This quarterly blog series brings the latest industry and regulatory updates impacting financial service providers in the UK. This article reviews changes from 10 March through 23 July 2023.
What a quarter it has been on the Government, Regulators and Compliance (GRC) front – it has been very positive to see genuine traction and desire to move forward with the vision set out by the chancellor last Christmas in his Edinburgh reforms. We’ve now seen the Chancellor set out the progress against that vision as well as some additional measures in his Mansion House Speech. And this quarter, the first real signs and evidence of how these will materialise in practice.
First and foremost, we have seen the receiving of Royal Assent of the Financial Services and Markets Bill, now becoming FSMA 2023. This is a significant step in streamlining UK FS legislation largely through revoking retained EU law.
And the regulators have been quick to respond: with wider rule making responsibilities, the PRA has issued a consultation paper outlining the proposed approach to reviewing its rules. The FCA meanwhile has published a draft Rule Review Framework to explain how they plan to monitor and review how the rules are working in practice, in line with the new obligation introduced by the Financial Services and Markets Act 2023.
We also have seen the release of the updated business plans of the FCA and the PRA -both largely continuing in the same direction chartered over the last couple of years in becoming more innovative and risk-based regulators. One big change however has been the adoption of their new secondary objectives as originally set out in the Edinburgh reforms. This requires the twin regulators to now also act in a way that advances the international competitiveness of the UK economy and its growth in the medium to long term. It’s still early days on this front with the first real view of how this will materialize being the September international conference the PRA will hold to deepen its understanding of the links between prudential regulation, international competitiveness, and growth.
The FCA meanwhile has in its latest business plan taken a position that it can best serve its new objective by ensuring it helps ensure UK markets function effectively and welcome new technology and innovation – and doing so through bolstering its systems, tools and data to better detect and respond to harms faster.
Finally, with all that said, let’s look at the individual updates for the quarter.
Regulatory updates this quarter
Conduct Updates
- Consumer Duty remains in the ‘spotlight’
With the spotlight focused on the deadline for the implementation of Consumer Duty rules, the FCA has continued to provide support and guidance through various industry engagements such as podcasts and webinars. These have been industry-wide, such as outcomes monitoring, as well as sector-specific – such as for Payments and e-money and Contract for Difference (CFD) portfolio.
The FCA also reviewed 14 firms’ fair value assessment frameworks, setting out the approach firms are taking. These observations were shared referencing good practices as well as examples where firms needed to improve their approach further to ensure they meet expectations under the Duty.
Furthermore, the regulator undertook an anonymous survey of 1,230 firms in some of the sectors in scope of the Consumer Duty to understand how prepared firms were in meeting the implementation deadline of 31 July 2023, and how they could be supported. To help firms make the most of the time remaining, the FCA published key questions from the Finalised Guidance for firms to keep asking themselves. The aim was to help firms reflect on their implementation of the Duty and identify gaps or areas for improvement.
With the deadline now behind us, the FCA is encouraging the industry to think out of the box and explore innovative solutions to deliver better consumer outcomes.
To this end, the FCA recently concluded a three-day tech sprint focused on leveraging the benefits of Open Finance to deliver better outcomes, as required by the Consumer Duty, for customers and firms alike.
The sprint witnessed wide ranging expertise and insights into data, technology, legal challenges, regulatory compliance and business change considerations, including from Team Cognizant, for using innovative technology solutions that can help manage/integrate customer data to drive better outcomes.
- Consumer Duty dictates financial promotions on social media
Furthering the cause of the Consumer Duty requirements, the FCA published a general consultation on how the rules apply and the regulatory expectations for financial promotions on social media. The consultation proposed that unauthorised persons, such as social media influencers, who promote a regulated financial product or service without the approval of an FCA authorised person may be committing a criminal offence. The guidance also provides additional clarity on when a communication might constitute a financial promotion.
