The topics covered in this month's update include:
- updates from the Chancellor of the Exchequer on FinTech and Listing Rules
- UNEP FI and EU Commission promote sustainability within financial services
- FCA releases second consultation on the Investment Firms Prudential Regime
- public censure of a principal firm for insufficient oversight of appointed representatives.
Please also see our separate web pages 'COVID-19: how the UK financial regulators are responding' and 'COVID-19: how the European financial regulators are responding' for the latest regulatory updates in relation to the coronavirus pandemic.
General Financial Services Regulation
Financial Services Bill 2019-21 progresses to final stages
On 19 April 2021, the House of Lords considered the Financial Services Bill. The Bill has been passed through the Lords with proposed amendments, which will now be considered by the Commons. The list of amendments and explanatory notes were published on the UK Parliament website on 21 April 2021. The progress of the Bill can be tracked here.
The proposed amendments include:
adding a new subsection 1C(2) to FSMA 2000, such that the FCA would be required to consider the general principle that firms should not profit from exploiting a consumer's vulnerability, behavioural biases or constrained choices when the FCA considers appropriate degrees of consumer protection inserting a new section 137CA to FSMA 2000 which would mean that authorised persons would have a duty of care towards consumers when carrying out regulated activities bringing Buy-Now-Pay-Later products within the scope of FCA regulation by allowing the Treasury to exclude provisions of the Consumer Credit Act 1974 and thus bring these products within the Regulated Activities Order requiring the FCA and PRA to have regard to the Net Zero carbon emissions target as set out in the Climate Change Act 2008 when making prudential rules for firms after 1 January 2022.
Update on the FCA's Transformation Programme
On 16 April 2021 the FCA published a letter to the Treasury which was sent to provide a progress update on the FCA Transformation Programme.
The regulator has strengthened its structure, with new directors, a Chief Operating Officer and a Chief Data, Information and Intelligence Officer. Operational efficiencies, such as the mandatory training of staff and the "use it or lose it" campaign to remove unused authorisations, have begun in earnest. Around 90 additional actions have been identified to implement the recommendations of the London Capital & Finance plc and Connaught Independent Reviews. Finally, the regulator has announced that it is pursuing investment in technology and data, which it hopes to leverage to move faster to identify firms and individuals who are more likely to cause harm.
The next progress update on FCA Transformation is expected before the accountability hearing on 12 May 2021.
Chancellor announces FinTech plans
On 19 April 2021, following on from the Kalifa Review, the Chancellor of the Exchequer revealed his plans for developing the UK FinTech industry. These include: an FCA "scale box" of enhancement measures for the existing "regulatory sandbox" to support growth stage firms; a taskforce from the Treasury and the Bank of England to explore the creation of a central bank digital currency (more on this below), with the possibility of a distributed ledger technology sandbox for firms who are planning to use this technology to improve market infrastructure; and the launch of a consultation to see how to implement the Listing Review.
Bank of England's diversity initiative
On 21 April 2021, the Bank published the opening speech by Andrea Rosen, titled Opening remarks: meeting varied people. In the speech, Ms Rosen announced that the Bank's Market Intelligence Charter would be re-launched to reflect its diversity objective more clearly and that the UK Money Markets Committee's three-yearly update would highlight the benefits of a diverse team.
Payment Services and Systems
Lending Standards Board: Authorised Push Payment scams
On 20 April 2021, the Lending Standards Board published an update to the Contingent Reimbursement Model (CRM) Code. With effect from 14 June 2021, the Code will include governance and oversight terms and the amendments make it clear that signatories can self-fund no-blame scam cases should they wish to. This was supported by a blog post in which the group urged all stakeholders to raise prevention, detection and awareness measures of authorised push payment scams in their agenda.
Latest minutes of the Payment Systems Regulator board
On 1 April 2021, the Payment Systems Regulator published the minutes of its board meeting on 20 January 2021.Among the decisions reached in the meeting, the board agreed that a high-level strategic approach to enforcement should be developed, covering decisions made before and after the opening of an enforcement investigation. The minutes note that "enforcement is an important regulatory tool and that taking formal enforcement action in suitable cases sends important messages to industry."
