The UK’s Financial Services and Markets Act 2023 (FSMA 2023) is a major regulatory update for the financial sector. It was introduced to establish a UK-centric regulatory framework post-Brexit and replace certain EU-driven regulations. With this Act, the UK government wants to increase flexibility, innovation, and market confidence while ensuring financial stability and consumer protection.
This article outlines key provisions and provides seven best practices to help organizations comply with the FSMA.
Key Provisions of the FSMA 2023
The FSMA 2023 introduces many important changes to the UK’s financial regulations. Below are its key provisions.
Regulatory Rule-Making Power (Sections 20–23)
One of the most significant elements of FSMA 2023 is that it grants the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) greater flexibility to create and amend regulations without having to follow EU rules. This regulatory flexibility allows UK authorities to tailor regulations specifically to the UK market and react to changes in global financial trends. As a result, financial organizations operating in the UK will now face domestic regulations, which could differ from the EU rules, possibly complicating cross-border operations.
Designated Activities Regime (Section 71)
This provision establishes a framework for regulating specific financial activities outside traditional regulated activities. The Designated Activities Regime (DAR) empowers the Treasury to identify activities requiring regulation for broader market integrity. What this means is that activities that may have previously operated with less oversight, such as certain fintech or crypto-related services, could now be subject to regulation.
Prudential Supervision (Sections 58–60)
The FSMA 2023 strengthens prudential regulation to make sure financial institutions maintain sufficient capital reserves. Firms must demonstrate robust risk management practices and comply with capital adequacy requirements to avoid possible bankruptcies. Also, financial firms must assess their risk profiles carefully and comply with updated capital and liquidity requirements to avoid regulatory sanctions.
Financial Promotion Amendments (Sections 57–58)
This Act revises regulations related to financial promotions. It aims to improve transparency in the advertising and marketing of financial products, so customers can make informed decisions after understanding the associated risks. This also includes tighter restrictions on high-risk investment promotions.to avoid ambiguity and deception.
Digital Assets Regulation (Section 65)
A new regulatory framework for crypto assets and digital currencies has been introduced. FSMA 2023 brings clarity to the regulation of digital assets that require consumer protection measures and security protocols. Also, FSMA 2023 establishes clear regulations for stablecoins used for payments. This is a direct response to the increasing use of stablecoins as a means of exchange.
This provision can have far-reaching implications for firms dealing with crypto or blockchain technologies, as they will be subject to stricter regulatory requirements. It can increase operational compliance costs as well.
Short Selling Regulation (Section 75)
The Act grants the UK government the power to regulate short selling independently of the EU’s Short Selling Regulation (SSR). This allows the UK to take a unique approach to short selling that aligns with its market conditions.
ESG and Sustainability (Sections 58 and 59)
A highlight of FSMA is that it integrates Environmental, Social, and Governance (ESG) considerations into regulatory frameworks. To meet this requirement, financial firms must now account for environmental and sustainability risks in their decision-making processes. They must also provide transparency in reporting how these are integrated into their operations.
Clearing and Settlement (Sections 68–70)
FSMA has introduced many reforms and rules around central counterparty clearing houses (CCPs) and settlement services. The idea behind these provisions is to maintain stability and resilience in clearing and settlements.
Financial Market Infrastructures (FMIs) (Sections 85–88)
This Act introduces stricter oversight for financial market infrastructures (FMIs) to make them secure. The legislators believed this clause is particularly important in a post-Brexit market where international trade is more dynamic.
Now that you know the key provisions, let’s turn to what organizations must do to comply with these new regulations.
7 Best Practices for Compliance with FSMA 2023
Here are some best practices that organizations can take to comply with FSMA 2023.
#1: Stay Informed of Regulatory Updates
FSMA 2023 empowers UK regulators with flexibility, meaning that regulations can evolve quickly. To stay on top of these changes, establish processes to monitor and respond to changes from the FCA, PRA, and HM Treasury.
#2: Improve Risk Management Systems
With updated prudential regulations, make sure to have strong risk management systems. Regularly review and update risk models to meet compliance and safeguard your systems from emerging cybersecurity, environmental, and business threats.
#3: Integrate ESG Into Strategy
Given the new ESG requirements, organizations should embed sustainability considerations into their financial decisions. Transparent reporting on ESG efforts will not only ensure compliance but also increase corporate reputation. More importantly, it will build trust in the eyes of consumers, who are increasingly leaning towards eco-conscious products and services.
#4: Review Marketing and Promotion Practices
FSMA 2023 tightens rules around financial promotions, particularly in high-risk areas like digital assets and investments. If you’re dealing with these assets, review your promotional materials regularly. They must not be misleading to consumers to comply with the new transparency requirements.
#5: Conduct Regular Compliance Audits
With the FSMA introducing new provisions for capital adequacy, digital assets, and market activities, regularly audit your compliance frameworks. This will help identify gaps early and reduce the risk of regulatory breaches.
#6: Use Regulatory Technology (RegTech)
RegTech solutions can automate routine compliance processes like reporting, risk assessments, and transaction monitoring. Implementing RegTech can reduce the administrative burden while ensuring adherence to FSMA provisions.
#7: Engage Legal and Compliance Experts
Given the complexity of FSMA 2023, engage external legal counsel and compliance experts to help you with the compliance. These professionals have the required background and expertise to provide up-to-date guidance based on your specific activities.
Thus, these are some best practices that can help meet the FSMA 2023 regulations.
Final Thoughts
The Financial Services and Markets Act 2023 is an important update for the UK’s financial system, as it offers regulatory flexibility, consumer protection, and market innovation. With a good understanding of its provisions and adopting the best practices mentioned in this article, you can ensure compliance while maintaining a competitive edge in the market.