The following posts provide a snapshot of selected UK, EU and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
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UK Delays Legislation for Amending Ancillary Activities Test
May 29, 2024
The Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024 was published on May 29, 2024 and enters into force on December 31, 2024. The 2024 Amendment Order amends the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 (S.I. 2023/548) by omitting the provisions relating to the new ancillary activities regime.
The 2023 Order, which enters into force on January 1, 2025, among other things, paved the way for the Financial Conduct Authority to develop a simpler test for determining which firms need to be authorized as investment firms as a result of their commodities and emission allowances trading business, known as the "ancillary activities test". The ancillary activities test is an exemption from investment firm authorization requirements for firms that trade commodity derivatives or emission allowances as an ancillary activity to their main business, such as energy and other commodity trading firms which are active in both physical trading and financial instrument trading. Under the MiFID II regime, the ancillary activities exemption became based upon a hard-edged test with various financial thresholds. Some of these tests resulted in counterintuitive outcomes for firms, while other issues with the way in which the legislation had been drafted needed resolving via unusually narrow or arguably unnatural interpretations of the text, sometimes supported by regulatory or industry guidance. The 2023 Order simplified the process for determining when a firm satisfies the "ancillary activities" test in the post-Brexit U.K.
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New UK Securitization Regime Set to Start on November 1, 2024
May 22, 2024
The Securitisation (Amendment) Regulations 2024 were made on May 22, 2024 and come into force for the most part on November 1, 2024. The Amending Regulations supplement the new U.K. securitization regime established under the U.K. Securitisation Regulations 2024, including establishing November 1, 2024 as the commencement date for the Securitisation Regulations 2024. The Amending Regulations do not revoke the onshored EU Securitisation Regulation 2017, which will take effect through commencement regulations. The Securitisation Regulations 2024 designate, under the new designated activities regime, certain securitization activities when undertaken by a firm in the U.K. and introduce a new definition of "institutional investor", removing overseas Alternative Investment Fund Managers that market or manage AIFs in the U.K. from due diligence requirements.
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UK Updates and Expands Equivalence for US Derivatives Trading Venues
May 14, 2024
The Markets in Financial Instruments (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2024 (SI 2024/638) were made on May 14, 2024 and entered into force on June 4, 2024. In preparation for Brexit, the U.K. onshored the EU's 2017 equivalence decision for the legal and supervisory framework applicable to designated contract markets and swap execution facilities in the U.S. for the purposes of the trading obligation for derivatives under the Markets in Financial Instruments Regulation. MiFIR requires that derivatives declared subject to the derivatives trading obligation must be traded on U.K. trading venues or third-country trading venues following an equivalence decision by HM Treasury. The onshored 2017 equivalence decision covers designated contract markets and swap execution facilities supervised and authorized by the Commodity Futures Trading Commission, and ensured that, when the U.K. left the EU, U.K. counterparties could continue to satisfy the DTO when they trade derivatives instruments on covered DCMs and SEFs.
