The Financial Services Act 2021 ('the FS Act') received Royal Assent on 29 April 2021 and has been hailed by HM Treasury as representing a 'major milestone in shaping a regulatory framework for UK financial services outside of the EU'.
What is the FS Act?
The FS Act is an omnibus piece of legislation that includes changes to (among other things) the retained versions of the EU Benchmarks Regulation, EU Market Abuse Regulation and the EU PRIIPs Regulation. Some of the reforms will be relevant for corporate issuers, as well as financial institutions, which we set out below.
The FS Act makes amendments to the retained law version of the EU Benchmarks Regulation ('UK BMR') to extend the transitional period for third country benchmarks under the UK BMR from 31 December 2022 to 31 December 2025.
This means that 'supervised entities' under the UK BMR (which, among other entities, includes credit institutions and investment firms) can continue to use the benchmarks provided by third-country administrators until that date, whether or not they are included on the FCA's third-country benchmarks register ('FCA BMR register').
From a corporate issuer perspective, this also means that prospectuses approved by the FCA may continue to reference benchmarks provided by third country administrators, even where these are not included on the FCA BMR register.
The FS Act also provides the FCA with additional powers to manage an orderly wind-down of a critical benchmark, such as LIBOR. This includes giving the FCA the power to:
- establish a legislative framework for the creation of synthetic LIBOR for use in tough legacy contracts. The FCA published a consultation paper on this on 20 May 2021, noting that any permitted use of synthetic LIBOR would not be a permanent solution. It also published a consultation paper in June 2021 on changes that need to be made to the methodology for certain sterling and yen LIBOR settings in order to create synthetic LIBOR after 2021;
- designate that a critical benchmark is no longer representative, or that its representative status is at risk. That rate would be designated an 'Article 23A benchmark', which means that continued use of such rate by supervised entities would be prohibited except where there may be an exception for tough legacy contracts;
- compel the administrator of a designated benchmark to change the benchmark's methodology, rules, or code of conduct; and
- prohibit new use of critical benchmarks that are due to be discontinued (this is separate to the legacy use power described above). This will be particularly relevant to US dollar LIBOR, given most US dollar LIBOR settings will continue in their current form until mid-2023.
The above reforms are of most immediate impact for 'supervised entities' for UK BMR purposes, but they will also have a knock-on impact on the benchmarks that corporates are able to use in respect of legacy transactions and for future funding and hedging purposes.
Market abuse reform (insider lists and PDMR/PCA transactions)
The FS Act makes amendments to the retained EU law version of the Market Abuse Regulation ('UK MAR') to clarify who is required to maintain an insider list and to adjust the timetable within which issuers are required to disclose certain transactions by their persons discharging managerial responsibilities (PDMRs) and their persons closely associated (PCAs) to the public.
Prior to the end of the Brexit transition period, the EU Market Abuse Regulation ('EU MAR') required issuers or any person acting on their behalf or on their account to maintain an insider list, and this was reflected in UK MAR.
The use of the word 'or' had caused some confusion under EU MAR, as some issuers’ advisers were not sure whether they were required under EU MAR to draw up their own insider list (ie separate from the issuer’s insider list).
The FS Act amends UK MAR to clarify that issuers and any person acting on their behalf or on their account are all required to maintain such a list. (This means that advisers will have standalone insider list obligations, but this reflects the existing UK version of ESMA MAR Q&A 10.1/2, so it should not have an impact on existing practice.) This reform broadly reflects changes made to EU MAR on 1 January 2021 by the EU SME Growth Market Regulation.
Prior to the end of the Brexit transition period, EU MAR required PDMRs and PCAs to notify the issuer of their transaction information within three business days of a transaction and the issuer would have to make details public within the same time period, and this was reflect in UK MAR.
The timing requirements under EU MAR had the potential to cause difficulties where an issuer received a late notification from a PDMR/PCA. With the reforms to UK MAR introduced by the FS Act, an issuer now has two working days after that information is notified to it by a PDMR/PCA, to make that transaction information public. This timing change broadly reflects changes made to EU MAR on 1 January 2021 by the EU SME Growth Market Regulation.
Note that under the FS Act the period for calculating the deadline is now counted in 'working days' (which is defined) rather than 'business days' (per EU MAR), but we do not expect this to have a significant impact.
Market abuse reform (extending the maximum criminal sentence)
The criminal market abuse regime in the UK is primarily composed of the insider dealing offences in the Criminal Justice Act 1993 ('the CJA 1993') and the market manipulation offences in the Financial Services Act 2012 ('the FS Act 2012'). These offences were punishable by up to seven years in prison.
The FS Act has amended section 61 of the CJA 1993 and section 92 of the FS Act 2012 to increase the maximum sentence for criminal market abuse from seven to ten years (bringing it into line with comparable economic crimes such as fraud and bribery).
Reform of the PRIIPs Regulation
The FS Act contains measures to address some of the unintended consequences of the EU PRIIPs Regulation, related to the scope of the EU PRIIPs regime and the content of key information documents (KIDs).
The FS Act makes amends to the retained law version of the EU PRIIPs Regulation ('the UK PRIIPs Regulation') to enable the FCA to clarify the scope of the UK PRIIPs Regulation through its rules. This will enable the FCA to address existing, and potentially future, ambiguities in relation to certain types of investment product by making rules specifying whether particular products or categories of products (for example plain vanilla corporate bonds) fall within the scope of the definition of a PRIIP, which will bring welcome clarity. However, the definition of a PRIIP will remain unchanged.
The FS Act also empowers the FCA to make rules addressing the disclosure of potentially misleading information to retail investors. The obligation for PRIIPs manufacturers to produce 'performance scenarios' in KIDs has changed, by replacing the term 'performance scenario' with 'information on performance'. This will allow the FCA to clarify what information on performance should be provided in a KID.
The amendments to UK MAR related to insider lists and PDMR/PCA transactions came into force on 29 June 2021. The other areas of reform are not yet in force, pending appointment of commencement dates by HM Treasury, but these are points to have on your radar.
If you would like to discuss how these reforms will impact your organisation or your transaction, please reach out to your usual Freshfields contact.
A 'major milestone in shaping a regulatory framework for UK financial services outside of the EU' (HM Treasury)