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The United Kingdom's Strategy for Digital Assets and Financial Market Regulation

Executive Summary


The United Kingdom government has initiated a comprehensive, multi-year strategy to re-engineer its financial services sector fundamentally. The explicit objective is to establish the UK as the preeminent global hub for economic innovation, digital assets, and capital markets by 2035. This strategy, principally articulated through the "Leeds Reforms" and the "Financial Services Growth and Competitiveness Strategy," is predicated on several core pillars: implementing a pro-growth regulatory framework, mandating profound digital transformation of market infrastructure, enhancing capital formation and deployment, and reinforcing market integrity through modernised conduct standards.


Key legislative and policy initiatives include a significant recalibration of the regulatory perimeter to reduce compliance burdens, exemplified by the radical streamlining of the Senior Managers & Certification Regime (SM&CR). Concurrently, the "Wholesale Financial Markets Digital Strategy" mandates a systemic technological overhaul, including the complete dematerialisation of shareholdings and a transition to a T+1 settlement cycle by October 2027. The strategy actively promotes the adoption of Distributed Ledger Technology (DLT) through controlled, live environments like the Digital Securities Sandbox (DSS) and landmark initiatives such as the pilot issuance of a Digital Gilt Instrument (DIGIT).


For market participants, this agenda necessitates immediate and significant capital investment in digital infrastructure and a thorough re-engineering of operational processes. However, it concurrently creates substantial opportunities derived from a more agile regulatory environment, the emergence of new digital asset classes, and a concerted policy effort to unlock deep pools of retail and institutional capital. The UK's strategy represents a decisive and integrated pivot towards a digital-first, globally competitive financial ecosystem.

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1. A New Regulatory Philosophy: Proportionality, Growth, and Competitiveness


The cornerstone of the UK's new direction is a fundamental recalibration of its regulatory philosophy, which explicitly elevates international competitiveness and economic growth as secondary objectives for the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), alongside their primary mandates.


  • The Leeds Reforms & 'Invest 2035' Strategy: This central policy package is designed to "rewire" the financial system by amending the UK's regulatory architecture to be more agile and growth-oriented.

  • Streamlining the Senior Managers & Certification Regime (SM&CR): The government intends to reduce the regime's administrative burden by an estimated 50%. Key reforms include:

    • Abolition of the Certification Regime: Removing the regime (under sections 63E and 63F of the Financial Services and Markets Act 2000) from primary legislation, empowering the FCA and PRA to institute a more flexible, proportionate, rules-based substitute.

    • Reduced Scope of Pre-Approval: Significantly decreasing the number of Senior Management Functions (SMFs) requiring regulatory pre-approval, transitioning toward a model where firms conduct their own "fit and proper" assessments and notify the regulator.

  • Accelerating Regulatory Processes: To enhance operational agility for firms, new statutory deadlines for regulatory decisions are being implemented:

    • New firm authorisations: Reduced from 6 to 4 months.

    • Senior manager approvals: Reduced from 3 to 2 months.

    • A streamlined authorisation regime for innovative start-ups ("L-Plates") is also under development to facilitate market entry.

  • Rebalancing Risk and Redress: The government is addressing perceptions of an overly cautious risk appetite within the system.

    • The Financial Ombudsman Service (FOS) will be reformed to ensure its jurisdictional decisions are more closely aligned with FCA rules, addressing industry concerns about inconsistent or unpredictable outcomes.

    • The FCA is conducting a formal assessment of the Consumer Duty's application to wholesale markets to ensure its principles do not create disproportionate burdens on business-to-business activities and to provide clarity on professional client categorisation.


2. Mandating Digital Transformation and Fostering Innovation


The UK is aggressively pursuing the end-to-end digitalisation of its market infrastructure to drive efficiency, enhance resilience, and improve data transparency.


  • Wholesale Financial Markets Digital Strategy: This strategy mandates both the optimisation of existing market structures and their transformation through new technologies.

    • Dematerialisation and Automation: The government is mandating the complete digitalisation of UK shareholding, making the digital register the sole legal evidence of title and eliminating paper certificates by the end of 2027. A transition to a T+1 securities settlement cycle is mandated for October 2027, requiring a fundamental overhaul of post-trade processes.

    • Promoting DLT and Tokenisation: The UK is creating a supportive legal and regulatory framework to facilitate the adoption of DLT.

      • Digital Securities Sandbox (DSS): A live, supervised financial market infrastructure (FMI) sandbox, operated by the Bank of England and FCA. It allows firms to test and scale DLT-based systems for trading and settling digital assets by temporarily modifying primary legislation (e.g., settlement finality regulations, CASS rules) to accommodate the unique features of DLT.

      • Digital Gilt Instrument (DIGIT): A pilot issuance of a new, digitally native UK government bond on a DLT platform within the DSS. This initiative is designed to catalyse DLT adoption, test the viability of on-chain atomic settlement (DvP), and promote interoperability between emerging DLT platforms and traditional infrastructure.