Central Bank Digital Currency (CBDC) taskforce
On 19 April 2021, the Bank of England and HM Treasury announced the creation of a CBDC taskforce, two CBDC external engagement groups (the CBDC Engagement Forum and the CBDC Technology Forum) and a new CBDC unit. The intention is to coordinate research and potential development between the Bank and the Treasury while including the views of a broad audience built across many areas of expertise and perspectives. This is outlined on the Bank's website and follows on from the Chancellor's announcement (see above).
The Government and the Bank of England have not yet made any decisions on whether or not to introduce a UK CBDC.
Post-Brexit changes for consumer credit firms
On 13 April 2021, the FCA reminded consumer credit firms that from 1 June 2021 firms subject to regulation 8 of the Consumer Credit (Disclosure of Information) Regulations 2010 must only use the post-Brexit pre-contract credit information form, while firms subject to regulations 10 and 11 and CONC 2.7.2R(4)(a) must only use the post-Brexit pre-contract consumer credit information (overdrafts) form.
Firms are reminded that failure to comply with the Disclosure Regulations will mean that credit agreements can only be enforced against debtors by order of the court under the Consumer Credit Act 1974.
Wood v. Commercial First Business Ltd – failure to disclose commission
The Court of Appeal has ruled on two different High Court appeals: Wood v. Commercial First Business Ltd (In Liquidation)  EHWC 2205 (Ch) and Pengelly v. Business Mortgage Finance 4 Plc  EHWC 2002 (Ch). The facts of the cases were different, but both cases concerned half-secret commission payments made to loan brokers by lenders.
Wood involved a broker being bound by contract clause to the effect that the broker would declare commissions received from lenders that were valued at over £250. The broker did not do so, which meant that the borrower assumed that no such commissions were paid, as the broker was under a fiduciary duty to the borrower. The High Court had ordered the lender to pay the borrower the aggregate of commissions paid by it to the broker and rescinded the relevant mortgage contracts and deeds.
Pengelly similarly involved mortgage broking. In Pengelly, however, the appeal by the lender was based on the ground that, in the absence of a fiduciary relationship, there was no basis for action against a third party that has paid a secret commission.
The Court of Appeal dismissed the cases on the grounds that these were undisclosed commissions. The reasoning for each was slightly different on the facts, however the main thrust of the judgment was that brokers should disclose commissions when obliged to do so, and any non-compliance in this disclosure (in both cases, for commissions received over the £250 agreed threshold) would be caught under the law of bribery; the court will not inquire into the payer's motives and will presume (on an irrebuttable basis) in favour of the principal.
Banking and insurance
PRA: approach to new and growing banks
On 15 April 2021, the PRA released policy statement PS8/21. Building on the earlier consultation paper CP9/20, the policy statement is aimed at banks which are in their first few years of being authorised by the PRA as a deposit taker and prospective banks interested in applying to be a deposit taker. Supervisory statement SS3/21, which gives regulatory force to the policy, takes effect from the date of publication (i.e. 15 April 2021).
UNEP FI climate targets for banks
On 21 April 2021 the United Nations Environment Programme Finance Initiative (UNEP FI) released it Guidelines for Climate Target Settings for Banks. The driving force behind these guidelines is the belief that financial institutions need to adapt their business models through lending and financing decisions if the goals of the Paris Agreement on climate change are to be met.
There are four guidelines:
- Banks shall set and publicly disclose long-term and intermediate targets to support meeting the temperature goals of the Paris Agreement.
- Banks shall establish an emissions baseline and annually measure and report the emissions profile of their lending portfolios and investment activities.
- Banks shall use widely accepted science-based decarbonisation scenarios to set both long-term and intermediate targets that are aligned with the temperature goals of the Paris Agreement.
- Banks shall regularly review targets to ensure consistency with current climate science.
