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UK Financial Services Regulation – 2022 Year-End Review


February 2, 2023

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In an unprecedented year for UK regulated firms, the UK Financial Conduct Authority (“FCA”) has taken extensive action in advancing a number of regulatory initiatives. This client alert assesses the regulatory landscape through the perspective of four areas of increasing regulatory focus: (a) the UK future regulatory direction of travel; (b) fintech and cryptoassets; (c) environment, social and governance (“ESG”) developments; and (d) the proposed extension the regulatory regime to non-financial services businesses.

A. UK future regulatory direction of travel

“A bold collection of reforms taking forward the government’s vision for an open, sustainable, and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens.”[1]

Jeremy Hunt, Chancellor of the Exchequer, 9 December 2022, written statement to Parliament

 

On December 9, the Chancellor of the Exchequer announced a set of major reforms to the UK’s financial services sector (dubbed the “Edinburgh Reforms”), which the government hopes will advance its vision for an open, sustainable and technologically advanced financial services sector.

The package contains 30 announcements, bringing together new and existing regulatory initiatives, and builds on the reform measures introduced through the Financial Services and Markets Bill (“FSMB”). We provide an overview of the reforms most relevant to our clients below.

I. Potential reform to the Senior Managers & Certification Regime

A review of the Senior Managers & Certification Regime will be conducted in Q1 2023, assessing where the regime could be reformed. This will entail a Call for Evidence collating feedback on the effectiveness, scope and proportionality of the regime as well as reviews by the FCA and PRA on the regulatory aspects of the framework.

II. Amendments to the prospectus and securitisation regimes

Several illustrative draft Statutory Instruments[2] have been published to demonstrate how the government can use the powers in the FSMB to reform the prospectus and securitisations regimes, which will help simplify the capital raising process for companies on UK markets and make the UK a more attractive destination for Initial Public Offerings.

III. Exploring the case for a UK central bank digital currency

A consultation will be published to explore the case for a central bank digital currency and to consult on a potential design. The Bank of England is also set to release a technology Working Paper setting out cutting-edge technology considerations informing the potential build of a digital pound.

IV. Establishing a financial market infrastructure sandbox

To ensure the financial services sector is prepared to embrace and facilitate the adoption of cutting-edge technologies, the government confirmed its intention to set up a Financial Market Infrastructure Sandbox in 2023, which will enable firms to test and adopt new technologies and innovations in providing the infrastructure services that underpin markets.

V. Regulating ESG rating providers

To deliver on its commitment to align the financial services sector with Net Zero and to support the sector to unlock the necessary private financing, a consultation on bringing ESG rating providers into the regulatory perimeter will be published in Q1 2023.

VI. Reforming the Short Selling Regulation

A Call for Evidence[3] on reforming the Short Selling Regulation has been launched, seeking views on the practice of short selling and whether and how the practice should best be regulated. The review intends to ensure that the UK’s approach to regulating the short selling of shares admitted to trading reflects the specificities of UK markets, continuing to facilitate the benefits of short selling, whilst also protecting market participants and supporting market integrity. Responses are requested by 5 March 2023.

VII. Repealing the regime for PRIIPs

A consultation[4] has been issued on the repeal of the regime for packaged retail and insurance-based investment products (“PRIIPs”) and an alternative retail disclosure framework. The government notes that current rules are unnecessarily prescriptive and can present information in unhelpful or misleading ways. Under the new regime, the FCA will determine the format and presentation requirements for disclosure. Responses are requested by 5 March 2023.

VIII. Re-assessing the role of the UK regulators

On 8 December, the government issued remit letters to the FCA[5] and PRA[6] which set targeted recommendations for how the regulators should have regard to supporting the government’s ambition to encourage economic growth in the interests of consumers and businesses as well as its objective to promote the international competitiveness of the UK. The remit letters align with the new secondary objectives of the regulators to promote growth and international competitiveness of the UK economy, which are being introduced through the FSMB.

IX. Removing certain reporting requirements under UK MiFID II / MiFIR

In addition to existing Wholesale Markets Review measures, Regulations[7] have been laid before Parliament on 9 December that are intended to remove certain burdensome EU requirements related to reporting rules. For example, the rules to be repealed include the MiFID II 10% depreciation reporting rule.

