7 Dec 2022
Each month we publish a round-up of the latest regulatory updates, covering only the salient points, including links to relevant documents and webpages. It's the gift that keeps on giving!
HM Treasury Publishes Policy Statement -Building a Smarter Financial Services Framework for the UK
As part of HM Treasury’s Edinburgh Reforms, they have published a Policy Statement, ‘Building a smarter financial services framework for the UK’. This statement sets out the government’s approach to repealing and replacing retained EU law on financial services to deliver a comprehensive FSMA model of regulation tailored to the UK. The Policy Statement provides an overview of the implementation of the Future Regulatory Framework (FRF) Review and refers to the government’s intention to create a framework for the regulation of financial services based on the Financial Services and Markets Act 2000 (FSMA).
Over time, the FSMB will repeal retained EU law, enabling the government to replace it with legislation designed specifically for UK markets. HM Treasury notes in the Policy Statement that they have identified 43 core files of financial services retained EU law (set out in Annex I). The repeal of this law will be split it into tranches, using a number of guiding principles for prioritisation that are explained further in the Policy Statement.
The first tranche of the repeals process will consist of:
The Wholesale Markets Review (WMR) which makes substantial amendments to various parts of the MiFID framework, many of which are implemented in the FSM Bill.
Lord Hill’s Listing Review, following which the government will commence the repeal of the Prospectus Regulation, and implement an entirely new regime for admissions to trading and public offers.
The Securitisation Review, which identified several opportunities to improve areas in the Securitisation Regulation.
The review into the Solvency II Directive.
The government will take a ‘twin-track’ approach to the next phase (Tranche 2) of the programme. Under this approach the government will bring forward those areas with the biggest potential benefits to deliver improvements to UK economic growth.
Tranche 2 consists of:
The implementation of the remaining aspects of the WMR.
Implementation of the remaining aspects of the Solvency II Review.
The UK PRIIPS Regulation (1286/2014).
The UK Short Selling Regulation (236/2012) (UK SSR).
The UK Taxonomy Regulation ((EU) 2020/852).
The UK Money Market Funds Regulation ((EU) 2017/1131) (UK MMF Regulation).
The revised Payment Services Directive ((EU) 2015/2366) (PSD2) and the Electronic Money Directive (2009/110/EC).
The Insurance Mediation Directive (2002/92/EC) (IMD) and the Insurance Distribution Directive ((EU) 2016/97) (IDD).
The UK Capital Requirements Regulation (575/2013) (UK CRR) and the CRD IV Directive (2013/36/EU).
The UK Long-term Investment Funds Regulation ((EU) 2015/760).
The consumer information rules in the Payment Accounts Regulations 2015 (SI 2015/2038).
HM Treasury has also published three draft statutory instruments to illustrate their approach to the use of FSM powers.
The reform of the Prospectus Regulation (the existing version of which will be repealed and replaced in time).
The repeal and restatement of some elements of the Securitisation Regulation with a view to the replacement of most firm-facing requirements by rules made by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), demonstrating how regulatory responsibility could look in regimes which involve more than one regulator under the enhanced FSMA model.
Giving the FCA rulemaking powers in relation to Payments regulation, which provides a demonstration of how the FRF powers might be used to ensure that the FCA has the necessary powers to make rules to replace retained EU law.
FCA Publishes Proposed Clarifications - Understanding the Scope of the Consumer Duty
The FCA published the final rules - A New Consumer Duty (PS22/9) - back in July 2022. Since publication of the final rules the FCA have identified a few areas where clarification is needed on how (the Duty) applies. On December 1st the FCA published their Quarterly Consultation NO 38 (CP22/26) which covered proposed changes to make certain points of the Duty clearer in the rules.
A summary of the proposed changes include the following:
Authorised firms approving financial promotions on behalf of unauthorised third parties, or communicating promotions, would be subject to the Duty.
Firms in the Temporary Marketing Permissions Regime (TMPR) would also need to consider the Duty with regard to the approval and communication of financial promotions.
The Duty would apply to FCA authorised firms creating a product or operating pension schemes for occupational pension scheme trustees, to the extent they can determine or materially influence retail customer outcomes.
An occupational pension scheme product would be considered closed once it is no longer possible for new members to join the scheme.
The FCA notes that there is an exclusion from the Duty for firms conducting activities in relation to non- retail financial instruments, which is intended to be used by firms conducting purely wholesale activity. This exclusion is not intended to cover instances where firms are designing and distributing funds for retail customers.
The Duty will come into effect on 31 July 2023 for new and existing products or services that are open for sale or renewal, and 31 July 2024 for closed products or services.