HM Treasury has committed to reviewing the U.K.'s equivalence decision under the Smarter Regulatory Framework. In addition, HM Treasury considers that the CFTC's regime remains equivalent to U.K. MiFIR. The new Regulations therefore revoke and replace the onshored 2017 equivalence decision, updating the list of trading venues to include all current CFTC-authorized DCMs and SEFs. -
UK Publishes Draft Securitisation (Amendment) Regulations 2024
04/22/2024
The draft Securitisation (Amendment) Regulations 2024 were published on April 22, 2024. In combination with the Securitisation Regulations (S.I. 2024/102), the draft Regulations will provide the U.K.'s new regulatory framework for securitizations as part of HM Treasury's Smarter Regulatory Framework. The Securitisation Regulations 2024 establish the designated activities relating to securitizations and repeal detailed legislative firm-facing requirements, which will move the rulebooks of the Prudential Regulation Authority and the Financial Conduct Authority. The Securitisation Regulations will enter into force when the existing Securitisation Regulations 2017 are repealed, which will be implemented by commencement regulations. The draft Regulations restate due diligence requirements for Occupational Pension Schemes and restate the prohibition on the establishment of Securitisation Special Purpose Entities (SSPEs) in high-risk jurisdictions, modifying it to apply to institutional investors, as well as originators or sponsors. -
UK Prudential Regulator Granted Power to Disapply Rules
04/19/2024
On April 18, 2024, the Financial Services and Markets Act 2000 (Disapplication or Modification of Financial Regulator Rules in Individual Cases) Regulations 2024 were made. The Financial Services and Markets Act of 2023 (discussed in our client note, "A Boost for UK Financial Services") provides a framework for the revocation of retained EU law (now known as "assimilated law") in financial services, much of which will be replaced by rules of the U.K. regulators. Transferring the detailed rules to the U.K. regulator's rulebooks promotes a more nimble approach by the U.K.'s regulators. The FSM Act 2023 gave new delegated power to the U.K.'s regulators for detailed rulemaking, subject to enhanced oversight by Parliament and HM Treasury, and provided various mechanisms for the operation of the regulatory framework, including granting HM Treasury the power to make regulations bestowing on each of the regulators the ability to disapply or modify its rules.
The Regulations also give the Prudential Regulation Authority the ability to disapply or modify the application of any of its rules made under the Financial Services and Markets Act 2000, where appropriate, and in accordance with the procedural requirements set out in the Regulations. The power will allow the PRA to consider the circumstances and business models of individual firms, further enhancing the agile approach to regulation. The Regulations enter into force on June 30, 2024. -
UK Regulators Consult on Digital Securities Sandbox
04/15/2024
On April 3, 2024, the Bank of England and U.K. Financial Conduct Authority published a joint consultation paper on proposed rules for the incoming digital securities sandbox. The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowered HM Treasury to establish sandboxes to facilitate the use of digital assets in financial markets. HM Treasury confirmed its approach to the DSS, which is the first such sandbox, in December 2023. The DSS will offer eligible firms a modified set of rules and regulations for a period of five years, enabling them to test out services using technology such as distributed ledger technology and give the regulators time to finesse a regulatory regime. It is hoped that digital securities could bring advantages, such as streamlining processes and reducing settlement risk and settlement times.
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UK Conduct Regulator Proposes Payment Optionality for Investment Research
04/11/2024
The U.K. Financial Conduct Authority has opened a consultation setting out proposals for allowing firms to use joint (bundled) payments for third-party research and execution services, subject to certain requirements being met. The proposals follow the recommendations made by the U.K. Investment Research Review in July last year, and which both the U.K. government and FCA accepted. This also follows the removal by the U.S. Securities and Exchange Commission of its temporary exemption on the need for U.S. firms to register as investment advisors if they sell research separately from execution. Responses to the consultation may be submitted until June 5, 2024. Depending on the scope of feedback received, the FCA is aiming to publish its final rules or guidance by the end of June 2024.
The FCA is proposing to introduce a new option that facilitates bundled payments for third-party research and execution services. The new option would be available alongside the existing methods of a firm making direct payments out of its own resources or from a separate research payment account.
Firms that opt to make bundled payments will need to satisfy certain conditions.
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UK Approach to Critical Third-Party Supplier Designation Published
03/31/2024
The Financial Services and Markets Act 2023 established a framework for the regulation of third parties who provide significant services to financial institutions, giving HM Treasury power to designate an entity as a "critical third party" if its failure would pose financial stability or confidence risk to the U.K. We discussed this in our client note, "The U.K.'s New Regime for Critical Third Party Supervision". HM Treasury published on March 21, 2024, its policy approach to designation of critical third parties.
