Developments in the London listing markets: Financial Services and Markets Bill and UK prospectus regime changes1 February 2023
"The FSMB's primary purpose is to revoke REUL in relation to financial services and to implement the outcomes of the Future Regulatory Framework Review, which was established by the government."
In this update, we report on the key aspects of the FSMB and the recently published draft statutory instrument which sets out the current proposals for reform of the UK prospectus regime. Our series of updates in relation to developments in the London listing markets from 2022 can be found here.
Financial Services and Markets Bill
The FSMB was announced by the Chancellor of the Exchequer at a speech at Mansion House on 19 July 2022 and introduced to Parliament the following day. Currently, the FSMB is before the House of Lords, following its third reading in the House of Commons in early December.
The UK formally left the European Union (“EU”) on 31 January 2020 and, following the expiry of the transition period on 31 December 2020, certain EU legislation was retained pursuant to the EU (Withdrawal) Act 2018 (as amended by the EU (Withdrawal Agreement) Act 2020).
The FSMB’s primary purpose is to revoke REUL in relation to financial services and to implement the outcomes of the Future Regulatory Framework Review, which was established by the government to determine how the financial services regulatory framework should adapt to the UK’s position outside the EU. The FSMB will create a framework of powers intended to allow the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority (“PRA”) to implement a comprehensive model of regulation based on the existing model principally set out in the Financial Services and Markets Act 2000 (“FSMA”). Under this model of regulation, the financial services regulators generally make the detailed regulatory requirements that apply to firms, operating within a statutory framework. The FSMB will include a new Designated Activities Regime (“DAR”) which is designed to “provide a framework for regulating activities related to financial markets in a proportionate way that reflects the degree of risk these activities pose”. Additionally, the FSMB includes provisions related to regulator accountability, including a secondary purpose for both the FCA and PRA in relation to growth and competitiveness, and a new regulatory principle that they must have regard to the need to achieve compliance with the UK’s net zero emissions target.
"To prioritise creation of the new rules, the REUL will be split into "tranches" with the government expecting to make significant progress on the first two tranches by the end of 2023."
Revocation of REUL
The Retained EU Law (Revocation and Reform) Bill (the “Reform Bill”, often known as the “Brexit Bonfire Bill”), also currently making its way through Parliament, intends to automatically repeal all remaining REUL at the end of 2023. However, this will not apply to financial services legislation as this will be repealed by the FSMB (although the Reform Bill will apply so that all REUL will no longer take precedence over UK law, including in respect of financial services).
Unlike the Reform Bill, the FSMB will not automatically repeal REUL. Instead the government will need to publish a statutory instrument commencing the repeal, coordinating this with the FCA and PRA to ensure transition to the new rules. To prioritise creation of the new rules, the REUL will be split into “tranches” with the government expecting to make significant progress on the first two tranches by the end of 2023. In a policy statement published on 9 December 2022¹, HM Treasury stated that the first tranche will aim to deliver the outcomes of the Wholesale Markets Review, Lord Hill’s Listing Review, the Securitisation Review and the Review into the Solvency II Directive.
There will be three ways in which REUL will be dealt with following implementation of the FSMB:
(i) Removal: the legislation is repealed without replacement;
"The FSMB is set to impose a secondary purpose on the FCA and the PRA of facilitating, subject to international standards, the international competitiveness of the UK (in particular, the financial services sector) and its growth in the medium to long term."
(ii) Replacement with provisions consistent with the FSMA model: requirements will either be restated in legislation or repealed so that the regulators can replace them with regulator rules; and
(iii) Replacement with provisions consistent with the FSMA model while also delivering targeted policy change: where this requires reform to the statutory framework, HM Treasury will lead on delivering reform and where it relates to specific firm-facing requirements, the relevant regulator will deliver this.
To illustrate how this will work in practice, HM Treasury published three example statutory instruments, alongside its December policy statement, covering the proposed reform to the UK versions of the Prospectus Regulation², the Securitisation Regulation³ and the Payments Regulation⁴. These set out the division of responsibilities between the regulators and the government. For example, the instrument covering the UK Prospectus Regulation, the draft Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023 (the “UK PRSI”), will set out a regulatory framework for a new public offers regime and then delegate the setting of detailed requirements to the FCA by giving it the power to replace the provisions of the UK prospectus regime “in a proportionate way consistent with the FSMA model” (this is an example of the method (iii) above). For further detail on the UK PRSI, see below.
Designated activities regime
The FSMB will establish the DAR to assist the implementation of a framework that is compatible with a comprehensive FSMA model. It will introduce a Part 5A to the FSMA that will, amongst other things:
"The government expects the FSMB to receive Royal Assent by Easter 2023."
- allow HM Treasury to specify designated activities related to financial markets or exchanges or financial instruments, financial products or financial investments, bringing them within the scope of the DAR; and
- give the FCA the power to make rules related to designated activities and impose requirements on persons carrying out those activities.
The FSMB also proposes a Schedule 6B to the FSMA that provides examples of activities that may be specified as designated activities under this regime, for example:
- offering securities to the public;
- applying for, securing or maintaining the admission of securities to trading on a securities market;
- short selling;
- activities related to derivatives; and
- activities related to securitisation.
This will be a non-exhaustive list and only indicative of activities that could be designated, the intention being to catch certain activities that are currently regulated by REUL but not by the FSMA.
Accountability of regulators
The FSMB is set to impose a secondary purpose on the FCA and the PRA of facilitating, subject to international standards, the international competitiveness of the UK (in particular, the financial services sector) and its growth in the medium to long term. It will also introduce a new regulatory principle for the FCA and PRA to ensure they contribute toward achieving compliance with the UK’s net zero emissions targets set out in the Climate Change Act 2008. The FSMA will be amended to require the FCA and PRA to keep their rules under review generally and to specifically review certain rules where HM Treasury requires it (where it considers it in the public interest to do so).
