My Lords, these two instruments make updates to financial services regulation to ensure that it remains effective following the passage of the Financial Services and Markets Act 2023, which I will refer to as FSMA 2023.
The Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 make two targeted changes to financial services retained EU law or REUL. FSMA 2023 repeals REUL in financial services, allowing the Government to deliver a smarter regulatory framework for the UK with regulation designed specifically for UK markets and consumers.
The repeal of each individual piece of REUL will be commenced once the Government and the regulators have made appropriate arrangements to replace it with UK rules or determined that no replacement is needed. Until financial services REUL has been fully replaced, FSMA 2023 ensures that it can be kept up to date through a power to modify REUL before its repeal takes effect.
The first change made by the instrument reintroduces a discount factor into the UK Capital Requirements Regulations. The discount factor reduces the amount of capital that small and medium-sized financial services firms are required to hold for certain derivatives activity.
The Secondary Legislation Scrutiny Committee raised this SI as an instrument of interest, noting the timeline of the original removal of the discount factor from UK legislation and the Government’s policy on mirroring changes in EU law. The Government removed the discount factor in April 2021 through the Financial Services Act 2021. The EU also removed the discount factor from its version of the Capital Requirements Regulations at that stage before reintroducing it later that year. The Government do not have a policy of mirroring EU law and, through the smarter regulatory framework, will tailor regulation to the UK. After industry raised concerns with the Government about the removal of the discount factor, we acted swiftly to reinstate it through this instrument. This will provide certainty to firms and align regulation to best practice globally.
The instrument also amends Article 51(5) of the benchmarks regulation to extend the transitional period for the third-country benchmarks regime to the end of 2030. Thanks to the transitional period currently in effect, UK users of benchmarks have access to non-UK benchmarks. The third-country regime, once it takes effect, would require administrators of those benchmarks to pass through one of the three access routes—equivalence, recognition or endorsement—for UK users to rely on them. There is a variety of issues with the third-country regime as originally drafted in the EU. For example, some third-country benchmarks are provided on a non-commercial basis, and administrators may therefore lack the economic incentives to come through these access routes. If the transitional period were to end with the third-country regime in its current form, many administrators may be unable or unwilling to use this regime for continued UK market access. Losing access to these third-country benchmarks could undermine the UK’s position as the centre for global foreign exchange and derivatives markets and have further repercussions given the widespread use of third-country benchmarks by UK firms.
This instrument therefore extends the transitional period from the end of 2025 to the end of 2030. This extension will provide time to review the UK’s third-country benchmarks regime and implement any changes in time for industry to take the necessary steps to comply with the regime before it comes into force.
The Secondary Legislation Scrutiny Committee asked about any risks posed by this extension. Although extending the transitional period entails some risk by allowing the continued use of lower-quality third-country benchmarks in the UK, those risks are outweighed by the risks that would arise from allowing the transitional
period to end with the third-country regime in its current form. Risks arising from the use of third-country benchmarks during the transitional period can be mitigated through regulation in the home jurisdiction of those benchmarks and through international co-operation for jurisdictions where specific benchmarks regimes are not in place.
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The second SI—the Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023—makes a number of consequential amendments arising from FSMA 2023. First, it makes consequential changes that are needed as a result of the repeal of a number of pieces of retained EU law. The repeals in question will take effect at the end of the year. Secondly, it updates a cross-reference in FSMA 2023 to align the Bank of England’s reporting requirements with its remit and responsibilities. Thirdly, it amends the Payment Card Interchange Fee Regulations 2015 to ensure that the Payment Systems Regulator effectively co-operates with other regulators under a new direction power provided by FSMA 2023. These are consequential changes that ensure the continuing functioning of the statute book following the passage of FSMA 2023.
Together, these SIs deliver important changes to ensure that the financial services regulatory framework continues to function effectively for consumers and businesses alike. I beg to move.