- The regulator leaves no stone unturned in supporting customers with the current cost of living crisis
The FCA has been keeping a close watch on what has changed in financial services for people in the UK over the last year or so as illustrated in the Financial lives survey for the Consumer experience of the rising cost of living – the burden of bills and ways to get support. To deal with this crisis, the FCA has set clear standards and expectations for how consumer credit, mortgage and insurance firms should help customers in financial difficulty. To this end, the regulator has published a host of guidance, consultation and policy statements - each aimed at specific sectors such as mortgage payments, consumer credit , insurance and overdrafts with a view to protecting consumers in these difficult times.
- SMCR makeover continues
In line with the announcements in the Edinburgh Reforms, the PRA has published a Discussion paper to review several specific elements of the Senior Manager and Certification Regime, starting with the approvals process to assist respondents in identifying areas of potential enhancements. The DP closed on June 1, 2023.
The PRA also published a policy statement moving SMCR forms from the PRA rule book and amending the length of employment history required from 5 to 10 years.
- No reward for Debt Packagers for any advice given to customers
In a compelling move to remove strong incentives for debt packagers to offer advice that does not have regard to the best interests of the customer or is not appropriate to the individual circumstances of the customer, the FCA has banned debt packager firms from receiving remuneration from debt solution providers.
Firms subject to the new rules are required to take steps to ensure they do not receive any commission, fee or any other financial consideration from a debt solution provider for any referral or related service conducted after 2 October 2023.
- Changing thresholds for SMEs and dual-regulation firms, albeit for different reasons
Although a bit delayed, but as part of the post implementation review of the rules extending access to the Ombudsman Service for more small and medium sized enterprises (SMEs), the FCA has launched a call for input. The aim is to understand whether the thresholds for SMEs to be able to refer complaints to the Financial Ombudsman Service (Ombudsman Service) remain appropriate.
Meanwhile, the FCA wants to ensure that the remuneration rules for smaller, less complex dual-regulated firms are proportionate to the risks they pose to consumers and markets in the UK. Thus, the FCA has proposed changes to the proportionality thresholds to exempt firms meeting the updated proportionality thresholds.
Crypto Updates
- Crypto under the regulatory scanner
Following the consultation paper on “Prohibiting the sale to retail clients of investment products that reference crypto assets”, the FCA published its response to the Business Impact Target (BIT) assessment carried out which was rated ‘not fit for purpose’ by the Regulatory Policy Committee on account of insufficient evidence. It was also observed that the assessment failed to clearly establish what would happen to the market in the absence of the intervention, limiting the ability to determine the change resulting from the measure.
However, there has been some progress with the way Crypto is allowed to be marketed as the FCA published PS23/6: Financial promotion rules for cryptoassets following its consultation last year. The rules take a consistent approach to cryptoassets to that taken for other high-risk investments, requiring firms to classify cryptoassets as ‘Restricted Mass Market Investments’. This would allow cryptoassets to be mass marketed to UK consumers subject to certain restrictions, in addition to the overarching requirement that financial promotions must be fair, clear and not misleading. The restrictions include clear risk warnings, banning incentives to invest, positive frictions, client categorisation requirements and appropriateness assessments.
The FCA also published a consultation on Guidance on cryptoasset financial promotions to ensure firms clearly understand the implications of the above requirement and proposing how firms might comply with these. The proposed guidance will also form an important component of the approach to supervising cryptoasset financial promotions.
Payments Updates
- Consumer Duty comes knocking on Payments’ doors
In a Dear CEO letter, the FCA has expressed concerns about insufficient controls within the payments industry resulting an unacceptable risk of harm to their customers and to financial system integrity. Furthermore, the regulator has urged firms to take appropriate action for three specific outcomes, which seem to align with the principles of Consumer Duty: (i) ensuring that customers’ money is safe; (ii) ensuring firms do not compromise the financial system integrity; and (iii) meeting customers’ needs, including through high quality products and services, competition and innovation, and robust implementation of the FCA Consumer Duty.
