Featured in this month's newsletter:
- Regulatory perspective on diversity and inclusion
- FCA's new power to remove firms' unused permissions
- Spending limit for contactless card payments to increase to £100
- Regulatory reporting by PRA-regulated firms in the spotlight
- HM Treasury's Economic Crime Levy consultation response and draft legislation
Please join us for our interactive roundtable on the SMCR conduct rules.
General financial services regulation
The importance of diversity and inclusion
On 22 September 2021, Sheldon Mills, FCA Executive Director (Consumers and Competition), delivered a speech at the Investment Association on the role of purpose and the importance of diversity and inclusion, which included the following:
- Firms operating in the investment management sector can utilise their influence on ESG by encouraging positive changes through their investment choices and developing their own ESG practices.
- Culture is key to the supervision of regulated firms, with a particular focus on inclusive environments and an entrenched purpose. Long-term diversity and inclusion improvements require firms looking inwardly at their current culture and making changes, not just implementing external initiatives.
- Firms should ensure the wellbeing of staff and maintain their purpose and values with hybrid working.
We discussed the regulator's joint discussion paper on diversity and inclusion in the financial sector in our August update.
FCA: challenges and priorities
On 22 September 2021, Nikhil Rathi, the CEO of the FCA, gave a speech at the Lord Mayor's City Banquet, highlighting the overarching FCA focus on ensuring that the UK maintains an attractive, pioneering financial services industry. His speech confirmed that the FCA will prioritise tackling serious misconduct, using their criminal powers, and litigating more where matters involve money laundering or financial crime. He noted that the FCA remains focused on its international elements, transitioning to a net-zero economy, and delivering a world without LIBOR. Additionally, the FCA will be regulating more data-heavy businesses, moving towards becoming a data and digital first regulator.
FCA: regulation round-up for September
On 16 September 2021, the FCA published its regulation round-up for September 2021, highlighting two of its key focus areas:
- Changes to the Appointed Representative (AR) Notification process: since 16 September 2021, the FCA has required principal firms to submit AR notifications via Connect with an accompanying Form A, individual application (CF1 AR) and/or (CF 30 AR) simultaneously (unless an exemption applies).
- An update on senior managers regime (SMR) applications and controlled functions by ARs: the FCA explained that in Q1 2021 it received higher volumes of SMR applications than it forecast. Resourcing levels were affected by the COVID-19 pandemic and it was unable to restore case volumes and allocation times to business-as-usual levels by the end of the financial year as planned.
FCA: response to Treasury Committee report on the regulation of London Capital & Finance (LC&F)
On 13 September 2021, the House of Commons Treasury Committee published a report discussing the FCA and HM Treasury's responses to the Committee's Fourth Report of 2021-22. The report addressed the FCA's regulation of LC&F, which we referred to in our July update. Key aspects of the FCA and HM Treasury's responses include:
- HM Treasury intends to publish its response to its consultation on the regulation of non-transferable debt securities, and plan for legislation, in the autumn of 2021.
- The Treasury does not believe the FCA needs a formal power to suggest changes to the regulatory perimeter, as their existing arrangements are sufficiently effective.
- The FCA aims to complete the measures to achieve the report's recommendations by the end of 2021, following its progress update published in July 2021. The regulator is considering whether additional changes are needed to stop consumers being misled about the regulatory protections that they have.
- Currently, the FCA is working with stakeholders to assist the market in developing services which more effectively meet consumers' need for support with financial decision-making and guide them towards making better investments.
The Committee has stated that it will closely follow the implementation of the FCA's recommendations and transformation programme.
FCA: removing unused firm permissions
On 9 September 2021, the FCA released a consultation paper, which discusses the new cancellation and variation power granted under the Financial Services Act 2021. The FCA proposes that firms confirm their permissions are accurate on an annual basis, ensuring that consumers are not mislead about the firm's credibility and the level of protection a firm offers. The new power would enable the FCA to cancel a firm's permissions more quickly - as soon as it considers them unused, serving a 14 day notice to firms that could lead to a variation or cancellation after one month. The consultation is open until 29 October 2021.
