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UK Regulatory Radar

Insights and implications

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February 2024


Our new issue of UK Regulatory Radar brings you the latest industry and regulatory updates impacting financial service providers in the UK.  

Click on the images below for our latest insights and see the 'Further updates' section for other sector-specific developments.


Further updates

In this issue


Prudential Regulation

The Bank of England (BoE) has published a  Policy Statement (PS1/24) on its revised approach to enforcement for PRA firms and financial market infrastructures (FMIs). The PS sets out feedback to responses received on CP 9/23 and resulting changes to draft policy. The revised approach provides a new path for early cooperation and greater incentives for early admissions, with the aim of speeding up investigations. The PS also clarifies the PRA's policies and procedures for making supervisory and non-enforcement statutory notice decisions.

The PRA is consulting on a new Statement of Policy (SoP) setting out the way in which it will exercise its power to grant rule permissions and waivers. The PRA proposes to make determinations based on criteria or factors included in subject-specific SoPs, or according to statutory criteria where there are no subject-specific criteria in place. This should provide clarity and transparency on how the PRA will assess applications, lowering the cost and increasing the speed of s138BA rule permissions.

Capital Markets and Asset Management

The FCA highlights in Market Watch 76 the continued presence of “flying” and “printing” behaviours which risk misleading the markets on a financial instrument's liquidity and / or price. The FCA outlines what firms can to do to reduce the risk of employees engaging in these behaviours. In Market Watch 77, the FCA observes how organised crime groups (OGCs) are committing market abuse in the equity spread bets and CFDs markets. The FCA highlights what firms should look out for and can do to guard against being used to facilitate insider trading by OGCs.

The FCA's Primary Market Bulletin 47 summarises changes that are being made to the short selling regulation. These include increasing the notification threshold for the reporting of net short positions in shares to the FCA from 0.1% to 0.2% of total issued share capital of an issuer (from 5 February 2024) and removing requirements around short positions in sovereign debt or sovereign CDS.

The UK government has deemed countries in the EEA (including EU) to be equivalent under the UK's Overseas Funds Regime (OFR). This important step means that EEA UCITS will be able to use a streamlined mechanism to market to UK retail customers. The OFR also provides a permanent replacement to the FCA's Temporary Marketing Permissions Regime for funds, which has been in place since Brexit. This decision ends uncertainty on how EEA funds would access the UK post-Brexit. Notably, the government stated it plans to consult on extending the FCA's Sustainability Disclosure Requirements regime to overseas funds in the OFR (these are currently out of scope of the SDR).

The BoE published its final Statement of Policy (SoP) on its approach to the power to temporarily prohibit or restrict discretionary payments to employees or shareholders of recognised UK central counterparties (CCPs) in severe circumstances. This power was granted to the BoE under FSMA 2023 as part of the provision of a special resolution regime for CCPs. The final SoP clarifies the types of factors the BoE may consider in assessing the statutory conditions for the use of the power, the types of circumstances that could lead to the statutory conditions being deemed to be met, and the process for giving any direction under this power. The BoE will use this power to support its objective to protect and enhance UK financial stability through ensuring the continuity of critical clearing services.

Insurance

The PRA has issued guidance on how firms that do not wish to file the templates earmarked for deletion as part of Solvency UK reform should notify the PRA in the interim. In particular, the PRA has removed the requirement on firms to submit the RSR, with effect from 31 December 2023.

The FCA has issued (PDF 144 KB)  a requirement on firms in its Wholesale Insurance portfolio to provide information on incidents of non-financial misconduct (NFM), such as discrimination, bullying and harassment. NFM is an area where the FCA has previously highlighted the need for improvements in both prevention and handling. The use of statutory powers to compel this information emphasises the seriousness of FCA concerns and potentially conveys a sense of frustration that firms are not giving NFM the priority it deserves and/or adequately addressing FCA concerns, despite ongoing communications in this area. Since NFM is an issue that can affect all sectors, the FCA's expectations, approach and subsequent outcomes will be relevant for all regulated firms.

Retail Conduct

The FCA published a report highlighting the good practice and poor practice it has observed in the first six months since the Consumer Duty came into force. While there is evidence good progress is being made, some firms are 'lagging behind'. Alongside observations under the four outcomes, the FCA calls out findings in the areas of culture, governance and monitoring and the treatment of vulnerable customers. Unsurprisingly, some identified areas for improvement reflect issues where the FCA has recently taken action such as customers being charged for a service they are not benefiting from (see 'Ongoing advice services' section below). The FCA is taking action in areas where it has concerns under the Duty, however, this publication highlights that the FCA will be equally proactive in providing practical guidance to help firms 'recalibrate' their approach to meet FCA expectations on aspects of the Duty.

The FCA has published the findings of its September 2023 small firms survey, a follow-up to a spring 2023 survey. This survey targeted firms not previously involved to understand how the FCA's additional engagement had helped firms prepare for the implementation of the Duty. The findings indicate improvements including (i) a significant increase in the proportion of firms in some portfolios reporting completion of required implementation steps, (ii) improvements in the preparedness of retail finance and debt advice firms, sectors which in the previous survey scored consistently lower than others. Outcomes monitoring was identified as the most challenging aspect of the Duty to implement. Other notable findings include 38% of firms reporting they have made significant improvements to consumer contracts, and 30% reporting they have identified or made significant improvements to their marketing strategies.

