7 Oct 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.
FCA publishes Discussion Paper (DP22/5) - Competition Impacts of Big Tech on the Financial Services Industry
Discussion Paper (DP22/5) covers the potential competition impacts of the ‘Big Tech’ firms’ entry and expansion into retail financial services. The FCA notes that in recent years, Big Tech firms entry into financial services, in the UK and elsewhere, has demonstrated their potential to disrupt established markets, drive innovation and reduce costs for consumers. The regulator wants to see these benefits ‘fully realised’ while also ensuring good consumer and market outcomes.
The FCA had adopted the Financial Stability Board’s definition of ‘Big Tech’, firms being ‘large digital companies with established technology platforms and extensive established networks’. This includes Facebook (Meta), Google (Alphabet), Apple and Amazon.
The Discussion Paper includes analysis on the competition impacts of Big Tech on four key retail sectors: payments, deposit taking, consumer credit and insurance. The FCA are seeking views on the potential competition benefits and harms from Big Tech firms in these sectors, which will inform their pro-competitive approach to digital markets.
Having examined the four retail sectors in scope, the FCA find five key themes emerging:
Potential for BigTech firms to enhance the overall value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions.Their entry into the payments sector with Google and Apple Pay are good examples.
In the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term they may seek to rely less on partnerships and compete more directly with existing firms.
Big Tech firms entry may not be sequential or predictable. While initial forms of entry may be hard to predict, once momentum builds, it may cause significant market changes to occur quickly.
In the short-term and possibly enduring longer, Big Tech firms entry in financial services could benefit many consumers; benefits arising from Big Tech firms own innovations, as well as increasing other market participants incentives to innovate, improve quality and reduce prices of financial products and services through increased competition.
In the longer term, there is a risk that the competition benefits from Big Tech entry in financial services could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes.
No regulatory changes are being proposed at this stage, and the FCA’s paper aims to stimulate discussion to inform their regulatory approach to Big Tech firms as part of the new UK pro-competitive regime for digital markets. The deadline for responses to the Discussion Paper is 15 January 2023. Following this, the FCA will consider feedback and intends to publish a Feedback Statement in the first half of 2023.
FCA Publishes Consultation Paper (CP22/19) - A New Baseline Financial Resilience Regulatory Return
Consultation Paper (CP22/19) on the proposed creation of a base financial resilience regulatory return for solo-regulated firms, referred to as ‘FIN073’. This will replace the FCA Financial Resilience Survey (formerly the Covid-19 Impact Survey) which was launched in June 2020.
In summary the FCA note the reason for this consultation:
"Over the last two years, having access to high quality baseline financial resilience data on a regular basis has improved our ability to meet our objectives to protect consumers and ensure market integrity. This data allows us to rapidly assess financial resilience risks at firms, resulting in early intervention where appropriate…Ultimately, this data helps in delivering our strategic commitment of reducing harm from firm failure.”
In the Consultation Paper the FCA explain that they are seeking to reduce both the administrative and financial burden that an ad hoc survey places on firms, and also to increase the quality and consistency of financial resilience data received from solo-regulated firms. Firms will be required to submit a FIN073 every quarter, including information such as the total amount of liquid assets that it controls, or to which it has unrestricted access; its average monthly cash needs arising from fixed costs; and net profit or loss in the last quarter.
FIN073 would apply to all FCA regulated firms except for credit brokers, MIFIDPRU investment firms, PRA authorised persons or Temporary Permission firms. The proposals also apply to authorised electronic money institutions and authorised payment institutions.
The Consultation Paper also contains a Draft Handbook text at Appendix 1, which makes the amendments to the FCA’s Supervision Manual (SUP) under the Financial Resilience Reporting Instrument 2022. Specifically, these amendments relate to SUP 16 Annex 53R and SUP 16 Annex 54G.
The deadline for responses is 2 December 2022. The FCA intends to publish a Policy Statement and final rules in spring 2023.
FCA Publishes New Webpage - Consumer Duty
The new webpage on the new Consumer Duty (the Duty) sets higher expectations for the standard of care firms provide consumers. The webpage detail some of the topics the FCA has received queries on, and makes particular reference to the FCA’s Finalised Guidance published in July 2022 (FG22/5).
