The UK Regulatory Radar is a regular publication from KPMG's EMA Financial Services Regulatory Insight Centre (RIC), providing a summary of the latest industry and regulatory updates affecting the UK.
The wide range and scope of regulatory change in the UK financial services sector is highlighted in the May 2022 update (PDF 1.19 MB) to the Regulatory Initiatives Grid, with key themes including adapting regulations to meet the challenges of ESG and digital finance and tailoring on-shored EU regulations for the UK. These themes were also highlighted in the Government's legislative plans as outlined in the Queen's Speech.
Other cross sectoral changes announced in the last month include HM Treasury's (HMT) policy statement on mitigating risks from critical third parties to the finance sector. Under the regime, HMT will — in consultation with the financial regulators and other bodies — be able to designate certain third parties to firms as 'critical'. Once a third party has been designated as 'critical', the financial regulators will be able to exercise a range of powers in respect of any material services that the third party provides to the finance sector (including make rules relating to the provision of these material services) gather relevant information from critical third parties, and take formal action (including enforcement) where needed. The financial regulators will publish a joint Discussion Paper on how they might exercise their powers, shortly after the legislation is introduced.
And the FCA has published a Policy Statement (PS) (PDF 544 KB) setting out its new cancellation and variation power to help streamline and shorten the process of removing firms' permissions. The FCA is making these changes to reduce the risk of harm that consumers are misled by incorrect or outdated permissions on the Financial Services Register.
Highlights this month:
The UK Transition Plan Taskforce (TPT) has launched a Call for Evidence (PDF 1.21 MB) that aims to identify the vital elements and key principles that should inform all transition plans. This will result in a model framework that can apply across all sectors, ensuring a shared and consistent understanding for firms of what is needed. The framework will inform UK regulations for certain financial sector firms and listed companies to publish climate transition plans. The consultation period closes on 13 July.
At the first meeting of the Climate Financial Risk Forum’s (CFRF) Third Session, new Terms of Reference and actions for the Transition Working Group (WG), the Disclosure, Data and Metrics WG and the Scenario Analysis WG were agreed. In addition, Members considered how they should adapt their workplans and whether there is scope for the Forum to undertake bespoke work to help firms navigate the unique set of challenges arising from external events such as the war in Ukraine and the implications of transition to net zero.
HM Treasury (HMT) is consulting (PDF 270 KB) on managing the failure of systemic Digital Settlement Asset (DSA) (including stablecoin) firms. HMT proposes to apply a modified Financial Market Infrastructure Special Administration Regime (FMI SAR) which will give the BoE powers to specify to an appointed administrator which of the two following objectives should take precedence in an administration: the return or transfer of funds and custody assets or continuity of services. In the case of stablecoins, a ‘systemic DSA firm’ might include — but is not limited to — the issuer of a stablecoin, a wallet, or a third-party service provider.
The PRA has announced that the PRA buffer adjustment, introduced in July 2020 due to the COVID-19 pandemic, will be removed with effect from end-December 2022. Supervisors will communicate firms’ updated PRA buffers as part of the 2022 Supervisory Review and Evaluation Process (SREP) where relevant, or separately.
The BoE has issued (PDF 938 KB) its first public assessment of the resolvability preparations of the eight major UK banks under the Resolvability Assessment Framework (RAF) — for more details, see the article above.
The BoE's Financial Policy Committee (FPC) has responded to feedback on its proposed revisions to the O-SII buffer framework for UK domestic systemically important banks (D-SIBs). The buffer applies to ring-fenced banks and large building societies, reflecting the additional damage that D-SIBs could cause to the UK economy if they were to fail or come close to failure. The revisions will:
- Change the metric used to determine O-SII buffer rates from total assets to the UK leverage exposure measure
- Recalibrate the thresholds used to determine O-SII buffer rates to prevent an overall tightening or loosening of the framework relative to its pre-COVID level
There is one change to the original proposal — the average of firms’ quarter-end leverage exposure measure over the year will be used to determine O-SII buffer rates, rather than the year-end value. This will take effect after the PRA’s December 2023 review. The main changes will take effect after the PRA’s December 2022 review of O-SII buffer rates but in time for the PRA to review rates under a revised framework in December 2023. Rates set in 2023 will apply from January 2025.
