Embracing change: A dive into the UK Financial Services Markets Act

by Ian Johnson, technology consulting senior manager at Accenture

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What is this article about?

The UK Financial Services Markets Act of 2023 represents a pivotal shift, granting regulatory agility, addressing emerging challenges, and extending oversight to cryptoassets.

Why is it important?

The act is crucial for its commitment to regulatory adaptability, addressing emerging challenges, extending oversight to cryptoassets, and enhancing consumer protection.

What’s next?

The payments industry will need to carefully navigate any regulatory transitions moving forward and ensure it does not affect opportunities for innovation negatively.

After a year of development, the royal assent of the UK Financial Services Markets Act (FSMA 2023) signifies that change is on the horizon for the UK’s financial landscape and its players.

The FSMA 2023 lays the groundwork for substantial transformation of the financial markets and its regulators’ powers while striving to promote a competitive landscape, encourage technological advancements, and foster environmental awareness within the financial sector.

Shifting regulatory powers and fostering competition 

In a significant shift of regulatory dynamics within the financial sector, the FSMA 2023 ushers in a new era for UK financial oversight post-Brexit. This transformation prioritises regulatory agility by entrusting rule-setting authority to UK regulators and responds to emerging challenges by introducing authorised push payment (APP) fraud reimbursements, enhancing consumer protection.

Additionally, the FSMA 2023 introduces the designated activities regime (DAR), a dynamic framework tailored for activities previously beyond the scope of existing regulation. Beyond conventional financial markets, this innovative approach also opens the door to regulating cryptoassets.

While initially focusing on areas aligned with retained EU law, the DAR’s potential scope extends far beyond, adapting as the financial landscape evolves. Additionally, the FSMA 2023 establishes the BoE central counterparties (CCP)/central securities depositories (CSD) regime for financial infrastructure oversight and a critical third-party regime to address systematic risks posed by key service providers. Importantly, this legislation empowers HM Treasury with rule prescribing authority, reinforcing the regulatory framework while preserving regulators’ independence.

Aside from their expanded powers, regulators like the Financial Conduct Authority (FCA),  Prudential Regulation Authority (PRA) and the Bank of England (BoE) also saw a revision to their regulatory objectives to include the emphasis on fostering effective competition and innovation within the provision of financial market infrastructure (FMI) services to boost the UK’s long-term growth and competitiveness in the global financial market. The recent expansion of credit unions’ abilities to provide financial activities for their members is a significant step towards making the banking landscape more competitive and inclusive.

Furthermore, in response to the shifting payment landscape and continuous importance of cash accessibility, critical measures to safeguard access to cash for financial institutions and consumers were introduced. The FSMA 2023 empowers HM Treasury to designate providers of cash deposit and withdrawal services, while the FCA enforces rules on these designated entities.

Tech advancements

The UK’s unwavering commitment to retaining its status as a global financial hub is reflected in this legislation as it champions technological advancements and regulatory clarity, via the introduction of the digital settlement assets (DSAs) and FMI sandbox.

DSAs are digital representations of value or rights, enabling seamless payment settlements, electronic transfers and trading, all while the government adapts to the crypto-driven revolution. HM Treasury’s extensive regulatory powers empower the creation of a comprehensive framework, ensuring oversight and protection for payments and payment systems using these assets.

Beyond DSAs, the FSMA 2023 also sets the stage for a broader cryptoasset regulation, reinforcing the UK’s position as a leader in fintech innovation. With the FMI sandbox providing a platform for innovation and experimentation, specifically DLT-based projects, the future holds a dynamic landscape that balances innovation and regulatory compliance, securing UK’s role as a top player within the global financial services ecosystem.

Environmental awareness

With ESG being on the top of the agenda for the financial services industry, it comes to no surprise that the commitment of FMI entities to contribute towards meeting the Climate Change Act of 2008 in the UK was reflected in the latest Act.

The integration of climate considerations into financial services will bring more scrutiny towards the environmental impacts of our payment systems’ and provide a much-needed push towards the direction of the development of sustainable financial products and services.

While no explicit requirements on ESG have been raised within the latest bill, this shift reflects the global appetite to lessen the environmental footprint within the financial landscape and presents an opportune time for FMI entities to review their strategies and roadmaps with an ESG lens.

What does this mean for payments players? 

In the ever-changing world of payments, players will need to carefully navigate the complex regulatory transitions laid out in the FSMA 2023 and seize opportunities for growth and innovation.

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