- Expanding horizons for the UK payments industry
- Renewed RTGS
Meanwhile, the Bank of England has announced that from June 2024, the renewed RTGS service will deliver a more resilient, flexible and innovative sterling settlement system to support monetary and financial stability. It will deliver benefits for the industry across four key areas: increased resilience, greater access, wider interoperability and improved user functionality.
- CHAPS transition to ISO 20022
Yet another key achievement has been the Bank of England’s successful migration to CHAPS, the UK’s high-value payments system, to ISO 20022 – the latest global financial messaging standard. This marks a significant milestone in the multi-year programme to renew the Bank’s Real Time Gross Settlement (RTGS) service: a programme whose objectives are to increase resilience, competition and innovation within the payments landscape.
- Cross-border payments
In a speech given at the Global Payments Summit in Cape Town by Victoria Cleland, Executive Director for Banking, Payments and Innovation – Bank of England, has stressed how enhancing cross-border payments to make them cheaper, faster, more transparent and easier to access would make an enormous difference to people and economies worldwide. With the new ISO20022 standards gradually catching up around the globe, cross-border payments will soon become a reality as the harmonisation requirements are met.
Sustainability Updates
- Climate related disclosures of UK financial institutions
In a continued effort to promote sustainability, the Bank of England has published a working paper exploring the determinants of firm disclosures by creating a unique, firm-level panel data set on climate-related disclosures of UK financial institutions. The paper documents the differences in disclosure levels across financial institutions with different sizes and over time. The analysis shows that climate‑related policy communications in the form of regulatory guidance on future mandatory disclosures is associated with a catch-up by firms previously disclosing less.
- Climate related risks and regulatory capital framework
On a different dimension, the Bank has also issued a report on climate related risks and regulatory capital framework, following from the Climate Change Adaption Report (CCAR) published in October 2021. The report suggests that existing capability and regime gaps are responsible for creating uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses.
The report also suggests that effective risk-management controls within PRA-regulated firms can reduce the quantum of capital required in the future for resilience, but the absence of controls might suggest a greater quantum of capital will be required. The unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than used for many other risks. Scenario analysis and stress testing will play a key role in this.
In terms of next steps, the Bank will continue to build its capabilities and forward-looking tools to judge the resilience of the financial system to climate risks, support initiatives to enhance climate disclosures, and promote high quality and consistent accounting for climate risks, amongst others.
- FCA calls out ‘poor benchmark’ in its review on ESG benchmarks
Following the portfolio letter to benchmark administrators outlining FCA’s supervisory priorities and view of the risks within the sector, the FCA completed a preliminary review of ESG benchmarks. This work assessed the quality of disclosures made by a sample of UK benchmark administrators. In general, this was poor. The assessment of the risks observed and the issues identified based on this preliminary review was notified to the benchmark providers in a Dear CEO letter. The FCA set out its expectation that businesses should have appropriate strategies to address the review findings and be prepared to explain these strategies at the regulator’s request.
- Climate Financial Risk Forum (CFRF) at work to help manage climate risk
The CFRF has published a series of helpful papers and tools to help firms develop their scenario analysis to manage climate risk and prepare for climate action.
The UK Centre for Greening Finance and Investment (UKCGFI) and the Climate Financial Risk Forum (CFRF) have been working together over 2022 to gather and synthesise the lessons from the process of the Bank of England’s Climate Biennial Exploratory Scenario (CBES), both to capture the learning for UK Fis and to share this internationally. Specifically for asset managers, the CFRF working group has published a paper that outlines the current state, and possible future direction for the development of scenario analysis as used by and applied to asset managers.
The CFRF has also published the Climate Disclosures Dashboard 2.0 , which builds on the illustrative dashboard published by the CFRF in 2021. The updated Dashboard incorporates both recent regulatory developments and progress made by industry in preparing climate-related disclosures whilst retaining the user-friendly structure of the original.
Wholesale Markets Updates
It has been a busy quarter for the Wholesale Markets team with the release of several policy statements and consultation papers, most of them spinning off from the Edinburgh’s reforms, the Wholesale Markets consultation back in 2021/22, the review of the UK Capital Markets competitiveness and of course the wider Future Regulatory Framework. We also saw the FCA launching their UK wholesale markets pre-application support service for overseas Wholesale market firms.
- Admission of new securities in the primary markets, a series of engagement papers
Serious consideration is given by the FCA to strengthen the UK’s position in capital markets and encourage firms to list in the UK. To kickstart this, a public event was conducted with key stakeholders in May this year which we attended, followed by a series of engagement papers for new public offers and admissions to trading in UK public markets. While the results of the report showed that things weren’t so dire as perhaps feared, there is work to do. It is therefore good to see the regulator taking a proactive approach by holding regular virtual engagement sessions with trade associations and interested stakeholders.
- Improving the secondary market regime
The Policy Statement on Improving the secondary market regime meanwhile was released to empower investors to lower the cost of trading and eventually bringing in more liquidity. This regime is also aimed to increase post-trade transparency.
As the next step, the FCA will set up a task force to develop good practices for trading venues and investment firms in any event of outages or breaches.
- The FCA Marketwatch 73 newsletter
The last marketwatch, Marketwatch 73, emphasis on the observations and findings from its recent market abuse peer review into firms offering Contracts for Difference (CFDs) and spread bets providers. These products are at risk of being used for insider dealing due to their speculative and leverage nature. Along with the key findings, the FCA has suggested CFD providers retrospect on the points made and take steps to ensure that their systems and procedure can detect and report potential market abuse.
- The FCA Marketwatch 74 newsletter
In the latest Marketwatch, Marketwatch 74, the FCA in its quest to maintain market oversight has once again touched on the topic of Transaction Reporting. They have made observations in the reporting by the firms covering RTS 22 transaction reporting and RTS covering the submission of financial instrument reference data.
There are existing persistent data issues despite the warning’s issued by them on the completeness, accuracy, and timeliness of the transaction reports. Several firms are still either not aware of the MDP Entity Portal or stating that they fully relied on data extracts provided by ARMs to provide reconciliation. Transaction reporting remains a challenge for many firms.
- Ceasing the use of Synthetic LIBOR and transition to US Dollar LIBOR
In June 2022, the regulator consulted (CP22/11) on US dollar LIBOR exposures and the feedback statement was released - LIBOR- FS23/2: Decisions on US dollar LIBOR. The FCA recommends the continuation of transition of contracts to refer US dollar LIBOR, and not rely on synthetic LIBOR which was always considered a temporary measure. The 3-month synthetic sterling LIBOR setting is expected to cease end-March 2024.
- Consolidated Tape framework
In CP23/15, the FCA sets out its proposed new framework to establish a consolidated tape (CT) in the UK. This CP sets out the framework of a CT for Bonds, FCA's criteria for running a CT by a CT provider and the tendering process for appointing a CTP. CT has been consistently mentioned in the past few years, from EU's MIFIDII, the Wholesale Markets Review (WMR) and the Edinburgh reforms. With this CP there is optimism that the regulator will stick to its promise of delivering the CT legislative and regulatory regime by 2024.
Prudential Risk Management Updates
- PRA looks to remove non-performing exposures (NPE) related Common Equity Tier 1 deduction.
On 14 March, the PRA published CP6/23, proposing to remove the Common Equity Tier 1 (CET1) deduction requirement related to non-performing exposures (NPE) that are treated as insufficiently covered by firms' accounting provisions. This proposal is the UK’s latest divergence from the previously adopted EU regulation (CRR) to better align with UK’s own objectives now that it is out of the EU.
With this move, the PRA aims to support the competitiveness of the UK as set out in the Financial Services and Markets Bill which is expected to be finalised in May 2023. In the views of PRA, having CET1 deduction related to NPE will increase unnecessary capital requirements, furthering the burden of financial institutions. The CP closes on Wednesday 14 June 2023.
