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The recently published Financial Services and Markets Bill (FSM Bill) is intended to recast the U.K.’s regulatory architecture post-Brexit. It was introduced to Parliament on 20 July 2022. The Bill implements the outcomes of the Future Regulatory Framework Review, which assessed whether the U.K. financial services regulatory framework is fit for purpose and able to support future growth, particularly in light of challenges such as Brexit and climate change, as well as several other initiatives such as the Wholesale Markets Review and stablecoin regulation. The FSM Bill therefore establishes a revised blueprint for financial services regulation, revamping the existing model under the Financial Services and Markets Act 2000 (FSMA) and providing the framework for the revocation of retained EU law (REUL) in financial services. The financial services regulators will be delegated powers for detailed rulemaking, while being subject to enhanced oversight by Parliament. To maintain the U.K.’s position as a leading financial services centre, the FSM Bill empowers HM Treasury to change legislation to ensure that mutual recognition agreements (MRAs) can be properly implemented, including bestowing powers on the relevant regulators to give effect to the MRAs.
Other post-Brexit initiatives are prioritised. Using a transitional regime to avoid further delay, there will be welcome relief to those acting in the wholesale markets, with the reduction of some of the more burdensome requirements across a raft of areas regulated under the U.K.’s Markets in Financial Instruments package (as inherited from the EU), as prefaced by the Wholesale Markets Review, which we discussed in our client note, “U.K. Wholesale Markets Review.”
The path is also laid for other initiatives to come to fruition, such as enabling the regulation of stablecoins for payment, key to encouraging innovation in payments and establishing the framework for financial market infrastructure (FMI) firms to explore new technologies in temporary pilot schemes.
There are also significant consumer protection measures in the FSM Bill, which will facilitate and protect access to cash (such as via ATMs), improve the financial promotions regime and provide for greater protection of victims of authorised push payment scams.
The FSM Bill is an important step forward for the U.K. in adjusting its regulatory framework. The implementation of the comprehensive FSMA model will involve immense effort by the government, the regulators, industry and other stakeholders. Other post-Brexit initiatives remain to be addressed: the government intends to implement more measures for the crypto market, with detailed consideration being given to alternatives over the next few months. And a consultation on the U.K.’s overseas persons regime is expected before the end of the year. In this client note, we summarize the main changes proposed in the FSM Bill.
The system by which financial services laws and regulations were made while the U.K. was part of the EU needs to be adjusted to reflect that the U.K. has now left the EU. The EU framework involves many requirements for firms that are written into statute because of the need to harmonise the position across all EU member states. The U.K.’s current system is designed to facilitate the EU law-making process. Prior to the EU’s financial services action plan and the 2008 financial crisis, EU financial services directives were high level, mostly only addressing passporting with principle-based requirements. Then, the U.K. had extensive rules in the Financial Services Authority’s Handbook, as did other EU national regulators. Those rules were subsequently harmonised across the EU in regulations, directives and technical standards, and upon Brexit, were grandfathered into U.K. law as statute, becoming REUL. However, with MiFID II alone comprising 1.7 million provisions, it is not reasonable for Parliament to keep all this up to date. It is therefore necessary to reinstate the status quo ante, with this detail in the FCA and PRA rules. It is widely accepted that many of the detailed requirements for financial services firms should be transferred to the U.K. regulator’s rulebooks to allow for a more nimble approach by expert regulators.
The FSM Bill implements the government’s policy of establishing a comprehensive FSMA model for financial services regulation. This will be accomplished by bringing some areas currently covered by REUL into FSMA, transferring the responsibility for making detailed rules to the regulators and strengthening Parliament’s oversight of the regulators.
Implementing this policy will involve several steps: first, the creation in FSMA of a Designated Activities Regime (DAR) for the regulation of activities related to the financial markets; secondly, the granting of rulemaking powers to the regulators for those areas where they do not yet have such powers to allow them to introduce rules covering the requirements in the (to-be-revoked) REUL. For example, a general rule-making power will be provided to the Bank of England (BoE) in respect of central counterparties (CCPs) and central securities depositories (CSDs), and the Financial Conduct Authority (FCA) will have the power to make rules for Data Reporting Service Providers (DRSPs) and Recognised Investment Exchanges (RIEs). Finally, the revocation of most REUL for financial services (set out in Schedule 1 to the Bill).