These are subdivided into many sub-guidelines which are more prescriptive but fall into these general principles. The guidelines, which will be reviewed at least every three years, are to apply on a "comply or explain" basis.
Basel Committee: principles for operational resilience
On 1 April 2021, the Basel Committee on Banking Supervision published Principles for Operational Resilience. This follow a consultation from August 2020. The Committee has set out seven principles:
- Banks should utilise their existing governance structure to establish, oversee and implement an effective operational resilience approach that enables them to respond and adapt to, as well as recover and learn from, disruptive events in order to minimise their impact on delivering critical operations through disruption.
- Banks should leverage their respective functions for the management of operational risk to identify external and internal threats and potential failures in people, processes and systems on an ongoing basis, promptly assess the vulnerabilities of critical operations and manage the resulting risks in accordance with their operational resilience approach.
- Banks should have business continuity plans in place and conduct business continuity exercises under a range of severe but plausible scenarios in order to test their ability to deliver critical operations through disruption.
- Once a bank has identified its critical operations, the bank should map the internal and external interconnections and interdependencies that are necessary for the delivery of critical operations consistent with its approach to operational resilience.
- Banks should manage their dependencies on relationships, including those of, but not limited to, third parties or intragroup entities, for the delivery of critical operations.
- Banks should develop and implement response and recovery plans to manage incidents that could disrupt the delivery of critical operations in line with the bank’s risk appetite and tolerance for disruption. Banks should continuously improve their incident response and recovery plans by incorporating the lessons learned from previous incidents.
- Banks should ensure resilient ICT including cyber security that is subject to protection, detection, response and recovery programmes that are regularly tested, incorporate appropriate situational awareness and convey relevant timely information for risk management and decision-making processes to fully support and facilitate the delivery of the bank’s critical operations.
The policy paper has been supplemented by revisions to the standing policy paper Principles for the Sound Management of Operational Risk, which was published on 31 March 2021.
PRA: rule waivers update
On 19 April 2021, the PRA updated its web pages on Capital Requirements Regulation (CRR) permissions, Solvency II approvals and Waivers and modifications of rules, to the effect that the PRR is no longer going to provider the consolidated list of waivers, CRR and Solvency II permissions. Instead, these are shown on the FCA register or can be requested by e-mail sent to [email protected].
European Commission adopts Solvency II and IDD sustainability
On 21 April 2021, the European Commission adopted an "ambitious and comprehensive" package of measures aimed at improving the flow of money towards sustainable activities.
Solvency II firms fall under Commission Delegated Regulation amending Delegated Regulation (EU) 2015/35 as regards the integration of sustainability risks in the governance of insurance and reinsurance undertakings which requires insurers to review sustainability risks as part of implementing the prudent person principle. Meanwhile, the Insurance Distribution Directive is amended by Commission Delegated Regulation amending Delegated Regulation (EU) 2017/2358 and Delegated Regulation (EU) 2017/2359 as regards the integration of sustainability factors and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products which inserts sustainability risks into rules of conflicts of interest and into product oversight and governance.
The legislation now needs to be considered by the Council of the EU and the European Parliament. If passed, it will come into force 20 days after publication in the Official Journal and will apply 12 months after this publication date.
Securities, Investments, and Markets
FCA: Second consultation on Investment Firm Prudential Regime (IFPR)
On 19 April 2021, the FCA published it second consultation paper (CP21/7) on the IFPR. The IFPR will apply to MiFID investment firms that are prudentially regulated by the FCA in the UK. CP21/7 is meant to be read alongside CP20/24, the first consultation paper on the IFPR. It is hoped that the new prudential regime for in-scope firms will be streamlined and simplified, with prudential requirements that are better calibrated to the risks of harm that firms pose to consumers and markets. The third and final consultation paper is expected to be published at the start of Q3 2021.