The FCA has written to 20 financial adviser firms requesting information about their ongoing advice services, for which clients continue to be charged post advice. Firms are being asked whether they have assessed ongoing services in response to the Consumer Duty, and what, if any, changes have been made in response. This action is an example of how the FCA is following through on its promise to challenge firms on key areas of harm in the context of the Consumer Duty. Concerns of consumer harm surrounding ongoing advice services has been a recurrently theme, most recently with the FCA airing concerns that some consumers may be paying for services, such as an annual review, but not receiving it.

The FCA has announced that, as a result of its intervention, insurance firms constituting 80% of the GAP insurance market have agreed to suspend sales of the product. Last year, the FCA gave GAP manufacturers three months to take action to demonstrate fair value after the first full year of general insurance value measures data highlighted concerns that some insurers may be failing to provide fair value, particularly in relation to GAP products. The FCA's dissatisfaction with firms' responses, has resulted in the FCA now requiring firms to pause sales whilst they bring them in line with FCA rules. The FCA will engage with the rest of the market with the aim of improving the value of the product across all firms.

The FCA has published the findings of its multi-firm work on Claims Management Companies (CMCs) that carry out unregulated claims services. The review was to assess concerns about the risk to consumers from the `halo' effect of FCA authorisation. The review identified that some CMCs had (i) undertaken very little or no regulated activity, (ii) inadequate systems and controls, (iii) non-compliant financial promotions, and (iv) significantly higher fees for unregulated claims. Reminding firms of their Consumer Duty obligations, the FCA highlights the relevance of Consumer Understanding to its findings. Demonstrating its intention to be more assertive, the FCA, whilst acknowledging fees for unregulated service do not fall within the regulatory perimeter, "strongly urge CMCs to keep in mind the spirit of the Consumer Duty". The FCA will likely regard this work a success as contact with CMCs has resulted in 70% stopping unregulated activity whilst some others have applied to cancel FCA permissions.

Payments

The BoE has published (PDF 3.3 MB) a staff working paper on the impacts of Open Banking (OB). The research, still in progress, has so far found that 49 countries have adopted OB policies. UK data shows that OB enables: (i) consumers to access both financial advice and credit; and (ii) small and medium sized enterprises to establish new fintech lending relationships. In a calibrated model, OB universally improves welfare through entry and product improvements when used for advice. When used for credit, OB promotes entry and competition by reducing adverse selection, but higher prices for costlier or privacy-conscious consumers partially offset these benefits. These generally positive findings should contribute to increasing the momentum around the roll out of Open Finance.

Pensions

The Pensions Regulator (TPR) has published its regulatory report on a cyber security incident at a large pension scheme administrator in 2023, detailing its actions, lessons learned, and the key steps trustees should take in the event of a cyber security incident. TPR's statement emphasises the importance of (i) robust cyber security and business continuity plans that are regularly reviewed and tested, (ii) open and transparent information sharing between schemes, administrators and TPR in order to understand the extent of impact and work to protect members. TPR sets out key steps for trustees including the importance of timely communication, immediate action to safeguard scheme members and restore key services, and the importance of monitoring transfer request volumes. The findings are relevant for all pension scheme trustees.

TPR has published new private markets (PM) guidance to support trustees in considering the role of private market assets in delivering improved outcomes for savers and highlighting the positive role PM investments can play in a diversified portfolio when accompanied by appropriate advice and effective governance. The guidance encompasses the legal duties of schemes, key investment considerations, opportunities, risks, and signposts to additional resources to aid trustees' decision making. TPR's guidance reflects the Government's Mansion House reforms, which are designed to enable the sector to unlock capital for UK industries and increase returns for savers.

Cross Sector

In an update on its progress to prevent financial crime, the FCA has identified four areas of focus — data & technology, collaboration, consumer awareness, and metrics & measuring effectiveness. For each area, the FCA sets out questions that boards should ask themselves to identify areas for improvement. In a related speech, the FCA requested that regulated firms and wider stakeholders read and act on the report.

The FCA has published its response to the annual reports of its six independent panels, which provide advice and challenges the regulator's performance. In a lengthy response, the common themes across these reports include (i) cost of living, (ii) professional indemnity insurance, (iii) smarter regulatory framework, (iv) competitiveness and growth, (v) ESG and Sustainability Disclosure Requirements, (vi) regulatory data and technology and (vii) Consumer Duty. The response outlines activities the FCA has, and intends to undertake, in each of these areas.

ESG and Sustainable Finance

HM Treasury has extended the UK Transition Plan Taskforce (TPT) mandate to July 2024, with the option of extending further to October 2024. The extension will allow the TPT to release its final outputs and support the work of the Transition Finance Market Review (TFMR). Output still expected for financial services comprises (i) final sector deep dive guidance, (ii) notes on adaptation, nature, the just transition, emerging markets and developing economies and (iii) a forward pathway on transition plans.

The FCA has launched a webpage that provides an overview of its Sustainability Disclosure Requirements (SDR) regime together with  suggested actions for firms and initial clarifications on aspects of the rules. The clarifications relate to topics such as the treatment of fund of funds under the labelling regime, the scope of the naming and marketing rules, and the robust, evidence-based standard of sustainability. The FCA will update the page over time to provide further clarifications on common queries.

Useful information:


The KPMG Regulatory Barometer helps firms identify key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change.

The KPMG Financial Services Regulatory Insight Centre monitors and tracks the evolving regulatory landscape. If you would like to discuss any of the topics covered in more detail, please contact a member of the team below:

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