FSMA 2023 paves the way for revocation of onshored financial services legislation

This article first appeared in the August 2023 issue of PLC Magazine http://uk.practicallaw.com/resources/uk-publications/plc-magazine.

On 29 June 2023, the Financial Services and Markets Bill received Royal Assent and became the Financial Services and Markets Act 2023. A broad, far-reaching piece of legislation, the Act makes a number of important changes to the UK's legislative structure and grants the FCA and the PRA (the regulators) considerable new powers. In this briefing, we consider at a high level some aspects of the Act that will, in time, revoke all onshored financial services legislation.

Revocation of retained law

The Act establishes a framework under which EU-derived financial services legislation will be revoked and, where necessary, replaced. Any replacement rules will be incorporated into UK law through the so-called FSMA model, under which the FCA and the PRA have extensive rule-making powers. Where necessary, rules that have been revoked can be reinstated in their original form, or with clarifications or minor amendments, in a different legislative or regulatory instrument.

In practice, this will mean that many of the EU-derived rules that were onshored in the form of a new body of "retained EU law" on 31 December 2020 (IPCD¹) will be transferred into either the regulators' rulebooks or "core" UK financial services legislation, such as the Financial Services and Markets Act 2000 (FSMA 2000). It will also make it quicker and easier to make and amend these rules, because they will not be subject to the full statutory legislative process.

Consultation on replacement rules

Certain rules – for example, the prospectus and PRIIPs² regimes – are likely to be amended or repealed altogether, while others are likely to be replicated with few changes. None of the onshored rules will be repealed until replacement rules (where applicable) are in place, and the repeal process for each piece of legislation will in most cases be subject to consultation. In some cases, the regulators can choose not to consult, but this will be subject to public disclosure requirements. For example, if the amendments are not material, reduce a regulatory burden, or remove a retained EU obligation without replacing it, the usual requirement to consult is waived. This is to give the regulators discretion as to whether a consultation is really needed, making the process quicker and more agile.

Notwithstanding this, the process will be detailed and time-consuming and we are unlikely to have a full, holistic, view of UK financial services legislation for several years. In the meantime, the Act makes provision for a number of pieces of EU-derived legislation to be amended. These are discussed further at Interim amendments below.

Which rules will be revoked?

The legislation to be revoked is listed in Schedule 1 to the Act, and includes UK MiFIR³, the UK Prospectus Regulation⁴, the UK PRIIPs Regulation⁵, UK EMIR⁶, and the UK BMR⁷. The revocation regime will also extend to delegated legislation made under in-scope primary legislation and provisions made under a number of EU Directives, including MiFID II⁸, the BRRD⁹ and the Settlement Finality Directive¹⁰. It will also catch the multitude of statutory instruments made to amend onshored EU legislation after IPCD. The Act also contains a "sweep-up" provision, under which EU-derived subordinate financial services legislation that is not listed in Schedule 1 will also be revoked, unless specifically saved by the Treasury.

The Act provides that the revocation of an instrument will not impact the continued effect of any amendments made by it to other UK legislation, so any such amendments will remain in effect unless otherwise amended. Similarly, retained EU law which has already been incorporated into the regulators' rulebooks – for example, the contractual recognition of bail-in requirement deriving from the BRRD – will not be revoked.

When will this happen?

Certain sections of the Act came into force on 29 June 2023, but much of the Act, including the sections that will revoke or amend existing rules, will not come into effect until such time as the Treasury specifies. This will be done through a series of commencement regulations, the first of which entered into force on 11 July 2023.

The Act allows the Treasury to specify different dates for different purposes, so we can expect to see different dates specified for the revocation of different rules. This will allow the Treasury to undertake the necessary consultations and ensure that any replacement rules are in place before revoking existing rules. The Treasury is also empowered to implement transitional provisions where necessary.

Interim amendments

Schedule 2 to the Act lists the pre-repeal changes that will be made to specific EU-derived legislation once the relevant provisions are enacted by the Treasury. Key changes include:

• removal of the MiFIR share trading obligation from 29 August 2023¹¹;
• amendment of the scope of the MiFIR derivatives trading obligation (DTO) to align with that of the EMIR clearing obligation (CO) from 29 August 2023¹²; and
• new powers for the FCA and the Bank of England so that they can exempt from the DTO and the CO, respectively, trades arising from certain post-trade risk reduction services;

The Treasury can also make further amendments where necessary, as long as they are made in furtherance of certain objectives, including to protect and enhance the stability and integrity of the UK financial system or to promote the safety and soundness of financial services firms.

And much more……

As mentioned above, the Act has a broad remit, and affects many aspects of the UK's legislative regime. Other future developments include:

• a new "designated activities regime", under which the Treasury can restrict certain activities that relate to or are connected to (i) UK financial markets or exchanges, or (ii) financial instruments, products or investments that are or are proposed to be issued or sold to or by UK persons. This might include offering securities to the public, issuing an instrument that references a benchmark, or undertaking activities relating to the entry into of derivative contracts;
• a number of changes to MiFIR, including with regard to pre-trade transparency, the double volume cap, position limits, and the definition of "systematic internaliser";
• the incorporation of cryptoassets within the ambit of FSMA 2000 – for example, by extending the FSMA restriction on financial promotion to cryptoassets; 
• the ability for the Treasury to establish financial market infrastructure sandboxes, through which firms can test new technologies and practices;
• the ability for the Treasury to designate certain third parties "critical", which will in turn unlock oversight powers of the regulators and the Bank of England;
• a new requirement for the regulators to have regard to the UK's climate targets; and
• the introduction of a new, controversial, secondary objective for the regulators, to facilitate (i) international competitiveness and (ii) the medium to long-term growth of the UK economy.

This is not an exhaustive list but should give readers an indication of the breadth of the Act's scope. If you would like to discuss the implementation or effect of the Act, or any of the above, please contact the authors or your usual Ashurst contact.

_{[1] The Brexit Implementation Period Completion Date, being the date on which the Brexit implementation period ended.
[2] Packaged Retail Investment and Insurance Products.
[3] The onshored version of EU Regulation No. 600/2014.
[4] The onshored version of EU Regulation No. 2017/1129.
[5] The onshored version of EU Regulation No. 1286/2014.
[6] The onshored version of EU Regulation No. 648/2012.
[7] The onshored version of EU Regulation No. 2016/1011.
[8] EU Directive 2014/65/EU.
[9] EU Directive 2014/59/EU.
[10] EU Directive 98/26/EC
[11] This date is specified in the first set of Commencement Regulations, rather than the Act itself.
[12] This date is specified in the first set of Commencement Regulations, rather than the Act itself.}