The Designated Activities Regime – or DAR – will operate in a similar way to the regime established for regulated activities under the Regulated Activities Order (RAO). HM Treasury will be empowered to designate in secondary legislation activities relating to financial markets, exchanges, instruments, products or investments. However, unlike the RAO model, HM Treasury will be able to set certain requirements directly and then provide for certain areas to be covered by the FCA’s rules. The FCA will only be able to make rules relating to a specific designated activity; its remit will not extend to the wider unrelated activities of those carrying out a designated activity, making it a narrower power than the regulator has over authorised firms. The carrying on of a designated activity must comply with the requirements or rules unless there is an exemption.
Schedule 6B to the Bill sets out the activities that will become designated activities (HM Treasury will be able to designate further activities.), which are:
Creating the concept of “EU-derived legislation”, the FSM Bill will revoke most REUL for financial services, including the statutory instruments that amended REUL in the “onshoring” process. However, the Bill will generally not revoke REUL incorporated into U.K. primary legislation or that is already part of a regulator’s rulebook. To enable a smooth transition, where appropriate, the revocation of legislation will only begin once the regulators have drafted and consulted on rules that are to replace the corresponding REUL provisions.
To illustrate how the new regime will work, the DAR activity of offering securities to the market and admission of securities to trading on a securities market falls within the prospectus regime, changes to which were announced in March this year. These will be implemented into the regime as follows:
The additional rulemaking responsibility for the regulators will significantly increase their powers. How and whether those powers should be constrained or overseen has already been subject to much debate. The FSM Bill makes provision to strengthen the regulatory accountability framework. HM Treasury will be empowered to require either the Prudential Regulation Authority (PRA) or FCA to make rules but may not specify the content or outcomes that such rules should seek to accomplish. The regulators will be required to keep their rules under review and to publish a statement of policy on how they conduct such reviews. HM Treasury will be able to require a regulator to review its rules (or appoint an independent reviewer) where HM Treasury considers it is in the public interest, for example, in response to market developments or if the rules do not appear to realize their purpose.
The FSM Bill will also require the PRA and FCA to notify relevant Select Committees when they launch a consultation on proposed rules, publish proposals on how they exercise their general regulatory functions or consult on proposals under a duty imposed by legislation. In June, the Treasury Select Committee (TSC) announced the creation of a new sub-committee – called the Sub-Committee on Financial Services Regulations – that will scrutinize financial services regulatory proposals, either ex-ante or ex-post. Ex-ante work will usually start at the consultation stage, with a decision on whether a proposal warrants detailed examination. The FSM Bill will require the regulators to respond in writing to any formal response to a consultation by a Parliamentary Committee.
In his new book, entitled Rules for the Regulators – Regulating Financial Services After Brexit (published with Politeia), Shearman & Sterling partner Barnabas Reynolds makes recommendations to promote a manageable, clear and simple system, including the below with regard to regulatory accountability:
The reforms don’t go this far. They also fall short of requiring the regulators to follow decisions of the Financial Regulators Complaints Commissioner, despite the FCA’s recent and high-profile decisions to ignore its own Commissioner in the London Capital & Finance case.
New secondary statutory objectives will be introduced obliging the FCA and PRA in carrying out their functions to support long-term growth and international competitiveness. For the PRA, the new growth and international competitiveness objective will operate in conjunction with its existing secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised firms (banks, large investment firms, insurers and credit unions). For the FCA, the new objective will go together with the FCA’s three existing operational objectives of consumer protection, market integrity and competition.
It is hoped that this will provide motivation for the FCA in particular to improve on its woeful turn-around times for new business for authorisations and other regulatory processes.
The FSM Bill will also introduce a new regulatory principle which the FCA and the PRA will be required to observe. They will be told to have regard to the need to achieve the U.K.’s statutory climate target. To avoid duplication, the Bill will remove the existing sustainable growth principle for both regulators. The Payment Systems Regulator’s (PSR’s) objectives are not changing and therefore its sustainable growth principle will remain; however, the net zero regulatory principle will be integrated into that principle.