When designating CTPs, HM Treasury is required by the FSM Act 2023 to consider the materiality of the third party's services to the delivery of essential activities, services or operations in the financial sector as well as the number and type of licensed firms to which the services are provided. This is a process where HM Treasury carries out the designation; a "critical third party" is not a status that firms would apply for. The policy paper sets out the process for designation, including receipt of a recommendation from one of the financial regulators and assessment of the basis for making a designation decision. HM Treasury discusses how it will engage with the relevant third-party service provider and the regulators, including communicating its decision. The process for de-designating a critical third party is also described.
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HM Treasury Publishes Policy Statement on Next Phase of Smarter Financial Services Regulatory Framework
03/21/2024
On March 21, 2024, HM Treasury published a paper on the next phase of its Smarter Financial Services Regulatory Framework, the U.K.’s program of post-Brexit regulatory reforms for financial services. The original policy statement on the smarter regulatory framework was published in December 2022 as part of the so-called Edinburgh Reforms (discussed in our client note, “UK Government Publishes Edinburgh Reforms for Financial Services”). This described the U.K.'s new model for regulation and set out how the U.K. would prioritize the repeal and reform of retained EU law for financial services. In July 2023, HM Treasury published a further policy statement, dividing the review of REUL into tranches, and detailing anticipated dates for reform. Further details of the U.K.'s future financial regulatory framework can be found on our website, Future of Financial Services Regulation in the UK.
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UK Public Offers and Admissions to Trading Regulations Published
03/06/2024
On January 29, 2024, the Public Offers and Admissions to Trading Regulations 2024 (SI 2024/105) were published. The Regulations implement the new Public Offers and Admission to Trading Regime, part of the new designated activities regime, and revise the existing prospectus regime inherited from the EU that currently sits in the U.K. Prospectus Regulation. The designated activities regime (DAR) is a new U.K. concept to give the Financial Conduct Authority rulemaking powers over financial sector activities, such as public offers and listing, which are not necessarily carried out by regulated firms such as banks (we discussed the DAR in our client note, "A Boost For UK Financial Services"). The new Regulations introduce a general prohibition on public offers of securities, coupled with a collection of exceptions from this prohibition. Many of the existing exemptions in the U.K. Prospectus Regulation, such as offers solely to qualified investors and offers made to fewer than 150 persons, are retained. Certain provisions, such as those establishing the new designated activities and provisions enabling the FCA to make rules, came into force on January 30, 2024. Most of the other provisions will enter into force once the U.K. Prospectus Regulation is revoked using powers under the Financial Services and Markets Act 2023. The FCA has engaged with stakeholders regarding many of the changes that will be housed in its rulebook in the future. It is expected to publish a consultation paper in Summer 2024 on its detailed proposals.
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UK Fifth Commencement Regulations Under the Financial Services and Markets Act 2023 Published
03/04/2024
The Fifth Commencement Regulations - the Financial Services and Markets Act 2023 (Commencement No. 5) Regulations 2024 (SI 2024/250)- under the Financial Services and Markets Act 2023 were made on February 29, 2024. One of the major reforms in the Financial Services and Markets Act 2023 related to regulatory accountability, especially of the Financial Conduct Authority and Prudential Regulation Authority. The Fifth Commencement Regulations now provide, among other things, for the coming into effect of certain provisions relating to the accountability of the Payment Systems Regulator, including:- Starting March 1, 2024, a requirement on the PSR to take certain steps in advance of taking an action where there is a material risk such action would be incompatible with the U.K.'s international trade obligations.
- Starting August 1, 2024, requirements for the PSR's consultations, requiring the PSR to keep general requirements under review, HM Treasury's powers to require the PSR to impose a requirement for a specified activity or for specific firms, detailing the cost-benefit analysis obligations and panel appointment statements of policy.
- Starting January 1, 2025, the remaining provisions on the PSR's accountability that are not already in force.
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UK Securitisation Regulations Published
03/04/2024
The Securitisation Regulations 2024 (SI 2024/102) were made on January 29, 2024, and will come into force for the most part when the Securitisation Regulation 2017 is revoked. This is part of HM Treasury's Smarter Regulatory Framework. The Securitisation Regulations 2024 designate, under the incoming designated activities regime, certain securitization activities when undertaken by a firm in the U.K. These are:- Acting as originator, sponsor, original lender or securitisation special purpose entity in a securitization.
