August Monthly Regulatory Update
By Kyte Ekstrom | FCA Regulation, FinTech |
General Regulation Updates
FCA Updates Webpage on Next Steps – Consumer Duty
The FCA has updated their webpage concerning consultation paper CP21/13 (A new Consumer Duty) which aims to set clearer and higher expectations of firms standards of care towards consumers. The consultation has now closed, but the FCA notes that they will consider responses and will set out the proposed text for any new rules or guidance in a subsequent consultation.
The subsequent consultation will also include the FCA’s further consideration of a private right of action and the impact of the introduction of the Consumer Duty on the FCA’s existing Principles for Businesses, as well as further details on how they intend to supervise and enforce the Consumer Duty.
The FCA expects to publish the second consultation by 31 December 2021, and will make any new rules by 31 July 2022.
Updated webpage: CP21/13: A new Consumer Duty
Whistleblowing – FCA Publishes New Online Form
The FCA has published a new form to enable reports of whistleblowing to be made online.
The FCA has also published two accompanying webpages;
Whistleblowing: where to make a report – which explains about the whistleblowing process and directs people to the correct contact team.
Legal Advice and Whistleblowing – which explains how the law applies to whistleblowers and how the FCA can help whistleblowers, and includes helpful links to ACAS, the Citizen Advice Bureau and other organisations and information.
New FCA online form: Whistleblowing online report
Whistleblowing: Where to make a report
Legal advice and whistleblowing
FCA publishes – Dear Chair of the Remuneration Committee Letter
The letter sets out the FCA’s approach to remuneration for 2021/22, and highlights areas for firms to consider. The letter covers, the following:
- Remuneration policies:firms should remain satisfied that their remuneration policies are aligned with their firm’s purpose, business strategy and values, and incentivise the right behaviours.
- Accountability:the Senior Managers and Certification Regime (SM&CR) is noted as a key tool to ensure high standards of conduct and culture within firms. For instances of misconduct, ex-post risk adjustments should be made in a timely manner. The reasons for adjustments should be transparent to the individuals concerned.
- Non-financial measures:During these challenging times the FCA expects to see more firms using non-financial measures in scorecards to support environmental, social and governance factors.
- Diversity and inclusion:The FCA urge you to review pay data across all protected characteristics and to act swiftly to address any disparities.
Firms are reminded to submit their remuneration policy statement by 30 September 2021. The letter details the further documentation that should accompany this submission.
FCA Letter – Dear Chair of the Remuneration Committee
FCA Updates Digital Sandbox Webpage with Information on Planned Cohort – Sustainability
The updated webpage provides further information about the second phase of the FCA’s planned sustainability cohort, which will focus on providing support to innovators looking to develop and validate solutions in the area of environmental, social and governance (ESG) data and disclosure. The FCA states that it will be opening the application window for the sustainability cohort on 6 September 2021, with a view to opening a sandbox to successful participants in November 2021 and providing access to the testing environment from January 2022.
The FCA will assess applications on the following eligibility criteria:
- Genuine innovation:the solution or product is sufficiently different from market standard;
- In scope:the solution would benefit UK consumers or financial services firms by solving one of the ESG data and disclosure use cases. Companies do not need to be domiciled in the UK, but their solution needs to be intended for use in the UK market;
- Need for a digital sandbox:the solution requires digital sandbox features in order to be developed or improved; and
- Credible testing plan:the application has proposed a well-designed testing plan, detailing success criteria and future steps.
The digital sandbox website online application form will go live on 6 September and the FCA will publish more information in the coming weeks.
Updated webpage: Digital sandbox
FCA publishes New Regulatory Sandbox Application Guide
The aim of the application guide is to assist firms when making a regulatory sandbox application. The guide asks a set of standard questions, questions relating to the development, technology and innovation of the product, and questions to determine meeting the FCA’s eligibility criteria.