FCA Publishes Consultation Paper (CP22/27) - Gateway for Firms who Approve Financial Promotions
Consultation paper ((CP22/27) sets out how the FCA plan to operate a new ‘regulatory gateway’ so that all firms wanting to continue approving financial promotions for unauthorised persons will need to apply for permission. This follows HM Treasury’s consultation in July 2020 on a ‘Regulatory Framework for the Approval of Financial Promotions’. The reforms are intended to ensure that the FCA can act quickly to put a stop to harmful financial promotions communicated by unauthorised firms, including in areas such as high- risk investments and Buy Now Pay Later (BNPL).
The FCA are consulting on the following proposals:
Approach to assessing applications:
The FCA propose that an applicant for permission to approve promotions will need to detail the type of financial promotions it is seeking permission to approve. Financial promotions in different sectors will be subject to different rules. The FCA proposes inserting a new chapter (SUP 6A, after SUP 6) into the Supervision Manual (SUP) containing guidance on applications for approver permissions.
The FCA does not intend to extend the compulsory jurisdiction of the Financial Ombudsman Service (FOS) to the approval of financial promotions. As a result, no Financial Services Compensation Scheme (FSCS) cover would be available for claims based on a complaint regarding the approval of a financial promotion.
the FCA intends to require firms to notify them within seven days whenever they approve, amend or withdraw approval of a financial promotion. The FCA also intends to impose a six- monthly reporting requirement covering a firm’s financial promotion approval activities in that period. These requirements would be set out in a new section in SUP: ‘Financial promotion approval reporting’ (SUP 16.30).
The FCA does not expect the proposals to be relevant to authorised persons approving the financial promotions of their appointed representatives (ARs) or of unauthorised persons within their corporate group. Moreover, they would not apply where an authorised person approves their own financial promotions for onward communication by an unauthorised person.
The FCA intends to publish a policy statement and final rules in the first half of 2023, although the precise timing depends on the legislative progress of the FSMB. The deadline for responses is 7 February 2023.
FCA Publishes New Webpage - Section 165 Request for Principal Firms
The webpage notes that it is sending principal firms a mandatory section 165 data request between 8 and 12 December 2022 requesting further information about their appointed representatives (ARs).
Firms will be required to provide the following information about their ARs and introducer ARs (IARs):
The reasons for any appointments
The nature of their regulated business
Whether any unregulated business is conducted and, if so, the nature of this business
Anticipated revenueThe nature of financial arrangements between you, as the principal, and your AR(s)
Complaints information and whether the AR is part of a group
Firms have until 28 February 2023 to respond.
FCA publishes Consultation Paper (CP22/23) - Regulatory Fees and Levies
Consultation Paper (CP22/23) in relation to the FCA’s regulatory fees and levies policy proposals for 2023/24 has been published.
The consultation closes on 16 January 2023. The FCA will consider any responses received and publish a policy statement by April 2023.
FCA Publishes Speech - Culture in Financial Services
The speech delivered by Emily Shepperd, the FCA’s Chief Operation Officer and Executive Director of Authorisations, in relation to culture in financial services.
Points of interest in the speech include:
Culture and the Consumer Duty:
The new Consumer Duty (the Duty) will encourage firms to analyse their culture and how it affects their conduct, as well as challenging firms to ask significant questions about their purpose. Given the Duty pre-empted current cost of living challenges, the FCA highlights the need for firms to pay particular attention to their most vulnerable customers. The FCA also emphasises that it does not set out to be prescriptive about culture, but will step in when customers are at risk of harm.
Diversity and inclusion (D&I):
D&I is also critical to culture as it can prevent groupthink. The FCA’s Early and High Growth Oversight tool aims to help new firms embed positive culture from the outset. Through Firm and Portfolio Assessment Models, FCA supervisors look at purpose, leadership, governance and the approach to people. The FCA expects firms to collect data on the diversity of their staff, actively monitor it with interest and take bold action where needed.
the FCA states that the biggest internal culture shift they has seen has been their growing commitment to innovation. Whilst the FCA makes every effort to support innovation, this is not at the cost of consumers or market integrity. The FCA’s ‘Cryptosprints’ have provided a good example: they have helped the regulator understand how the crypto-sector works and where future opportunities lie and have helped the sector to understand the purpose of FCA requirements and what is expected of them.
the FCA notes that firms are focusing significantly on the ‘E’ and the ‘S’, but less so on the ‘G.’ The FCA is looking closely at what support firms offer employees to improve their culture, which will, in turn, improve their business conduct.
FCA Publishes Portfolio Letter to Providers - Contracts for Difference
The portfolio letter sets out the FCA’s supervisory strategy for firms that predominantly generate revenue from contracts for difference (CFD providers) and the key harm-related risks that CFD providers may pose.
Key points from the portfolio letter include:
dealing with problem firms:
A significant minority of firms in the sector operate business models that cause significant consumer harm. In some cases, consumers have lost life-changing amounts of money.
The FCA have seen three core, often concurrent, poor behaviours:
A small number of firms in the UK’s Temporary Permissions Regime (TPR) have targeted consumers for whom CFDs are inappropriate and use scam/churn techniques to directly profit from their clients’ losses.
