November 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.

Top regulators set out their vision

The government and regulators continue to set out their vision for the near-term future of financial services. On 9 November, the Chancellor delivered an update to Parliament on the government's plans for financial services. He stressed the importance of the financial services sector to the UK economy and the need to continue supporting vulnerable customers. He also hailed the start of a “new chapter for financial services”, as the UK leaves the EU, with a focus on openness, innovation and green finance.

We outline the detail of the key components on equivalence and green finance below. Also announced were future consultations on the UK Listings Regime (since launched), the UK overseas regime and reform of the UK's regime for investment funds. To help UK financial services exports to the EU remain competitive, firms will be able to reclaim input VAT, worth an estimated £800 million. The Chancellor also referenced the Independent Fintech Strategic Review, the Payment Landscape Review and the Bank of England (BoE) and HM Treasury (HMT) work on central bank digital currencies as an alternative to cash, and announced a future consultation on stablecoins.

The new CEO, Nikhil Rathi detailed the challenges and priorities for the FCA in a podcast and his Mansion House speech. These range from the immediate challenges of the pandemic, the end of the transition period and LIBOR transition, to the longer-term challenges of increasing pressure on the financially vulnerable, new technology offering great potential for innovation but raising new ethical and regulatory questions, the rising responsibilities of consumers to make their own investment decisions, and climate change. He also emphasised that the FCA is undergoing its own transformation programme, especially around its use of data.

In his Mansion House speech (PDF 667 KB), PRA CEO and Deputy Governor for Prudential Regulation, Sam Woods again picked up the theme of a simpler prudential regime for small banks and building societies (see our September Regulatory Radar). He also spoke about the future regulatory framework and how the UK might diverge in approach from the Eurozone, particularly regarding the application of proportional regulation, the PRA's new mantra being “Keep it strong and simple”.

New prudential rules for banks and investment firms delayed

On 16 November, acting on industry feedback, HMT, the PRA and the FCA issued a joint statement on the implementation of prudential reforms in the Financial Services Bill, setting out revised timelines for the introduction of the new Investment Firms Prudential Regime (IFPR) and the implementation of Basel 3 reforms - the UK equivalent to the outstanding elements of the revised Capital Requirements Regulation (CRR2).

IFPR will now be delayed from June 2020 to 1 January 2022. The FCA's June 2020 paper did not generally propose fundamental differences to EU rules, but asked questions about interpretation, points of detail and use of member state discretions. However, it seems unlikely that the FCA will weaken its current approach of demanding a SREP and ICAAP (to be become ICARA) for relevant firms.

The PRA will now target an implementation date of 1 January 2022 for the Basel 3 elements. We would expect these to include the elements that the EU has timetabled for June 2021 (credit risk, counterparty credit risk, net stable funding ratio, disclosures, MREL) and September 2021 (FRTB:SA reporting), but the PRA has yet to confirm the specifics. There is no change to the planned implementation timeline for Basel 4 elements (see the HMT/PRA April 2020 statement).

UK equivalence decisions and approach

The Chancellor's statement detailed a package of equivalence decisions given to EEA states across several areas of financial services regulation. In summary, the decisions will allow UK firms to continue to access some EEA services and ensure efficiencies in capital and margin across intra-group entities in the UK and EEA. In particular:

  • Two equivalence decisions under EMIR will allow UK firms to seek or apply an exemption from the requirement to clear through a central counterparty (CCP) or meet margin requirements for transactions with an EEA State entity in the same group. These exposures will therefore qualify as intragroup exposures in the credit valuation adjustment (CVA) calculation, ensuring that UK firms will in many cases not have to capitalise CVA on OTC exposures to EEA State affiliates. Also, UK firms will be able to continue to treat derivatives traded on EEA regulated markets as exchange-traded derivatives rather than OTC derivatives.
  • Seven equivalence decisions under CRR will allow UK firms not to be subject to increased capital requirements as a result of their EEA State exposures.
  • Three equivalence decisions under the Solvency II Regulation cover both reinsurance and group capital treatment.
  • An equivalence decision under the Central Securities Depositories Regulation (CSDR) means EEA CSDs recognised by the BoE will be able to continue to service UK securities.
  • An equivalence decision under the Benchmarks Regulation (BMR) will allow EEA benchmark administrators to be added to the FCA's benchmarks register and to provide benchmarks to UK supervised entities.(During the transitional period for third country benchmarks under UK BMR, UK supervised entities are currently permitted to use all third country benchmarks until end 2022.)
  • Equivalence has been granted to CCPs established in EEA States. Therefore, subject to a CCP-specific recognition determination by the BoE, UK firms will be able to continue using EEA CCPs. 
  • Audit equivalence has been given to the EEA States as well as equivalence decisions under the Credit Rating Agencies Regulations.

These decisions are in addition to the 2019 directions made by HMT granting equivalence and exemption decisions to the EEA States under the Prospectus Regulation and Transparency Directive. Not all 40 possible equivalence decisions have yet been given, notably under MiFID II for the derivatives and share trading obligations. However, the UK Government has not ruled out further equivalence decisions as it considers that comprehensive mutual findings of equivalence between the UK and the EEA States are in the best interests of both parties.