The regulatory sandbox looks to provide firms with:
- the ability to test innovative propositions in a controlled environment
- reduced time-to-market at a potentially lower cost
- support in identifying appropriate consumer protection safeguards to build into new products and services
- provide better access to finance
The FCA has also confirmed that the regulatory sandbox is now always open. This means firms can submit applications at any point throughout the year.
FCA Regulatory Sandbox Application guide
Payment Services, E-Money & Open Banking
Bank for International Settlements Announces Proposal – Global Real-Time Retail Payments Network
The Bank for International Settlements (BIS) Innovation Hub Singapore Centre and the Monetary Authority of Singapore (MAS) has published a proposed blueprint for enhancing global payments network connectivity via multilateral linkages of countries’ national retail payment systems. Details of the blueprint, known as project Nexus, are detailed in a report and further technical documents which cover the following:
- Nexus ‘gateways’, which will be developed and implemented by the operators of participating countries’ national payment systems. These gateways will co-ordinate compliance, foreign exchange conversion, message translation and the sequencing of payments among all participants. They will also be based on a common set of technical standards, functionalities and operational guidelines that are set out in the report. Participating countries will only need to adopt the Nexus protocols once to gain access to the broader cross-border payments network.
- An overarching Nexus scheme that sets out the governance framework and rulebook for participating retail payment systems, banks and payment service providers to co-ordinate and effect cross-border payments through the network.
BIS acknowledges that further work will be needed on the governance model, oversight and scheme specification, and on addressing legal differences between jurisdictions. Feedback on the report has been requested.
Nexus: A blueprint for instant cross-border payments
FCA Publishes Portfolio Strategy Letter – Investment-Based Crowdfunding Firms
The recent Portfolio Strategy Letter, aimed at firms that are active in the investment-based crowdfunding (IBCF) market, sets out the FCA’s objective concerning the supervision of IBCF firms to ensure that these firms promote investment opportunities appropriately so that consumers can understand the risks ‘these speculative and high- risk investments’ pose.
The letter sets out the key risks that the FCA has observed in the market, as well as their expectations of firms and a summary of its planned work:
- Inappropriate investments:The FCA is concerned that too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. The FCA have set out their expectation of how firms should address the risk to consumers, including: gathering of information on customers, disclosures to customers, and the management of conflicts of interest.
- Scams:The FCA highlights exposure to fraud and investment scams when using crowdfunding platforms, for example due to inadequate due diligence when hosting investments and approving financial promotions. The FCA sets out their expectations of how firms should address this risk, including: conducting thorough due diligence procedures, educating consumers about the risk of scams, and maintaining a high standard of operational resilience.
- Oversight of appointed representatives:The FCA are concerned that consumers may be inappropriately exposed to high-risk investments, fraud, and scams due to inadequate oversight by firms of the activities of their Appointed Representatives, and expects chief executives of IBCF firms to understand their responsibilities and accountability for the actions and conduct of their firms’ appointed representatives (ARs), and to ensure that firms have robust systems and controls for the oversight of ARs’ activities. The FCA will seek assurances from chief executives on these issues.
- Disorderly firm failure:The FCA are concerned that as IBCF firms are predominately loss making, and that there is a risk that firms fail in a disorderly way, which could lead to consumer harm, including the loss of client assets. The FCA expects firms to: have a good understanding of their regulatory capital requirements and reporting requirements, undertake regular reviews of the adequacy of their capital and liquidity, and have a credible wind-down plan that includes appropriate and timely triggers for implementation.
The FCA will monitor firms’ activities in respect of these issues and emphasises that chief executives are responsible for ensuring that their firm meets FCA requirementsand for taking all necessary steps to ensure these are met in practice. The FCA warns that it will use the Senior Managers and Certification Regime (SMCR) to engage directly with accountable individuals on areas of concern.