TheCityUK's report on the UK's regulatory strategy
On 7 September 2021, TheCityUK published a report on the strategy for making the UK the leading international financial centre (IFC) within five years. The report focuses on the following key strategy areas:
- increasing the share of the main global financial and professional service markets in the UK by creating strong market access and introducing regulatory agreements for cross-border supplying of products and services
- generating global market competence in the central areas of increasing global demand: the UK could work with G7 and G20 jurisdictions to establish green disclosure standards and principles to enable international ESG communication
- establishing the IFC ecosystem in the UK by making it more globally competitive: by introducing a regular review of the UK's IFC, it will be more coherent, trusted, and achieve its goals efficiently.
Payment services and systems
Payment Systems Regulator (PSR) panel: annual report 2020/21
On 15 September 2021, the PSR panel published its annual report for 2020/2021. The report highlighted:
- The central issues addressed by the panel are: access to cash decreasing during the pandemic; the implementation of Confirmation of Payee across the six big banks, and reviewing consumer protection from fraud; and consumer protections in inter-bank payments.
- The panel's priorities for the future centred around sharing knowledge around the changing payments systems, establishing consumer protection, and maintaining competition.
- Key themes for the year: the long-term impacts of Brexit on consumers, innovation, and competition; changes and complexity in regulations; and COVID-19 highlighting the risks to the current cash-centred infrastructure.
Bank of England: Real-time gross settlement (RTGS) and CHAPS 2021/22 strategy
On 6 September 2021, the Bank of England (BoE) published its RTGS and CHAPS annual report, including the BoE 2021/21 strategy. The BoE outlined specific projects, including:
- Regarding the core ledger, the BoE will undertake design activity for liquidity management, account structure functions, and settlement.
- Consulting in 2021 for "Transition State 4" – several additional developments for the RTGS in areas such as extended operating hours, multiple message networks, and additional application programming interface.
- Investigating the benefits of ISO 20022, considering how data is used and creating guidance for corporate payments.
Contactless card payments limit to increase to £100 from 15 October 2021
On 27 August 2021, it was announced that the spending limit for contactless card payments will increase to £100, with the roll-out beginning on 15 October 2021.This follows the FCA's announcement in March 2021 that the single transaction threshold for contactless card payments would increase from £45 to £100, amending the contactless exemption in Article 11 of its technical standards on Strong Customer Authentication.
Consumer credit and mortgages
FCA: no extension for temporary guidance on delaying mortgage capital repayments
On 8 September 2021, the FCA updated its webpage which provided temporary guidance to assist borrowers with maturing interest-only and part-and-part mortgages who were impacted by the COVID-19 pandemic. The FCA decided not to extend the guidance as the harms they were designed to protect against had not materialised to the predicted extent. The FCA has suggested that, where borrowers delayed their capital repayments, firms may decide to contact them to discuss their repayment plans and offer them the finalised guidance.
Proposed Directive on credit servicers and credit purchasers to be considered by European Parliament
On 7 September 2021, the European Parliament amended its procedure file on the proposed non-performing loans Directive on credit servicers and credit purchasers, indicating that the proposed Directive will be considered during its 18 to 21 October 2021 plenary session. In June 2021, the Council of the EU and the Parliament reached political agreement on the proposed Directive.
Banking and insurance
PRA: balancing Solvency II review objectives for best outcome
On 22 September 2021, Gareth Truran, PRA Director (Cross-Cutting and Insurance Policy) gave a speech on the review of the UK Solvency II regime, which included discussions of the following:
- The three objectives of the Solvency II review are complementary, and reforms should be considered in the context of how reforms may interact and complement each other to achieve the objectives.
- Where relaxing capital requirements is considered, a cost benefit analysis should take place, considering whether (and why) insurers may invest differently if there are no incentive changes and after deployment of released capital.