The PRA has issued final policy (including a Supervisory Statement (SS1/22), a Statement of Policy and updates to SS9/17 (PDF 854 KB) on Recovery Planning) on trading activity wind-down (TWD). Firms will be expected to meet the expectations of SS1/22 by 3 March 2025. TWD firms are expected to have a set of capabilities that can be utilised to develop and either partially or fully execute the TWD option, in both recovery and post-resolution restructuring. PRA supervisors will engage with TWD firms throughout the period until March 2025 and will want to understand that firms are making adequate preparations significantly in advance of the implementation date. Firms should expect dialogue to commence in H2 2022.
The PRA’s statement on the EBA Guidelines (GLs) relating to the management of non-performing and forborne exposures (NPEs and FBEs) notes that the prudential aspects of the GLs broadly represent good credit risk management standards and may be a helpful reference for firm’s management of NPEs and FBEs. However, the PRA reminds firms that the GLs are not applicable to or in the UK. In particular, the PRA has not adopted the 5% gross NPE ratio threshold for applying detailed requirements and the approach to valuation and revaluation of the collaterals used for NPEs remains at the discretion of individual firm.
The PRA has launched the biennial Insurance Stress Test (IST) for the largest PRA-regulated life and general insurers. The IST aims to assess sector resilience to severe but plausible adverse scenarios, guide supervisory activity and enhance the PRA’s and firms’ ability to respond to future shocks. The deadline for submission is 28 September 2022. The scenario specifications include a life stress centred on falling interest rates, and a hurricane scenario to reflect the significance of US exposures on the London market. In response to heightened geopolitical and economic risks, the PRA has included an additional question on the implications of rising inflationary pressures on firms’ balance sheet and business model. The published scenarios are not comprehensive — insurers are expected to carry out their own testing on additional scenarios which are most relevant to their business model. The PRA proposes to host roundtables for general insurers (18 July) and life insurers (20 July) to discuss and clarify any aspects of the IST.
In a speech at the City & Financial 9th Annual Operational Resilience for Financial Institutions Summit, PRA Executive Director Duncan McKinnon reiterated that UK operational resilience policy is outcome-based. He also noted that, where firms are not able to remain within their defined impact tolerances, they will need to build substitutability into the way services are delivered, review and adapt outsourcing arrangements, and re-architect or replace legacy systems which have remained critical to the delivery of services despite their obsolescence. He noted that “we [the PRA] expect for it [operational resilience] to become a major consideration in [firms’] investment programmes. Designing services to be resilient is often easier than reverse engineering resilience into fragile services.”
Capital Markets and Asset Management
The FCA and the BoE’s joint discussion paper on Money Market Fund (MMF) reform followed on from the FSB’s 2021 policy proposals. After gathering feedback, the UK authorities will consult on policy measures to strengthen the resilience of MMFs, reduce the need for extraordinary central bank intervention and support the provision of cash management services. The FCA also published guidance (PDF 94.8 KB) relating to MMFs’ liquidity thresholds and portfolio requirements.
The FCA’s discussion paper (PDF 671 KB) on the reforms to the listing regime is a continuation of the Primary Markets Effectiveness Review that the FCA started in 2021. The main proposals are to simplify the listing regime for equity shares from two segments (standard and premium) into a single segment. The single segment would have mandatory obligations, but issuers could decide whether to opt for supplementary obligations which would provide an enhanced role for shareholders. The proposal aims to broaden access to listings to a wider range of companies. The paper also discusses reforms to the current rules and guidance on the sponsor regime to make it more efficient.
The FCA’s Market Watch 69 offers guidance around firms’ arrangements for market abuse surveillance, drawing on its observations from engaging with small and medium sized firms. Areas covered include market abuse risk assessments, calibration of order and trade surveillance, policies and procedures, outsourcing, and the role of front office staff in surveillance.
