August 2020

This UK regulatory round-up provides insights on where the agenda is heading and implications for firms. As we move beyond the pandemic and as the post-Brexit landscape takes shape, we track the direction of UK regulation and highlight key developments.

The customer is king

The Financial Policy Committee's (FPC) August Report (PDF 11.9 MB) highlights that UK banks have remained resilient under the stress of the pandemic. However, the reliance on extraordinary central bank support to address potential issues in key markets suggests there is a need for an internationally coordinated review of the resilience of firms and markets. New ways of making payments (e.g. stablecoin), which become critical to the functioning of the economy, will need to be regulated to clear standards and possibly brought into the regulatory perimeter to maintain financial stability.

The FPC also continued to emphasise the need for markets participants to transition away from LIBOR before the end of 2021. This is a common message from all regulators, as covered in KPMG's latest Regulatory Round-up on the LIBOR transition. Meanwhile, HMT is indicating the pivotal role it will play in the formation of UK regulation after the end of the transition period, especially in relation to the capital markets. 

The regulators continue to focus on prudential issues, but the large majority of recent regulatory outputs have a consumer-centric theme, whether to remedy customer detriment, prevent it crystallising in the short term, or improve financial education and awareness to mitigate customer harm in the longer term.


Driving good customer outcomes in all sectors

Since the July edition, regulators have published a significant number of papers or initiatives that are designed directly to improve the outcomes for the end consumer. Some of these changes are near term, in direct response to the impact of the pandemic for example, while others are longer term and are generational or strategic in nature. Regardless of timescale, they are designed to achieve three broad outcomes:

1. Remediate customer detriment

  • The FCA is consulting on guidance for firms to help customers identify their quickest and easiest options to claim for any cancelled travel or events caused by the pandemic. It applies to insurance and credit and debit card firms.  
  • The FCA is also proposing further support for “mortgage prisoners” suffering detriment to make it easier for lenders to offer a switch, as well as allowing customers to delay repayment of the capital on interest-only loans at maturity.
  • The FCA has published numerous updates on the test court case relating to Business Interruption insurance. The judgment is expected late September. The outcome will have a material impact on insurers and customers alike as it will likely generate large scale remediation activity, a surge in complaints or both.

2. Proactively mitigate customer harm.

  • The FCA is consulting on further guidance on the fair treatment of vulnerable customers, designed to ensure this is properly embedded in firms' culture, policies and processes. 
  • In a similar vein, and alongside the portfolio letters issued to other firm types (see the February edition), it is the turn of debt advice firms (PDF 192 KB) to be told to put customer interests at the heart of their business, give sound advice and manage their risks. 
  • The findings of an FCA review into re-lending by firms that offer high-cost credit has identified concerns about firms' conduct, including irresponsibly encouraging consumers to borrow more.
  • The FCA's call for input is looking for early views on what should happen to consumers coming to the end of a second payment deferral period (as a result of the pandemic) for mortgage and consumer credit products, so that they are still treated appropriately.
  • To better understand the different challenges faced by generations, the FCA has published a feedback statement (PDF 578 KB) on its findings, which will shape the FCA's forward-looking view. This view will centre around enabling effective consumer investments decisions, ensuring consumer credit markets work well, making payments safe and accessible, and delivering fair value in a digital age.
  • To mitigate the consumer protection issues caused by the impact of the pandemic on residential property and investment markets, the Temporary High Balance Coverage (which increases the FCSC limit on deposits from £85,000 to £1 million) has been extended from 6 to 12 months. 
  • To address consumer protection issues more broadly, the FCA, unsurprisingly, has confirmed a ban on discretionary commission models for motor finance and is also implementing measures to improve the relevant disclosure obligations. 
  • The FCA proposes to abolish same-day redemptions from authorised, open-ended property funds by imposing a notice period requirement of 90 to 180 days for retail investors. Although this will impact only about 20 funds, it will impact many thousands of end investors and their intermediaries.
  • In a first move into regulation of crypto assets designed to protect consumers, HMT is proposing to make marketing them a financial promotion, thereby bringing them within the remit of the FCA and requiring approval by an authorised firm. 
  • Further, to raise the bar for all financial promotions, HMT is also consulting on establishing a regulatory “gateway”, which an authorised firm must pass through before it is able to approve the financial promotions of unauthorised firms.

3. Improve financial education and awareness

  • The Bank of England has launched a much welcomed initiative designed to improve financial literacy within primary schools in an engaging manner by using characters from The Beano. Previous such initiatives have started but have not been sustained. Hopefully, this one will fare better.
  • The FCA has launched its enhanced register designed to help customers protect themselves from fraud and scams by understanding whether the firms they are dealing with are authorised. Critically, however, a directory of certified and assessed persons (i.e. non-Approved Persons) will not be added to the Register until later this year.

Focus on non-systemic firms and new entrants

The PRA is consulting (PDF 903 KB) on UK recovery planning, which resolves previous uncertainty around proportionality and will be welcomed by non-systemic firms. In line with discretion granted under the Bank Recovery and Resolution Directive (BRRD), the PRA proposes to apply Simplified Obligations for recovery planning for firms whose failure would not be expected to have a significant negative impact on financial markets. Firms deemed eligible:

  • Will be permitted to reduce the minimum number of stress scenarios considered in recovery planning to two (the current requirement is three scenarios, or four for systematically important institutions); and 
  • Will no longer be expected to submit the information template referred to in SS 9/17.

