How the FSMB will transform UK financial markets

Post-Brexit regulation

Amanda Khatri

Editorial Manager

How the FSMB will transform UK financial markets

The Financial Services and Markets Bill (FSMB), one of the largest proposed legislative changes to the UK’s financial services sector, is currently making its way through Parliament.

The FSMB represents 300 pages of post-Brexit regulatory change. It revokes current, EU-derived regulation and replaces it with a legislative framework designed specifically for the UK’s financial markets. The goal is to enable “green, technologically advanced and globally competitive” financial services for the UK at a time when European capitals are attempting to steal a march on London as Europe’s financial hotspot.

Post-Brexit regulation

Under the FSMB’s terms, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) will retain their primary objectives while acquiring new responsibilities. The PRA will still promote the safety and soundness of regulated firms and protect insurance policyholders, and the FCA will continue to ensure market integrity, protect consumers, and promote effective competition.

But their secondary objectives are a little more contentious. Both bodies will need to consider growth and the effect on UK’s international competitiveness in their decision-making. The FSMB will also require them to “have regard” for the environmental impacts of their decisions and to support the Government’s commitment to achieving a net-zero economy.

Although growth and competitiveness are therefore built into the bill, there is clearly scope for tensions to arise between competing demands. There is already evidence that the PRA in particular has a slightly different view than Government sponsors of the FSMB and rejects the idea of the regulatory race to the bottom that inspired a number of Brexit’s proponents.

According to Victoria Saporta, PRA Director of Prudential Policy, her organisation will reject existing policy and regulation that no longer works for the UK and build on structures that bolster competition, innovation and stability instead. This is not quite the bonfire of red tape that some were looking for but may be – appropriately enough – the more prudent approach.

Trading, innovation and digital

As to who is affected, the Bill’s remit will cover the entire financial services value chain. Most notably, the share-trading obligation and double-volume cap that was introduced by MiFID II will be removed. This will lift the much-criticised restrictions on where and how firms can execute trades, making the UK a more attractive business location.

The FSMB is also attempting to increase coordination between the regulators over new technologies, data use, and the arrival of decentralising forces such as cryptocurrencies, stablecoins, NFTs, tokenization, and blockchain. The UK Government has made clear its commitment to building up the country as a leader in innovation in FinTech and innovation, so the plans to regulate certain types of stablecoins contained within the FSMB are no surprise. Current regulatory frameworks for electronic money and payment systems will be extended with a view to enabling real stability in the market, and ‘digital settlement assets’ that are used as a means of payment will be covered.

Further evidence of the Government’s commitment to innovation and competition, the Bill also enables the creation of Financial Markets Infrastructure Sandboxes which will enable firms to test new technologies under real-world market conditions.

The FSMB gives the Treasury the ability to designate certain activities as critical services, with cloud-based technology and other outsourced provision being the more obvious examples. Regulators will then be able to monitor, regulate, and take enforcement action against those ‘critical’ third parties. The intention is to ensure resilience, reliability, and trust within UK’s financial services infrastructure, which is to be applauded. It will, however, also create compliance issues for a range of previously unaffected businesses.

More and less compliance

The FSMB comes with the promise of less red tape, stable markets, digital innovation, and greater competition. It should, as a result, deliver the elusive economic growth that has become the focus of much of the country’s macroeconomic community.

But legislative change always brings challenges with it, and FSMB is no exception. The scale and scope of the task cannot be overstated. This is regulatory change on an unprecedented scale and moving from years of incremental EU regulation to a UK-only regime is no picnic for regulators. The Government has already indicated that it could take many years of public consultation and detailed policy work.

Then there are the hurdles to implementation within regulated institutions. The FSMB may embrace the spirit of deregulation – to an extent – but more regulation is just as likely. Compliance officers could easily be forgiven for looking at the coming regime with some disquiet – especially as they are already dealing with new regulations around ESG, cybersecurity, and more. Legal teams and regulatory change managers will need to strengthen certain controls and policies while mothballing others. The process will be even more challenging at global firms with multiple jurisdictions to navigate.

Even if day-to-day activity and reporting remain the same, the regulation from which they derive will change. The coming documentary shuffle will be a sight to see and will almost certainly highlight any workarounds and patches in current processes and procedures.

And there are signs that the new regulatory environment could prove to be unhelpfully fluid, with the Government reserving the power of ‘rule review’ to itself, enabling it to direct regulators to reconsider decisions where it is ‘in the public interest’. This increased scope for Government intervention is controversial. The intention may be admirable – and no regulator is free from scrutiny or immune to error. But the execution may create additional uncertainty and headaches.

Looking ahead

Preparing for this change (which, along with the reform of Solvency II, is being likened to Big Bang 2.0) is essential. Legislative timescales can be deceptive, with deadlines approaching much faster than first imagined. Anyone with compliance responsibilities should familiarise themselves with the contents of the bill, and ensure that current controls and processes are watertight and automated. It’s also important that teams go directly to the source, gathering information on the FSMB from official Government sources to ensure accurate and timely information. Leveraging horizon scanning tools to identify upcoming regulatory hurdles is also key to mitigating cost and stress in the long run for compliance teams. While it can be easy to focus only on one’s own industry or sector, it’s important for compliance executives to look more widely at regulations as a whole and consider how regulations in other countries or regions could provide relevant insights into dealing with the changes from FSMB implementation.

The FSMB will have sweeping impacts on compliance teams, organizations and teams should not only focus on the immediate and direct impact of regulatory change within their own department but also look at how FSMB will indirectly impact other departments, processes and systems. Preparation and planning are the only ways to properly navigate the choppy waters ahead.

Keep ahead of emerging regulations by speaking to CUBE.

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