UK poised to tear up and re-write financial services legislation

The Financial Services and Markets Bill 2022-2023 (the ‘FS Bill’) received its first reading before the House of Lords on 8 December 2022. It is currently scheduled for its second reading on 10 January 2023. Schedule 1 to the FS Bill sets out the retained EU directives and regulations that the government proposes will be repealed in their entirety and replaced with new primary or secondary legislation and/or rules promulgated by the appropriate UK regulator.

What’s being repealed?

The legislation proposed to be repealed captures the entire gamut of financial services in the UK. The intention is to also repeal EU Solvency rules which will materially impact banking and credit institutions. The impacted areas include:

• the Markets in Financial Instruments Directive (‘MiFID’);
• position limits and reporting;
• the Alternative Investment Fund Managers Directive (‘AIFMD’);
• prospectus rules for listed companies;
• packaged retail investment and insurance products (‘PRIIPS’);
• securitisation;
• over-the-counter derivatives;
• market abuse;
• insurance directives; and
• consumer credit.

In addition, the FS Bill will introduce a new framework for approval of financial promotions and a definition of ‘digital settlement assets’ to modernise regulation in the crypto space. A detailed commentary by HLaw (as at 4 November 2022) on the introduction of this new framework can be found here.

Where does that leave the UK?

Following Brexit, it seemed an inevitable consequence that the UK would repeal a large proportion of retained EU financial services law and implement its own financial services regulation. Political considerations aside, in part this will ensure that UK laws and regulations are interpreted under UK legal principles and statutory interpretation rules, as opposed to considering EU legislation and court decisions.

Assuming that new UK legislation retains substantially the same rules as existing retained EU law, UK firms will still need to update their compliance manuals and client agreements to comply with new UK legislative and rulebook references. This process will be material to asset management and other firms both in terms of management time and costs. As a result, it would be prudent for the UK to consider changes to existing rules to improve the competitiveness of the UK financial services industry. The UK will also need to ensure that any changes to retained EU legislation (whether favourable or otherwise) are enacted in short order to avoid a lengthy hiatus period.

Cross-border implications

A concern for cross-border businesses to bear in mind is the potential for divergence between core EU and UK rules. This may result in duplicated and/or conflicting compliance burdens for firms. For example, the last decade has seen a plethora of new compliance obligations placed on investment managers and fund managers, in particular under MiFID and with the introduction of AIFMD in 2013. These changes, while not universally popular, have been implemented by the UK asset management industry at no small cost to those firms.

While the UK government has the opportunity to consider cutting red tape and revising unnecessarily burdensome regulation, UK regulated firms that are engaged in providing cross-border EU services and marketing financial products into the EU will still need to comply with EU legislation regardless of any new UK legislation. Larger institutions are often regulated both in the UK and the EU so any beneficial changes to UK legislation (for example, capitalisation requirements or product disclosure rules) may be of limited benefit to those firms. Consequently, the Treasury and UK regulators will need to exercise caution to ensure that the cost-benefit analysis of divergence in each case works in favour of both firms engaging in UK only and EU cross-border businesses.

These and other concerns were voiced at the evidence stage before the House of Lords European Affairs Committee. Michael Dobson when providing evidence to the House of Lords regarding AIFMD, as published in The House of Lords European Affairs Committee 1^st Report of Session 2022-2023, noted that: “We have suffered the costs of implementing that, and undoing it now would cost more, for little benefit”. Caroline Dawson further opined that “If you have duplicative or conflicting regulation, that presents a barrier to and increased costs for cross-border business”.

Where does that leave us going forward?

It is important to note that the FS Bill is still at the House of Lords reading stage and therefore the text is still subject to change. Even when the text has been finalised, assuming that there will be a reasonable implementation lead in time for any new legislation, it may be that changes will only start to be effective from late 2023 or 2024 at the earliest.

Further, Schedule 1 to the FS Bill that sets out the retained EU legislation to be repealed will not be operative from the date the FS Bill is passed into law. The Treasury has confirmed that it and financial services regulators will consult on replacement legislation and financial services rulebook changes before the associated Schedule 1 legislation is formally repealed. Whether or not divergence from EU law or the introduction of new regulatory constructs will lead to positive outcomes for the industry can only be assessed when the associated draft replacement legislation is published for consultation.

Winston Penhall, Senior Consultant at HLaw, comments, “The only certainty for UK firms is that in the medium term (a) some material retained EU financial services legislation will be repealed and replaced with UK only law/regulation; and (b) they will need to make provision for the management time and cost required to update compliance manuals/processes and client agreements/product documents when new UK legislation comes into force.”

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law