Shearman And Sterling

financial services in the UK, Financial Services Act 2021, Brexit

Future of Financial Services Regulation in the UK




News and Events

The U.K. has engaged in a fundamental review of its financial regulatory framework since leaving the EU in January 2020. Changes are ongoing and tracked on our Financial Regulatory Developments blog. We set out below the various regulatory initiatives propelling these changes and discuss some of the individual areas that are being reformed.

Initiatives and Topics

Financial Services Act 2021 

The Financial Services Act 2021 (FSA 2021) introduced changes across a range of areas including: (i) prudential regulation of banks and investment firms; (ii) benchmarks; (iii) the U.K. Markets in Financial Instruments Regulation; (iv) the U.K. version of the European Market Infrastructure Regulation; (v) the U.K. Packaged Retail and Insurance-based Investment Products Regulation; (vi) the U.K. overseas funds regime; and (vii) insider dealing, money laundering and market abuse. We discuss the FSA 2021 in our post, “UK Financial Services Act 2021 Published”.

The majority of the provisions of the FSA 2021 have now entered into force.

View the Financial Services Act 2021 (original, as enacted) and Explanatory Notes.

Future Regulatory Framework Review 

The U.K.’s 2022 Financial Services Future Regulatory Framework Review proposals set out the government’s policy approach to regulatory reform post-Brexit. It confirmed the government’s commitment to establishing a new comprehensive model for financial services regulation, building upon the Financial Services and Markets Act 2000. The Review proposed: (i) the creation of the Designated Activities Regime, to provide the U.K. regulators with powers over financial market activities by non-regulated persons such as securities issuers and some traders; (ii) an expansion of powers for HM Treasury; (iii) enhanced rulemaking powers and the introduction of new secondary statutory objectives for the FCA and PRA; and (iv) new statutory requirements on regulators, enhancing Parliament’s ability to hold them accountable. These have all been introduced under the Financial Services and Markets Act 2023 (FSM Act 2023) (discussed in our client note, “A Boost for UK Financial Services”).

Other aspects of the Financial Services Future Regulatory Framework continue to be taken forward as part of the Edinburgh Reforms.

We discuss these changes further in our post “HM Treasury Publishes Final Policy Following Financial Services Future Regulatory Framework Review”.

View HM Treasury’s Response to the Future Regulatory Framework Review.

Edinburgh Reforms 

The Edinburgh Reforms, a series of initiatives which were announced on 9 December 2022, aim to reform various aspects of regulation governing the U.K. financial services sector.

A plan to implement a number of the Financial Services Future Regulatory Framework proposals were set out under the Policy Statement, “Building a smarter financial services framework for the UK” (published as part of the Edinburgh Reforms). Many of these have since been implemented through the Financial Services and Markets Act 2023 (FSM Act 2023) which are discussed in our client note, “A Boost for UK Financial Services”. These include the implementation of the “FSMA model” of regulation, secondary objectives for regulators to incentivize international growth and competitiveness and the revocation of EU law.

Other aspects of the Edinburgh Reforms remain under consultation and/or are due to be implemented in 2024. These include:

  • Reforms to the U.K.’s ring-fencing regime for larger retail banks.
  • Faster settlement cycles for which an Accelerated Settlement Taskforce has been established.
  • Review of the Senior Managers and Certification Regime, which regulates individuals working in financial services.
  • Plans to bolster sustainable finance.
  • Reforms to the rules on unbundling of investment research which are set to be removed by the U.K. government, following recommendations in the UK Investment Research Review.

We discuss the Edinburgh Reforms more widely and in greater detail in our client note, “UK Government Publishes Edinburgh Reforms for Financial Services”.

View the Edinburgh Reforms.

Financial Services and Markets Act 2023 

In addition to providing for the revocation of retained EU law in financial services, the FSM Act 2023 introduced changes to U.K. financial services law across a range of areas, including: (i) the U.K.’s new regulatory architecture; (ii) regulatory accountability; (iii) sustainability and green economic reforms; (iv) MiFID II wholesale markets; (v) digital asset regulation; (vi) financial market infrastructure regulation; and (vii) insurance. We discuss the FSM Act 2023 in our client note, “A Boost for UK Financial Services”.

The FSM Act 2023 represents further implementation of the government’s post-Brexit Future Regulatory Framework Review and the Edinburgh Reforms.

View the Financial Services and Markets Act 2023 (original, as enacted) and Explanatory Notes.

