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.
Highlights this month
ESG and Sustainable Finance
ESG data and ratings: the FCA has announced the formation of a group to develop a voluntary Code of Conduct for ESG data and ratings providers. The FCA has previously expressed its support for regulatory oversight of these firms.
Diversity and inclusion (D&I): the FCA will shortly publish a paper entitled `Understanding approaches to D&I in the FS industry'. In a recent speech, FCA Executive Director for Consumers and Competition Sheldon Mills stressed the importance of promoting D&I within financial services firms to achieve the FCA's statutory objectives of protecting customers, making markets work well and ensuring effective competition in consumers' interests. He highlighted the importance of continuing to collect data: while many firms focus on gender and ethnicity as the most visible diversity characteristics, firms should not forget the importance of also collecting socio-economic data and engaging employees with the data collection process (e.g. by explaining how the data is used and what insights can be gleaned from it).
O-SII buffer rates : the PRA has confirmed that it will maintain firms' Other Systemically Important Institutions (O-SII) buffer rates for 2022. The PRA will reassess O-SII buffer rates in 2023 based on the Financial Policy Committee's updated framework. The decision on O-SII buffer rates taken in December 2023 will be based on end-2022 financial results and will take effect from January 2025.
Identifying O-SIIs : the PRA has updated its policy on its approach to identifying other systemically important institutions (O-SIIs) following consultation earlier in the year.
Solvency II — streamlining reporting and disclosure requirements: the PRA is consulting on proposals to streamline a number of current Solvency II reporting and disclosure requirements for insurers, and to improve data collection of data where reporting is currently not tailored appropriately to the features of the UK insurance sector or to the PRA's supervisory needs.
The proposals involve revoking retained EU Technical Standards for firms' supervisory reporting and public disclosure under Solvency II and making new rules to amend and them.
Solvency II — feedback on Risk Margin and Matching Adjustment: the PRA has published a Feedback Statement providing a summary of the responses received to its Discussion Paper on `Potential Reforms to Risk Margin and Matching Adjustment within Solvency II'.
Asset finance — credit risk management: the PRA has written to Chief Risk Officers (CROs) of PRA-regulated firms in the asset finance sector, summarising key themes and control weaknesses identified post-administration in relation to the Arena Holdings Group of companies — PRA-regulated firms are expected to consider these in order to strengthen their credit risk management frameworks.
Depositor Protection : the PRA published final rules on minor tweaks to depositor protection. The PRA had identified a number of areas where rules are no longer achieving the expected benefits and so need to be revoked, are redundant so need to be deleted, or require amendment to ensure they reflect the original policy intent of an effective compensation scheme for deposits which minimises the adverse effect that the failure of an FSCS member could have.
Capital Markets and Asset Management
LIBOR wind-down: the FCA is consulting on requiring LIBOR's administrator, IBA, to continue to publish the 1-, 3- and 6-month US dollar LIBOR settings under an unrepresentative `synthetic' methodology between 1 July 2023 until end-September 2024. After this, publication would cease permanently. The FCA also announced that it will require IBA to publish the 3-month synthetic sterling LIBOR setting until end-March 2024.
Liability Driven Investment (LDI): following volatility in the gilt market in the Autumn, the UK authorities and EU regulators have reiterated their expectations for market participants. In a speech, the Bank of England (BoE) articulated its view that the root cause of the recent LDI event was poorly managed leverage. The BoE indicated it will work with other international regulators to improve banks' and non-banks' stress testing, supervise to limit risks from leverage, and build greater transparency around leverage by regulatory disclosures from non-banks and supervisory monitoring. In December’s Financial Stability Report, the Financial Policy Committee went further, stating that regulators should set out “appropriate steady-state minimum levels of resilience for LDI funds.” More broadly, the FPC remains concerned about risks arising from the non-bank sector and reiterated strong support for urgent international and domestic policy responses. In 2023, the Bank will run an exploratory scenario exercise focused on risks in the non-bank sector for the first time.
The FCA also published a statement welcoming publications by The Pensions Regulator, the Central Bank of Ireland, and the Commission de Surveillance du Secteur Financier (Luxembourg) regarding the resilience of LDI portfolios and the governance of pension schemes using LDI strategies. The FCA expects asset managers to take appropriate action to "learn lessons" from recent events and stated all market participants should factor recent market conditions into their risk management practices. The FCA will "maintain a supervisory focus" to ensure vulnerabilities are addressed and will publish a statement on good practice towards the end of Q1 2023.