HMT also published a Guidance Document (PDF 258 KB) that sets out how the UK intends to use its equivalence framework as one of the key mechanisms to facilitate cross-border financial services transactions and market access. The UK's approach will be guided by certain key principles:

  • a commitment to open, safe, and resilient financial markets
  • a commitment to robust and high-quality regulation, guided by international standards
  • a desire to facilitate international financial services business by reducing barriers and frictions where possible
  • a desire to reduce global market fragmentation
  • a desire for friendly and effective collaboration with international partners

Equivalence will be judged on outcomes, which will allow jurisdictions to change and adapt their rules but still allow the UK to judge them equivalent provided there is no material impact. HMT will be responsible for making equivalence determinations, based on technical advice and information from the financial services regulators. Once HMT is satisfied of equivalence, it will lay secondary legislation for parliamentary scrutiny.

Given that mutual equivalence has not yet been agreed on the MiFID II share trading obligation, the FCA set out its approach to allow UK market participants to continue to be able to access EU trading venues after the end of the transition period. The FCA will use its Temporary Transitional Power (TTP) to allow UK firms to access an EU trading venue as long as the venue is a UK-Recognised Overseas Investment Exchange, has applied under the temporary permissions regime or its activities meet all the conditions required to benefit from the Overseas Person Exclusion.

Firms can apply for market-making exemptions from the Short Selling Regulation (SSR) - the FCA has also updated its web page on how UK and EEA firms should submit notifications of the exemption. It has also updated what firms reporting net short positions need to do during and after the transition period.

UK's approach to Green Finance

The Chancellor's statement referred to the UK's approach to implementing the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and announced that climate disclosures by large companies and financial institutions will be mandatory by 2025. The UK will implement a new green taxonomy and will issue its first Sovereign Green Bond in 2021, “in response to investor demand”. The FCA does not currently intend to implement EU sustainable finance regulation or any rules akin to it. There is therefore a regulatory gap. However, the UK introducing yet another definition when global efforts are focused on convergence of definitions may be of concern to clients, both financial and non-financial.

On 9 November, Andrew Bailey set out the BoE's commitment to climate risk and stressed that COVID-19 does not change that. Risks from climate change are greater and more complex to manage than those of the financial crisis and the pandemic, and they require firms to be ambitious and act now. Investing to support the transition to zero net emissions will be a critical part of the recovery. Firms must meet the BoE's expectations on climate risk by end-2021. At the same summit, Nikhil Rathi spoke on the climate challenge, highlighting the role of finance in the transition to a cleaner and less carbon-intensive economy and the role of regulation in this transition.

A BoE announcement on 13 November set out initial expectations for the 2021 climate biennial exploratory scenario (CBES). Large UK banks, building societies, life and general insurers and ten selected Lloyds managing agents will be invited to take part. The BoE will not use the results to size firms' capital buffers, but firms must assess how climate risks could impact their business and review whether additional capital needs to be held against this.


  • End-December 2020: balance sheet cut-off date for the exercise
  • June 2021: CBES official launch and scenarios published
  • End September 2021: participants' initial submissions due
  • December 2021: BoE to announce decision on whether to run a second round of the exercise
  • Q1 2022: results of the CBES published (in the event of a second round, the BoE will publish results at the end of Q1 2022)

Planned engagement with participants ahead of launch:

  • December 2020: BoE will inform participants about its high-level approach for the CBES in various key areas, including counterparty exposure data. It will also release a provisional set of scenario variables to be included in the exercise
  • February 2021: BoE will release a set of draft data templates and a draft qualitative questionnaire for feedback from participants
  • April 2021: BoE will release a finalised set of data templates and qualitative questionnaire

Meanwhile, the PRA has published feedback to its aide to general insurers on a framework for assessing financial impacts of physical climate change, which identified the need for further work in assessing:

  • Each hydro-meteorological region-peril in detail (which is being considered by the Central Banks and Supervisors Network for Greening the Financial System - NGFS)
  • How current catastrophe model calibrations allow for climate change that has crystallised to date (which will be explored as part of the CBES)
  • How the insurance industry's experience in quantifying physical climate change risk on the liability side of the balance sheet could be used to develop a similar framework for assessing the risk on the asset and investment side

Continued focus on COVID-19 impacts

The government recognises that economic uncertainty created by COVID-19 makes it more crucial than ever to foster a long-term investment culture. HMT, the BoE and the FCA have therefore convened a working group to facilitate investment in “productive finance” - investment that expands productive capacity, furthers sustainable growth and can make an important contribution to the real economy. The group will build upon work already undertaken to investigate the challenges and potential barriers to investment in productive finance assets, including HMT's 2016 Patient Capital Review and the Asset Management Taskforce's UK Funds Regime Working Group's Long-Term Asset Fund (LTAF) proposal, which was given special mention in the Chancellor's 9 December statement.