Mansion House Reforms 

The Mansion House Reforms, announced in July 2023, build on the proposals of the Financial Services Future Regulatory Framework Review and Edinburgh Reforms, describing (in the Policy Paper, Building a Smarter Financial Services Regulatory Framework: Delivery Plan) how HM Treasury will deliver the so-called Smarter Regulatory Framework for the U.K.

Other aspects of the Mansion House Reforms include further details regarding proposed reforms to the U.K.’s regimes for securitisation, short selling, the Public Offers and Admissions to Trading Regime and the retail investor disclosure framework.

View the Mansion House reforms.

Wholesale Markets Review 

HM Treasury conducted its Wholesale Markets Review in 2021, proposing changes to the onshored Markets in Financial Instruments (MiFID II) regime. MiFID II was originally “on-shored” post-Brexit with minor amendments, and the Review sought to tailor these measures to the U.K. market.

The reforms are broad and varied, ranging from fundamental changes to the commodity derivatives markets to the removal of burdensome obligations in equity markets. Our client note “UK Wholesale Markets Review” summarises the key shifts arising from the Review and how they will be implemented.

Many of the reforms have been given effect, such as through the Financial Services and Markets Act 2023 (FSM Act 2023), while others are still being taken forward by the FCA and the government. The FSM Act 2023 changes include:

  • Revocation of the requirement to apply commodities position limits to all exchange-traded contracts and economically equivalent over-the-counter (OTC) contracts. Trading venue operators (as opposed to the FCA) have the power to set position controls, although the FCA retains discretion to determine the contracts for which trading venues must set position limits and will continue to set limits directly for OTC contracts.
  • Alignment of the scope of parties subject to the Markets in Financial Instruments regime’s trading obligation and the clearing obligation under the European Market Infrastructure Regulation. The FCA and BoE have new powers to exempt certain risk reduction measures from the trading and clearing obligations respectively.
  • Granting the FCA rulemaking powers governing the pre- and post-trade transparency regime, formerly governed by the Markets in Financial Instruments regime.
  • Amendments to the rules for trading venues—the pre-trade equity waivers regime has been delegated to the FCA, with FCA rules and guidance still expected in other areas. The U.K. government is considering the introduction of a new type of trading venue (or a segment of existing platforms) tailored to the requirements of smaller SMEs.
  • Revocation of the share trading obligation and the double volume cap.
  • Granting the FCA rulemaking powers on whether firms satisfy the conditions for systematic internalisers.
  • Granting the FCA rulemaking powers for data reporting service providers, enabling it to set a framework for the development of a “consolidated tape” for transactions in equity and non-equity instruments. Requirements for a consolidated tape were originally introduced under MiFID II but neither the U.K. nor the EU have yet established one.

View the Financial Services and Markets Act 2023 (original, as enacted) and Explanatory Notes.

View the initial consultation and response to the Wholesale Markets Review.

UK Listing Review 

The U.K. Listing Review, published on 3 March 2021, aims to make the U.K. a more attractive global capital markets hub post-Brexit. Many of the suggested reforms draw upon similar regimes in other countries and are aimed at “closing the gap” between the U.K. and other global centres.

The proposed changes, many of which have been implemented, represent a major overhaul of the U.K.’s listing and capital markets rules. These include changing the dual class share structures in the premium listing segment, replacing rules concerning SPAC listings, reducing free float requirements, rebranding the standard listing segment and reforming the prospectus regime. We discuss the Review in our client note, “UK Listing Regime Reform”.

The FCA spearheaded the implementation of many of these proposals and continues to do so. In May 2023, the FCA proposed further reforms such as streamlining its ‘standard’ and ‘premium’ listing segments for certain offerings. Soon thereafter, the FCA published additional measures, guidance and support to bolster the competitiveness of U.K. wholesale markets. 

View the UK Listing Review.

View our client notes, “FCA moves ahead with a single equity listing category” and “Draft UK Listing Rules Published for new Commercial Companies Equity Segment”.

Access to UK Market 

Access by overseas firms to the U.K. wholesale markets has traditionally been largely based upon the Overseas Persons Exclusion (OPE), which permits cross-border wholesale business to and from the U.K. without parties outside the U.K. requiring a local licence. This provision has been instrumental to the success of the City of London and stands in stark contrast to the ‘regulatory perimeter’ of less successful closed financial markets, such as those in most of the EU.

HM Treasury’s review has so far focused on the OPE, and the onshored equivalence regime for MiFIR investment firms and recognition regime for overseas investment exchanges. There has also been considerable work in recognition of overseas clearing houses and settlement systems. However, other than for clearing houses and bank consolidated capital, few equivalence decisions have been reached with the EU.