The policy was adopted following HM Treasury’s Wholesale Markets Review, in which wide-scale changes were proposed across a raft of areas formerly regulated under the EU’s MiFID II regime. The U.K. originally “on-shored” the Markets in Financial Instruments Regulation into U.K. law as REUL with only minor amendments following its exit from the EU. The FSM Bill includes the new set of amendments that aim to tailor this unwieldy package of European measures for the U.K. market. Changes are to be made in particular where the rules are considered to have had unintended outcomes, are duplicative or excessive or have curbed innovation in the market.
Relevant parts of the U.K.’s MiFID II legislation is due to be revoked under the FSM Bill. However, the amendments discussed here are subject to a transitional period, allowing the changes to be made before revocation, giving priority to these significant measures.
The MiFID II requirement for commodities position limits to be applied to all exchange-traded contracts will be revoked. Over-the-counter, or non-venue traded (OTC), contracts that are economically equivalent to exchange-traded commodity derivatives will also be removed from the position limits regime. The powers for setting position controls will be transferred from the FCA to the operators of trading venues, reflecting the status quo ante under MiFID I. The government will, however, give the FCA discretion to determine the contracts in respect of which trading venues will be required to set position limits. The FCA will continue to set limits directly for OTC contracts, if needed, and will have new powers to establish a framework to support trading venues in setting position limits.
MiFID II imposes a “trading obligation,” requiring mandatory on-venue trading of some derivatives. However, changes made by the EU in 2019 to the scope of the related clearing obligation in EMIR were not reflected in the MiFID II trading obligation. This led to a mismatch in the scope of parties captured by the trading and clearing obligations. To eliminate this, the FSM Bill aligns the scope of parties subject to the trading obligation and clearing obligation and explicitly makes counterparties that fall within the scope of the clearing obligation subject to the trading obligation.
The FCA is also being granted a new power to make changes to the trading obligation, where necessary, to prevent or mitigate disruption to markets, subject to HM Treasury’s approval.
Firms that use the risk reduction measure of portfolio compression are currently exempt from certain obligations, including the trading obligation, best execution requirement and transparency obligations. To further encourage the use of risk reduction measures, the Bill grants the FCA powers to specify other risk reduction services that can benefit from these exemptions. The BoE is also being granted powers to exempt such services from the clearing obligation. The power will only be available where the BoE considers it necessary or expedient for financial stability purposes. Risk reduction services are post-trade services that aim to reduce non-market risks in derivatives portfolios, such as portfolio compression. Transactions that contribute to the price discovery process are excluded.
The MiFID II pre- and post-trade transparency regime, previously set out in primary legislation, will be delegated to the FCA. The regulator will make rules to provide for a qualitative and quantitative assessment of instruments that should fall within the regime, determine when and how pre-trade transparency requirements should apply and establish a post-trade transparency regime.
The Wholesale Markets Review proposed a range of changes to the rules governing trading venues, but these have not been implemented in the Bill. The following actions are still expected from the U.K. government and regulators:
The U.K. government is also considering the introduction of a new type of trading venue (or an additional segment of existing trading platforms) tailored to the requirements of smaller SMEs. Proposals to lift the restriction on operating Systematic Internalisers (SIs) within the same legal entity as OTFs are subject to further consideration.
The following obligations will be removed from the rules for equity markets:
SIs are investment firms that execute client orders on their own account on an organised, frequent systematic and substantial basis. A quantitative threshold is currently used to determine whether an investment firm must be authorised as a SI (e.g., based on the number and size of trades it conducts). Under the FSM Bill’s proposed regime, the quantitative tests will be abandoned in favour of empowering the FCA to make rules on whether firms satisfy the conditions for SIs. Those rules may, at the FCA’s discretion, be entirely qualitative.
There will no longer be any restrictions on mid-point execution of client orders across an SI’s own book. This changes the position under MiFIR, which has since 2018 restricted SI’s execution of orders at the mid-point between best bid and offer for all transactions other than those which were “large in scale.”