- Selling a securitization position to a U.K. retail client.
The Securitisation Regulations 2024 introduce a new definition of "institutional investor," removing non-U.K. Alternative Investment Fund Managers that market or manage AIFs in the U.K. from due diligence requirements.
In addition, the Securitisation Regulations 2024 repeal detailed legislative firm-facing requirements. These requirements will be moved to the regulator rulebooks. Both the Prudential Regulation Authority and the Financial Conduct Authority consulted last year on their proposed approach and rules, and are expected to publish their final rules in Q2 this year. -
UK Data Reporting Services Regulations 2024 Published
02/19/2024
On January 29, 2024, the Data Reporting Services Regulations 2024 (SI 2024/107) were made. The Data Reporting Services Regulations 2024 will enter into force on the same day that the Data Reporting Services Regulations 2017 are revoked, which is April 5, 2024, according to the Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023. The Data Reporting Services Regulations 2024 will replace the Data Reporting Services Regulations 2017, restating with modifications some of the 2017 content.
The Financial Services and Markets Act 2023 granted the FCA power to make rules for data reporting service providers (DRSPs), of which there are three types- Approved Publication Arrangements, Approved Reporting Mechanisms and Consolidated Tape Providers. DRSPs generally facilitate compliance by investment firms of their regulatory reporting obligations, ensuring that market data is accessible and supporting effective price formation and best execution.
The Data Reporting Services Regulations 2024 set the regulatory perimeter of the U.K.'s regime for DRSPs, set out the authorization regime for providing a data reporting service, and restate the FCA's supervisory and enforcement powers. The FCA is also given powers to run a tender process to select U.K. CTPs for a particular asset class. No CTP is yet established in the U.K. or the EU. The FCA published its final framework for a consolidated tape for bonds in December 2023, and the tender process for the bond CTP will progress through 2024. -
Fourth Commencement Regulations Under Financial Services and Markets Act 2023 Published
01/18/2024
The Fourth Commencement Regulations - the Financial Services and Markets Act 2023 (Commencement No. 4 and Transitional and Saving Provisions) (Amendment) Regulations 2023 - under the Financial Services and Markets Act 2023 were made on December 14, 2023. The Fourth Commencement Regulations provide, among other things, for:- The repeal of HM Treasury’s obligation to review legislation in various financial services legislation, including but not limited to, the Short Selling Regulation, the Securitization Regulation, the Alternative Investment Fund Managers Regulations and the U.K. version of the European Market Infrastructure Regulation. These repeals took effect on December 15, 2023.
- The revocation from April 5, 2024 of the Data Reporting Services Regulations 2017 and related implementing legislation such as (i) the provisions in the onshored Markets in Financial Instruments Regulations that provide HM Treasury and the regulators with powers to specify further detail relating to data reporting services; and (ii) the provisions in the MiFIR Delegated Regulation on the provision of data on reasonable commercial basis. The revocation of these provisions on this date aligns with HM Treasury's aim of the draft Data Reporting Services Regulations 2023 entering into force on April 5, 2024. The draft Data Reporting Services Regulations 2023 will replace the Data Reporting Services Regulations 2017, restating with modifications some of the 2017 content. The FCA has confirmed the final framework for a consolidated tape for bonds, which will also enter into force on April 5, 2024.
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UK Financial Conduct Authority Publishes Rule Review Framework
01/16/2024
The U.K. Financial Conduct Authority has published its Rule Review Framework, setting out how it will set, measure and monitor the outcomes of its Handbook rules. The Rule Review Framework was mandated under the Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services). The FSM Act 2023 transferred responsibility for making detailed rules to the U.K.'s regulators, significantly increasing their powers. To ensure proper oversight of the use of those powers, the FSM Act 2023 provides for an enhanced regulatory accountability framework, which includes requiring the FCA (and the Prudential Regulation Authority, which consulted on its proposed in 2023) to keep their rules under review and publish a statement of policy on how they conduct those reviews.