- The PRA undertook an information-gathering quantitative impact study, selecting specific scenarios against which it requested data from firms. This exercise allowed the PRA to gather data on a range of policy options to later narrow down to use during consultations.
Basel Committee on Banking Supervision (BCBS): cyber security and climate-related financial risks
On 20 September 2021, the BCBS published a press release after meetings on 15 and 20 September 2021 discussing, amongst other topics, climate-related financial risks. Following the publication of the reports on climate-related financial risks in April 2021, the BCBS is determining whether the current Basel framework sufficiently addresses these risks. The consultation will take place later in 2021 and will consider the need for further measures. The meetings also included discussions of cyber security, with the BCBS encouraging banks to adopt effective practices and frameworks that meet accepted industry standards, such as the National Institute of Standards and Technology cybersecurity framework.
PRA: policy statement on regulatory framework for financial holding companies
On 15 September, the PRA published a policy statement, outlining their final rules around the application of existing consolidated prudential requirements to financial holding companies (FHCs) and mixed FHCs that have been designated or approved under the Financial Services and Markets Act 2000 (FSMA). Since the UK implemented the CRD V Directive, holding companies in UK banking groups fall under supervisory approval and the approved parent holding company of a UK consolidation group is responsible for ensuring that consolidated prudential requirements are upheld.
In June 2021, the PRA held consultations on its proposals and, as they received no responses, made no changes to the draft policy. The legislation came into force on 17 September 2021, except rule 4.1 in Annex F (Groups) (which comes into force on 1 January 2022) and the Statement of Policy's (which took effect on 15 September 2021).
PRA: "Dear CEO" letter giving feedback from review of reliability of regulatory reporting
On 10 September 2021, the PRA published a "Dear CEO" letter from David Bailey (PRA Executive Director, UK Deposit Takers Supervision) and Rebecca Jackson (PRA Acting Executive Director, Authorisations, RegTech and International Supervision), addressing its feedback on the PRA's findings from its analysis of firms' regulatory reporting.
In October 2019, the PRA sent a "Dear CEO" letter to outline deficiencies in a range of firms' systems for reliable regulatory returns and noted that many firms did not uphold the same diligence in preparing regulatory returns as they did with their financial reporting. The PRA will utilise the full extent of its enforcement powers when a firm has not met its expectations, and it expects all firms to acknowledge its findings, taking steps to improve their systems relating to regulatory reporting.
Securities, investments, and markets
FCA: LIBOR transition
On 21 September 2021, the Association for Financial Markets in Europe published a speech on the current status of the transition from LIBOR, highlighting the importance of firms addressing issues ahead of the cessation of LIBOR (for most purposes) on 31 December 2021.The speech discussed several issues, including:
- Fallback rates: regardless of the primary rate chosen, contracts should include fallback rates (a requirement under the UK and EU Benchmarks Regulation), which should account for cessation potential and significant changes to the benchmark.
- Synthetic rates: the FCA is due to consult on which legacy contracts can use any synthetic sterling and yen LIBOR settings. The FCA stated that synthetic LIBOR should be solely a bridging solution, and market participants should not wait for the synthetic solution before amending contracts. The consultation was published on 29 September 2021 and is open until 20 October 2021.
- Credit sensitive rates: in July 2021, the FCA discussed its apprehension around the use of credit sensitive rates in UK markets. Firms using these rates should thoroughly determine the conduct risks involved and ensure clients understand these risks.
FCA: new listing regime proposals
On 17 September 2021, Clare Cole (FCA Director of Market Oversight) gave a speech, outlining their proposals for a new listing regime to increase the flexibility and agility of the regime, and ensure it is suitable for all types of companies in the current economy. The FCA consulted on the Primary Markets Effectiveness Review and outlined several short-term reform projects:
- Reducing the free float level to 10%.
- Increasing the minimum market capitalisation for listing on the main market to £50 million to increase investor trust.
- Allowing dual class share structures in the premium segment.
Despite these short-term projects, the reform process is only just beginning and the FCA intends to work with stakeholders across a range of industries to reframe the perception of public markets in the UK.