The FCA has published a consultation on improving equity secondary markets, which includes proposals to amend the SI reporting regime. The FCA plans to replace the existing regime, which requires firms to report trades in financial instruments for which they are SIs in an SI register. The FCA will replace this obligation with a new designated reporter regime, where firms will voluntarily assume the obligation to report irrespective of the financial instrument in question.
MiFID II introduced requirements for a “consolidated tape” for transactions in equity and non-equity instruments. It requires a consolidated tape provider (CTP) to collect post-trade information published by trading venues and approved publication arrangements and to consolidate this into a continuous live data stream made available to the public. No consolidated tape has yet been set up in either the U.K. or the EU. The U.K. intends to maintain these requirements to establish a consolidated tape.
DRSPs, (of which CTPs would be an example), are governed by the Data Reporting Services Regulations and currently fall outside the scope of the FCA’s authorisation regime. The Bill will grant the FCA rule-making powers for DRSPs, which will (amongst other things) enable the FCA to set a framework for the development of a consolidated tape.
As confirmed in HM Treasury’s report on the review of the U.K. Securitisation Regulation, the FSM Bill amends the U.K. Securitisation Regulation to introduce an equivalence regime for recognising non-U.K. securitisations as “simple, transparent and standardised” (STS) securitisations in the U.K. Currently, the U.K. Securitisation Regulation provides that where originators and sponsors are established outside the U.K., the securitisation cannot be designated as an STS securitisation. This means that U.K. investors in such non-U.K. securitisations do not benefit from the preferential capital treatment accorded to U.K. STS securitisations.
As with the transitional changes for MiFID II, these changes to the U.K. Securitisation Regulation are subject to a transitional regime.
The Bill will give HM Treasury the power to bring the issuance or facilitation of the use of “digital settlement assets” (DSAs) used as a means of payment into the U.K. regulatory perimeter.
Initially, the regime is primarily intended to capture stablecoin activities. DSAs will be defined 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 Bill introduces the above new definition of DSAs, which has a broad scope that will cover stablecoins and may also cover other digital or crypto assets that meet the terms of the definition. HM Treasury will be able to amend the definition to account for future technological developments. DSAs therefore differ from cryptocurrencies and other crypto assets that are primarily used for speculative investing, such as Bitcoin and Ether. The extension of the regulatory perimeter to stablecoins that are predominantly used to facilitate trading and investment activities in unbacked crypto assets will be re-considered by HM Treasury at a later stage (expected later in 2022).
To bring stablecoins used as payment within the regulatory perimeter, the Bill empowers HM Treasury to establish a supervisory regime for stablecoin issuers, similar to the existing electronic money and payments regimes.
The FSM Bill also provides for the scope of Part 5 of the Banking Act 2009 to be extended to provide for the recognition of payment system using DSAs or a DSA service provider posing potentially systemic risks. DSA service providers will include the issuer of a DSA in a payment system, those providing services to safeguard and/or administer DSAs, DSA exchange providers, the firm setting the rules for access to the system and those involved in the transfer of money or DSAs using the payment system, including any infrastructure provider. HM Treasury would have the power to recognise the payment system using DSAs or a DSA service provider. Once recognised, the BoE would supervise the operators of a DSA recognised payment systems, with responsibility for issuing codes of practice, giving directions and taking enforcement action, among other things.
Under the Bill, DSA payment systems would also become subject to competition regulation by the PSR, and the scope of the Financial Services (Banking Reform) Act 2013 will be extended to provide for this. HM Treasury will also be responsible for designating firms for these purposes.
The Bill also gives HM Treasury power to amend, by secondary legislation, existing special administration regimes to cover recognised payment system using DSAs or a DSA service provider, to preserve financial stability in the event of any such firm’s failure.
Details of proposed approach to the regulation of DSAs were previously published in HM Treasury’s response to the related consultation, which concluded that all stablecoins used for payment that reference fiat currencies, including a single currency stablecoin or stablecoin based on a basket of currencies, should be subject to U.K. financial regulation. Stablecoins that reference commodities will be excluded from the new rules, although such stablecoins may well already be regulated as futures.
In addition, the government intends the FCA to have the power to regulate issuers of stablecoins for payments as well as other entities providing related services, including wallet providers and firms providing custody services. The requirements will ensure convertibility into fiat currency, at par and on demand. As with other entities providing payment services and e-money issuance, stablecoin-based payment service entities will need to be established in the U.K. to provide these services in the U.K.
Notably, HM Treasury’s response highlighted that consumers would have a legal claim to redeem the value of the token against either the stablecoin issuer or, where appropriate, the third party facing the consumer. This is necessary since the government noted that often a stablecoin issuer may not offer holders a legal claim, leaving a customer with no redemption rights or with rights against a third party but that, for consumer protection, it will not permit no legal claim to be available.
Firms which engage in activities in relation to stablecoins for payment would become subject to numerous regulatory requirements, including FCA authorisation, capital requirements, rules for ensuring the quality and safekeeping of reserve assets, orderly failure and insolvency requirements for issuers and service providers, systems and controls, risk management and governance, conduct requirements, anti-money laundering requirements, outsourcing, operational resilience and security requirements.
HM Treasury’s separate consultation on managing the failure of DSAs sets out its proposed approach, which entails adjusting the existing FMI special administration regime (FMI SAR). Proposed changes to the FMI SAR include an additional objective for the return or transfer of funds and custody of assets and empowering the BoE to introduce further rules to support the additional objective as well as to direct administrators. The regime would take precedence over the Payment and E-Money Special Administration Regime (PESAR) in cases where both the FMI SAR and the PESAR apply to a firm.
As announced, the FSM Bill will amend the Payment Services Regulations 2017 to enable the PSR to require mandatory reimbursement by payment service providers of victims of APP fraud. The PSR will have a duty to consult on a draft regulatory requirement, and to impose such regulatory requirement, within two and six months respectively of the legislation coming into force. This mandates regulatory action on APP scam compensation by participants in the Faster Payments Service where a payment is executed following fraud or dishonesty.
The FSM Bill will implement the regulatory gateway for the approval by authorised firms of financial promotions of unauthorised firms. Authorised firms will be banned from approving financial promotions of unauthorised firms and will need to apply to the FCA to have the prohibition removed in whole or part before they are able to approve financial promotions of unauthorised firms. Firms that apply for authorisation in future will be able to apply for a permission to approve such financial promotions at that time. The FCA will be able to apply conditions to a permission, such as restricting the types of financial promotions a firm can approve. The regulator will be able to revoke a permission if a firm does not approve any promotions in a 12-month period or if the FCA believes it would advance one of its operational objectives.
HM Treasury will be empowered to make regulations providing for exemptions from the requirement to pass through the regulatory gateway. HM Treasury has indicated that exemptions will be available for authorised firms approving financial promotions of unauthorised companies within their group and for principals approving financial promotions for their appointed representatives for regulated activities, for which the principal has agreed to accept responsibility.
The FCA is expected to consult on implementing the regulatory gateway before the end of the year. Earlier this year, the FCA consulted on proposals to amend its rules on the approval of financial promotions of unauthorised firms by authorised firms, including, among other things, to require all relevant financial promotions to include a date stamp and the introduction of a new rule requiring firms to self-assess whether they have the necessary competence and expertise in an investment product or service before approving or communicating a financial promotion. The final rules are expected to be published in Q3 2022.
HM Treasury has confirmed that the Financial Promotion Order will be amended to bring “qualifying crypto assets,” within scope of the U.K.’s financial promotion rules, which will be implemented through a separate piece of legislation. Other measures are in the process of being finalised, following consultations, such as the financial promotion exemptions for high net worth individuals and sophisticated investors and the rules on high risk investments. We discussed these in our client note, “Tightening the Financial Promotions Framework in The U.K.”
The government is taking forward its plans to use an FMI sandbox to assess the existing legislative framework in a technologically-neutral manner. The FSM Bill gives HM Treasury and the regulators powers to temporarily modify certain legislation and rules and to disapply the existing requirements for FMIs approved for participation in the FMI sandbox. The intention is to obtain clarity about whether distributed ledger technology (DLT) could be used to meet the same regulatory outcomes or whether its use will lead to legal ambiguity.