- BoE and PRA issued feedback statement on prudential liquidity framework Discussion Paper (DP) 1/22
FS1/23 provides a summary of the responses to the Bank of England and the PRA’s Discussion Paper (DP) 1/22 – ‘The prudential liquidity framework: Supporting liquid asset usability’ . BOE and PRA have been concerned that banks are overly concerned about utilizing their HQLA (hence reducing the LCR ratio) - in publishing this FS, the Bank and the PRA aim to contribute to improving understanding of why and to what extent banks are reluctant to draw on their stock of HQLA when facing liquidity pressures and how HQLA usability could be improved.
- Dear CEO letter – liquidity management multi-firm
In liquidity management multi-firm review, the FCA set out detailed findings and good practices from its multi-firm review of liquidity management frameworks. FCA chose 14 (Authorised Fund Managers) firms of different sizes and asked them to provide information on their liquidity management frameworks and followed up with in-depth discussions on their methodologies. FCA observed that, with few exceptions, many firms did not attach enough weight to liquidity management in their governance framework, and that firms’ approaches to stress testing methodologies varied from highly sophisticated in-depth models to basic tick-box exercises.
- Stress testing results of UK banks 2022/23 have been published.
The Bank of England published Stress testing the UK banking system: 2022/23 results where the results of the 2022/23 annual cyclical scenario (ACS) stress test indicate that the major UK banks would be resilient to a severe stress scenario that incorporated persistently higher advanced-economy inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies with materially higher unemployment, and sharp falls in asset prices. It’s been also called out that the scenario is more severe than the 2007–08 global financial crisis (GFC).
The results indicate the UK banking system would be able to withstand the severe macroeconomic scenario and has the capacity to support households and businesses throughout the stress.
Other Updates
- Big Tech impresses the FCA
Last year we published our view on the Big Tech entry into retail financial services [FCA DP22/5], where the FCA had asked for industry feedback on the potential competition impact on Big Tech’s entry.
Following the feedback and to complement the FCA’s ongoing programme of work in relation to digital markets, the regulator has proposed some additional steps including, a review of supervisory approach and a Call for Input on Big Tech firms as ‘gatekeepers’ and key drivers including the role of data sharing asymmetry between Big Tech.
- Regulators are opening up to ‘Open Banking’
The PSR has made an announcement about the Joint Regulatory Oversight Committee’s (JROC) ambitious programme of work to take forward recommendations for the next phase of Open Banking in the UK, centred around six themes. To support this, the JROC has launched two new working groups on variable recurring payments (VRP) and future Open Banking entity. The JROC has also tasked Open Banking Limited (OBL) to lead and coordinate workstreams on four of the other key themes. Namely – (1) levelling up availability and performance, (2) mitigating the risks of financial crime, (3) developing proposals for dispute processes and (4) improving technology flows to third-party providers (TPPs) and end users.
Key highlights for the next quarter
- Day 2 preparation for Consumer Duty
With the active book deadline behind us, firms will be looking to prepare for their day 2 commitments in delivering good customer outcomes as well as considering strategic solutions to become more customer centric, as mandated by the Duty.
- Big Tech entry into financial services
FCA is expected to issue a call for Input (by late 2023) on Big Tech firms as ‘gatekeepers’ and key drivers including the role of data sharing asymmetry between Big Tech firms and financial services.
- 2nd Resolvability Assessment Framework (RAF) report
The Bank of England and the PRA plan to publish the 2nd resolvability assessment of the major UK firms, as part of the Resolvability Assessment Framework. The findings will show how resilient and stable banks are, in the scenario of resolution.
- Payment Systems Regulator (PSR) looks to publish interim report of cross-border interchange fee market review
The aim of the review is to understand the rationale behind the increases in interchange fee (IF) rates for Mastercard and Visa’s consumer debit and credit card-not-present (CNP) transactions between the UK and the EEA. PSR also wants to understand the impact these increases may have on UK service users.