As further lockdown measures are implemented in the UK (whether national or more localised), we have seen regulators respond accordingly to continue to defer non-urgent requirements, provide additional specific guidance to firms to help support their customers and, finally but critically, re-iterate the need to act flexibly and treat customers fairly. The FCA has deferred the deadline (PDF 547 KB) for firms to conduct their first assessment of the fitness and propriety of their Certified staff. Similarly, its latest primary market bulletin also confirmed its continued deferral of corporate reporting whilst the disruption continues.

The FCA published additional guidance to support customers experiencing financial difficulties in relation to their mortgage, consumer credit as well as insurance and premium finance arrangements. Beyond publishing sector specific additional guidance, the FCA has also re-asserted the need to ensure that firms are objectively and robustly considering the need of their customers firstly in a recent speech but also in the form of a reminder to insurers of the impending deadline to review the value of their products in light of the impacts of coronavirus.

More on retail conduct

The FCA published another tranche of portfolio letters; this time it was the turn of mortgage intermediaries (PDF 227 KB), claim management companies(CMCs) (PDF 160 KB), Lloyd's insurers and market intermediaries (PDF 229 KB) and price comparison websites (PDF 212 KB). No great surprises in any of them, although the reference by the FCA that “many CMCs have demonstrated a poor understanding of, and sometimes attitude to, their regulatory obligations” illustrates the scope of supervisory challenges the FCA expects in this sector. Given the number and frequency of these portfolio letters, to help firms keep track, the FCA also published (PDF 95 KB) the list of all 40 different business model segments.

Two new FCA publications centre on proactively protecting customers that could be taken advantage of. First are mortgage borrowers which have mortgages with closed book providers and those with interest-only/part-and-part mortgage borrowers. The FCA has finalised guidance to support these borrowers so they do not become trapped in legacy products and can source new deals when their current mortgage deals end. Second is a joint announcement by the FCA, TPR and Money and Pensions Service (MaPS) to flag for members of the Rolls Royce defined benefit pensions scheme the risks associated with increased transfer activity as a consequence of redundancies. The FCA is following up this announcement with an information request to a number of advisers who have advised on transfers from this scheme.

Finally, the FCA's review into change and innovation in the unsecured credit market (aka The Woolard Review) has commenced with its call for input. The review is an opportunity for the FCA to take a step back and look at changes in the market and how these could develop in the future. The review will focus on four key themes: the drivers and use of credit, change and innovation (supply side), the role of regulation and COVID-19 context.

Banking - prudential treatment of legacy instruments

On 16 November, the PRA sent a Dear CFO letter (PDF 431 KB) to UK deposit-takers regarding remediation of prudential treatment of legacy instruments. Legacy instruments are capital instruments that did not comply with the new definition of own funds when CRR was introduced in 2013. The PRA shares the EBA's concerns on subordination provisions and flexibility of distribution payments, which create risks to the eligibility of firms' own funds and eligible liabilities instruments. The PRA:

  • Expects firms to avoid complex features and capital structures that could complicate prudential assessment and may also undermine capital instruments' loss-absorbing properties and CRR compliance
  • Expects firms to consider whether such instruments present challenges to resolvability
  • Expects firms to undertake a risk-based approach to assess appropriate remedial actions for such instruments before the end of the CRR 1 transition period on December 2021
  • Requests firms to share action plans with PRA supervisors by 31 March 2021

General insurers - reserving and exposure management

On 13 November, the PRA issued a letter to CROs of general insurers sharing insights from its recent supervisory review, which includes consideration of the impact of COVID-19 and observations on contract uncertainty.

The review has revealed evidence of reserve weakening prior to the pandemic, including bias in reserve estimates and possible weakening in case reserve estimates, despite claims experience continuing to deteriorate. The PRA warns that it will sharpen its focus on those firms that have material exposure to financial lines of business, if it considers that adequate measures have not been taken. It encourages boards to satisfy themselves that the key assumptions related to the rate of future claims development remain appropriate, that case reserving has not weakened over time and that there is no unjustified anchoring to optimistic business plan loss ratios. The PRA will seek evidence of the risk function's involvement in challenging reserving teams and ensuring that the board is suitably well-informed.

The review work also sought to compare and contrast exposure management frameworks across the market, covering property, casualty, cyber and specialty lines of business. The PRA identified a broad range in the quality of frameworks reviewed, but a number of common themes among the firms exhibiting better practice. In particular, exposure management frameworks for non-property classes of business are less mature than for property classes, and man-made catastrophe risk assessment remains significantly behind that of natural catastrophe risk assessment. The PRA warns that it will sharpen its focus on firms that are materially exposed to man-made catastrophe risk and where progress towards better practice remains slow.

Firms exhibiting better practice demonstrate a more consistent approach across the whole portfolio, have stronger data governance, more consistent data capture across lines of business and set clear data standards. These firms have also invested in tools and techniques (such as scenario testing) that better support forward-looking risk assessment, are quicker to incorporate the impact of emerging risks, explicitly consider the risk of clash across the portfolio and set risk appetites against which exposures can be more meaningfully monitored.

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