In the FCA’s first portfolio supervision letter (PDF 186 KB) to Data Reporting Services Providers (DRSPs) (consisting of approved reporting mechanisms (ARMs) and approved publication arrangements (APAs)), it identified the key risks in the DRSP sector as:
- market concentration due to a small number of providers
- inadequate systems and controls to identify incomplete and potentially erroneous trade or transaction reporting data
- insufficient operational resilience
The letter outlines the FCA's expectations of firms and the supervisory work it will undertake in these areas.
In its response (PDF 200 KB) to its July 2021 consultation on extending the Senior Managers and Certification Regime (SMCR) to financial market infrastructure, HM Treasury confirmed that it will introduce SMCR for Central Counterparties (CCPs) and Central Securities Depositories (CSDs), with the legislation giving the power to the Bank of England to set detailed rules. HMT also signalled that it may extend SMCR to credit rating agencies (CRAs) and recognised investment exchanges (RIEs) but will consult further. HMT may also extend SMCR to recognised payment systems and specified service providers, but will take account of the forthcoming review of the regulatory perimeter for systemic firms in payments chains regulated by the BoE before taking this further.
The PSR’s panel published its digital payments initiative report (PDF 313 KB). This review was commissioned in response to last year’s Access to Cash Working Group’s recommendation for further work to enable digital payments. The recommendations included:
- Improving consumers and SMEs awareness and understanding of, and trust in, digital payment options
- Tackling barriers to new digital payment services and service features, including enabling new functionalities and improving trust by addressing fraud risks
- Reducing digital exclusion
- Putting better data in place to monitor the transition to digital payments
Retail Conduct updates
Following the conclusion of its investment platforms market study back in 2019, the FCA published the findings of its follow-up review into investment platforms and costs and charges. In the review, the FCA focused on the experience of non-advised customers. It found that whilst the main platform and fund charges were signposted, activity-based charges were sometimes hard to locate. As part of the findings the FCA published good and poor practice.
The FCA has published a consultation paper which proposes to broaden out the current dormant asset scheme to include insurance, pension and investment firms. Under the existing scheme, dormant monies in bank/building society accounts are paid into a reclaim fund which then puts this money towards funding good causes.
The FCA has set out final rules (PDF 442 KB) to close a loophole whereby a claim management companies (CMCs) were able to bring new claims to FSCS - even where they undertook the original regulated activity. It also requires CMCs to tell FCA of connections they have to regulated firms that could be relevant to this. The rules come into effect in short order —7 July 2022.
Following the format of the FCA’s recent 3-year strategy, the FOS has published its strategy — also 3-years, aligned to strategic outcomes and with associated metrics to assess progress. Under its ‘Enhanced our service’ outcomes, it intends to provide a timely, efficient and effective service, communicate openly and in the most effective way and continuously improve customer experience. For its 'Preventing complaints and unfairness arising' it will share insight to prevent unfairness to consumers, enable effective resolution of issues with firms, empower consumers to know when to complain. Finally, under an internally focussed outcome of 'Building an organisation with the capabilities it needs for the future', it will look to attract, develop and retain staff with fungible skillsets and leverage data and technology.
The FCA and TPR have jointly published feedback from their call for input on pension customer journeys. They were seeking to understand the factors that influenced consumer decision-making and engagement and sought views on what else could be done to help engage consumers so they can make informed decisions that lead to better savings outcomes. The FCA and TPR have concluded no additional actions are required beyond those already captured within the FCA’s Business Plan and TPR’s Corporate Strategy.
To further evidence how much more coordinated the two are becoming, the FCA and TPR published a joint feedback statement on a framework to assess and promote Value for Money in pension schemes looking at investment performance, customer service & scheme oversight and costs & charges. Most respondents agreed on the need to support better decision making and the importance of how the ‘value of money’ information is presented. However, there were a range of views on how to measure and compare the information -albeit with a strong desire for to build on existing work. The regulators plan to publish a consultation at the end of 2022.
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: