European Tech Regulation

The Financial Services and Markets Act

The Financial Services and Markets Act 2023 (FSMA 2023) brings significant changes to the UK financial services and markets regime.

It will enable retained European Union financial services law to be revoked and replaced with requirements specifically designed for the UK.

It also will bring under regulation aspects of the sector which had not previously been within the UK’s financial services regulators’ remit, seeking to build what the government has described as a ‘smarter services framework’ for the UK.

Affected businesses

FSMA 2023 will apply to:

  • The financial services firms authorised and regulated by the UK Financial Conduct Authority (FCA) and the UK Prudential Regulation Authority (PRA).
  • Firms that are not currently authorised and regulated by the FCA or the PRA but may become subject to the new Designated Activities Regime (DAR), summarised below.

Key impacts

Revocation of EU-derived financial services legislation

FSMA 2023 establishes a framework under which all EU-derived financial services legislation (250+ pieces of retained EU legislation) will be revoked and, where necessary, replaced. The legislation that will be revoked includes, among many others, the:

  • Markets in Financial Instruments Regulation (MiFIR)
  • European Markets Infrastructure Regulation (EMIR)
  • Short Selling Regulation
  • Capital Requirements Regulation
  • Market Abuse Regulation
  • Prospectus Regulation
  • Sustainability Disclosures Regulation
  • Securities Financing Transactions Regulation
  • Central Securities Depositories Regulation (CSDR)
  • Packaged Retail and Insurance-Based Investment Products (PRIIPs)

The revocation of retained EU law will be dealt with by one of the following three methods which will impact the timing of their revocation:

  1. Where the relevant requirements are no longer needed, they will be revoked without replacement.
  2. Where requirements are still considered appropriate for the UK regime, they will either be restated in UK legislation or revoked to be replaced with regulatory rules.
  3. Where requirements require a UK policy change, His Majesty’s (HM) Treasury will take responsibility and lead on making such changes, most likely through a mixture of statutory and regulatory reform.

HM Treasury expects that it will take several years to revoke all EU financial services retained law.

With the exception of the legislation that is no longer needed and will be revoked without replacement, individual pieces of retained EU law will only be revoked once there is replacement legislation. However, this is still to be drafted and passed through Parliament, and consultations on the new rulebook text are yet to be launched. In the future, however, this will make it quicker and easier for the UK to make and amend these rules, as the rules will not be subject to a full statutory legislative process. 

New Designated Activities Regime

FSMA 2023 creates a new Designated Activities Regime (DAR) under which designated activities that were previously regulated under retained EU law will be regulated by the FCA outside the context of authorisation.

Activities under the DAR will not be subject to authorisation or the threshold activities, but instead HM Treasury can prohibit or impose specific rules and requirements. HM Treasury has the power to designate certain activities relating to UK financial markets or exchanges, or financial instruments, products or investments (including crypto-assets), that are or are proposed to be issued or sold to or by UK persons.

Designated activities are likely to include:

  • Undertaking activities relating to the entry into derivative contracts.
  • Short-selling.
  • Acting as an originator, sponsor, original lender or securitisation special purpose entity in a securitisation.
  • Selling a securitisation position to a retail client in the UK.
  • Issuing an instrument that references a benchmark.
  • Offering securities to the public.
  • Arranging for the admission of securities to trading.

The DAR entered into force on 29 August 2023. Persons who are not currently authorised or regulated by the FCA should be aware that they may be subject to the DAR.

Critical third parties

  • FSMA 2023 provides the ability for HM Treasury to designate as ‘critical’ certain third parties providing services to authorised firms, payment and e-money institutions, and financial market infrastructures.
  • If designated as critical, they will be subject to oversight by the PRA, Bank of England and/or the FCA.
  • A third party may only be designated as ‘critical’ if a failure in, or disruption to, the provision of the relevant services could threaten the stability or confidence in the UK financial system.

Digital settlement assets

HM Treasury is given broad powers in relation to the regulation of payments that include digital settlement assets (DSAs). Among other things, this could be used to establish an FCA authorisation and supervision regime, building on existing payment regulation to mitigate conduct arising from payment providers using stablecoins.

FSMA 2023 introduces and defines digital settlement assets as ‘a digital representation of value or rights, whether or not cryptographically secured, that –

(a) can be used for the settlement of payment obligations,

(b) can be transferred, stored or traded electronically, and

(c) uses technology supporting the recording or storage of data (which may include distributed ledger technology)’.

The definition is not limited to just cryptographically secured assets or assets using distributed ledger technology (DLT) and shows a clear focus on stablecoins, which are often used as a bridge between fiat currencies and crypto-assets such as cryptocurrencies. This is in line with the EU’s recent regulation surrounding crypto-assets and stablecoins.

FSMA 2023 thereby gives HM Treasury the power to amend the definition in the event that there are changes in the features, underlying technology or usage of these assets.

Enforcement

Enforcement of specific provisions of FSMA 2023 will depend on the type of business and financial service in question and will need to be assessed on a case-by-case basis.

Key timings

FSMA 2023 came into force on 29 August 2023.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.