The U.K. has signed the Berne Financial Services Agreement with Switzerland, confirming mutual recognition of aspects of the financial services regulatory and supervisory regimes in each jurisdiction. Free trade agreements covering financial services have also been signed with other nations including Australia, New Zealand, Japan and Norway, Iceland and Liechtenstein. Trade negotiations with the U.S. are ongoing.

Key materials:

HM Treasury Call for Evidence on the Overseas Framework - July 2021.

View our post, “UK Government Signs Agreement with Switzerland on Mutual Recognition for Wholesale Financial Services”.

Critical Third-Party Regulation 

HM Treasury and the regulators have been granted new powers under the Financial Services and Markets Act 2023 (FSM Act 2023) to oversee firms that provide critical services to regulated firms, their service providers and FMIs (U.K. regulated firms). This follows concerns that the financial sector relies heavily on unregulated service providers, particularly in the IT sector, for critical infrastructure whose failure could cause systemic or customer issues.

HM Treasury is empowered to designate an entity as a “critical third party” (CTP) if its failure would pose financial stability or confidence risk to the U.K. The FCA, PRA and Bank of England have been granted direct powers over critical third parties. The introduction of the CTP regime will not reduce the responsibility of U.K. regulated firms, their boards and senior management, which must continue to assess the risks for their outsourcing and third-party arrangements, including undertaking appropriate due diligence.


Cryptoasset Regulation

Cryptoasset activities

The U.K. plans to bring certain activities relating to cryptoassets within its regulatory perimeter. Firms conducting relevant activities and offering their services in or to the U.K. by way of business would need to apply for authorization from the FCA. The relevant activities are:

  • Issuing or admitting cryptoassets to trading.
  • Operating cryptoasset trading venues.
  • Dealing as principal or arranging deals in cryptoassets.
  • Operating a cryptoasset lending platform.
  • Safeguarding or safeguarding and administering cryptoassets (or arranging the same).

Overseas firms offering their services into the U.K. may need to obtain FCA permission, although HM Treasury envisages equivalence/deference-type arrangements in the future and is considering alternative approaches to full authorization in the interim.

Key materials

View our post on HM Treasury’s final proposals for the cryptoasset regulatory regime.

Cryptoasset promotions

The promotion of cryptoassets within the U.K. has been regulated under the financial promotion regime since October 8, 2023. Cryptoassets are classified as Restricted Mass Market Investments, meaning their promotion to retail investors is subject to certain conditions.

Key materials

View our posts on the:


Certain activities relating to stablecoins will be brought within the regulatory perimeter under powers granted by the FSM Act 2023 (discussed in our client note, “A Boost for UK Financial Services”). At this stage, the U.K. has decided to regulate:

  1. Issuance, safeguarding, safeguarding and administering and arranging of safeguarding or safeguarding and administering of U.K. issued fiat-backed stablecoins.
  2. Use of fiat-backed stablecoins in payment chains. The new regime will capture the use of fiat-backed stablecoins issued in or from the U.K. by a firm licensed to do so. The U.K. government intends to permit the use of overseas issued fiat-backed stablecoins in payment chains, with measures to ensure it is done safely and effectively.

The Bank of England will be responsible for the financial stability of systemic payment systems using sterling-denominated stablecoins in retail payments, systemic service providers to payment systems using stablecoins and related service providers. The FCA will supervise non-systemic fiat backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only.

Key materials

View our post on the proposed regulation of fiat-backed stablecoins.

FMI Sandboxes

FMI sandboxes will be used to assess the existing legislative framework in a technologically-neutral manner. The FSM Act 2023 gave HM Treasury powers to establish individual sandboxes through statutory instrument, to temporarily modify certain legislation and rules and to disapply the existing requirements for FMIs approved for participation in an FMI sandbox, the first of which will be a Digital Securities Sandbox.

Key materials

View the Financial Services and Markets Act 2023 (original, as enacted) and Explanatory Notes.

HM Treasury - Consultation on the Digital Securities Sandbox – July 2023.

View our post, “HM Treasury Consults on First Financial Market Infrastructure Sandbox – the Digital Securities Sandbox”.

DeFi and DAOs

Decentralized finance, or DeFi, refers to financial services offered using self-executing “smart contracts”, without relying on traditional financial intermediaries. As part of its consultation on the future regulatory framework for cryptoassets, HM Treasury considered options for regulating those involved in DeFi product chains, from those who create or edit protocols and code to Decentralized Autonomous Organisations (DAOs). The Treasury concluded that it does not wish to front-run the work of international organizations and will focus its efforts on supporting those organizations in developing an appropriate regulatory approach.

