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Financial services contributed £75.5 billion in UK tax revenue in 2018/19, employing around 1.1 million people. The 2019 Queen’s Speech background paper expressed a desire to bring forward, in the upcoming parliamentary session, legislation to:

Ensure that the UK maintains its world-leading regulatory standards and remains open to international markets after we leave the EU.

The Bill, Explanatory Notes, Delegated Powers Memorandum, Human Rights Memorandum and Impact Assessment have been published on the Bill page. The Bill’s stated objectives are to:

  • enhance the UK’s world-leading prudential standards and promote financial stability;
  • promote openness between the UK and international markets; and
  • maintain an effective financial services regulatory framework and sound capital markets.

The Bill takes an incremental approach, introducing technical reforms in these areas. The Treasury has consulted on some of the areas of the Bill but the responses to these consultations have not yet been published.

Perhaps given the technical nature of the changes, few have attracted significant media interest thus far.

The Bill amends existing laws on financial services in 17 distinct areas. In brief, grouped by its three stated objectives, these areas are:

Objective 1: Enhancing the UK’s world-leading prudential standards and promoting financial stability

1. Investment Firms Prudential Regime

Prudential rules require financial firms to hold assets and put in place procedures so that financial markets stay stable even in tough economic times. EU prudential rules passed in 2013 were viewed as requiring reform, in part because they applied largely the same rules to many different types of financial firms, without fully catering for their size and how risky their activities were. The EU therefore passed reforms in 2019 to create a new tailored prudential regime for investment firms, which will apply from 2021 – after the UK has left the European single market. Clauses 1 and 2 of the Bill therefore provide a framework for the UK’s own Investment Firms Prudential Regime, to be similar in substance to that being introduced in the EU and largely implemented in rules to be made by the UK Financial Conduct Authority (FCA).

2. Implementation of Basel III

The Basel III standards are a set of prudential rules which were internationally agreed after the 2007/2008 financial crisis. The UK has committed to implementing the Basel III standards in full by 2023. Some of these standards have already been implemented through legislation passed at EU level; clauses 3 to 7 of the Bill therefore amend existing laws, and grants the Treasury the power to make further amendments in future, in connection with the implementation of the Basel III standards. Since the UK Prudential Regulatory Authority (PRA) will also play a part in implementing these standards through its existing rule-making powers, the Bill also introduces an enhanced “accountability framework” with a list of matters the PRA must have regard to when exercising its rule-making powers.

3. LIBOR transition

The London Interbank Offered Rate (LIBOR) is an interest rate benchmark used to indicate banks’ costs of funding their activities (for example, the cost of obtaining money for a loan it will make). It is used as a reference in hundreds of trillions of pounds’ worth of financial contracts around the world. The FCA has said that, after 2021, it will no longer persuade or compel banks to submit the underlying data that goes to calculating LIBOR, causing concern that it could cease to exist. Existing powers on benchmarks granted to the FCA, passed under EU law and to form part of UK law from 2021, are seen as insufficient to ensure a smooth transition away from the use of LIBOR. Among other things, clauses 8 to 19 therefore grant the FCA greater powers to compel the continued publication of benchmarks, to prohibit the use of benchmarks, and to oversee the orderly “wind-down” of benchmarks.

4. Benchmarks: extension of third-country transitional period

Current EU law, which will form part of UK law from next year, will prohibit referencing benchmarks administered by a foreign country (from 2022, after a transitional period ends), unless one of three “access routes” are used by the administrator of that benchmark. Foreign-administered benchmarks are important to the UK market, which is a global hub for currency and interest rate swap transactions. Fears that many important foreign benchmark administrators would be unable or unwilling to use the “access routes” that allow their benchmarks to continue to be used led the Government to extend the transitional period for the ban on foreign-administered benchmarks to 2023. Clause 20 extends this transitional period again for a further three years while the Government considers a longer-term response to this issue. Clause 21 makes minor and consequential amendments as a result of the changes made in the Bill.

Objective 2: Promoting openness between the UK and overseas markets

5. Gibraltar Authorisation Regime

Because the UK and Gibraltar will no longer be subject to EU arrangements from 31 December 2020, the Bill would establish a new Gibraltar Authorisation Regime to allow financial services firms based in Gibraltar to continue to offer regulated activities in the UK. The Bill sets out arrangements for implementing and running the new regime, which would be based on compliance with the objectives of the Bill, alignment of law and regulatory oversight in both jurisdictions, and cooperation between parties on both sides.

6. Overseas Funds Regime

After leaving the European single market, “passporting” rights will be lost. European Economic Area (EEA) investment funds which currently market themselves to retail (non-professional) customers in the UK using a passport will therefore need to seek UK recognition to continue marketing. The Government has introduced a temporary marketing permissions regime to avoid this “cliff-edge” (which the Bill raises to five years long) following which such funds will need to have gained UK recognition to continue operating as they do. The Government considers the current process for granting marketing approvals to foreign retail funds to be expensive and time-consuming, so clauses 24 to 26 introduce a simplified new regime for granting marketing approval to overseas retail funds (including non-EU funds), based on whether the Treasury considers the jurisdiction where that fund is based to have “equivalent” investor protections to its own regime. A separate “equivalence” regime will also be introduced for money market funds (broadly, funds that invest in short-term debt). For funds whose countries do not benefit from an equivalence determination, the existing recognition process is being simplified. 

