Brexit, LIBOR, and financial crime update: What does the new Financial Services Bill mean for UK market participants?
On 21 October 2020, The UK government announced the launch of the Financial Services Bill. The Bill was specifically created to ensure that the UK financial services sector is still positioned at the forefront of the global market post BREXIT.
The Bill has a particular focus on the regulatory standards and framework for the UK financial services market once it leaves the EU. Its key aim is to create more competition for UK businesses and consumers whilst still being a key player in global markets .
Many senior figures within the UK financial services market have been questioning the regulatory framework post-BREXIT and how they should best prepare their companies for trading with international partners as of January 2021.
So, what will the new measures mean for your business and how will it impact the way you conduct business outside of the UK?
The main objective of the Bill will be to enhance the UK’s regulatory standards and its attractiveness as a location for business, both of which will be crucial to help the UK economy bounce-back in the post-COVID period.
Some stand-out aspects of the Bill in this regard are
- It seeks to solidify that the UK’s regulatory framework will remain world-class and promote financial stability, ensuring effective implementation of the remaining Basel III standards.
- A new prudential regime is introduced for investment firms, giving the Financial Conduct Authority the powers it needs in order to oversee an orderly transition away from the current LIBOR benchmark.
- A simplification of the investment fund market process with a stated aim to promote more openness between the UK and international markets.
- An introduction of measures to improve the functioning of the Packaged Retail and Insurance-based Investment Products Regulation, as well as an increase in penalties for market abuse.
- The Bill also details a 3-year extension of the transition period for the UK to stop using some ‘third country’ financial benchmarks, moving from 2022 to 2025 in order to allow more time for suitable replacements to be found.
Will this be the final legislation?
This Bill will need to go through a process of review from both the House of Commons and the House of Lords. Once each House agreed on all details contained within the proposal this will be passed for final Royal Assent, after which it will become law.
What potential impacts could this have on your KYC and AML systems?
As the final Bill has not yet been passed it could still of course be subject to change. But should this ultimately pass into law, it could mean that improved KYC and AML systems would need to be implemented by all UK market businesses in order to ensure that the new standards are adhered to.
The UK is now regarded as a ‘third-country’, which will create considerable implications for market participants and other reporting entities’ business models, structures, and compliance requirements.
The UK will no longer be able to submit simplified EDD checks and newer, more strenuous AML checks will have to be submitted. UK businesses must also ensure that they meet KYC standards which are permissible in certain EU member states.
EU Members follow a combination of guidelines established under both the Financial Action Task Force (FATF) and the Implementation of AML Directives, the latest of which being AMLD5. There is also the upcoming AMLD6, and National AML Acts which Members will also be required to adhere to.
What does this mean for your LIBOR transition?
There is still uncertainty over tough legacy contracts and more clarity needs to be defined in terms of what sort of contracts will fall within the Article 23C exception.
The definition of what can be deemed as a tough legacy contract is unclear and will leave market participants unclear as to how to transition such contracts. This however should not stop firms from transitioning their legacy books away from LIBOR indexed contracts.
Firms will now remain heavily dependent on FCA guidance on contracts, especially those which will need additional review.
If you would like to discuss the changes proposed within this Financial Services Bill and how they could potentially impact your LIBOR transition or your AML and KYC processes, please contact a member of our team for a free, no obligation consultation.