The Law Commission has separately instigated a project investigating how DAOs should be characterised from a legal perspective.

Key materials

HM Treasury Future financial services regulatory regime for cryptoassets.

Law Commission - Decentralised Autonomous Organisations (DAOs) - Law Commission.

Designated Activities Regime 

The FSM Act 2023 creates a new “Designated Activities Regime” for the regulation of activities related to the financial markets by non-regulated entities such as issuers and traders. HM Treasury is empowered to designate activities, instruments, products or investments and can prescribe directly requirements for these, while delegating others to the FCA. Any firm, regardless of whether it is U.K.-regulated or not, conducting a designated activity will not need to be licensed or regulated, but will be subject to FCA supervision and enforcement for that activity. So far, the following activities have been designated by HM Treasury in draft or final statutory instruments:

  • Financial markets activities, such as offering relevant securities to the public in the U.K., admitting securities to trading on certain venues and communicating advertisements relating to offers of securities and admission of securities to trading. This will replace the existing prospectus regime in the U.K.
  • Short Selling:
  • Entering into a short sale of a share.
  • Entering into a transaction which creates or relates to a financial instrument other than a share, where an effect of the transaction is to confer a financial advantage on the person entering into that transaction in the event of a decrease in the price or value of a share.

We discuss the revised short selling regime in our client note, “ The UK’s Lighter-Touch, Post-Brexit, Short Selling Regime”.

  • Securitization:
    • Acting as an originator, sponsor, original lender or a securitisation special purpose entity.
    • Selling a securitisation position to a U.K. retail client.

The following activities may also become designated activities in the future since they were listed as examples in the FSM Act 2023:

  • Derivatives Trading:
    • Activities related to entering into derivatives contracts, including those contracts not cleared by a CCP.
    • Holding positions in commodity derivatives.
  • Using a benchmark.
  • Contributing to a benchmark:
    • Contributing data to a regulated benchmark administrator for the purpose of the administrator determining a benchmark.
SMCR Review 

The Senior Managers and Certification Regime imposes liabilities on individual employees and directors in the U.K. financial services industry and is generally regarded as being rather onerous. HM Treasury has launched a review of the SMCR following concerns raised by firms about aspects of the regime. The FCA and PRA are simultaneously seeking evidence on potential ways to improve the regime.

Key materials

HM Treasury Senior Managers & Certification Regime: Call for Evidence

Payments Landscape Review 

HM Treasury has published its Future of Payments Review report, setting out a series of recommendations to improve the U.K.’s existing payments landscape for consumers. A key proposal is for the U.K. government to develop a National Payments Vision and Strategy providing high-level guidance on priorities and setting guiding principles for the industry. The Review includes a range of other proposals, including accelerating reforms to the Strong Customer Authentication requirements to an FCA-led, outcomes-focused approach and reviewing the regulatory requirements applicable to FinTechs.

Key materials

View our post, “UK Future of Payments Review Report Published”.

Review of Funds Regime 

The U.K. government’s Review of the UK funds regime considered tax and regulation of funds in the U.K. to make the country a more attractive location to set up, manage and administer funds. Proposals include simplifying the taxation of funds, increasing the range of investment products available for investors in the U.K. and promoting the U.K. funds regime abroad. Government work on these proposals is ongoing.

The government has introduced a regulatory regime for a new category of fund, the Long-Term Asset Fund, designed to invest in illiquid, long-term assets. The FCA published a Policy Statement on broadening retail and pensions access to LTAFs in June 2023.

Sustainability and Green Economic Reforms 

The FSM Act 2023 empowers HM Treasury to prepare a policy statement on sustainability disclosure requirements. The FCA and PRA will need to have regard to the statement when preparing their own rules or guidance on sustainability disclosures and publish statements in their annual reports on how they have complied with this obligation. “Sustainability” for these purposes includes matters relating to the environment, social, community and human rights issues, tackling corruption and bribery and governance in relation to these matters.

HM Treasury is also required to conduct a review into how well U.K. financial regulation is equipped to eliminate the financing of the use of “forest risk commodities” and how to improve financial regulation for these purposes. Forest risk commodities are those derived from plant, animal or other living organisms, the production of which involved the conversion of forest into agricultural land. The U.K. government has announced that palm oil, cocoa, beef, leather and soy will be among the commodities listed in upcoming legislation defining relevant products for these purposes.

The U.K. has adopted to date a less far reaching and comprehensive regulatory regime than in the EU.