Portfolio letter: investment-based crowdfunding
FCA Publishes Third Consultation Paper – A New UK Prudential Regime for MiFID Investment Firms
The main proposals of the third and final Consultation Paper (CP21/26), on the implementation of the Investment Firms Prudential Regime (IFPR), include:
- DisclosureThe FCA propose that FCA investment firms that are not small and non-interconnected (ie non-SNIs) should disclose information about their risk management and governance arrangements, and about their own funds, own funds requirements and investment policy. They also proposes that all small and non-interconnected firms that have issued additional tier 1 instruments should disclose information about their risk management arrangements, and all FCA-authorised investment firms must make some disclosure on their remuneration policies and practices, proportionate to the size and type of firm.
- Own funds: excess drawings by partners and membersThe FCA proposes to introduce a rule requiring an FCA-authorised investment firm that is a partnership or LLP to deduct excess drawings by its partners or members that exceed the profits of the firm.
- Technical standardsThe FCA proposes to apply onshored binding technical standards (BTS) under the retained EU law version of theCapital Requirements Regulation (575/2013) (UK CRR) and Financial Conglomerates Directive (2002/87/EC) (FCD) that are relevant to the IFPR with specific modifications that are set out in MIFIDPRU (the FCA Handbook sourcebook which will contain the IFPR rules), with two exceptions which will be incorporated into a MIFIDPRU annex.
- DepositariesThe FCA is proposing to: amend the requirements that depositaries must meet so that they are no longer required to have permission to deal on their own account; allow other FCA-authorised investment firms to act as a depositary where they also provide the MiFID ancillary service of safe-keeping and administration of financial instruments; and change the relevant minimum own funds requirement.
- UK resolution regimeThe FCA plans to make changes to its Handbook to reflect the removal of FCA-authorised investment firms from the scope of the UK resolution regime.
- EnforcementThe FCA outlines how they plan to make use of their new enforcement powers under the Financial Services Act 2021.
- Consequential changesIn their second Consultation Paper (CP21/7), the FCA explained how MIFIDPRU was intended to interact with other prudential sourcebooks in the FCA Handbook. In this Consultation Paper, the FCA sets out the remaining IFPR consequential changes they propose to make to the Handbook and Glossary.
The consultation closes on 17 September 2021. The FCA will then consider feedback and publish a policy statement and final rules for the IFPR as a whole in Autumn 2021.
Consultation paper: A new UK prudential regime for MiFID investment firms (CP21/26)
Proposed MIFIDPRU 1 Annex 5R application form
Proposed MFIDPRU 2 Annex 8R notification form
Proposed IP1: Template on proportion of voting rights
Proposed Template OF1: Composition of regulatory own funds
FCA Publishes Policy Statement on Amendments to Rules – General Insurance Pricing Practices
The FCA has published a policy statement containing revisions to their current rules on general insurance pricing practices (PS21/11). Following feedback from stakeholders, PS21/11 makes minor changes to PS21/5, published in May 2021. PS21/11 sets out the FCA’s final rules intended to address the harms the FCA had found from their general insurance pricing practices market study.
Changes introduced by the FCA relate to:
- The FCA has clarified the application of its rules to firms that give discounts or other incentives to customers.
- The FCA has clarified the application of its reporting rules to intermediaries that rebate commission.
- The FCA has amended the definition of a renewal, so that where an existing customer actively buys a policy with the same firm through a different channel or distribution arrangement, the firms should treat this as new business rather than renewal business.
Alongside this Policy Statement, the FCA have also published a set of Q&As to address some of the questions they have received since publishing PS21/5. The FCA will update these where we consider that further clarification is relevant.
The Handbook instruments making these changes are set out in Appendix 1 to the policy statement, and come into force on 1 January 2022.
Policy statement: General insurance pricing practices – Amendments (PS21/11)
Non-Investment Insurance: General Insurance Auto-Renewal and Home and Motor Insurance Pricing Instrument 2021 (FCA 2021/32)
Handbook Administration (Home and Motor Insurance Pricing) Instrument 2021 (FCA 2021/33)
Updated Q&As on the published rules
FCA Resumes – (MS19/1) Credit Information Market Study
The FCA has announced that work on their market study to examine the credit information market has resumed following a pause necessitated by the COVID-19 pandemic. The study, initially launched in 2019, will focus on the following themes:
- the purpose, quality and accessibility of credit information;
- market structure, business models and competition; and
- consumers’ engagement and understanding of credit information and how it affects their behaviour.
