Introduction to a parallel universe - the designated activities regime

Background

In March 2023 we published an article providing some background on the designated activities regime (DAR) and how it will impact firms¹. In this article, we continue to explore some of the key issues, with a particular focus on supervisory approach and enforcement. 

What is the DAR?

The DAR is a framework for the regulation of certain activities relating to financial markets which are currently unregulated. It was established through amendments to the Financial Services and Markets Act 2000 (FSMA) made by the Financial Services and Markets Act 2023 that came into force on 29 August 2023. 

The DAR itself is due to come into force in a number of tranches – currently, of the regimes covered by this article, only the Securitisation Regulations are currently in force (as of 1 November 2024). The remaining Regulations will likely come into force within the next 12-24 months. 

The DAR provides a mechanism for HM Treasury and the FCA to regulate certain activities relating to financial markets that are typically carried out by non-financial institutions as well as by financial services firms. Under the regime, persons carrying on certain designated activities will need to comply with requirements and rules specified by HM Treasury and the FCA, unless they benefit from an exemption. However, persons carrying out designated activities will not be required to obtain authorisation as a condition of carrying on the activity.

Territorial impact of the new regime

Each set of designated activities has a different territorial approach – whilst in some instances firms will only be considered to be conducting designated activities if they do so from a UK establishment, in others cases firms will be caught wherever they are in the world if there is a ‘link’ to the UK (e.g. if the activity relates or is connected to a) financial markets or exchanges in the UK or b) financial instruments, financial products or financial investments that are (or are proposed to be) issued or sold to, or by, persons in the UK).

What activities have been designated so far?

We set out below, a list of those “designated activities” listed as such in legislation that has been published to date.

What are the consequences of an activity being designated?

Depending on the approach taken by HM Treasury in relation to a specific activity, the consequence of it being designated will be one of the following:

• The activity is permitted provided the person carrying out the activity complies with the designated activity rules set by the FCA relating to that activity and any other requirements imposed in respect of that activity by designated activity regulations; and / or
• The activity is prohibited to the extent specified in the relevant designated activity regulations.

To date, HM Treasury has not used the DAR to prohibit the performance of any particular designated activities. 

How will the FCA supervise and enforce the new regime?

Each designated activity will have its own framework for supervision and enforcement to be set out in relevant designated activity regulations, taking into account the relevant provisions of FSMA. 

The FCA has a power of direction imposing requirements specific to a firm or a group of firms relating to the carrying out of designated activities (e.g. to take or refrain from taking a specified action) under Section 71O of FSMA, if provided for in HM Treasury regulations. A direction or notice must be given in writing to the person or persons to whom it applies. But the FCA has the power, in the circumstances the FCA considers it appropriate, to publish the direction or notice in the way that the FCA considers to be best calculated to bring it to the attention of persons likely to be affected by it.

Each Regulation specifies the way in which directions can be given and the extent to which that power is available to the FCA in relation to a particular designated activity. The Regulations also set out the FCA’s powers in relation to persons knowingly concerned in a contravention of the relevant Regulations, including a direction given under section 71O of FSMA – such powers include public censure and issuance of financial penalties. 

Designated activity regulations may also contain provisions:

• Requiring the supply of information.
• Concerning investigations, including the making of reports.
• Conferring powers of entry.
• Conferring powers of inspection, search and seizure.
• Conferring powers of censure.
• Imposing monetary penalties.
• Concerning appeals.
• Conferring functions (including functions involving the exercise of a discretion) on a person.

Unless set out in the designated activity regulations, a breach will not:

• Make a person guilty of an offence; 
• Make any transaction void or unenforceable; or 
• Give rise to any action for breach of statutory duty. 

On 11 November 2024, the draft Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024⁸ were laid before Parliament. Once finalised, these regulations will provide the FCA with powers to supervise designated activities by gathering information and launching investigations into persons carrying out designated activities, and to enforce its designated activity rules by publicly censuring or imposing financial penalties on persons that breach them. This instrument does this by extending the FCA’s existing supervision and enforcement powers under FSMA 2000 so they can be used in relation to designated activities. The Regulations also set out the procedures that will apply to the giving of directions by the FCA relating to designated activities. 

What should firms be doing now?

Whilst we await final legislation to be passed as well as rules from the FCA to be finalised, firms can be taking steps to prepare themselves for the DAR coming into force, including by:

1. Establishing governance frameworks to govern how designated activities will be (or will not be) conducted with a view to ensuring compliance with the requirements. As part of this, firms will want to ensure that there is adequate oversight over relevant activities.
2. Consider whether it is helpful to establish a series of working-groups, on either a business-line or statutory instrument basis, to consider the potential impact of the new regime. Firms should consider which senior management functions will be involved.
3. Start to scope likely impact based on statutory instruments published to date. Firms should start to consider how the incoming changes might impact the products and services that they provide – firms can start to scope the likely impact even without the FCA rules having been finalised.
4. If possible, begin to identify policies / procedures / systems that may need to be updated to reflect incoming regime.
5. Communicate internally and think about who needs to know about the changes and communicate early.
6. Monitor communications from HM Treasury and FCA and determine if, in relation to the FCA consultations, the firm wishes to respond bilaterally or through trade associations.