The consultation closes on 28 May 2021. BoE: Transition from LIBOR update
On 19 April 2021, the Working Group on Sterling Risk-Free Reference Rates published the paper Transition from LIBOR in Sterling Structured Products. The paper is intended for issuers, manufacturers, distributors, investors and any other stakeholders in the sterling structured product markets. It sets out how using compounded arrears in SONIA would allow the sterling structured products market to be redesigned based on a risk-free rate and is intended to support transition from LIBOR by the end of 2021.
UK Government: Response to the Listing Review
On 19 April 2021, the Chancellor of the Exchequer released a statement to outline how the key recommendations from Lord Hill's Listing Review would be progressed:
- The Chancellor has agreed to present a "State of the City" annual report to Parliament starting in 2022.
- A "growth" or "competitiveness" objective for the FCA is being considered as part of the Future Regulatory Framework review.
- Three recommendations on reviewing the prospectus regime, using prospectuses from other jurisdictions in secondary listings, and facilitating forward-looking information provision in prospectuses are expected to be brought to public consultation later in 2021.
- A recommendation to improve the efficiency of further capital raises by listed companies is being considered as the topic of an expert discussion, in a form yet to be decided.
- The Department for Business, Energy and Industrial Strategy is going to review the use of technology to improve retail investor involvement in corporate actions.
FCA and UK Government: London Capital & Finance plc complaints
On 19 April 2021, the FCA published its broad approach to complaints made regarding London Capital & Finance plc (LCF). Together with the Serious Fraud Office, the FCA is continuing to investigate the issue of mini-bonds by LCF. To date the Financial Services Compensation Scheme has paid more than £57 million to approximately 2,800 LCF bondholders. The government will be setting up a bespoke compensation scheme, which will be available to all LCF bondholders that have not yet received compensation.
In assessing complaints made to the FCA regarding LCF, the FCA has identified a small number of investors who were given incorrect information in the course of direct communications with the FCA that may have led them to conclude their investment was safer than it was. While the FCA does not consider that this was the primary cause of investor losses, it recognises that the communications may have played a role in the investor's decision to invest or to remain invested. The FCA therefore intends to offer ex gratia payments to those investors who fall within this category who have not been compensated by the FSCS and will be contacting the relevant investors directly. Other complaints will be handled in accordance with the Complaints Scheme. The FCA does not expect to make ex gratia payments to these investors but expects to write to the majority of complainants, acknowledging the errors it made in relation to LCF, reiterating the FCA's apology, and providing them with full information about the government scheme.
The FCA anticipates providing a response to complainants by the end of June 2021.
Concurrently, the Treasury has begun an open consultation on the regulation of mini-bonds (non-transferable debt securities), with the intention of bringing the issuance of mini-bonds into the scope of financial services regulation. The consultation closes at midday on 21 July 2021.
European Commission adopts MiFID II sustainability
As reported above, on 21 April 2021, the European Commission adopted measures aimed at improving the flow of money towards sustainable activities.
Under Commission Delegated Directive amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors and preferences into the product governance obligations, investment firms that make and distribute financial instruments will need to consider sustainability factors as part of the product approval. Furthermore, the proposed Commission Delegated Regulation amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms requires MiFID investment firms which conduct portfolio management and provide financial advice to clients must consider the clients' sustainability preferences when choosing appropriate investment products and must then demonstrate how the selection meets the client's sustainability profile when they provide the suitability report as part of the investment recommendation. Such investment firms would also be required to consider sustainability risks as part of their risk management policies and organisational requirements.
Funds and asset management
European Commission adopts UCITS and AIFMD sustainability
As reported above, on 21 April 2021, the European Commission adopted measures aimed at improving the flow of money towards sustainable activities.
UCITS management companies will be covered by Commission Delegated Directive amending Directive 2010/43/EU as regards the sustainability risks and sustainability factors to be taken into account for UCITS, which requires managers to integrate sustainability risks into UCITS management and specifies organisational requirements, types of conflicts of interest, and conduct of business for UCITS management companies. Alternative Investment Fund Managers will be covered byCommission Delegated Regulation amending Delegated Regulation (EU) No 231/2013 as regards sustainability risks and sustainability factors to be taken into account by alternative investment fund managers and required to consider sustainability risks in either qualitative or quantitative terms as part of due diligence and risk management processes for the funds they manage.
