Liz Booth reports on the Financial Services and Markets Bill, which aims to allow the UK to begin setting its own rules for financial services, post-Brexit
Just when you thought it was all over, more regulation appears to remind us what Brexit was all about.
Earlier this year, the Financial Services and Markets Bill 2022-2023 was introduced to parliament and had its first reading in the House of Commons. The bill, which lawyers from Ashurst describe as “the most significant piece of post-Brexit legislation since the Financial Services Act 2021”, contains provisions affecting a broad range of areas, including UK MiFID, critical third parties, the financial promotions regime, the Designated Activities Regime and stablecoins used as payments.
Crucially, and of particular importance politically, the lawyers explain that it also provides a framework for revoking retained EU law and replacing it with UK-specific legislation implemented via the UK model of financial services regulation.
The bill aims to implement the outcomes of the Future Regulatory Framework Review, giving the financial regulators greater responsibility for setting UK financial services rules and introducing a new secondary objective for the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA): promoting the growth and international competitiveness of the UK economy.
Retained EU law will continue to apply for a transitional period, during which the regulators will draft and, where necessary, consult on replacement rules. No retained EU law will be revoked until the replacement rules are in place.
Lawyers at Shearman & Sterling law firm add: “The system by which financial services laws and regulations were made while the UK was part of the EU needs to be adjusted to reflect the fact that the UK has now left the EU.
“It is widely accepted that many of the detailed requirements for financial services firms should be transferred to the UK regulator’s rulebooks to allow for a nimbler approach by expert regulators.”
So, what will be the main impact for financial planners? Dr Matthew Connell, director of policy and public affairs at the Chartered Insurance Institute (CII), believes it will result in “a reduction in the amount of prescriptive legislation coming through. The FCA is focusing more on supervision and enforcement than on policy and rulemaking, so big set-piece legislative initiatives like MiFID and Solvency II are less likely to be replicated at UK level.”
There is a possibility that the FCA will actually start taking away some of the prescriptive rules such as MiFID, he adds. “For example, rules about contacting customers when markets are falling were often counterproductive because they encourage people to think about selling their investments at precisely the time when they should be holding onto them. Another example is that MiFID had a definition of advice that was connected to giving a personal recommendation about a financial instrument that made it very difficult for the FCA to allow a more relaxed approach, for example when people were contacting their pension scheme to discuss options on retirement.”
The weight of regulation should be commensurate with the level of risk to the consumer
Therese Chambers, director of consumer investments at the FCA, hinted at this in her speech at the PFS Festival of Financial Planning, when she said: “Once the FCA has greater rulemaking powers under the future regulatory framework legislation, we will be able to do more. We’ve already announced that, to get ready for these changes, we want to carry out a holistic review of the boundary between advice and guidance. Our aim with this is to understand where existing regulation may carry a disproportionate burden, and to explore ideas to reduce that burden, while continuing to provide the right level of consumer protection.
“As our starting point, the weight of regulation should be commensurate with the level of risk to the consumer. This is likely to mean a move away from some of the more one-size-fits-all aspects of the existing MiFID regime. However, consumer circumstances and needs vary across and between individuals, and indeed for individuals throughout their lifetime. So this is a complex topic that deserves full consideration, and we look forward to hearing from you all.”
Dr Connell believes: “There will still be consequences, hopefully mostly positive ones. Now the government is passing the Financial Services and Markets Bill through parliament, which is stripping out a lot of EU rules from primary legislation.
“These rules haven’t disappeared – they still exist in the FCA and PRA handbooks – but as Therese Chambers said in her speech, some of these rules will be reviewed and hopefully will be improved.
“There is the potential for some rules that really weigh heavily on advisers, such as compulsory professional indemnity insurance, to be reworked so they don’t have as big an impact.”
However, Dr Connell also warns that there is the potential for some bad outcomes: “One good thing about the EU legislative process and the fact that it took an enormous amount of time to get legislation through (at least seven years) was that any knee-jerk response from MPs to whatever the latest newspaper headlines were, tended to be cushioned by the weight of EU legislative processes. MPs tend to have quite an aggressive approach to financial advisers and a huge amount of impatience with the FCA when it tries to investigate issues carefully.
“That could mean the FCA is under more pressure to introduce knee-jerk regulation on the back of scandals like British Steel. So, we could see less soporific prescriptive EU legislation, but more targeted UK legislation.”
Overall, the CII welcomes the decision not to replicate primary legislation at EU level into UK legislation. The next stage, it says, is to encourage UK regulators to review rules that create unintended consequences for the public and the increased oversight provisions in the legislation provide a good mechanism to make this happen.
It is important that prescriptive requirements are not reintroduced to primary legislation during the legislative process, in particular, requirements on professional indemnity insurance, as these should be addressed at the level of regulatory rules, the CII concludes.
Liz Booth is contributing editor of PFP