7. Markets in Financial Instruments Regulation (MiFIR)

MiFIR, an EU regulation adopted in 2014, introduced the “Title 8” regime under which foreign firms whose countries benefit from an “equivalence” decision could provide certain investment services or undertake certain investment activities in the EU without needing to obtain authorisation. From next year the power to grant “equivalence” in respect of the UK will pass to the Treasury. Clause 27 amends MiFIR (which will become part of UK law from 2021) to broadly reflect changes made by the EU. The changes include granting the FCA powers to specify reporting requirements, changes to the “equivalence” assessment criteria, granting the Treasury powers to impose specific requirements on firms registered under the regime, and additional powers for the FCA (under a procedure) to restrict or withdraw the recognition of specific firms using the regime.

Objective 3: Maintaining the effectiveness of the financial services regulatory framework and sound capital markets

8. Cancellation of the authorisation of firms

Clause 28 introduces a new procedure to allow the FCA to cancel or vary an inactive firm’s authorisation to perform certain regulated activities. The new procedure would be available where an authorised firm fails to pay required fees or provide required information, with the aim of keeping the Financial Services Register of authorised persons accurate and up-to-date to allow consumers to make informed decisions, and to deter fraud caused by the use of identities of inactive authorised firms.

9. Amendments to the Market Abuse Regulation (MAR)

The Government is seeking to make two changes to MAR (as it will apply in the UK from 2021) which are said to be aligned with changes to be made by the EU. The first concerns the requirement to maintain insider lists (lists of people with access to certain sensitive information within listed issuers). The Bill clarifies that both issuers and those acting on their behalf or on their account must maintain such lists. The second change extends the time issuers have to notify the public of senior managers’ transactions in their instruments (such as shares) from within three business days of the transaction to within two working days of it being notified by the senior manager.

10. Extending the maximum criminal sentence for market abuse

Insider dealing and market manipulation are criminal offences, which include, for example, someone dealing in securities like shares in circumstances where they have an unfair advantage, or giving out false information to influence the price of securities to make a gain or cause loss.

The maximum sentence for both these offences is currently seven years’ imprisonment. Clause 30 increases the maximum sentences to ten years’ imprisonment to bring it into line with fraud, which the Government considers to be a comparable economic crime.

11. Application of money laundering regulations to overseas trustees

The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) sets the framework the UK will use to implement sanctions and anti-money laundering policy after leaving the European single market. Clause 31 amends SAMLA to ensure that regulations made by the Government relating to the enabling, detection or investigation of money laundering can apply to foreign trustees of trusts with links to the UK. Without it, the Government is concerned that any powers HMRC sought to exercise to access information on such trustees are at risk of being held invalid under legal challenge.

12. Debt Respite Scheme

The Bill provides greater powers for the Government to implement the second part of the Debt Respite Scheme, the Government’s strategy to help individuals struggling with problem debt: the statutory debt repayment plan (SDRP). The SDRP will be introduced by regulations.

Clause 32 would amend the Financial Guidance and Claims Act 2018 to empower the Government to make regulations which will compel creditors to accept amended repayment terms; provide for a charging mechanism through which creditors will contribute to the cost of running the scheme and repayment plans; and include in SDRPs debts owed to central government departments.

13. Successor accounts for Help-to-Save savers

Help-to-save is a scheme introduced by the Government from 2018 to encourage those on low incomes or in receipt of certain benefits to save money. Participants set up and deposit money into savings accounts on which the Government will pay a bonus after two and four years. However, no provision is currently made for the use of the savings after the scheme is over, for savers who do not withdraw their savings. Clause 33 therefore amends existing legislation to allow the Treasury to make regulations for the transfer of these savings into successor accounts (which may be interest-bearing) in the absence of instructions from the account holder.

14. Amendments to the Packaged Retail and Insurance-based Investment Products (PRIIPS) Regulation

The EU PRIIPs Regulation introduced a new disclosure regime for certain investment products that are regularly provided to retail (non-professional) investors. There has been market uncertainty on which products are within its scope and the accuracy of the information which it requires to be disclosed to investors. Clause 34 therefore amends the PRIIPs Regulation, as it applies in the UK from 2021, to empower the FCA to make rules to specify which products are within the scope of the PRIIPs Regulation and to amend the disclosure requirements for products within its scope, with the aim of increasing the accuracy of information provided to investors.

15. Amendments to the European Markets Infrastructure Regulation (EMIR)

Clause 35 amends EMIR, as it applies in the UK from 2021, to reflect changes made at EU level which will only come into force after the UK leaves the European single market. The changes are intended to improve access to derivative “clearing” services (through which a heavily-regulated third party becomes the middleman for a derivative transaction so that the parties need not take credit risk on each other) by explicitly requiring that these services are provided on fair, reasonable, non-discriminatory and transparent terms. It also imposes enhanced requirements for trade repositories (entities which collect and maintain data on derivative contracts) to maintain data verification, reconciliation and transfer policies and procedures.

16. Financial Collateral Arrangements

The EU Financial Collateral Directive (adopted in 2002) sought to simplify the process of taking financial collateral across the EU. However, whereas it was intended to apply to transactions involving certain financial institutions (including public authorities and many banks), the UK implementing regulations applied the provisions to transactions between all institutions and businesses. Clause 36 affirms that the legislation is valid and should be treated as such, to avoid any doubt that might be raised by a future legal challenge as to whether the UK implementing regulations were correctly made. It also provides that the Government’s power to make secondary legislation relating to financial collateral arrangements in future should be subject to the draft affirmative rather than the made affirmative procedure.

17. Appointment of the FCA Chief Executive

Clause 37 requires that appointments for the Chief Executive of the FCA be limited to a fixed, once-renewable five-year term (so for a maximum of ten years). Currently, legislation does not set out a term length for the FCA Chief Executive. The new limits are consistent with requirements for appointments for the post of Deputy Governor of the Bank of England.

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