October Implementation Plans:
In PS22/9, the FCA announced that firms at Board level (or equivalent management body) should have agreed their implementation plans by the end of October 2022. Firms need to be able to show they have scrutinised and challenged these plans ensuring they are deliverable and robust to meet the new standards. The October deadline reflects that firms will need clear plans in order to implement the Duty properly and on time. The FCA do expect firms to have set out how they will do so in time to ensure timely implementation. Plans should, by the October deadline, be sufficiently developed to provide both governing bodies and the FCA with assurance that the expectations set out in the Duty have been carefully considered and will be implemented for new and existing products by 31 July 2023.
Firms should also consider any work needed with other parties to prepare for the Duty and ensure their plan allows enough time for this.
Consumer Duty Board Champions
In FG22/5, the FCA stated that they expect firms to have a champion at Board (or equivalent governing body) level. This champion should be an Independent Non-Executive Director (NED), where possible. For larger organisations with group structures, the FCA expect this champion to be at an appropriate Board level to ensure that the Duty is discussed in a meaningful way.
The primary role of the Board champion is to support the Chair and CEO in ensuring that i) the Duty is being raised regularly in all relevant discussions. ii) the Board is challenging the firm’s governing body/management on how it is embedding the Duty and focusing on consumer outcomes.
Throughout the guidance in FG22/5, the FCA have included examples of the types of questions the Board champion, or other members of a firm’s governing body, could ask to assure themselves the firm is meeting expectations under the Duty.
Definition of Closed Products:
FCA Publishes Portfolio Letter - High-Cost Lending Products
The Portfolio Letter sets out the FCA’s updated view on the key risks of harm which they believe high-cost firms pose to their customers and the markets in which they operate.
The letter notes, ‘You should consider the degree to which your firm presents such risks and take the necessary steps to mitigate them. We also set out our strategy for this portfolio to ensure that firms understand our focus, expectations of them and the related actions in order to manage their risks and reduce harm to consumers.’
The letter covers the following key points, among others:
Cost of Living:
The FCA notes that it is particularly important that firms proactively take steps to manage and mitigate the risk of poor consumer outcomes and provide the appropriate assistance to customers in the light of the rising cost of living.
Raising standards: Our Consumer Duty
The New Consumer Duty will require firms to act to deliver good outcomes for customers (including those in vulnerable circumstances). This reflects the positive and proactive expectations the FCA have of firm conduct, and the FCA’s desire for firms to think more about consumer outcomes and place consumers interests at the heart of their activities.
Portfolio and Consumers
In the period since the FCA’s last portfolio letter there has been change in the shape of the market with a number of firms facing significant challenges as a result of poor historical lending practices. The FCA expect consumer demand for credit to continue, but note that it is important that firms offering credit, do so responsibly. Consumers should be able to understand and afford their credit products.
The FCA’s Focus:
The FCA will continue to focus on responsible lending (in particular, considering how firms promote and describe their products and the information they give customers, firms' approach to affordability, including creditworthiness assessments, and sustainable borrowing for consumers). The FCA explains that board level and senior management should prioritise embedding a healthy culture that is reflected in firm policies. Decision-making should be aligned with consumer interests. Firms are reminded to consider and act on the FCA's guidance for firms on the fair treatment of vulnerable consumers (FG21/1) as well as any relevant findings from the retail bank implementation review.
Finally, the FCA refers to risks of harm and its expectations relating to sludge practices, affordability and relending, forbearance and complaints handling.
PSR Publishes Final Decision and Policy Statement (PS22/2) - Card-Acquiring Market Remedies
(PS22/2) sets out the Payment Systems Regulators (PSR’s) final decision on remedies relating to their card-acquiring market review. This follows the PSR’s provisional decision on remedies set out in Consultation Paper (CP22/3).
The remedies mandated by the PSR to address the concerns identified in the card-acquiring market are as follows:
Provide trigger messages to businesses reminding them at the end of their contract term that they could get a better deal if they shopped around.
Provide summary information boxes of the card fees businesses are charged and provide an initial online quotation tool of key charges to help them make informed choices.
Allow businesses to switch card acquiring providers easily by requiring that Point of Sale (POS) terminal contracts do not run for more than 18 months.
The PSR will implement the remedies through specific directions. In particular, specific direction 14 requires providers of card-acquiring services to provide information to merchants, while specific direction 15 requires providers of card-acquiring services to provide prompts to merchants. Specific direction 16 limits the length of POS terminal contracts.
The PSR has also published advice on the format and content of the information required under specific directions 14 and 15.
The 14 firms subject to the specific directions must implement the remedy relating to POS terminal contracts from January 2023, and the two remaining remedies from July 2023.
The PSR will monitor firms compliance with the directions and the impact of the remedies to determine whether any further action is required.