Member Update

The Next Chapter for UK Asset Management Regulation

What is the Financial Services and Markets Bill?

Introduced in July 2022, the UK’s Financial Services and Markets Bill (FSMB) is a landmark piece of post-Brexit legislation, which could usher in some potentially significant changes to how the domestic financial services industry – including asset management –  is regulated.

The FSMB is looking to bolster the competitiveness of the UK on the global stage. The Bill will implement outcomes of the Future Regulatory Framework, support the Government’s levelling up agenda, and also aims to harness the opportunities of “innovative technologies” in financial services.

At the heart of the FSMB, which may become law by as early as Spring 2023,  is a proposal which could see the revocation of all retained EU laws related to financial services, including UCITS, AIFMD (Alternative Investment Fund Managers Directive), MiFIR (Markets in Financial Instruments Regulation), Solvency II and the PRIIPs (Packaged Retail and Insurance-based Products) rules, along with regulations covering sustainability related disclosures, derivatives and short selling

However, it is important to stress that revocation does not necessarily mean these rules will be scrapped entirely – if at all –  although they might be subject to changes.

Why is this happening?

At the point at which Brexit was consummated, the UK onshored vast swathes of pre-existing EU laws, mainly because there was no domestic legislation to replace them.  A lot of the onshored rules are prudent and relatively uncontentious, so will likely be retained. However, there might be EU laws which are duplicative of UK legislation or that are no longer suitable given the UK is no longer in the Single Market.  Meanwhile,  some laws may simply be inappropriate and in need of annulment.

The rules certainly create scope for the UK’s financial services regulations to diverge from the EU. For instance, the UK government has already said it will try and use these powers to impose changes to MiFIR, including removing the UK share trading obligation together with revisions to the rules around pre-trade transparency and systematic internalisers.

More significantly, the UK has already said it will implement substantial changes to the Solvency II regime, aimed at insurance companies. Under the revised rules, insurers will be subject to lower risk margin requirements and could benefit from streamlined reporting. If these provisions are enacted, the Treasury believes £100 billion of trapped capital in the insurance industry could be freed to invest into illiquid assets, including long-term infrastructure programmes and green energy.

In some quarters, however, there are mounting concerns that the FSMB could result in asset managers operating in both the UK and EU having to comply with two different sets of rules, a scenario which could create cost and complexity at a time when the industry needs neither.

Nonetheless, there is certainly potential for UK regulators to revise some of the existing rules as they apply to funds. IIMI will be reaching out to its diverse membership to discuss if any particular aspects of EU funds law needs changing, the findings of which will be outlined in a white paper later in Q1.