Continuing the theme of increasing clarity for non-systemic firms, this year's Conference for Chairs of Non-Systemic Banks and Building Societies was the launching point for the PRA's proposed new guide to help new and growing banks “scale the mountain” from initial authorisation to becoming established players in the banking market. In her speech, Sarah Breeden noted that no small bank has yet become a large bank and that new firms must be able to grow safely and resiliently with the regulatory path clearly mapped out. This path must include contingency plans and a way “off the mountain”, if required.

The speech also announced a consultation (responses due by 14 October) and new Supervisory Statement to clarify how regulatory expectations will change for banks as they grow from new to mature. These expectations include capital buffers of six months' operating expenses, new capital to be injected well before a firm hits its buffers, development of stress-testing capabilities, credible recovery and solvent wind-down plans, high expectations of boards and governance, and proactive and open relationships with regulators.

Ongoing COVID-19 prudential measures

The PRA published a statement to insurers, clarifying its approach to the application of the matching adjustment (MA) during COVID-19. The MA has functioned as intended thus far during the pandemic, but the PRA has provided further guidance to ensure consistency in firms' interpretation of regulatory policy. The clarifications focus on management of the MA portfolio, eligibility, calculation and reflection in the Solvency Capital Requirement.

The PRA has issued a further statement on the application of the EBA requirements on reporting and disclosure of measures applied in response to COVID-19. The PRA confirmed that it is exercising the option to implement the disclosures in a proportionate manner. Therefore, only globally systemically organisations (G-SIIs) or other systemically important institutions (O-SIIs) will be required to submit the disclosures and these will be at the highest level of consolidation in their jurisdiction. Relevant firms should make disclosures on a biannual basis, either at 30 June and 31 December, or at their half-year and year-end dates, if different.

Following the ECB's recommendation that firms should not pay dividends until January 2021, the PRA notified banks that it will undertake its assessment of post-2020 distribution plans in Q4 2020. This will be based on current and projected capital positions and the levels of uncertainty around the economy, market conditions and capital trajectories at the time.

Prudential framework: banks & wholesale brokers

The PRA is consulting until 30 September on proposed changes to its rules, supervisory statements and statements of policy as result of the fifth Capital Requirements Directive (CRD V). The consultation covers supervisory requirements and guidance under Pillar 2, adjustments to remuneration policies, establishment of Intermediate Parent Undertakings (IPUs) and governance requirements. It will apply to banks, building societies and PRA-designated investment firms.

For the most part, the PRA judges that CRD V does not currently required major changes to its approach. However, it proposes to implement the PRA buffer on an individual basis for firms that are part of a UK consolidation group or part of an RFB sub-group in relation to the PRA Buffer (Pillar 2B), and to amend its rules to set out more explicitly the need for firms to have sufficient capital to absorb losses resulting from stress scenarios.

The PRA will consult further in autumn 2020 on draft rules to implement the remaining elements of CRD V not covered by the current consultation, including a new requirement for approval and supervision of holding companies, clarification of the capital stack, a revised definition of the maximum distributable amount (MDA), revisions to the capital buffers that may be applied, and the introduction of supervisory requirements to measure, monitor and control interest rate risk in the banking book (IRRBB).

The PRA does not propose to implement CRD V requirements that do not need to be complied with until after the end of the transition period. These include some of the requirements for IPUs and Pillar 2 requirements for the leverage ratio.

Further clarity on supervisory expectations

The FCA has published a letter (PDF 308 KB) for chairs of remuneration committees. The letter sets out the FCA's recent findings and how it plans to assess a firm's remuneration policies and practices this year. The letter contains useful examples of good and poor practice. The overarching message is to highlight the importance that the FCA places on firms maintaining a healthy culture by recognising the right behaviours in response to the pandemic. 

The FCA has published a statement on its view of the risks and benefits of Employer Salary Advance Schemes (ESAS). ESAS are commonly promoted as an alternative to high cost credit and are designed to achieve the same outcomes for employees. The statement covers what employers and employees should consider when using them to mitigate the risks, and summarises the FCA's ongoing interest in this topic.

HMT's growing involvement in regulation

Recent announcements by HMT indicate both that the UK Government is willing to diverge from EU regulation and that it will play an increasing role in setting the strategic direction and mechanics of UK financial services regulation. The PRA and the FCA have generally been able to implement EU legislation and regulation without the need for UK legislative instruments, under powers in the UK's European Act. From now on, the government and parliament will have a much greater involvement in new and amended regulation.

A policy paper proposes changes to the UK version of the EU Benchmarks Regulation (BMR) by extending the transitional period for third-county benchmarks from 31 December 2022 to 31 December 2025. The BMR transition period ends on 31 December 2021. There are industry concerns about the lack of clarity around the legal framework for endorsement and recognition prescribed in the BMR and the lack of economic incentives for third-country benchmarks to apply. HMT asserts that the current limited timeframe could mean that UK firms could lose access to important benchmarks, which could have serious repercussions given their widespread use for risk management, treasury financing and overseas investment.

HMT will shortly bring forward legislation that will assist the FCA when considering draft applications for registration from prospective securitisation repositories (SRs) prior to the end of the transition period. SRs have previously been registered with ESMA.

HMT's Call for Evidence on the Payments Landscape Review is the first stage of the review that was announced in June 2019. It asks questions about the opportunities, gaps and risks that need to be addressed in order to ensure that the UK maintains its status, in HMT's view, as a country at the cutting edge of payments technology. The paper covers the range of developments in the payment's architecture from Open Banking and faster payments to cross-border payments.

Concurrently, the Payment Services Regulator has announced that it will be developing its future strategy over the coming few months, given the rapidly evolving payment environment since it was first given its mandate in 2015.

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