UK aims to break free from EU rules with new financial services bill

On July 20, the UK government introduced the Financial Services and Markets (FSM) Bill to parliament. As the largest piece of financial services legislation in more than 20 years, the bill sets out the fundamentals of the UK’s post-Brexit regulatory approach to everything from wholesale markets to prudential standards to crypto assets. Touted by the government as a potential “Big Bang 2.0 for the City”, market participants have instead greeted the bill as an evolutionary waypoint that sets the UK up for incremental regulatory change rather than a revolutionary overhaul.

“It isn’t necessarily, in its own right, something that transforms how any financial services firms will be going about their business,” says Andrew Pilgrim, UK financial services partner at EY. “But it sets the parameters for how the regulators and government will do that in the future.”

New rules

Above all, the FSM Bill opens the door to repeal retained EU law which currently sits on UK statute books. This includes the current iterations of the Markets in Financial Instruments Regulation and the European Market Infrastructure Regulation, among others. Moving forward, the UK Treasury and financial regulators, including the Financial Conduct Authority and Prudential Regulation Authority, will devise new rules that will, for the most part, sit on the regulators’ books. The government envisions this process taking several years, however, as legislation will not be revoked until a suitable alternative has been developed.

UK financial regulators have also been given secondary objectives to consider the long-term growth and competitiveness of the UK as a financial centre, beyond their primary financial stability goals. This feature of the FSM Bill has attracted criticism from some quarters, given the possibility that these secondary aims could contribute to the watering down of regulatory standards. Yet, according to EY’s Mr Pilgrim, the tiered nature of these goals should limit the probability of this outcome. “I think it’s a good compromise,” he says. “The FSM Bill is very clear that [these are] secondary objectives. They are only issues that can be looked at after those primary objectives have been fulfilled.”

Meanwhile, the FSM Bill also advances several changes in the realm of wholesale markets, based on the outcomes of the UK government’s March 2022 Wholesale Markets Review. This includes amendments to the Markets in Financial Instruments Directive framework, such as removing the double-volume cap on dark-pool trading, as well as share trading obligations. “The UK obviously wants to break free of some of the inherited EU rules that it deems to be overly complex or restrictive. Some of this relates to things like the way firms internalise trades and use alternative markets like dark pools,” says Anish Puaar, head of European market structure at Rosenblatt Securities.

Incremental change

Even so, the changes proposed in the bill from a wholesale markets perspective are incremental and, for the most part, expected. On this basis, the issue of regulatory divergence with the EU is unlikely to occur as quickly as once anticipated, but rather on a slower and more progressive basis. “We’re seeing, in trading and markets, a divergence that could slowly increase in certain areas; little tweaks here and little tweaks there," says Mr Puaar.

Finally, the FSM Bill introduces the notion of a “digital settlement asset” (DSA) to British law, which is designated as a digital representation of value or rights that can be either cryptographically secured or not. By establishing the notion of a DSA, the bill also brings stablecoins, when used as a means of payment, inside the UK’s regulatory fold. The UK Treasury has also been given the power to update the definition of a DSA to keep pace with market changes. In addition, the Treasury will be permitted to develop financial market infrastructure sandboxes to test emerging technologies.

Following parliament’s summer recess, the FSM Bill will be debated in September. Most observers expect the newly appointed Conservative prime minister to move quickly to ensure royal assent is received with minimal delay. For now, however, the market reaction to the bill has been generally positive, even if it represents the first milestone in a much longer evolutionary process.

“All of this points to the UK wanting to remain a high-standard jurisdiction. But you also have this real push for innovation. And the UK will definitely have the ability to be more fleet of foot once the FSM Bill gets royal assent and becomes an act. There’s an opportunity here for the UK to lead in [several financial services] areas,” says Mr Pilgrim.