"Whilst the FSMB provides a framework for the repeal of REUL and the implementation of a new regulatory regime, it may be some time before specifics of the new regulatory landscape begin to take shape."
The FSMB will also introduce a host of other provisions including:
- revising the regulatory framework for financial market infrastructures, i.e. central securities depositories, recognised investment exchanges and data reporting services providers;
- giving HM Treasury the power to designate a person who provides services to authorised persons, relevant services providers or financial market infrastructures as “critical third parties” and giving the Bank of England, FCA and PRA the power to make rules imposing duties on them;
- requiring that authorised firms must obtain approval from the FCA if they wish to authorise financial promotions of unauthorised firms (or do so pursuant to a specified exemption);
- giving HM Treasury the power to make provisions as necessary to ensure that “mutual recognition agreements” related to financial services or markets can be implemented. It is expected that these agreements will provide recognition of UK rules in other jurisdictions and vice versa; and
- other measures related to access to cash, senior managers and certification regime for central counterparties and central securities depositories and insolvency arrangements for insurers.
The government expects the FSMB to receive Royal Assent by Easter 2023, at which point REUL can, in theory, begin to be repealed and replaced by new rules set by the regulators. However, it will likely take years to develop and implement the replacement rules and, during the intervening time, REUL will continue to govern certain aspects of the financial services sector.
Given its importance in setting the future direction of financial services and markets, the progress of the FSMB is being keenly watched by financial and legal commentators as it continues through Parliament. However, whilst the FSMB provides a framework for the repeal of REUL and the implementation of a new regulatory regime, it may be some time before specifics of the new regulatory landscape begin to take shape and we get an indication of how far it will diverge from the existing legislation.
"The draft UK PRSI demonstrates how the government intends to reform the UK prospectus and public offers regime once the UK Prospectus Regulation... is repealed."
Additionally, it is currently unclear how the “secondary purpose” will work in practice and how HM Treasury will monitor its implementation. It is possible to see how this could conflict with the regulators’ objectives of protecting consumers and enhancing market integrity, potentially proving controversial in the eyes of the public.
DRAFT ILLUSTRATIVE UK PRSI
On 9 December 2022, as part of the package of financial reforms referred to as the Edinburgh reforms, HM Treasury published the draft UK PRSI, noting that it will form part of the first tranche of the government’s financial services reforms under the FSMB. The draft UK PRSI demonstrates how the government intends to reform the UK prospectus and public offers regime once the UK Prospectus Regulation, derived from the EU Prospectus Regulation, is repealed. HM Treasury notes that the UK PRSI is not in final form in terms of drafting, design or format and will continue to develop before a final version is laid before Parliament following Royal Assent of the FSMB.
Some of the key proposed changes to the UK prospectus and public offers regime include:
- A new public offer architecture: there will be a general prohibition on public offers of securities, which will be achieved by amending the criminal offence contained in s85(1) FSMA. However, there will be exemptions from this prohibition. The principal exemptions will apply to offers where securities are admitted to trading on UK markets or offered by means of regulated platforms;
- Admissions to trading on regulated markets: the concept of a prospectus will be retained as an important part of an IPO in the UK. The FCA will be given enhanced rulemaking responsibilities regarding admissions of securities to trading on UK regulated markets. It will be able to specify when a prospectus is required, its content and the manner and timing of approval and publication as well as other matters;
- Admissions to trading on multilateral trading facilities (“MTFs”) operating primary markets: the FCA will be given rulemaking powers to ensure that, in appropriate circumstances, the rulebooks of MTFs operating as primary markets require an admission document to be published and treated as a prospectus. This will enable such admission documents to be subject to the statutory compensation remedy for prospectuses;
- Forward-looking information: given that Lord Hill identified forward-looking statements to be useful information for potential investors when making investment decisions, the reformed regime will establish a different liability threshold for certain categories of forward-looking information in prospectuses, to be specified by the FCA. This is to encourage companies to include such information in prospectuses where the current regime does not;
- Offers of securities not admitted to trading: the new regime will continue to allow companies to offer securities to the public without having them admitted to a securities market. The government is reforming the requirements for such offers, making it easier for companies to raise large amounts of capital whilst maintaining investor protection. The government will remove the requirement for a prospectus where the offer exceeds €8m. Instead, it will create a route through which offers of any size can be made to the public. Companies will be required to use a public offer platform where the offer is not otherwise exempted from the prohibition on public offers and where the total value of the offer is above a certain – so far undetermined – threshold. Operation of such a public offer platform will become a new regulated activity under the FSMA; and
- An enhanced scope of the public offer regime: following consultation, the government has decided to bring certain non-transferable securities (“NTS”), including but not limited to minibonds (a form of non-transferable debt security), within the scope of the new public offers regime where those NTS may cause harm to investors if their offer is not subject to greater regulation.
"The government’s approach to reforming the UK prospectus regime relies heavily on the delegation of a greater degree of responsibility and rule-making powers to the FCA."
Commentary and next steps
The government’s approach to reforming the UK prospectus regime relies heavily on the delegation of a greater degree of responsibility and rule-making powers to the FCA in an effort to make regulation in this area more agile and effective and facilitate wider participation in the ownership of public companies. While progress in relation to tranche 1 is expected in 2023, the full suite of reforms will only take effect once the FCA has consulted on and implemented rules under its expanded responsibilities.
We expect considerable progress to be made in relation to financial services reforms during 2023 and we will be following developments closely. Not least, so that we can monitor and report on the likely timing of relevant changes and the practical implications of these for our clients and contacts in the context of their fundraising and capital markets activities.
Trainee Ben Harvey also contributed to this article.
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