July 31, 2023 | Procurement Strategy
Three years after the United Kingdom’s exit from the European Union, the U.K. government has introduced the 'Edinburgh Reforms' to overhaul financial services regulations. The cornerstone of these reforms is the Financial Services and Markets Act 2023, replacing the previous homonymous Act of 2000.
While the Act aims to make the U.K. financial market more dynamic and open, it has stirred controversy due to the extensive powers granted to governmental authorities, particularly His Majesty’s Treasury, over the financial services sector. The Treasury is the big winner of the new legislation. HM Treasury’s powers, especially over the usually apolitical regulators (the Bank of England, Prudential Regulation Authority and Financial Conduct Authority), have increased significantly, which will allow it to directly influence companies within the sector.
HM Treasury holds extensive disciplinary powers over critical third parties, including:
Procurement functions need to be prepared for the impact of the new legislation on potential critical third parties (CTP) within the market. Overall, there is a need to enhance existing processes and controls to factor in the risks that the new law poses to CTPs.
Designated CTPs must meet minimum resilience standards set by HM Treasury, potentially leading to increased costs and a "UK FS premium" in pricing.
Procurement functions should ensure compliance with resilience standards for designated CTPs and consider applying similar standards to material supplier engagements.
Increased scrutiny of CTPs necessitates enhanced digitalization of procurement functions and improved risk management systems to monitor supplier performance.
Procurement functions should review exit strategies for CTPs in light of the Act's provisions for prohibiting or limiting firms from continuing service provision.
The Act offers an opportunity for easier discussions with CTPs regarding operational resilience, benefiting both new and existing agreements.
Firms in the financial services industry can now better oversee and obtain assurance from the CTPs they rely on.
Despite the Act's benefits in terms of deregulation and protection against single points of failure, there are inherent risks. The concentration of risk remains a threat to the U.K. financial services market, and the Act does little to address it. Moreover, the Act's powers lie with HM Treasury, leaving its interpretation and application subject to political changes, which may lead to uncertainty and challenges for financial institutions.
The Financial Services and Markets Act 2023 represents a significant reform for the U.K. financial markets. While it aims to boost dynamism and openness, concerns remain over the concentration of power in HM Treasury and its potential impact on the financial services sector.
Procurement functions must adapt to the Act's implications, enhancing resilience and risk management while closely monitoring regulatory changes.
How the Act's powers will be leveraged by future governments remains uncertain, adding an element of complexity and anticipation for financial institutions.