The risks involved in the operation of the FMI sandbox will be mitigated by limits on the amount and values of instruments permitted for an FMI activity. In addition, the regulators will be empowered to monitor an FMI’s sandbox activity and could suspend or terminate an FMI’s participation in the sandbox.
The Bill provides for the extension of the Senior Managers’ and Certification Regime (SMCR) to U.K. CCPs and CSDs. The SMCR was originally implemented for U.K. banks in 2016, extended to all U.K. authorised firms in December 2019, and further extended to U.K. benchmark administrators in December 2020. The Bill also enables HM Treasury to apply the regime to credit rating agencies (CRAs) and RIEs, after consulting with industry. In its latest Perimeter Report, the FCA called for the SMCR to be extended to CRAs, RIEs and payment services firms.
The government will be able to decide when to apply the SMCR to any FMI entity and to tailor the regime according to the type of entity. Powers to supervise SMCR compliance by CCPs and CSDs are granted to the BoE. The FCA is granted powers to supervise CRAs and RIEs. Both the FCA and the PRA will be responsible for making detailed rules setting out the obligations of individuals within the regime, which will consist of a senior managers regime, a certification regime and conduct rules.
The EU CCP Recovery and Resolution Regulation (CCP RRR) came into effect post-Brexit and is not REUL. The U.K., when it was an EU member state, supported and helped develop the EU CCP RRR. The U.K. is therefore taking the opportunity of the FSM Bill to introduce rules in this area, replicating some (but not all) aspects of the EU regime. The Bill broadens the existing regime for the recovery and resolution of CCPs that are failing or have failed. The BoE, as U.K. resolution authority, will have additional powers to safely resolve a CCP, including to:
The EU CCP RRR will mostly apply from 12 August 2022, with remaining provisions applying from 12 February 2023. The above provisions of the FSM Bill come into effect when regulations are made to do so.
Currently, the regulators’ direct powers over third parties that provide critical services to authorised firms, their service providers and FMIs are limited. The Bill would grant HM Treasury and the regulators a new express power to oversee such third parties. HM Treasury will be able to designate an entity as a critical third party if it provides services to authorised firms, relevant service providers (authorised e-money institutions, payment institutions and registered account information services) or FMIs and its failure would pose financial stability or confidence risk to the U.K. The FCA, PRA and BoE will be empowered to (amongst other things):
The regulators will be required to publish a policy statement on how they intend to use their disciplinary powers. The Bank of England, PRA and FCA have published a discussion paper setting out their proposals, with responses due by 23 December 2022.
The U.K. Government consulted on changes to the insolvency regime for insurers in 2021 and published its response in April 2022. The changes were intended to enable the regulators to intervene earlier where an insurer was in financial difficulty, to better protect policyholders and maintain confidence in the insurance sector. The Bill implements the main proposals consulted upon.
The Bill clarifies the scope of liabilities that may be written down by the court pursuant to a “write-down order” under section 377A of FSMA, which will replace the current section 377 FSMA. HM Treasury, the PRA, the insurer itself or a shareholder, policyholder or other creditor of the insurer can apply to the court for a write-down order. The court may make a write-down order if it is satisfied that the insurer is, or is likely to become, unable to pay its debts and that the write-down is reasonably likely to lead to a better outcome for policyholders and creditors (taken as a whole) than not making the order. The write-down order cannot reduce the value of certain “excluded liabilities” (e.g., amounts payable in respect of wages or salary or under an occupational pension scheme).
One or more persons will be appointed as the write-down manager. The manager will be an officer of the court and must monitor the write-down’s progress (always with a view to delivering a better outcome for policyholders and other creditors which, where appropriate, may include applications to court to vary or revoke the write-down order). The Financial Services Compensation Scheme will also be obliged to pay out where policyholders’ payments have been reduced under a write-down. Except with the permission of the court, there will be a statutory moratorium on certain legal actions (including security enforcement) against the insurer for so long as the write-down is ongoing, commencing from the date of the application.
