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Crypto opportunities and greater UK-focused regulation lie ahead as the UK Financial Services and Markets Bill clears the last hurdles. Bill Lumley reports.

The UK banking sector is expressing cautious optimism about the latest UK Financial Services and Markets Bill, which is the first major shake-up of UK financial services law since the last such act was passed more than 20 years ago. 

The legislation — currently working its way through the UK government and expected to be passed in the next few weeks — will make significant changes to the UK regulatory framework by overhauling the regulation of the wholesale markets and infrastructure.

It will also impose new obligations on the Financial Conduct Authority (FCA) and the Prudential Regulation Authority, including obligations to provide greater focus on medium to long-term growth and international competitiveness. 

The new law will provide a focus on climate change issues — however, not to the extent originally suggested — by giving the government the power to override regulatory decisions, says Keystone Law financial regulation partner Tony Watts. “The bill has frameworks for retained EU law either transferring it to UK legislation or regulators’ rules with changes or revoking it altogether,” he adds.

Adding crypto

The bill also brings cryptocurrencies within the UK regulatory framework for the first time, a shift described as “a great step forward” by Rohit Bhosale, digital bank specialist at Persistent Systems. 

“With this development I can see more and more people venturing into the crypto space,” Mr Bhosale says. He suggests the bill will not require much change to digital banking infrastructure, but adds: “With many challenger banks working on a crypto proposition, it could require a change of priorities for those who don’t want to be left behind.”

The new legislation should enable policy-makers to introduce a comprehensive regulatory regime for crypto assets, according to Nick Taylor, head of public policy EMEA at global cryptocurrency exchange Luno. “The next step is for HM Treasury to introduce secondary legislation empowering the FCA to write bespoke rules for the crypto asset sector. This is something that crypto firms have been advocating for and is a huge step in the right direction,” he says. 

“Comprehensive regulation will drive up standards, protect consumers and give businesses the certainty to invest, innovate and create jobs in the UK.”  

Meanwhile, the exclusion of non-fungible tokens from the scope of the crypto asset financial promotions regime has been welcomed as “a step in the right direction” by Natalie Linhart, legal counsel at blockchain software company ConsenSys. 

The UK economy’s reliance on financial services and the City of London means it is important that implementation of the new legislation does not disrupt the link between strong independent regulation and a vibrant financial services sector, according to Nick Fahy, CEO of Cynergy Bank.

“We don’t want to see unnecessary political interference in regulation,” he says. “On the positive side, it is hoped that the bill will lead to prudential freeing-up of capital, particularly for the challenger bank segment, to drive the UK economy to the benefit of all, including the green infrastructure.”

The new bill aims to harness opportunities for innovative technologies within the banking sector such as digital sandboxes. Ted Datta, senior director head of the financial crime compliance practice for Europe and Africa at Moody’s Analytics says: “Compliance teams within the financial sector must be diligent in understanding and implementing the changes put forth by the bill and be more rigorous in investigating their supply chains to adhere to this aspect of [it].

“By doing so, they will ensure their organisations remain compliant and contribute to the broader goals of fostering a progressive, responsible and more sustainable financial market in the UK.”

New and cutting edge

The focus on deregulation of the 2000 Financial Services and Markets Act failed to have the desired impact that financial services and government bodies were looking for, according to Alisa DiCaprio, chief economist at blockchain technology firm R3. She welcomes the fact the new bill will provide regulation around the application of “new, cutting edge” technologies that can help bolster the UK’s financial services position.

For example, it will enable the UK Treasury to set up one or more financial market infrastructure sandboxes, allowing participating firms to test tools such as distributed ledger technology (DLT) within a regulatory environment. 

“Against a backdrop of rising international competition, with other jurisdictions like Europe moving ahead with its DLT pilot, this will be vital in ensuring the UK remains at the forefront of financial services innovation,” Ms DiCaprio says.

Martin Hartley, group chief commercial officer at Emagine Consulting and a member of the Bank of England decision-maker panel, backs the bill and the lengths it goes to safeguard the UK financial services sector. “Reducing regulation while creating freedom for innovation in the sector is a step in the right direction and will inevitably provide opportunities for many,” he says.

“It’s positive to see that the changes have united political parties — something that is extremely rare, but highlights their commitment to assisting growth in the industry.”

what we will start to see now is divergence — the UK will do things differently

Simon Morris, CMS

Simon Morris, financial services partner at UK law firm CMS, says it’s still difficult to forecast the bill’s impact. “In my opinion, the greatest change will be the pushing down of the making of certain rules from what was the European Commission level, to the UK regulator level. This means regulation, or at least the rules, may become more volatile,” he says.

“As of today, UK regulation is virtually a carbon copy of France, France, Italy, Germany and Spain, because it’s all based on the same legislation. Even though we left the EU many years ago, what we will start to see now is divergence — the UK will do things differently.” 

And Mr Morris suggests that while the forthcoming legislation will suit London — which might give the UK a small boost — he warns it might be less attractive for global firms because they like to have a single set of rules to follow.

“They don’t need to have two or three or four or five separate systems for each different country they operate in. It is a double-edged sword,” he adds.

Cloud providers

Major changes in the supervision of both financial institutions and their usage of ‘critical’ third parties such as cloud service providers are also proposed by the bill, according to Puja Prabhakar, UK and Ireland head of financial services at Avanade, a joint technology venture between Microsoft and Accenture.

The cloud providers would have known this was coming for some time and will be ready to adapt to any regulatory scrutiny, she says, as most major banks have at least two cloud providers and have worked this out for themselves. “Big Tech has historically avoided the weight of regulatory burdens, as banks typically face five times more regulation than Big Tech,” Ms Prabhakar adds.

Kirston Winters, chief risk officer at global post-trade network Osttra, says implementation of the legislation will be key in terms of how UK financial services function over the long term.

“Only when the intricate policy detail emerges, following the plethora of reviews, can the City judge whether these reforms will ultimately prove to be successful,” he says. “As always, the devil will be in the detail in terms of the application of the regulations and the proportionate calibration to the UK markets.”

Further changes to the legislation as it passes through parliament, with discussion papers at the FCA, are likely to slow its progress, cautions Sunil Dhall, chair of the UK Equity Markets Association and chief financial and operating officer at investment bank Peel Hunt. But, he adds: “Once it comes in, we need to start moving quite swiftly.”

However, Ms Prabhakar argues the bill seems like a series of disparate initiatives rather than an integrated approach. “In many cases, the Treasury has not yet proposed specific details but is in ‘listening mode’,” she says.

“This lack of detail has led to many forecasting widespread deregulation, but it is still premature to make such predictions.The government needs to ensure that the pace and cost of regulatory change is manageable for itself, regulators and the industry. This is important, as this is expected to take several years.”


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