Productive Finance: following the conclusion of its recent consultation paper regarding broadening the distribution of the Long-Term Asset Fund (LTAF) to retail investors, the FCA published a webpage to help investors and potential investors understand how their units in an LTAF are priced. Although the webpage does not set out any new regulatory requirements for LTAFs, fund managers that plan to establish an LTAF may find it a useful recap of the existing requirements. More broadly, the UK Productive Finance Working Group (an industry-led group convened by the UK authorities) published a series of guides with key considerations for investing in less liquid assets. The guides covered various topics including value for money, performance fees, liquidity management, and fund structures for investing in less liquid assets.
Retail Conduct Updates
FOS future funding model: the FOS has published a feedback statement on its proposals to create a future funding model. The FOS intends to (i) consult on plans to change its compulsory jurisdiction and voluntary jurisdiction levies to recover fixed costs, (ii) introduce a 12-month time limit for disputing case fees and (iii) trial changes to the group fee account arrangements. These proposals are in response to changes in complaint volumes and type, and to incentivise constructive behaviour in industry.
Defined benefit (DB) pension transfer: the FCA continues its work in the area of non-compliant pension transfer advice publishing updates to its statement on DB pension transfer redress in response to concerns about the exclusion of fees and charges from some firms calculations and unfair contract termination. Related to this, the FCA has confirmed changes to its methodology for calculating redress for non-compliant pension transfer advice, including former members of the British Steel Pension Scheme (BSPS) and is also consulting on extending its temporary BSPS asset retention rules so that the rules apply until firms have resolved all relevant cases. This will help prevent firms seeking to avoid the cost of redress liabilities. The current temporary asset retention rules expire on 31 January 2023. In addition, the FCA has written to personal indemnity insurance (PII) firms setting out its expectations of these firms when responding to queries from BSPS scheme firms about whether their PII is likely to cover claims about BSPS advice.
Financial promotions gateway : the FCA has launched a consultation setting out how they plan to operate a new financial promotions gateway. This gateway requires all firms that want to continue approving financial promotions for unauthorised persons to apply for permission and will require firms to demonstrate they have the right expertise for the promotions they wish to approve.
Portfolio letter for Financial Advisers and Intermediaries: the FCA has written to Financial Advisers and Intermediaries highlighting its expectations of firms with regard to advice suitability, pensions and investment scams, firm failure and phoenixing.
Contract for Difference (CFD): the FCA has written to firms offering contacts for difference (CFDs) setting out the standards it expects CFD firms to demonstrate in order to protect consumers and ensure market integrity. The FCA is concerned as CFDs are highly leveraged derivatives and adverse price movements in relevant markets can lead to substantial losses for consumers. The FCA wants firms to ensure their investors have all information necessary to properly assess the regulatory coverage attached to their products.
Pension Dashboards: Regulators continue their work to deliver pensions dashboards, allowing savers to see their pension information in one place. The Pensions Regulator is consulting on a dashboards compliance and enforcement policy setting out its expectations on how schemes should comply with new regulations. The FCA has confirmed new rules and guidance requiring FCA-regulated pension providers to connect and supply information about personal and stakeholder pensions to the Pensions Dashboard. Under the rules providers will be required to (i) complete connection of their schemes to the digital architecture operated by the Pensions Dashboard programme (ii) be ready to receive requests to find pensions, and search records for data matches and (iii) be ready to return pensions information to the consumer's chosen pensions dashboard. The rules must be implemented by 31 August 2023.
Transforming data collection: the BoE and FCA provided their latest update on their joint transformation programme and progress to transform data collection from the UK financial sector. As part of phase two, “discovery work” is underway on commercial real estate data, and on the FCA's strategic review of prudential data collection from solo-regulated firms. The discovery stage for the “retail banking business model” and the “incident, outsourcing and third-party reporting” use cases will begin in Q1 2023. In early 2023, a report will be published that looks at key questions around the development and adoption of data standards in the financial sector. The PRA is also expected to launch its “Banking Data Review” early in the new year.
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: