May Monthly Regulatory Update
By Kyte Ekstrom | Brexit, Compliance, E Money, FCA Regulation, Financial Industries, Financial Promotions, FinTech, Investment, Investment Advisor, Investment Manager, News, payments, Pensions, regtech |
FCA Publishes Dear CEO Letter to E-money Firms on FSCS Protection
The FCA has published a Dear CEO letter to e-money firms asking them to write to their customers to make clear how their money is protected. Firms must make it clear if the Financial Services Compensation Scheme (FSCS) does not apply.
The FCA is concerned that many e-money firms are promoting themselves and their services like traditional bank accounts or an alternative to banks, but that they are not adequately disclosing the differences in protections between e-money and bank accounts. The FCA is particularly concerned that e-money firms are not making clear that FSCS protection does not apply. This leads to concern that e-money firms are potentially misleading customers to the extent to which their products or services are regulated by the FCA.
The FCA is asking e-money firms to:
- Write to customers within six weeks of 18 May 2021 and remind them how their money is protected through safeguarding, and to make clear that FSCS protection does not apply. The FCA states that this must be separate from any other messaging or promotional activity.
- Review financial promotions in light of BCOBS 2.3.1AR (requiring communications made to e-money customers and each payment service or e-money promotion to be accurate and not emphasise any potential benefits of a payment service or e-money without also giving a fair and prominent indication of any risks, like lack of FSCS protection) and BCOBS 2.3.4G. In particular, firms need to ensure that promotions give customers enough information.
- Bring this letter to the attention of the board, as the FCA expects the board to have considered the issues raised and to have approved the action taken in response.
The FCA intends to follow up with a sample of firms to assess the action taken in response to the Dear CEO letter.
FCA Dear CEO Letter: Please act – ensure your customers understand how their money is protected
FCA Publishes Consultation Paper – A New Consumer Duty CP21/13
The FCA Proposes to introduce a new ‘Consumer Duty’ setting higher expectations for the standard of care that firms provide to consumers and setting a higher level of consumer protection in retail financial markets.
The proposals in this consultation paper apply to firms in relation to their regulated activities, concerning products and services sold to retail clients. The proposals extend to firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer.
The proposed consumer duty has two main objectives:
- A new Consumer Principle which will provides an overarching standard of conduct; requiring firms to act to deliver good outcomes for retail clients, or require firms to act in the best interests of retail clients.
- A set of Cross‐cutting Rules and Outcomes that support the Consumer Principle by setting clear expectations for firms’ cultures and behaviours.
The proposed Consumer Duty would add to the range of regulatory tools already in place to meet the FCA’s strategic objective of making markets work well.
Comments can be made on this consultation paper until 31 July 2021.
The FCA expect to publish the second consultation by 31 December 2021, and will make any new rules by 31 July 2022.
Consultation paper: A new Consumer Duty (CP21/13)
FCA Publishes Discussion Paper on Strengthening Financial Promotion Rules for High-Risk Investments and Firms Approving Financial Promotions
The main point of paper DP21/1 is to discuss ways to improve and help consumers understand and assess financial promotions:
- The features of the investment
- The costs they are likely to incur
- The risks they might take and the benefits they could derive from the investment
- Whether the investment will meet their needs
The discussion paper asks for views on three areas where changes are proposed to protect consumers:
- Classification of High-risk investment: determining the level of marketing restrictions that should apply to investments and whether certain investments, which are not currently subject to restrictions, should be.
- Segmentation of high-risk investment market: despite existing marketing restrictions, too many consumers continue to invest in inappropriate high-risk investments. The plan is therefore to strengthen the investor categorisation process where access to a financial promotion is restricted to only certain types of investors.
- Responsibilities of approving financial promotions under section 21 of (FMSA): firms that approve financial promotions for unauthorised persons must ensure the promotions meet the required compliance standards. the FCA is seeking views on whether these firms should be required to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading.
The FCA want to hear views on the issues discussed by the 1st of July 2021. In addition to considering the responses received, the FCA propose to undertake the testing of ideas informed by behavioural research. Separately, the FCA will publish a full response to the CfI, together with the next steps of their wider consumer investment strategy, later in the year.
FCA discussion paper: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions (DP21/1)
FCA publishes evaluation report on Digital Sandbox Pilot
The digital sandbox pilot was launched by the FCA, in partnership with City of London Corporation (CoLC), the aim of the pilot was to foster a regulatory environment in order to promote innovation in financial services. The report sets out various findings and key lessons learned. overall the report concludes that the sandbox has accelerated the development of innovative products and solutions within financial services.
The pilot gave participants access to a range of development tools, such as anonymous data assets for testing and developing proof of concept, an API marketplace and a coding environment, as well as providing access to expert mentors and observers.
While the evaluation report states that it is too early to determine long-term outcomes, the FCA’s ongoing evaluation indicates a range of benefits, including: accelerated product development, validating and improving AI and machine learning models, refining business plans, and networking within the pilot ecosystem.
The FCA noted key lessons learned, which are as follows:
- Significant industry demand for a digital testing environment, particularly from start-ups and early-stage firms.
