March 2023
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
Further Updates
In February, the Financial Services Regulatory Initiatives Forum issued the sixth edition of the Regulatory Initiatives Grid, which sets out planned regulatory initiatives. Developments reflected in the grid will shape the UK's regulatory model going forward. Important items have been highlighted at the start of the relevant section.
ESG and Sustainable Finance
Pension scheme ESG disclosures: The Pensions Regulator (TPR) has begun a new campaign to ensure that pension trustees meet their ESG reporting duties. TPR will review ESG disclosures by defined benefit, defined contribution and hybrid schemes in the spring and summer of 2023, checking their statement of investment principles (SIP), implementation statements (IS) and, where relevant, their TCFD-aligned disclosures. The review findings will be shared with industry and TPR has warned that it will take enforcement action where trustees have not produced the correct disclosures.
From the Regulatory Initiatives Grid:
- Early 2023— Updated Green Finance Strategy (including update on UK Green Taxonomy).
- Q1/Q2 2023 — FRC review of Corporate Governance Code.
- Q1 2023 — HMT consultation on bringing ESG ratings providers within the FCA's remit.
- Q1 2023 — joint PRA/FCA Discussion Paper on SM&CR.
- H1 2023 — joint PRA/FCA consultation on diversity in financial services. Policy Statement in Q4 2023/Q1 2024.
- June 2023 — Policy Statement on SDR and investment labels.
- Q4 2023 — FCA consultation on implementing ISSB disclosure standards into FCA listing or transparency rules.
Banking Prudential
Ring-fencing and resolution regimes for banks: The December 2022 'Edinburgh reforms', aimed at driving growth and competitiveness in the financial services sector, called for a review of whether the ring-fencing and resolution regimes for banks (both established in the aftermath of the Global Financial Crisis) are effectively aligned. As a first step, HMT has now issued a Call for Evidence seeking views on the practicalities of aligning the regimes for banks and long-term options for reform.
Simpler regime: The PRA is consulting until 30 May on liquidity and disclosures requirements (CP4/23) as part of its development of a 'strong and simple' prudential framework for non-systemic banks and building societies. This follows CP5/22, which set out initial proposals, and CP16/22, which addressed the definition of a Simpler-regime firm. A further consultation in H1 2024 will look at capital-related measures. CP4/23 should be read in conjunction with CP5/23 on "Remuneration: Enhancing proportionality for small firms". For more on both consultations see article above.
Removal of the 'bonus cap': Together, the PRA and FCA are consulting (CP15/22) on removing the current limits on the ratio between fixed and variable components of total remuneration, the 'bonus cap'. The regulators consider that this would strengthen the effectiveness of the remuneration regime by increasing the proportion of compensation at risk that can be subject to incentive setting tools within the remuneration framework — including deferral, payments in instruments, and risk adjustment. The proposed changes are anticipated to come into effect for Q2 2023 and would apply to a firm's performance starting the following year.
The second resolvability assessment: The Bank of England (BoE) has written to the CFOs of the UK's eight major banks in advance of the second resolvability assessment, which is due to start in October 2023. The second assessment will evaluate progress made in remediating issues identified during the first assessment (as well as any new issues that have emerged since) and monitor progress in achieving and embedding resolvability outcomes. The BoE expects to see improvements in firms' assurance processes and will focus on a more detailed assessment of the `adequate financial resources' outcome (this may include requests for data, documentation or live evidence). It will again issue a public statement after the assessment, supplemented by private feedback to firms. Subsequent assessments will focus on the 'continuity and restructuring' outcome (in 2025-2026) and the `coordination and communication' outcome (in 2027-2028).
From the Regulatory Initiatives Grid:
- H1 2023 — Final principles for sound model risk management practices.
- Q1 2023 — PRA Discussion Paper on Liquid Asset Usability—feedback later in 2023.
- Q3 2023 — Consultation on implementation of changes to the PRA 110 reporting template.
- Q2 2023 — Final rules on contingent leverage, feeding into the Leverage Ratio.
- Q3 2023 — Consultation on amendments to the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
Capital Markets and Asset Management
Wholesale Data Market Study: The FCA has found through its trade data review that the market does not work as effectively as it could in allowing effective competition and innovation. Contributing factors include concentration, limited choice and switching, and complex pricing and licensing. In response to this and other concerns, the FCA has launched a wholesale data market study into the markets for benchmarks, credit ratings data and market data vendor services. It will decide whether to make a market investigation reference to the Competition and Markets Authority after six months and the final report is due in a year.
Implementation of the Investment Firms Prudential Regime (IFPR): The FCA published the findings of a multi-firm review with its initial observations on how firms have implemented the IFPR (which was introduced in January 2022 to deliver streamlined and simplified prudential requirements for certain UK investment firms). The review focused on capital adequacy, liquidity adequacy and wind-down planning under the internal capital adequacy and risk assessment (ICARA) process, as well as regulatory reporting. The FCA found that most firms had "engaged well" in the review and had made progress with their understanding of the requirements, but there are also areas for improvement.
FMI Outsourcing and third-party risk management: The BoE published three supervisory statements (SS) for outsourcing and third-party risk management for Central Counterparties (CCPs), Central Securities Depositories (CSDs) and Recognised Payment System Operators (RPSOs). The requirements are intended to align with and complement the regulatory framework on operational resilience for FMIs published in March 2021. These SS also replicate the requirements of PRA SS2/21 on outsourcing and third party risk management for banks, PRA designated investment firms and insurance firms. FMIs are expected to meet the requirements by 9 February 2024.