The FCA’s work will reflect market and regulatory developments relevant to credit information that have emerged over the last 18 months, including the response of credit reference agencies and lenders to COVID-19. The study will also take into account the recommendations made to the FCA in the Woolard Review of change and innovation in the unsecured credit market, published in February 2021.
The FCA intends to engage with industry and consumer groups and complete their analysis during Q3 2021, ahead of publishing an interim report in Q1 2022. The interim report will set out the FCA’s vision for the credit information sector, their emerging findings (including on lenders’ reporting of forbearance) and the FCA’s early thinking on any potential remedies.
Report: Future of the Credit Information Market research report
Updated webpage: MS19/1: Credit Information Market Study
FCA publishes portfolio strategy letters – Mortgage Third Party Administrators & Outsourcing to Third Party Mortgage Administrators
The FCA has published two ‘Dear Board of Directors’ letters: Outsourcing to Third Party Mortgage Administrators and Mortgage Third Party Administrators (TPA). The letter to TPA firms sets out the FCA’s view of the key risks these firms pose to their customers or the markets in which they operate and outlines the FCA’s expectations. These include:
- Fair treatment of consumersThe FCA expects firms to place sufficient emphasis on treating customers fairly, which includes recognising and looking after vulnerable customers and mortgage prisoners, dealing with complaints fairly and providing extended forbearance where appropriate. The letter identifies that poor treatment of customers is caused largely by weak operational oversight, ineffective systems and controls, and lack of meaningful management information. It indicates that it will act where it identifies firms causing, or likely to cause, significant harm to customers.
- Vulnerable customersFollowing on from the FCA’s recently published finalised guidance (Guidance for firms on the fair treatment of vulnerable customers), the FCA emphasises that protecting vulnerable consumers is one of their key focuses and that they expect firms to embed the fair treatment of vulnerable consumers into their culture, policies and processes throughout the customer journey. The FCA will monitor firms’ compliance and act where they find that vulnerable customers have not been treated fairly.
- Operational resilience:the FCA states that appropriate systems and controls, and policies and procedures, as well as adequate governance and oversight, and a close and effective relationship between TPA firms and the firms for which they administer mortgages, are key to ensuring that firms operate within their regulatory remit and can demonstrate they are treating their consumers fairly. The letter advises TPA firms to review their arrangements with the firms who outsource to them to ensure that both parties deliver these expectations effectively.
- Financial resilience:The FCA notes that the coronavirus pandemic underlines the need for all firms to have adequate resources in place and expects firms to familiarise themselves with their guidance FG20/1 – Assessing Adequate Financial Resources. The FCA uses several data sources to monitor indicators of potential financial distress and consequential risks of harm, and will engage with firms where it considers that they have breached regulatory obligations. The FCA notes that if routine monitoring highlights financial concerns, firms are required to report these immediately.
- Forbearance and due consideration:The FCA expects firms to treat customers in default or arrears difficulties with forbearance and due consideration. Firms should refer to the FCA’s March publication Coronavirus Linked Forbearance: Key Findings.
The portfolio letter provided to firms that outsource mortgage administration activities reminds them of their regulatory responsibilities and the FCA’s expectations that firms cannot outsource regulatory responsibility for activities carried out on their behalf by TPAs. The FCA require such firms to ensure TPA firms have appropriate systems and controls, policies and procedures in place, together with their own internal governance and oversight in order to demonstrate they are treating their consumers fairly. The Senior Manager responsible for TPA firm oversight should have this included in their Statement of Responsibility. The FCA state that they will hold Senior Managers to account where they find rules have been breached.
Portfolio letter: Outsourcing to third party mortgage administrators
Portfolio letter: Mortgage Third Party Administrators
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