- The benefits of future cohorts having a narrower focus.
- The benefits to participants of a more structured journey through the cohort, rather than the digital sandbox being a ‘self-service’ platform
Based on the feedback collected throughout the pilot, along with an independent evaluation, and in order to support the Kalifa Review, which recommended a permanent digital sandbox be created to encourage further collaboration within UK financial services – to support this the FCA and CoLC will:
- Run a second cohort of the digital sandbox in late 2021.
- Further improve the digital sandbox testing environment by making suggested improvements to the platform.
- Expand on the use of the digital sandbox testing environment to highlight the opportunities and value it contributes to the financial services ecosystem.
- Focus the efforts of the second cohort on sustainability and climate change.
- Explore with industry and other stakeholders a viable sustainable operating model for a future, permanent version of the digital sandbox.
FCA Report: Supporting innovation in financial services – the digital sandbox pilot
FCA Publishes Speech on Effective Regulation in a Post-Pandemic world
The speech, delivered by FCA chair Charles Randell, highlights what the FCA needs to do for it to be as effective as possible in the post-COVID-19 world. Highlights from the speech include the following:
- the FCA must ensure that authorised firms meet a high. enough standard, not just when they apply for authorisation but also once authorised. Noting that, they need to know whether firms are using their authorisation and what for; and need to quickly remove the authorisations of firms which are not using their authorisations, or firms which are misusing them.
- the FCA will continue to focus on its four priorities for basic consumer protection: safe and accessible payments; sustainable credit; clear and safe investment choices; and fair product terms, including price.
- the FCA needs to focus on outcomes and ensure that firms do the same. Firms need to be responsible for identifying if consumers are trapped in a cycle of unaffordable debt and take action to break that cycle when required.
FCA Speech: Cautious optimism for the post-pandemic world
FCA and Pensions Regulator publish joint call for input – Pensions consumer journey
The FCA and TPR are inviting views on what else can be done to help engage consumers so that they can make informed decisions that lead to better pension saving outcomes.
The paper focuses on the behaviour of consumers at key points in the pension saving journey with a view to improving pension outcomes.
The FCA and TPR are seeking feedback on the main behavioural biases that influence saver engagement with pensions:
- Structural issues within society which can have an effect on good pensions outcomes.
- Different types of employment affecting pension saving behaviour.
- The large gender income gap in the UK which is reflected in a gender gap in pensions.
- The gap in the pension landscape across ethnic groups.
- People with disabilities whose incomes and living circumstances have a knock-on effect on pension provisions and savings.
- Other examples of protected characteristics that lead to inequalities in pensions.
The regulators are requesting information about the data used by firms to monitor and improve engagement by different cohorts of consumer, and feedback on what can be learned from other industries to drive the use of technology as an engagement tool. They are also keen to establish what type of support can be given to employees in their selection of a workplace pension.
Finally, the call for input asks whether there are areas of regulatory overlap between the FCA and the Pensions Regulator that cause problems for the consumer journey.
Feedback can be submitted until 30th June 2021.
FCA and the Pensions Regulation: Call for input – Pensions consumer journey
Financial Services Bill Receives Royal Assent
The UK has taken an important first step in shaping its own financial services regulation outside the EU and the Financial Services Bill received Royal Assent on the 29th of April 2021.
What does this mean for the Financial Services Act 2021?
- This amends the Financial Services and Markets Act 2000 (FSMA) to establish the legislative framework for the Investment Firms Prudential Regime and for the UK implementation of the final Basel III standards.
- Also, amends FSMA to establish the legislative framework for the Overseas Funds Regime and the Gibraltar Authorisation Regime.
- Further amendments to the UK Benchmarks Regulation (EU) 2016/1011 to provide the FCA with additional powers to manage a wind-down of a critical benchmark, such as LIBOR, and extend the transitional period for third country benchmarks.
- This also amends the Criminal Justice Act 1993 and the Financial Services Act 2012 to increase the maximum sentence for criminal market abuse.
- And, gives HM Treasury the power to bring interest-free buy-now-pay-later products into the scope of FCA regulation.
After a debate held in the House of Commons, certain amendments made by the House of Lords were rejected by the House of Commons. These pertain to:
- A firms duty of care to customers: the House of Commons voted to insert a new clause containing amendments to FSMA requiring the FCA to consult on whether it should introduce rules that require authorised persons to owe a duty of care to consumers. the House of Lords considered the amendments made to the Bill by the House of Commons and the House of Commons has revised the clause concerning a firms duty of care to consumers.
- Mortgage prisoners: the House of Commons voted to reject a House of Lords clause relating to borrowers holding mortgages in closed mortgage books (mortgages held by firms not taking on new customers – noted as ‘inactive lenders by the FCA) or with unregulated firms, who are up to date with their mortgage repayments but are paying higher than necessary payments and are unable to switch to a better deal (known as mortgage prisoners). The House of Lords clause concerning mortgage prisoners was rejected.
HM Treasury press release: Milestone for UK financial services as Bill receives Royal Assent
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