Asset managers and the evolving UK regulatory landscape
This content was originally published by IBS Intelligence, June 2024 edition.
FSMA 2023 heralded significant transformations in the regulatory landscape for the UK’s financial services sector, setting in motion a series of policy reforms aimed at changing existing regulations.
The UK’s Financial Services and Markets Act 2023 (FSMA 2023) is a key component of the UK’s post-Brexit overhaul of financial regulation. Many in the UK’s asset management sector – valued at over £8.8 trillion ($11.2 trillion) at last count – have kept a watchful eye on developments in legislation. Already under pressure due to high interest rates, increased competition, and proliferating geopolitical risks, the need to cut costs, increase efficiency, and do more with less is more pressing than it has ever been. As we proceed further into 2024, what should asset managers know about FSMA 2023?
Post-Brexit regime change
Following the official end of the Brexit transition period on 31 December 2020, the UK Government took the initiative in reshaping financial regulation to move away from previous alignment with EU law. FSMA 2023 forms part of a significant governmental push to enable UK financial services regulators such as the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to establish an updated set of rules and regulations to enhance the UK’s global competitiveness.
For example, the new Designated Activities Regime (DAR), enables the FCA to create rules around ‘designated activities’ that are not currently authorized or regulated by the financial services watchdog. While currently covering activities such as short selling, entering derivatives contracts and applying for securities to be admitted to trading, the DAR regime allows rulemaking to be adapted by the regulators in the future; for example, to take account of new global standards, market innovation and business models.
Driving innovation through regulation
The FCA’s drive to update the Alternative Investment Fund Managers Directive (AIFMD) post-Brexit, by making it more proportional rather than applying it only to those above a certain threshold of assets under management, has been welcomed by asset managers as a sign of the UK’s increasing global competitiveness. This is also supported by other FCA initiatives, such as the streamlining of retail regulations concerning non-UCITS (Undertakings for the Collective Investment in Transferable Securities) funds by ensuring that disclosures are aligned across similar products, enabling retail investors to make well informed decisions.
Adopting cutting-edge technologies
FSMA 2023 has also generated significant excitement in relation to adopting new technologies and ESG frameworks in financial services. ESG, AI and machine learning, and digital assets such as cryptocurrencies have all been referenced in the new framework, providing asset managers with additional reinforcement to make the technology investments they need to drive increased competitiveness globally. The FCA has also highlighted its desire to create a blueprint for fund tokenization using digital ledger technology (DLT), driving innovation in smart contract enabled digital ledgers such as a blockchain.
The significant changes FSMA 2023 has set in motion for the UK financial services sector highlight the importance of getting to grips with the changes to the regulatory framework, as well as the differences that may emerge with its neighbors, particularly in crossborder trade. Efficient technology-powered processes will be key to ensure compliance in the face of any regulatory divergence between the EU and UK, and to remain globally competitive.
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