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UK Legislates to Implement the Digital Securities Sandbox
01/12/2024
Legislation implementing the U.K.'s first digital sandbox – the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 – came into force on January 8, 2024. The DSS Regulations enable the Digital Securities Sandbox to be established. The regulators are expected to consult soon on the proposed application process and rule changes.
U.K. recognized investment exchanges, recognized central securities depositories and investment firms that are licensed to operate a multilateral trading facility or organised trading facility, as well as any other U.K. firms identified by the Financial Conduct Authority or Prudential Regulation Authority, may participate in the FMI sandbox as a "sandbox entrant". Sandbox arrangements carried out by a sandbox entrant must relate to either the activity of operating a trading venue or carrying on maintenance, notary or settlement functions in relation to in-scope instruments, or be ancillary to those activities. In addition to the ability of the primary sandbox entrant to carry out those activities within the sandbox, the following classes of firms may participate in FMI sandbox arrangements: firms using the services provided by the sandbox entrant; firms providing services to the sandbox entrant or its users; and firms carrying on activities or providing services in connection with an in-scope instrument used in connection with the FMI sandbox arrangements. By including this third class of firms, firms would be allowed to provide services that are ancillary or complementary to trading and settlement activities, such as clearing, within the sandbox.
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UK Payment Systems Regulator Publishes New Rules for Mandatory Reimbursement of Authorized Push Payment Scams
01/11/2024
The Payment Systems Regulator has published its Final Policy Statement on its new regime for fighting authorized push payment scams. The Financial Services and Markets Act 2023 (discussed in our client note, “A Boost for UK Financial Services”) imposed a new obligation on the PSR to require payment service providers to reimburse consumers when a payment is executed over the Faster Payments Scheme and the payment was executed following fraud or dishonesty.
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UK Conduct Authority Sets Out Detailed Changes to Listing Rules
01/11/2024
The U.K. Financial Conduct Authority is consulting on detailed proposals to reform its listing rules which are focused on a single listing segment, a more disclosure-based regime and changes to the sponsor regime. The FCA is proceeding with its original proposal to introduce a single listing segment, which it put forward in its consultation last year, discussed in our client note, "FCA Moves Ahead with a Single Equity Listing Category". Taking into account feedback to its consultation, the FCA sets out how the proposed 'commercial companies' equity share listings framework would work, including eligibility, significant and related party transactions, dual/multiple class share structures and sponsors. The 'commercial companies' category would replace the existing 'premium' and 'standard' listing segments. The FCA also describes details of the other listing segments changes it is proposing to make.
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UK Conduct Regulator Consults on Bond and Derivatives Markets Transparency Requirements
01/08/2024
The U.K. Financial Conduct Authority has opened a consultation on proposals for improving transparency for bond and derivatives markets. Following the Wholesale Markets Review, the Financial Services and Markets Act 2023 grants powers to the FCA to make rules which will replace the current pre-trade and post-trade disclosure rules for bonds, structured finance products, emission allowances and derivatives set out in the U.K. Markets in Financial Instruments Regulation. The FCA's rules must ensure efficient price formation and the fair evaluation of financial assets. This consultation sets out the FCA's proposed approach to those rules. Responses to the FCA's consultation may be submitted until March 6, 2024.
The FCA is proposing that trading venues and investment firms dealing OTC will be subject to minimum harmonized transparency requirements for sovereign bonds, corporate bonds and certain derivatives subject to the clearing obligation. For these financial instruments, there will be large in scale thresholds. Pre-transparency waivers will be available for orders above the threshold and deferrals for post-trade requirements. For other financial instruments, the FCA is proposing to set the standards and criteria to which trading venues should refer in order to meet the FCA's transparency expectations. Investment firms dealing in other financial instruments will not be required to report their transactions to the public.
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