Where an insurer is subject to “financial difficulties” (i.e., where write-down or administration proceedings are in effect or a winding-up petition has been presented and remains outstanding), suppliers of goods or services to or counterparties to certain “financial contracts” with the insurer cannot exercise contractual provisions that terminate or allow for the termination of their contract due to the insurer’s financial difficulties, or require the insurer to pay any outstanding charges as a condition of continued supply, without the consent of the court, relevant office-holder or (where there is no office-holder) the insurer. However, the court may order that the prohibition does not apply in certain circumstances, including where enforcing it would cause hardship to a person other than the insurer. It should be noted that the category of “financial contracts” includes certain contracts excluded from the scope of the equivalent prohibition in section 233B of the Insolvency Act 1986.
Life insurance policyholders will also be restricted from surrendering their rights under contracts (which typically entitles them to convert those contracts to cash) or switching to a different fund where an insurer enters financial difficulty. This restriction will be subject to similar terms (including exemptions) as will apply to terminating supply and financial contracts.
According to the government, cash is still an important payment method for millions of people across the U.K. and is the second most frequently used means of payment, with roughly ten percent of adults relying extensively on cash in their daily lives.
The FSM Bill protects access to cash by inserting a new Part 8B into FSMA. Firms designated by HM Treasury will be obliged to ensure reasonable access to withdrawal and deposit facilities, such as ATMs, for individuals and reasonable access to deposit facilities for SMEs. In HM Treasury’s consultation, it stated that initially the largest retail and banking providers would be subject to these requirements. As proposed, HM Treasury will be empowered to set geographic baselines for reasonable access to cash withdrawal and deposit facilities across the U.K. Flexibility in adapting the baselines in response to changing needs will be preserved as the baselines will be set out in a policy statement following consultation with the FCA. The FCA will be given powers to oversee the designated firms to ensure the reasonable provision of cash access services and will be able to make rules governing designated firms. In addition, the FCA will be able to direct and impose requirements on designated firms.
As announced by HM Treasury in a Policy Statement, measures to preserve the U.K. wholesale cash infrastructure will be brought in by adding a new Part 5A to the Banking Act 2009. HM Treasury will be empowered to recognise firms as having market significance or systemic significance depending on their wholesale cash distribution activity, which generally means activities that facilitate or control the arrangements to make cash available for retail distribution and the removal of cash from circulation. The BoE will be granted powers to oversee the wholesale cash industry to ensure it continues to operate effectively, including:
These will enable the BoE to set objectives for designated entities, e.g., high level principles (as approved by HM Treasury) and codes of practice for the operations of recognised firms. The BoE will also be able to require recognised firms to provide information, which will assist the BoE in monitoring risks. The BoE will also be able to impose requirements on individual firms by issuing directions.
These will allow the BoE to exercise the same powers as under the market oversight regime but with the objective of managing financial stability risks. The BoE will also operate a special administration regime for use in the event that a recognised systemic firm became insolvent. Similar special administration regimes already apply to banks and larger investment firms, however, this is a new regime intended for systemically important businesses in the wholesale cash industry not falling under those regimes.
A recognised firm may be penalized for failing to comply with a code of practice or direction. Where a compliance failure by a recognised systemic firm poses a risk to the U.K. financial system or have serious consequences for businesses throughout the U.K., the BoE may issue the firm with a closure notice, requiring it to cease performing certain functions temporarily, permanently or until further notice. Finally, the BoE will have management disqualification powers to prohibit individuals from holding positions of responsibility in a recognised firm. Various provisions set out the enforcement process to be adhered to, such as warning notices, appeals and injunctions.
Also included in the FSM Bill are changes to the Credit Unions Act 1979. Following consultation and industry engagement, the government is proceeding with proposals to allow credit unions to offer, subject to FCA approval, hire purchase, conditional sale agreements and insurance distribution services to their members. In addition, certain corporate governance changes will be implemented, such as a requirement for credit unions to submit annual accounts to the FCA and statutory provision to allow a credit union to lend to and borrow from other credit unions, even when there is no membership link.
 The FRCC published a report regarding the FCA’s supervision of LC&F and its refusal to compensate investors under its complaints scheme. The report recommended, amongst other things, that the FCA abandon the restrictive test it applied in allocating ex gratia compensation to LC&F investors and re-decide these cases. In its response, the FCA rejected this (and a number of other) recommendations made by the FRCC.