Financial Market Infrastructure 

Several measures under the FSM Act 2023 strengthen the existing regime for financial market infrastructure. These include extending the Senior Managers’ and Certification Regime to U.K. CCPs and CSDs, broadening the existing regime for the recovery and resolution of CCPs that are failing or have failed and empowering HM Treasury and the Bank of England to take measures to protect the wholesale cash industry.

Equivalencies for overseas clearing houses and settlement facilities have also been progressed by U.K. regulators.

Key materials

View the Financial Services and Markets Act 2023 (original, as enacted) and Explanatory Notes.

HM Treasury – Senior Managers & Certification Regime (SM&CR) for Financial Market Infrastructures (FMIs): consultation and response.

View our post, “ HM Treasury Confirms Equivalence of US Commodity Futures Trading Commission Regime for Central Counterparties”.

Bank prudential Regulation 

Basel 3.1

The Bank of England has published the first of two sets of proposed final rules for the implementation of Basel 3.1. The Basel 3.1 changes introduce the as yet unimplemented Basel reforms to banks’ regulatory capital frameworks, intended to restore credibility in the calculation of risk-weighted assets and improve the comparability of banks’ capital ratios.

The first Policy Statement includes near final rules on:

  • the scope and application of the Basel 3.1 standards;
  • new requirements for market risk and methodologies for its calculation;
  • new methodologies for calculating credit valuation adjustment risk;
  • a new standardized approach for Pillar 1 operational risk capital requirements; and
  • redenomination of certain Basel 3.1 references to U.S. dollars and euros into pounds sterling.

The BoE plans to publish a further Policy Statement with near final rules on the remaining aspects of Basel 3.1 in Q2 2024, including revisions to the standardized and internal ratings-based approaches to calculating credit risk, amendments to the credit risk mitigation framework and implementation of the output floor.

The final rules on the U.K. implementation of Basel 3.1 will be published once HM Treasury has revoked the relevant parts of the Capital Requirements Regulation. The rules will take effect from July 1, 2025, with a 4.5-year transitional period requiring firms to fully implement the standards by January 1, 2030.

Key materials

View our post, “Bank of England Publishes Policy Statement on Implementation of Basel 3.1 Standards”.

Stronger simpler framework for smaller banks

Implementation of the PRA’s Strong and Simple framework for small banks began in January 2024. The new framework is intended to simplify the prudential regulation of non-systemic banks and building societies that are not internationally active, reducing costs for firms, but maintaining their resilience. The approach contrasts with the existing regulatory approach which has been to apply broadly the same requirements to all banks and building societies, irrespective of their size and activities. Firms eligible for the regime will be known as Small Domestic Deposit Takers and SDDT consolidation entities.

Key materials

View our post, “UK Prudential Regulator’s Rules for Small Banks Coming at Start of 2024”.

Retail Regulatory 

Revised Retail Disclosure Framework

The U.K. is replacing its existing onshored Packaged Retail and Insurance-Based Investment Products Regulation with a revised retail disclosure framework, which will be implemented by the Consumer Composite Investments (Designated Activities) Regulations 2024 supplemented by FCA rules. This will lead to a revised U.K. retail disclosure regime that is applicable only to complex products, suitable to the U.K.’s capital markets and encourages informed retail investor participation in those markets. The amended retail disclosure regime will be part of the U.K.’s new Designated Activities Regime, established under the Financial Services and Markets Act 2023 (FSM Act 2023). Any person, regardless of whether they are U.K.-regulated, conducting a designated activity will fall under the FCA’s remit.

Key materials

View our post, “New UK Retail Disclosure Framework for Consumer Composite Investments”.

Financial Promotions

The FSM Act 2023 implements a new regulatory gateway for regulated firms to approve the financial promotions of regulated firms. Regulated firms will be prohibited from approving such promotions unless they have obtained FCA permission to remove the whole or part of the prohibition. The prohibition does not apply where exemptions exist. HM Treasury has proposed a series of reforms to the existing exemptions for high net worth and sophisticated investors, including raising the financial thresholds and eligibility criteria to qualify, which are due to come into force in 2024.

Key materials

View the Financial Services and Markets Act 2023 (original, as enacted) and Explanatory Notes.

View our posts on:

Other changes under the FSM Act 2023

Other proposed reforms to the retail regulatory regime include measures to mitigate the risks of authorized push payment scams, new powers for HM Treasury to expand the scope of those who may be obliged to pay case fees to the Financial Ombudsman Service and measures to protect retail access to cash.