The Treasury's recent consultation on its proposals for the reform of the UK's financial services framework is clear in its mission: it seeks to renew the UK's position as the world's pre-eminent financial centre. The reform objectives are to establish a coherent (and more user friendly), agile and internationally-respected financial services regulatory framework. 

The strategy is to retain and build on the underpinning Financial Services and Markets Act 2000 (FSMA) model to create a 'comprehensive FSMA model' of financial services regulation.  We have discussed previously the challenges of the existing regulatory framework here.  In this article we look at the Treasury's vision of a comprehensive FSMA model.

The framework foundations: the FSMA model

The starting point is to look at the blueprint we currently have. When we talk about the FSMA model we mean the legislative and regulatory financial services framework which has its foundations in the FSMA, supplemented by secondary legislation (principally the Regulated Activities Order (RAO)) and also by the financial services regulators' rules (including the FCA Handbook and the PRA Rulebook). The model divides responsibilities between Parliament, which sets the overall approach and institutional architecture through primary legislation, the Treasury which, through secondary legislation and within the parameters laid down by Parliament, sets the regulatory perimeter, determining which activities are regulated (and therefore require authorisation unless an exemption applies) and which are not, and the regulators which set the direct regulatory requirements, or rules, which apply to authorised firms.

The complication: the legacy of retained EU law

On coherence, user-friendliness and agility, the UK's current, untidy regulatory framework scores low. The onshoring of directly applicable EU law has left the UK with a legacy of detailed regulatory requirements - which under the FSMA model would mostly be regulators' rules - scattered across primary and secondary legislation, which is harder to update and requires a high degree of technical expertise to consider properly.

The way forward: transfer of rule-making responsibility to the regulators

The Treasury's proposals involve a transfer of responsibility to the technically expert financial services regulators to determine the rules which should apply in areas covered by retained EU law.

The Treasury proposes three key structural reform pathways depending on whether or not the activities currently covered by retained EU law fall within the scope of the RAO.

RAO activities:

A large proportion of retained EU law covering activities falling under the RAO will be repealed and replaced by regulators' rules, where appropriate with targeted improvements to reflect the specifics of UK markets. This will allow for consistency in financial services regulation in the UK and the development of coherent and user-friendly rulebooks.

Activities outside the RAO (1): a new Designated Activities Regime

Retained EU law also covers a number of activities which can have an impact on the financial markets or consumers but which do not fall within the regulatory perimeter of the RAO (for example entering into derivatives contracts or short selling). For these activities, products or conduct a new Designated Activities Regime (DAR) will be created.

The DAR will mirror the existing RAO approach, with the Treasury determining the in-scope activities via secondary legislation, but the regulators will have more limited rule making powers than they do in relation to regulated activities. Importantly, persons carrying out designated activities would not need to be FCA-authorised or meet threshold conditions, and would only be required to follow the regulators' rules in relation to the designated activity (unlike the RAO regime which applies also in relation to activities of authorised firms which are not regulated).

This new kind of FSMA regulation will be available also as a framework for future developments, to bring new activities or activities which bring new risks within the scope of regulation.

Activities outside the RAO (2): detailed solutions for FMIs

The DAR will not be appropriate for certain types of financial market infrastructure (FMI), such as credit reference agencies, trade repositories, recognised investment exchanges, payment services and e-money entities, which currently are covered by retained EU law but which sit outside the FSMA authorisation framework. More detailed and involved solutions will be required for these FMIs to ensure that the regulators have the right rulemaking powers to enable them to set direct regulatory requirements replacing retained EU law provisions which derive from a variety of EU regimes.

For central counterparties (CCPs) and central securities depositories (CSDs), currently regulated and supervised by the Bank of England, the proposal is to confer on the Bank a general rulemaking power (enhancing its current limited powers to make rules for CCDs and CSDs) replacing the provisions in retained EU law.

Result: a comprehensive FSMA model

These proposed reforms to the legislative framework to address the retained EU complication, together with the dual proposals for the government to have the power to require the regulators to make rules in specific areas of regulation to address wider public policy concerns, and to set specific policy matters which the regulators must consider when exercising their rules in specific areas of regulation, have the objective of creating what the Treasury calls a comprehensive FSMA model. As far as possible the regulators' rulebooks will be the single source of direct regulatory requirements for firms.

The comprehensive FSMA model is likely to score substantially higher on coherence and user-friendliness, which will be warmly welcomed by those subject to the regulatory requirements currently dispersed across primary and secondary legislation and regulators' rulebooks. Of course, none of this will happen overnight; the move to a comprehensive FSMA model is a significant and complex undertaking and will take a number of years to complete. However, the result promises to be an agile and responsive regulatory framework fit for the UK's future.

Responses to the Treasury's consultation can be submitted up to 9 February 2022. If you would like to discuss any aspect of the consultation please contact Lindsay Lee or Bruce Stephen.


Lindsay Lee

Senior Associate