Banking Act 2009 provides that the Bank, its directors, officers, employees and agents are immune from liability in damages for anything done or not done in the exercise of its functions, as described in that section.

Arrangements for the investigation of complaints

850. Part 6 of the FSA 2012 governs the investigation of complaints against the FCA, the PRA and the Bank ("the regulators") by the Financial Regulators Complaints Commissioner.
851. Section 84 of the FSA 2012 requires the regulators to put in place a scheme for the prompt, independent investigation of complaints made against them in respect of their relevant functions (as defined in section 85), for example complaints about maladministration.
852. Under section 84(1)(b), the regulators must appoint an independent person as the "investigator" (i.e. the Complaints Commissioner). This appointment requires the approval of HM Treasury under section 84(4), and it must be made on terms and conditions reasonably designed to ensure the Complaints Commissioner’s independence from the regulators, and to ensure that complaints will be investigated under the scheme without favouring the regulators (section 84(5)).
853. The Act amends section 84 to provide that HM Treasury, rather than the regulators, must appoint the Complaints Commissioner on terms and conditions reasonably designed by HM Treasury to ensure independence from the regulators, and to ensure that complaints will be investigated under the scheme without favouring the regulators.
854. Section 86 of the FSA 2012 requires the regulators to consult publicly on a draft of the proposed scheme, and any alteration to or replacement of the complaints scheme, to consider and report on representations received, and to publish up-to-date details of the complaints scheme. The current complaints scheme is available on the Complaints Commissioner’s website .
855. Section 87 of the FSA 2012 deals with the operation of the complaints scheme. Under subsection (1) a regulator may decide not to investigate a complaint in accordance with the scheme if it reasonably considers that it would be more appropriately dealt with in another way. A regulator may make an initial investigation of a complaint, and the Scheme must provide for the possibility of referral of any complaint it is investigating to the Complaints Commissioner (subsection (2)(a)). The regulator must also notify the Complaints Commissioner of complaints it has decided not to investigate, and the Complaints Commissioner may choose to investigate such a complaint (subsections (3) and (4)).
856. Where the Complaints Commissioner has conducted an investigation, it must report on it to the regulator and the complainant, and the investigator can recommend that the regulator makes a compensatory payment to the complainant or remedies the matter, or both (subsection (5)). The Complaints Commissioner can publish all or part of the report if the investigator thinks that it ought to be brought to the attention of the public (subsection (2)(b)(iii)) and, if a report is critical of the regulator, the regulator must inform the investigator and the complainant of the steps it proposes to take in response (subsection (6)) and the investigator may require the regulator to publish all or part of that response (subsection (7)).
857. Two further subsections were inserted in section 87 by section 20 of the Small Business, Enterprise and Employment Act 2015, requiring the complaints scheme to provide for the Complaints Commissioner to make an annual report. Under subsection (9A), the annual report is prepared and published by the Complaints Commissioner, who must send a copy of the report to each regulator and HM Treasury. If the report makes recommendations or criticisms about the regulators' handling of complaints, the regulators must produce and publish a response. The regulators must send a copy of their response to both the Complaints Commissioner and HM Treasury. HM Treasury must lay the annual report and any responses before Parliament.
858. The Act inserts a new subsection (9A)(ba) to require the regulators, in their response to the Complaints Commissioner’s annual report, to provide a summary of the cases in which they decided not to follow "relevant recommendations" of the Complaints Commissioner, and a summary of the reasons for those decisions. "Relevant recommendations" is defined in a new subsection (9C) as recommendations to the regulator contained in the Complaints Commissioner’s annual report, or in final reports given by the Complaints Commissioner in relation to individual complaints during the period to which the annual report relates.
859. Subsection (9B) provides a power for the complaints scheme to include provision about the period to which each annual report must relate, and about the contents of the report. It also requires the complaints scheme to provide for the report to include specific contents.
860. The Act inserts a new subsection (9B)(f), which enables HM Treasury to direct the Complaints Commissioner to include other matters (as may be specified in the direction) in its annual report.

Politically exposed persons

861. Section 77 requires HM Treasury to exercise existing powers contained in section 49 of the Sanctions and Anti-Money Laundering Act 2018 to amend regulation 35 of the MLRs. This regulation sets out the existing requirements in relation to enhanced customer due diligence with respect to PEPs including, at paragraph (4), taking into account guidance issued by the FCA.
862. The FCA must give guidance on the enhanced customer due diligence measures required in relation to PEPs, their family members and known close associates in accordance with section 139A of the Financial Services and Markets Act 2000 and regulation 48 of the MLRs.
863. Further detail as to the relevant legal background is explained in the policy background section of these Notes.

Forest risk commodities: review

864. Section 79 obliges HM Treasury to carry out a review to assess the extent to which regulation of the UK financial system is adequate for the purpose of eliminating the financing of the use of prohibited forest risk commodities.
865. Once HM Treasury has undertaken this review, it must publish and lay before Parliament a report which states its conclusions, 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.
866. The timing of HM Treasury’s report is connected with the making of regulations by the Secretary of State under paragraph 1 of Schedule 17 to the Environment Act 2021, which will specify "forest risk commodities" for the purposes of the prohibition in that Act on regulated persons using illegally produced forest risk commodities (or products derived therefrom) in UK commercial activities. HM Treasury’s report must be published and laid before Parliament before the end of 9 months beginning with the day on which the first regulations under paragraph 1 of Schedule 17 are made.
867. Section 79 sets out relevant definitions for the purposes of the scope of the review:
     1. "UK financial system" has the same meaning as in section 1I of FSMA 2000 (meaning the financial system operating in the UK including (a) financial markets and exchanges; (b) regulated activities and claims management activities; and (c) other activities connected with financial markets and exchanges).
     2. "Forest risk commodities" has the same meaning as in Schedule 17 to the Environment Act, namely a commodity specified in paragraph 1 to that Schedule, to be specified further by regulations made by the Secretary of State under that paragraph (which are yet to be made as at the date of this Act receiving Royal Assent).
     3. "Prohibited" forest risk commodities refers to those commodities (or products derived from those commodities), the use of which is prohibited by paragraph 2 of Schedule 17 to the Environment Act 2021. Paragraph 2 prohibits regulated persons (for the purposes of that Act) from using forest risk commodities (or products derived from such commodities) in their UK commercial activities unless relevant local laws were complied with in relation to those commodities. "Relevant local laws" are further defined under that legislation.