ESMA: updates to Q&A on the AIFMD
On 30 March 2021 ESMA published an updated questions and answers document on the Alternative Investment Fund Managers Directive (AIFMD). The new updates can be found in Section XV of the document and concern ESMA guidelines on performance fees in UCITS and certain types of AIFs, such as when performance fees can be paid, how to use the performance reference period and that European Long-term Investment Funds (ELTIFs) are not normally in the scope of the AIFMD.
ESMA: updates to Q&A on the UCITS Directive
On 30 March 2021, ESMA also updated its questions and answers document on the application of the UCITS Directive. Like the updated to the AIFMD (above), these updates clarify how the crystallisation of performance fees and the performance fees reference periods operate under the Directive.
Investigations and Enforcement
FCA: public censure for appointed representatives oversight failings
On 20 April 2021, the FCA published a final notice issued to Alsford Page & Gems Ltd for oversight failings on the retail sale of extended warranty insurance by its appointed representatives. According to the notice, the firm has agreed to pay restitution of £399,902 to affected customers that were potentially mis-sold extended warranty insurance on retail products due to its insufficient oversight of six appointed representatives. The firm has provided evidence to the regulator's satisfaction that a proposed financial penalty, which would have been £670,600, would have caused financial hardship and it is the firm's parent company, PSC Insurance Group Limited, that has made the restitution payments.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, gave this quote for the accompanying press release: "Principal firms have a responsibility to oversee their Appointed Representatives and ensure they are carrying out regulated activities properly. Without adequate oversight, customers are at risk and, as this case shows, where that is the case, the FCA will take action against the Principal. APG’s oversight of its Appointed Representatives was inadequate and ineffective which created the risk that customers, including those who are vulnerable, might be sold products they did not really want or which did not meet their needs.”
FCA: first supervisory notice to Cypriot firm offering CFDs to retail consumers
On 16 April 2021, the FCA published a first supervisory notice to Finteractive Ltd, which had been offering high risk Contracts For Difference (CFDs) to UK retail customers. The FCA has responded to 47 complaints about Finteractive Ltd, which included the use of misleading financial promotions, failure to inform customers about the risks of the product, applying pressure to customers to invest and failing to allow withdrawal of customer funds. The firm has been ordered to withdraw its CFD business from the UK and to display a notice on its website to the effect that it is not permitted to provide regulated financial services to UK consumers.
FCA: speech on Anti-Money Laundering (AML) controls
On 24 March 2021, Mark Steward, the FCA Executive Director of Enforcement and Market Oversight, delivered a speech to the AML & ABC Forum in which the topic of an effective and purposeful AML control regime was brought to the fore. Mr Steward pointed out that two of the largest FCA sanctions within the past 12 months had related to financial crime and AML, that there are 42 investigations ongoing concerning AML and financial crime activities, that the AML investigations are by nature complex and that the regulator has increased its surveillance of online investment promotions within the past 12 months.
FCA: extension of financial crime reporting obligation
On 31 March 2021, the FCA released policy statement PS21/4. This will extend the number of firms which need to submit an annual REP-CRIM return from 2,500 to around 7,000 firms. The following firms will be affected:
- FSMA-authorised firms within the Money Laundering regulations which either: a) hold client money or assets, or b) carry on an activity that the regulator considers to be a high money laundering risk
- all payment institutions, unless they only conduct money remittance services, only conduct account information and/or payment initiation services, or were a person with temporary PI authorisation
- all electronic money institutions
- all multilateral trading facilities
- all organised trading facilities
- all cryptoasset exchange providers
- all cryptoasset custodian wallet providers.
Joint Money Laundering Steering Group: proposed revisions to trade finance guidance
On 20 April 2021, the Joint Money Laundering Steering Group published proposed revisions to its trade finance sectoral guidance, which are open for comment until 18 June 2021.