  • Modernising Payments and Digital Money Infrastructure:

    • Systemic Stablecoins: The Bank of England is consulting on a comprehensive regulatory regime for systemic stablecoins. It has signalled a significant policy shift by considering allowing a portion of backing assets to be held in remunerated High-Quality Liquid Assets (HQLA), creating a more viable business model for issuers within a prudential framework.

    • Tokenised Deposits: The potential for tokenised commercial bank deposits to facilitate real-time, on-chain settlement within the existing regulated banking system is being actively explored in conjunction with the DSS.

    • RTGS Modernisation: The Bank of England's upgraded Real-Time Gross Settlement (RTGS) service is being enhanced to provide the foundational, risk-free settlement asset (central bank money) for a digital future, with work underway to extend operating hours and develop a synchronisation interface for DLT-based payment systems.


3. Enhancing Market Access and Capital Formation


A primary objective of the strategy is to unlock new sources of capital and create more efficient pathways for investment into the UK economy.


  • Boosting Retail Investment: Reforms are designed to address the UK's low levels of retail investment.

    • The advice-guidance boundary is being reformed to permit firms to provide more "Targeted Support," enabling them to guide consumers toward investment opportunities more actively.

    • Long-Term Asset Funds (LTAFs), which provide access to illiquid assets like private equity and infrastructure, will be permissible for inclusion in retail Stocks & Shares ISAs.

  • Attracting Institutional and International Capital:

    • Pension Reform (Mansion House Accord): This agreement encourages the consolidation of pension funds into "megafunds" that will allocate a minimum of 10% to private assets, with a significant portion directed toward UK growth companies.

    • PISCES (Private Intermittent Securities and Capital Exchange System): A new FMI has been launched, creating a regulated venue for the intermittent trading of shares in private companies, allowing them to access liquidity and scale before a potential public listing.

    • International Concierge Service: A dedicated office within HM Treasury has been established to provide tailored support to international financial services firms seeking to develop or expand their operations in the UK.


4. Upholding Market Integrity and Professional Conduct


While pursuing deregulation, the government and regulators are reinforcing standards of conduct to ensure market trust and foster healthy firm cultures.


  • Tackling Non-Financial Misconduct (NFM): The FCA is extending its rules on NFM (encompassing bullying, harassment, and discrimination) from the banking sector to all regulated financial services firms.

    • The rules, located in the Code of Conduct (COCON) and Fit and Proper Test (FIT) sourcebooks, clarify that serious NFM occurring in an individual's private life can be deemed relevant to their fitness and propriety if it calls their integrity into question.

    • The reform ensures that NFM conduct rule breaches must be included in regulatory references, a measure designed to prevent individuals with a history of misconduct ("r" lling bad apples") from moving between firms undetected.


5. Strategic Imperatives and Operational Impact for Market Participants


The cumulative impact of these reforms presents a complex set of challenges and opportunities, requiring a strategic and proactive response from all firms in the financial services sector.


  • Mandatory Operational and Technological Overhaul: The non-negotiable deadlines for the T+1 settlement transition (October 2027) and the dematerialisation of securities (end of 2027) necessitate immediate and significant investment in digital infrastructure, process automation, and data management systems. Firms must re-engineer post-trade operations to achieve straight-through processing and manage the compressed settlement cycle.

  • New Opportunities in Digital Assets and Markets: The supportive regulatory stance on DLT, tokenisation, and new forms of digital money, combined with the creation of the DSS and PISCES, creates significant first-mover advantages. Firms should actively develop strategies for asset tokenisation, DLT-native financial products, and participation in new digital market infrastructures.

  • Evolving Compliance and Governance Frameworks: The streamlining of SM&CR will reduce certain administrative burdens but requires firms to maintain robust internal governance and "fit and proper" assessment capabilities. The expanded NFM framework necessitates a review of HR policies, training, and internal reporting mechanisms to ensure compliance and cultivate a positive workplace culture.

  • Strategic Re-evaluation of Client Engagement Models: Reforms to the advice-guidance boundary and the policy push to foster a retail investment culture will compel firms to develop new, scalable models for client interaction, product suitability, and investor education.

  • Critical Need for Proactive Regulatory Engagement: Many of the detailed rules underpinning these reforms are still subject to consultation (e.g., the final form of the stablecoin regime, the replacement for the Certification Regime). Proactive engagement with ongoing consultations by the FCA, PRA, and Bank of England is critical for firms to influence the final regulatory architecture and prepare for its implementation.


 
 

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The posts listed on the 'What we think' webpages are our interpretation of regulatory developments we have been reading about. They should not be considered legal, regulatory or other advice. Contact us if you want to understand the impact of public policy, regulation and governance changes for you.

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