FCA: consumer investments strategy and feedback statement
On 15 September 2021, the FCA published a paper detailing its consumer investment proposals following an analysis of responses to its September 2020 request for input on the consumer investments market, as well as utilising its own intelligence, data, and evidence base. The FCA plans to publish its consumer investments strategy in early 2022. The regulator will include the following measures to achieve its strategy:
- Reinforcing the financial promotion regime in relation to classifying high-risk investments, increasing the requirements on firms approving financial promotions. In Q4 2021, the FCA will consult on the new rules.
- Regulatory changes to further assist consumers who want to invest in straightforward products. In Q1 2022, the FCA will consult on their proposals ahead of implementation at the start of 2023.
- Analysing the Financial Services Compensation Scheme framework, ensuring it is appropriate and proportionate. The FCA will publish a discussion paper on this topic in Q4 2021.
- Addressing the appointed representatives regime's misuse. The FCA will consult on this in Q4 2021.
FCA: Board delay to publishing final report on independent review into interest rate hedging products (IRHP) redress scheme
On 8 September 2021, the FCA published the minutes of its 21 and 22 July 2021 Board meeting. The Board stated that the independent review of the supervisory intervention on IRHPs remains ongoing, and it likely that the publication of the report will be delayed. In March 2020, the FCA stated that a variety of circumstances have led to the review taking longer than predicted.
Funds and asset management
Investment Association (IA): guidance on FCA's guiding principles on ESG and sustainable investment funds
On 20 September 2021, guidance was published by the Investment Association relating to the FCA's guiding principles on ESG and sustainable investment funds. This followed the FCA's publication of a "Dear Chair" letter (July 2021), highlighting that chairs of authorised fund managers (AFMs) should increase the clarity and quality of authorised ESG and sustainable investment funds.
The Annex to the "Dear Chair" letter contained guiding principles to assist an authorised investment fund undertaking a sustainable investment strategy or pursuing ESG outcomes. The IA's guidance includes commentary on the guiding principles and their scope, explains the timing of applying the principles to firms' investment processes, and discusses how the guiding principles work with the Sustainable Finance Disclosure Regulation.
International Organisation of Securities Commissions (IOSCO): artificial intelligence guidance for market intermediaries and asset managers
On 7 September 2021, IOSCO published their final report on market intermediaries and asset managers using artificial intelligence and machine learning (AIML). The report outlines the expected standards of conduct and highlights that regulators require firms to:
- continually and sufficiently monitor and test the algorithms to confirm the results of an AIML technique, ensuring that the data relevant to the AIML's performance is of sufficient quality
- meaningfully inform consumers about how the firm uses AIML
- have specific senior management who are accountable for the oversight of AIML, including an internal governance framework.
European Commission uses Delegated Regulation relating to Packaged Retail Investment and Insurance-based Products (PRIIPs)
On 7 September 2021, the European Commission adopted a Delegated Regulation and Annexes, which amended the regulatory technical standards on key information documents (KID) for PRIIPS (PRIIPs KID Delegated Regulation). The Delegated Regulation includes the following amendments to the PRIIPs KID Delegated Regulation:
- Changes to the methodology used to calculate transaction costs.
- Modified summary cost indicators and amendments to the presentation of information of PRIIPs costs.
- New methods of calculating, and presenting, appropriate performance scenarios.
Although the Delegated Regulation will face scrutiny from the European Parliament and Council of the EU, it is scheduled to apply from 1 July 2022. We discussed the Commission's approach to PRIIPs in our September and August updates.
Investigations and enforcement
FCA: ban for non-financial misconduct
On 17 September 2021, the FCA published the final notice as issued to Jon Frensham, an independent financial adviser, and sole director, at Frensham Wealth Ltd. The notice explains that Mr Frensham is prohibited from performing any function relating to regulated activities for non-financial misconduct. Due to an offence committed whilst he was an approved person, the FCA determined that Mr Frensham is not a fit and proper person because of his lack of integrity and good reputation. In August 2021, the Upper Tribunal unanimously dismissed Mr Frensham's reference made after the FCA published a Decision Notice against him in March 2021.
