The Financial Services and Markets Act (2023) marks a pivotal shift in UK regulation, reshaping the landscape in which you operate from the moment it became law on 29 June 2023.
As one of the most extensive overhauls since the FCA and PRA’s inception in 2013, FSMA23 not only consolidates post‑Brexit autonomy but also introduces structural reforms, from the new designated activities regime to safeguarded oversight of critical third parties, that will influence every aspect of your financial business.
Our financial services solicitors are ready to guide you through the requirements of the FSMA, from interpreting powers for digital settlement assets to advising on the enhanced duties around cash access and APP fraud, ensuring you remain compliant and competitive as the UK regime evolves.
Contents:
Why is FSMA23 so important?
FSMA23 is significant because it refreshes the overarching framework for financial regulation in the UK. It’s considered the most comprehensive overhaul of UK financial regulation since the creation of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) in 2013.
Re-shaping of the regulatory landscape under FSMA23 includes:
- Future regulatory framework: FSMA23 establishes powers to facilitate an extensive, medium-term programme to replace European Union (EU)-derived financial services rules with tailored, UK-specific versions. This exercise will be conducted in stages and involve careful coordination between the financial regulators and HM Treasury to ensure that there is no gap between the EU law being phased out and the new UK rules being introduced.
There will also be a shift towards incorporating more rules into the FCA Handbook, PRA Rulebook, and Bank of England rules, rather than imposing requirements through legislation. To reflect the more influential role of regulators in shaping the UK financial regime going forward, FSMA23 contains additional safeguards regarding the accountability of regulators and their engagement with financial businesses.
- Designated activities regime (DAR): The DAR is a new UK regulatory regime for financial activities which were previously covered by EU regulations. The DAR is based on the existing FSMA regulatory model but falls short of bringing DAR activities within the full regulatory regime for UK ‘regulated activities’. Financial operations initially covered by the DAR will include short-selling and certain activities involving derivatives, securities and securitisation.
The DAR, however, has broader relevance for financial services businesses. This is because, in the future, DAR will offer an alternative route for HM Treasury to introduce ‘lighter touch’ regulatory requirements for new activities without necessarily designating new ‘regulated activities’. For more information about the FSMA regime and regulated activities, please see our Knowledge hub article on ‘What you need to know about the Financial Services and Markets Act 2000’.
- Critical third parties (CTPs): FSMA23 extends the powers of the financial regulators to allow them to oversee (to a limited extent) the activities of certain ‘critical’ or systemic non-regulated businesses on which large numbers of financial services firms rely, such as IT and cloud service providers. This is aimed at ensuring that the UK financial system remains resilient and robust and is not exposed to excessive risk from unregulated sectors.
- Digital settlement assets (DSAs): FSMA 23 introduces the concept of DSAs and grants HM Treasury the power to bring DSAs under financial regulation as needed. This future-proofs the UK regulatory regime for innovations in the digital asset space, potentially laying the groundwork for stricter future regulation of cryptoassets and stablecoins.
What other key changes does FSMA23 introduce?
In addition to outlining structural changes, FSMA23 also introduces significant enhancements to existing regulatory rules.
- Guidance for regulators: FSMA23 gives the FCA and the PRA a new secondary competition objective, which requires them to consider the UK’s international competitiveness and sustainable UK economic growth when carrying out their work. New regulatory principles around net zero transition and environmental targets to which the regulators should ‘have regard’ are also introduced.
- Financial Promotions Gateway: FSMA23 introduces a new gateway for regulated firms seeking to approve financial promotions for non-regulated businesses. Currently, any regulated firm can do this, even if it lacks expertise in the subject matter of a financial promotion. For an update on further recent changes to the UK regime for financial promotions, please read our Knowledge Hub articles ‘Marketing high-risk investments’ and ‘Marketing cryptoassets to UK consumers: what you need to know about the new standards’.
- Access to cash and automated push payment (APP) fraud: Under FSMA 23, the FCA will be subject to a new duty to seek to ensure that UK current account customers continue to benefit from free access to cash, both for withdrawals and making cash deposits. The Payment Systems Regulator also receives new powers to require payment service providers to compensate customers who fall victim to APP fraud (scams where banking customers are duped into transferring money electronically to fraudsters).
- Bank accounts for politically exposed persons (PEPs): FSMA23 requires the FCA to initiate a review into whether the money-laundering checks necessary for individuals with political connections to open a UK bank account are being implemented as intended. This follows high-profile cases of UK MPs struggling to access banking facilities. Alongside this, on 20 July 2023, in response to concerns raised following Nigel Farage’s dispute with Coutts, the government also announced that it would use powers under FSMA 2023 to introduce new safeguards for customers who believe their bank accounts are being closed unfairly.
- Other key changes: FSMA23 brings reforms to other key areas of UK financial services. There are revisions to the UK regulatory regime for financial market infrastructure (FMI) providers. This regime enables the Bank of England and the FCA to establish rules for FMI firms, lays the groundwork for an FMI digital Sandbox (or regulatory testing ground), and extends the existing accountability regime to senior staff in FMI and credit rating agency firms.
FSMA23 also includes changes that will allow financial services mutual recognition arrangements (MRAs) to be established through secondary legislation, facilitating and accelerating new cross-border trade agreements. New processes for insurance company insolvency and for central counterparties which get into difficulty are also introduced. Finally, FSMA23 serves as the vehicle for implementing many of the capital market reforms arising from the government’s Wholesale Markets Review consultation.
When do changes in FSMA23 take effect?
Changes in FSMA23 are being ‘commenced’, or brought into effect, in stages.
Some changes came into effect immediately on June 29, 2023, when FSMA23 became law. These include the Financial Promotions Gateway, the CTP regime, and the facilitation of MRAs. A second tranche of changes is due to take effect from 29 August 2023. This second stage encompasses the new regime for DSAs, provisions regarding access to cash, and the secondary competition objectives for the FCA and PRA.
The start date for the remaining items in FSMA23 is left for HM Treasury to commence by way of legislative order. The first of a series of commencement orders has now been published. The order lists several pieces of retained EU law which will be replaced with UK-specific variants by 1 January 2024.
Summary
FSMA23 is a far-reaching piece of legislation which aims to re-position the UK at the forefront of financial services in a post-Brexit world. It will have an immediate effect through new regulatory requirements for key UK financial services business activities. However, its full impact may only emerge over time as the UK financial services regime diverges from the constraints of a harmonised EU regime and seeks to reshape itself for the future.
Harper James’ financial solicitors are well-placed to explain and interpret the FSMA 2023 changes as this journey develops. They can provide timely and targeted advice on the implications of FSMA23 for your financial services business. If you’d like to know more about any aspect of FSMA23, please do not hesitate to reach out to our experienced team.