B. Fintech and cryptoassets

“One area of global focus is crypto, both opportunities and risks – a new product, easily accessible and able to operate cross-border, raising issues of consumer protection, market integrity, data privacy and financial crime and more.”[8]

Nikhil Rathi, FCA CEO, 14 July 2022, speech at Peterson Institute for International Economics

 

(1) Overview

Cryptoasset markets have faced a turbulent year. Regulators view the speed of growth of cryptoassets and growing interconnectedness with “traditional” finance as potentially posing a systemic risk. In response, the FCA has noted that its approach to the regulation of cryptoassets aims to “balance innovation and competition alongside the need for orderly markets and consumer protection”.[9] Currently, the UK does not have a bespoke regulatory regime for cryptoassets. Some cryptoassets, such as security tokens, fall within existing regulatory perimeters due to their specific characteristics most cryptoassets are currently unregulated. However, as discussed below, 2022 has seen some significant developments in this regard.

(2) Developments in 2022

Cryptoassets developments in the Financial Services and Markets Bill

The FSMB is a landmark piece of legislation for the whole UK financial services industry. The FSMB was introduced into Parliament in July and it is the first major piece of post-Brexit legislation through which the UK will build the future regulatory framework in the UK, which includes the regulatory framework for cryptoassets. Amongst a multitude of other reforms, the FSMB proposes to hand power to HM Treasury to create new digital asset regulatory regimes and bring certain cryptoassets within the scope of, and modify existing regulatory frameworks. The proposals reflect the aim to be proportionate and risk based, and, as such, the UK will start by regulating a few specific cryptoassets and service providers.

The FSMB proposes to extend the existing regulatory regime to cover “digital settlement assets”; a new concept in UK law which encompasses stablecoins used as a means of payment, meaning that stablecoins and cryptoassets used exclusively for investment purposes are excluded from the new rules. Under the FSMB, HM Treasury is granted a sweeping range of powers to create a regulatory regime around digital settlement assets, including the power to issue “designated activity regulations”.

The FSMB also allows for a payment system using digital settlement assets to be designated as a regulated payment system by HM Treasury, which will bring such payment system under the remit of the Payment Systems Regulator (“PSR”). The PSR will then have powers to issue directions, influence system rules, conduct investigations and so on, with the primary aim of ensuring that the relevant DSA-based payment systems are subject to appropriate economic and competition regulation.

Law Commission consultation on legal status of cryptoassets

Towards the end of the year, the Law Commission consulted on proposals for legal reform of the law relating to property as regards cryptoassets.[10] While the consultation concluded that English law is largely flexible enough to accommodate cryptoassets, it does propose some limited reform. For example, the consultation recommended the recognition of a distinct third category of personal property “date objects”, which would encompass cryptotokens, including NFTs.

Introduction of a cryptoasset firm change in control regime

Since January 2020, exchange providers and wallet providers have been subject to registration requirements and supervision for anti-money laundering requirements. In August of this year, the FCA imposed a 25% change in control threshold on these firms, meaning that a new owner acquiring 25% or more of the shares or voting rights must be approved by the FCA as fit and proper in advance.[11]

Implementation of the “travel rule”

The UK is also implementing the travel rule in respect of any payments made in cryptoassets in the UK. The travel rule, which requires information on the source of the assets and its beneficiary to “travel” with the transaction will have a de-minimis threshold of €1,000. Cryptoasset service providers (i.e. exchange and wallet providers) are expected to have implemented their compliance solutions by September 1, 2023.

(3) What to expect in 2023

In line with the government’s intention turn the UK into a “global hub for cryptoasset technology”[12], 2023 will see further developments in the sphere of cryptoasset regulations. Most notably, we will watch the implementation of the FSMB and the outcome of the consultation on establishing a UK Central Bank Digital Currency. Additionally, a Financial Market Infrastructure Sandbox in 2023. The government has also indicated that, in the near future, certain “qualifying cryptoassets” will be brought within the scope of the financial promotion restrictions. The definition of “qualifying cryptoassets” has not yet been confirmed, but it will likely include any cryptographically secured representation of value or contractual rights which is fungible and transferable.[13] On 1 February 2023, HM Treasury published a consultation on the future financial services regulatory regime for cryptoassets . A separate client alert will shortly be published on this consultation.

C. ESG developments

“As the world is looking to financial markets to enable the transition to a greener and…



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