Financial Services and Markets Act 2023

The Financial Services and Markets Act 2023 (FSMA 2023) was finally – after a year of consultations and modifications – passed and published on legislation.gov.uk, the official platform of the UK government for publicizing legal documents. The Act is a landmark piece of legislation that will have a profound impact on the UK’s financial services sector and all individuals who use financial services and markets. Encompassing 349 pages of comprehensive reforms, the Act aims to reshape the UK’s financial regulatory landscape to ensure it remains competitive, innovative, and stable in the face of evolving challenges and opportunities.
One of the key objectives of the Act is to bolster the competitiveness of UK markets. With Brexit creating uncertainties about the UK’s position as a global financial hub, the Act seeks to (re-)instill confidence and attract investment by providing a stable and flexible regulatory environment. By granting the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), and Bank of England (BoE) new rule-making powers, the Act enables these regulators to tailor requirements that suit the unique characteristics of the UK’s financial services market. This approach is expected to encourage growth and innovation while ensuring that regulatory safeguards are in place to maintain financial stability.
Overall, the Act implements most of the announced Edinburgh Reforms and the findings from various reviews (e.g. wholesale market review) and brings about significant changes to UK financial market regulation to implement better and smarter regulation following Brexit. Some of the key provisions and themes of the Act are outlined below. Please note in this context that the summary only presents a small excerpt of provisions and themes. For detailed, comprehensive information, we strongly recommend the review of the entire Act.
Some of the key provisions and themes of the Financial Services and Markets Act 2023 are as follows:
(1) The Act sets out provisions for the revocation of various EU-derived financial services and markets laws, commonly referred to as „retained EU law“, ranging from retained direct principal EU legislation, to UK subordinate legislation that implemented or transposed EU obligations, to EU „tertiary“ legislation, a catch-all category of other EU-derived legislation related to financial services or markets, and certain specified provisions of the Financial Services and Markets Act 2000 (FSMA). A corresponding list is set out in Schedule 1. Some of the key affected regulations include:
– the retained Benchmark Regulation,
– the retained Capital Requirements Regulation,
– the retained Market Abuse Regulation,
– the retained Markets in Financial Instruments Regulation,
– the retained Short Selling Regulation,
– the retained Money Market Fund Regulation,
– the retained Securities Financing Transaction Regulation,
– the retained PRIIPs Regulation,
– the Undertakings for Collective Investment in Transferable Securities Regulations 2011,
– the Alternative Investment Fund Managers Regulations 2013.
The Act does NOT provide a revocation date, as alternative UK regulations may have to be consulted on and made before revoking the existing retained regulations.
(2) The Act grants beforementioned powers to the FCA, the PRA, and the BoE to implement market rules that adapt to the specific needs of the UK financial market and that may replace the current retained regulations.
(3) The Act introduces a new Designated Activities Regime (DAR). The DAR is intended to regulate certain financial services activities that fall outside the scope of the existing regulated activities authorization regime. Specifically, under the regime, the HM Treasury will have the authority to designate specific financial activities related to UK financial markets, exchanges, and financial instruments, including cryptoassets. Once designated, these activities may be either prohibited or subject to specific rules and requirements. The Financial Conduct Authority will be responsible for the creation of rules concerning these designated activities which will most likely include activities relating to short selling, securitizations, or derivatives trading. To implement the DAR, the Treasury will issue an instrument similar to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) which will contain a lost of such designated „non-regulated“ activities.
(4) The Act provides an upcoming new supervisory framework for financial markets infrastructures (FMIs). Specifically, the Act grants rulemaking powers to the BoE for purposes of regulating central counterparties (CCPs) and central securities depositories (CSDs). In fact, the BoE may replace provisions in retained EU law that pertain to the regulation of CCPs and CSDs with its own rules over time, allowing for more prompt action in case of emerging risks. Likewise, the Act issues powers to the HM Treasury to introduce FMI sandboxes which allow for the testing and adoption of new technologies, enabling firms to explore the application of innovative solutions, such as Distributed Ledger Technology (DLT) and blockchain, with certain regulations temporarily disapplied or modified, to foster experimentation and the development of cutting-edge financial services.
(5) The Act establishes a new Critical Third-Party Regime, which aims to ensure that financial services firms‘ increasing reliance on third-party service providers, including cloud service providers, does not pose undue systemic risks to the financial sector. According to the new regime, the HM Treasury will be given powers to designate a firm as „critical“ and to define which firms fall under this category. Furthermore, the FCA and the PRA will be provided with powers to set up specific rules for such „designated critical firms“, and to supervise and enforce compliance with the new rules and requirements for designated critical third-party service providers. This is to ensure that these firms adhere to the necessary standards and regulations to prevent potential risks to the financial system.
(6) The Act introduces the notion of digital settlement assets (DSA) which is defined as „a digital representation of value or rights, whether or not cryptographically secured, that— (a) can be used for the settlement of payment obligations, (b) can be transferred, stored or traded electronically, and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology).“ In this context, the HM Treasury is also given the power to modify the DSA definition in the future to keep up with technological advancements. The Act thereby makes amendments to the scope of the Banking Act 2009, enabling HM Treasury to recognize payment systems and service providers involving DSAs, subjecting them to Bank of England supervision. The Act also grants HM Treasury broad regulatory powers over payments involving DSAs, recognized payment systems, DSA service providers, and service providers connected to such systems. Such powers may be used to establish a corresponding authorization and supervision regime to impose conduct, prudential, and market integrity requirements.