The Designated Activities Regime: What to Expect and How to Prepare

Introduction

The Financial Services and Markets Bill (FSM Bill) is currently making its way through the UK Parliament, introducing significant changes to the UK's financial services regulatory framework. Among these changes is the Designated Activities Regime (DAR), which aims to regulate certain financial activities that fall outside the core authorisation regime under the Financial Services and Markets Act 2000 (FSMA). In this blog post, we'll discuss the DAR, its potential impact on firms, and practical considerations to help your business prepare.

Overview of the Designated Activities Regime

The DAR allows HM Treasury to specify certain activities related to financial markets, instruments, products, or investments as designated activities. This may include cryptoassets, securitisations, short selling, derivatives, and benchmark usage, among others. The regime is designed to be proportionate, ensuring that non-financial services entities carrying on certain financial activities are subject to rules without requiring full authorisation under FSMA.

Who Will Be Impacted?

The DAR is expected to impact a broader range of entities than those currently authorised under FSMA, including unregulated corporates. The exact scope of activities covered will become clearer once the FSM Bill is passed and HM Treasury begins designating activities. However, firms involved in securitisations, short selling, derivatives, and offering securities to the public are likely to be affected. The crypto space is also expected to see further regulation under this new regime.

Impact on Firms

While the DAR is intended to be proportionate, firms falling within its scope will need to navigate a new set of rules and engage with the Financial Conduct Authority (FCA). The FCA will have the power to impose requirements on those carrying out designated activities, potentially impacting a wider range of firms' activities. Firms may also face compensation and enforcement consequences for failing to comply with the rules.

Practical Considerations

Firms should consider the following steps to prepare for the DAR:

1. Determine if their activities fall within the scope of the DAR.
2. Monitor any designated activities and related regulations proposed by HM Treasury.
3. Prepare to comply with new rules, including amending client documentation and internal processes.
4. Engage with the FCA, learning to navigate the new regulatory landscape.

Several practical matters remain unclear, such as how unauthorised firms will be monitored and the consequences of breaching DAR requirements. Firms should keep an eye on the progress of the FSM Bill and subsequent draft statutory instruments (SIs) for further clarity.

Next Steps

The FSM Bill is currently in the Committee stage in the House of Lords, with the government aiming to have it finalized by Easter 2023. Firms should monitor the progress of the Bill and any changes it undergoes as it moves through Parliament. After the Bill receives Royal Assent, watch for finalizations of the prospectus SI and more information from the FCA on implementing the DAR.

By staying informed and preparing for the DAR, firms can be ready to navigate the new regulatory landscape and ensure compliance with the evolving financial services regulatory framework in the UK.

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