Defining inside information in the context of financial journalism
On 16 September 2021, Advocate General Kokott delivered her opinion concerning, in the context of financial journalistic activity, the definition of inside information and the exception to the prohibition on disclosing inside information in Market Abuse Directive (repealed) and Market Abuse Regulation. The referring court raised questions which are key to companies, individuals (and their advisers), and financial journalists when it comes to knowing how to apply and interpret the definition of inside information and exceptions to the disclosure prohibition.
The underlying proceedings relate to the applicant, a financial journalist on a British newspaper's website, who published two articles regarding market rumours of possible takeovers. He is contesting a penalty imposed on him by the AMF (the French financial markets authority), which alleges that the appellant informed financial analysts about his upcoming articles during telephone conversations, therefore constituting inside information. The judgment of the CJEU is awaited.
FCA: sentencing for money laundering
On 9 September 2021, the FCA published a press release detailing the sentencing of Richard Faithfull to five years and ten months' imprisonment for money laundering. He was also disqualified from being a company director for ten years. Richard Faithfull laundered £2.5 million under an international organised crime group, which included the proceeds of several overseas investment frauds for over 12 months. He used knowledge gained from working in the regulated sector to defraud victims by paying himself fictional "dividends" to imply that the underlying investments were successful.
HM Treasury: Economic Crime Levy consultation response and draft legislation
On 21 September 2021, HM Treasury published their consultation response and draft legislation for a new levy on the anti-money laundering (AML) regulated sector – the Economic Crime Levy (ECL). Under the ECL, AML-regulated entities with over £10.2 million in revenue in the UK will be liable to make levy payments, which will be collected by the FCA, HM Revenue & Customs, and the Gambling Commission. The first levy will be collected from April 2023 to March 2024. The government is holding a consultation on the draft ECL legislation, which will run until 15 October 2021.
Office for Professional Body Anti-Money Laundering Supervision (OPBAS): 2020/21 progress and themes report
On 20 September 2021, OPBAS released a report on the progress made by professional body supervisors (PBSs) in addressing money laundering. OPBAS found varying levels of achievement amongst firms, and significant weaknesses which require improvement. For example, the report highlighted that many PBSs had not implemented an approach that sufficiently prioritised their anti-money laundering supervisory work based on an assessment of the risks they were facing. OPBAS anticipates that PBSs will be undertaking ongoing investments and improvements, focusing on areas which will have the most impact on money laundering prevention, and working alongside other authorities to deter criminal activity in the UK.
FCA: Dear CEO letter on trade finance activity
On 9 September 2021, the FCA published a "Dear CEO" letter, addressing trade finance activity, including a discussion on economic and financial crime. The letter highlighted firms' insufficient focus on identifying and assessing financial crime risk factors and, at the client level, that risk assessments had been too generic to effectively cover potential types of risk exposure. The letter suggests firms undertake a holistic assessment of their financial crime risks, including money laundering, terrorist financing, sanctions evasion and fraud.
Token regulation risks
On 6 September 2021, the Chair of the FCA and PSR gave a speech to the Cambridge International Symposium on Economic Crime, discussing the risks of token regulation. The speech included that:
- speculative crypto tokens remain unregulated by the FCA. Therefore, in the event of losses, approximately 2.3 million British consumers of these coins are not protected by the Financial Services Compensation Scheme
- despite welcome efforts to stop online fraud from paid-for advertising, legislation is required to create a long-term solution to the problem
- legislators need to focus on three issues in their consideration of crypto regulation: how to support innovation, how to prevent digital tokens being used for financial crime, and the extent to which consumers should still be able to buy speculative, unregulated tokens at their own risk.
The speech suggested two cases where regulators should have the ability to take action to reduce potential harm to customers caused by speculative tokens: cryptoasset promotions, and where there is risk of contagion of the regulated business of authorised firms due to unregulated activities in digital tokens.