They typically use the following methods:
Financial promotions purporting to advertise products other than CFDs which fail to highlight the risks CFDs pose.
Once the client is onboarded, the use of pressure-sales tactics to persuade them to invest increasing amounts of money, including via credit cards and loans.
The charging of excessive or inappropriate fees.The refusal to process requested withdrawals.
putting customers’ needs first:
The FCA notes that ‘The drive to maximise revenue sets up conflicts of interests in respect of the targeting of clients, the size and frequency of client trading and the charges levied on that trading activity.’ In light of this, the FCA expects firms to have analysed all relevant conflicts of interest inherent in their business models and to comply with, and consider, all relevant FCA rules and guidance. The FCA will take action where there is inadequate managing, or exploitation, of conflicts of interest.
delivering assertive action on market abuse:
The FCA notes, ‘Poor systems and controls often result in firms being used as conduits of financial crime, primarily insider dealing.’ The FCA ,therefore, remains concerned at the level of suspicious transaction activity in the CFD sector and the weakness of some firms’ controls. Where the FCA identifies firms operating materially below minimum standards, they indicate that they will take enforcement action.
reducing harm from firm failure:
All firms should have implemented the Investment Firms Prudential Regime (IFPR), which came into force on 1 January 2022, and considered the FCA’s recently-published Observations on Wind-down Planning. Where the FCA identify material prudential weaknesses, they will take action. This has recently included imposing capital/liquidity scalars, business restrictions and skilled persons reports.
By the end of January 2023, the FCA expects all CEOs to have discussed this letter with fellow directors and the board, and to have agreed action points and next steps.
FCA Publishes Findings of Multi-Firm Review - General Insurance Pricing Rules
The FCA has published a new webpage setting out the findings of a multi-firm review assessing firms’ compliance with the pricing rules in ICOBS 6B. The webpage refers to specific examples of good practice and areas for improvement. The review, among other things, considers how firms satisfy themselves that they do not systematically discriminate against motor and home insurance customers based on the number of years they have held their policy, including any renewal (tenure).
Every firm subject to the FCA’s pricing rules, in line with ICOBS 6B.2.60R, is required to attest annually to its compliance. The evidence, overall, indicates that most firms have complied since the rules came into effect on 1 January 2022 and have continued on an ongoing basis. However, many of the smaller firms in the market had few or no records to show how they had complied.
The FCA did not identify any issues regarding firms’ compliance with the incentives rules or judgements regarding potentially reportable breaches of the pricing rules where firms had identified instances in which the price for consumers renewing their home or motor insurance policies was higher than the equivalent price for a new customer, using the same distribution channel.
The FCA will continue to scrutinise firms’ attestations and the systems and controls that underpin them, and expects firms to make improvements to address any issues identified.
HM Treasury Announces Plans - Modernisation of Consumer Credit Legislation
As part of HM Treasury’s Edinburgh Reforms, they have published a consultation as the first step in a process to reform consumer credit legislation (previously announced in June 2022). HM Treasury is seeking views on the objectives, principles and overall direction of the proposed reform.
The consultation notes:
‘Reforming the regulatory regime based around (the Consumer Credit Act 1974 (CCA) will modernise and simplify consumer credit and consumer hire regulation, facilitating innovation in products and the arrival of new entrants into the market. Providing a wide range of credit products which are appropriate for a broad consumer market is an important part of growing the economy’.
HM Treasury intends to develop more detailed policy proposals in due course, which will be put to stakeholders through a second stage consultation.
Implementation of the final approach will likely require primary legislation to be brought forward when parliamentary time allows. The FCA will consult on their approach to any new rules in due course.
Comments can be made on the consultation paper until 17 March 2023.
Pensions Dashboard Programme (PDP) Publishes Consultation Paper on Design Standards
The Consultation Paper sets out a draft of the mandatory design standards that will apply to the data presented on pensions dashboards. This Consultation paper follows on from the PDP’s call for input in July and August 2022.
The consultation is seeking feedback from the pensions industry on a number of points, including whether the standards facilitate content which is engaging, inclusive and accessible and whether the standards strike the right balance between consumer protection and allowing dashboard providers to tailor the content to their target audiences. The data, overall, must provide adequate consumer protection as well as an accessible and consistent user experience.
Dashboards that have been developed by an organisation and approved by the FCA, known as qualifying pensions dashboard services (QPDS), will need to follow the design standards. Pension providers and schemes will begin compulsory connection to the dashboard ‘ecosystem’ from April 2023 and should find the consultation of interest as it explains how the pension information they provide is intended to be presented on the dashboards.
The consultation is being run alongside the FCA’s consultation on the proposed regulatory framework to be applied to dashboard operators. The consultation closes on 16 February 2023, and the PDP aims to issue finalised design standards by summer 2023.