Updates to UK EMIR: The BoE/FCA Policy statement aims to align the UK derivatives reporting framework, under UK EMIR, with international guidance issued by CPMI-IOSCO and provide clarity to counterparties and Trade Repositories (TRs). The PS streamlines the FCA registration process for TRs that are already registered or recognised under the UK SFTR. It also introduces new requirements for TRs which will improve data quality, promote consistency of reporting, and facilitate the orderly transfer of data between TRs and to regulatory authorities.
From the Regulatory Initiatives Grid:
- Q1 2023 — Policy Statements (PSs) on improving equity secondary markets and guidance on trading venue perimeter.
- Q2 2023 — The “Vote Reporting Group” will publish proposals for consultation.
- Q2/Q3 2023 — Consultation Papers (CPs) on commodity derivatives and the consolidated tape.
- Q3/Q4 2023 — Formal engagement on the Overseas Funds Regime will take place later than planned.
- Q4 2023 — CP on transparency for bonds and derivatives.
Insurance Prudential
Solvency II reform: Sam Woods' delivered a conciliatory speech at the ABI's conference, stressing the PRA has 'moved on' from previous disagreements with the Government (and industry) and will follow the competitiveness and growth direction that has been set for it (read our analysis here). The tone, however, was strikingly different in the Bank of England's letter of 6 March to the Parliamentary Treasury Committee, where the 0.5% to 0.6% increase in likely insurer failure over a three year period was billed as a “relative increase in the probability of failure of around 20%”, potentially exposing taxpayers to the cost.
Insurers in financial difficulty: This CP sets out the PRA proposed rules and policy in respect of the changes introduced by the Financial Services and Markets Bill 2022-23 (FSMB) to the Financial Service and Markets Act 2000 (FSMA) concerning insurers in financial difficulty.
Amongst the changes, the Policyholder Protection Part (PPP) of the PRA Rulebook will be amended to incorporate how the Financial Services Compensation Scheme (FSCS) top-ups will operate during a write-down. The PRA also outlines its process for consenting to an application for a write-down, a pre-requisite for obtaining a court order, and to the appointment of a wind-down manager.From the Regulatory Initiatives Grid:
- June and September 2023 — The PRA will consult on Solvency II review.
- The PRA is also looking at increased concentrations in annuity reinsurance and whether further guidance or regulatory change is needed— timing unclear.
Retail Conduct
British Steel Pension Scheme (BSPS): Regulatory activity in relation to the pension transfer advice provided to BSPS members continues. Following earlier warnings, the FCA has formally required two firms to stop making unsolicited settlement offers to former members of the BSPS. The firms will be required to apply the redress scheme to consumers who have accepted these offers in the same way they must for consumers who have not accepted offers. This action confirms the FCA's continued scrutiny of this area and its intention to take action to put a stop to this practice and protect consumers.
Consumer Duty Dear CEO letters: The FCA has published a further 11 Dear CEO letters for firms setting out it's expectation of firms when implementing the Consumer Duty. Whilst not delivering anything particularly new, they provide a granular view and firms should use them to inform their implementation plans. The FCA intend to release one for each relevant portfolio. Of most interest to firms will be the annexes where the FCA outlines its expectations on how firms in these sectors should embed the Duty. As such, these letters are likely to set the initial supervisory priorities for the FCA.
The new letters cover the following portfolios:
Payments
New tariff framework: The BoE published its response to the consultation on a new tariff framework for the payment mechanisms — Real-Time Gross Settlement (RTGS) and CHAPS. Respondents expressed support for a revised approach that was proportionate, simple, and predictable. They also acknowledged the benefits that RTGS and CHAPS provide and recognised the need to review the tariff framework. Aside from changes to the CHAPs fee structure, the Bank's proposals remain largely unchanged. The new framework will be implemented following the introduction of the new core settlement engine in 2024.
Scam reimbursement: The Treasury Sub-Committee on Financial Services Regulations (TSCFSR) has criticised the Payment Systems Regulator (PSR) for the slow implementation of mandatory reimbursement for fraud victims. The committee also outlined its objections to PSR proposals to hand the refund process to Pay.UK viewing this as a conflict of interest and an opportunity for the banking industry to slow down implementation. The Committee recommends plans are revised to incorporate the use of directions to payment service providers under section 54 of the Financial Services (Banking Reform) Act 2013 and for mandatory reimbursement to be in place by the end of 2023
In response, the PSR stated it will carefully consider the feedback and clarify what it believes are misinterpretations around how its powers can be used to require mandatory reimbursement. The PSR policy statement which was planned for Q1 2023, is now expected in May 2023.
Open Banking: The PSR has welcomed has the Strategic Working Group's (SWG's) report on Open Banking. The report sets out stakeholders' views on the priorities, long-term governance, and funding options for the future Open Banking implementation entity. The report includes gap analysis and potential solutions to transition to a future optimal state. The report identifies a number of gaps/perceived gaps and provides discussion around potential solutions to transition to a future optimal state. The findings will be used to inform the roadmap to deliver the Joint Regulatory Oversight Committee's (JROC) vision for Open Banking, recommendations for which are expected to be published later in Q1 2023.
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:
