April 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.

ESG and Sustainable Finance

UK Sustainability Disclosure Requirements (SDR): The FCA has announced a delay to its planned Policy Statement on the proposed SDR and investment labels. The statement was due to be published on 30 June 2023 but will now be published in Q3 2023. The effective dates of the new requirements will be adjusted accordingly.

Improvements to ESG benchmarks: The FCA has written (0.15 MB) to benchmark administrators highlighting significant issues identified in its review of ESG-related benchmarks — the review found the overall standard of disclosures to be 'poor'. All benchmark administrators are expected to have strategies to address the issues identified in the review. The FCA will be conduct further work in this area and benchmark administrators may be required to explain their response strategies on request.

Consultation on a future regulatory regime for ESG ratings providers: The UK Government has published a consultation (0.24 MB) on bringing ESG ratings providers within the FCA's regulatory remit. The proposals would see a wide range of ESG-linked data and ratings products brought into scope, including all products which make an `assessment' of ESG factors, even if not labelled as an ESG-linked product. The new regime could affect all firms providing ESG assessments to users in the UK, even if the providing firm is based overseas. The new regime could affect all firms providing ESG assessments to users in the UK, even if the providing firm is based overseas.

The Bank of England (BoE) report on Climate-related risks and regulatory capital frameworks: The BoE’s report summarises its latest thinking, bringing together key findings, including the research submitted to an earlier call for papers and discussions at the Climate and Capital conference held in October 2022. The update does not set out any policy changes but clarifies the BoE's thinking and identifies areas for future work. 

Climate Financial Risk Forum (CFRF) Session 3 guides: The Session 3 guides focus on the transition to net zero, scenario analysis, and climate disclosure, data and metrics. The guides do not constitute regulation, but the CFRF is working to drive best practice in the effective management and disclosure of climate-related financial risks and opportunities. 

Diversity disclosures: FCA Primary Market Bulletin 44 reiterates the amendments to the Listing Rules introduced in FCA PS22/3. UK and overseas standard and premium listed firms must make disclosures reflecting their progress towards FCA-determined gender and ethnicity diversity targets at board and executive management level, as well as implementing comprehensive diversity policies for key board committees. The first disclosures will be made in annual reports beginning in April 2023.

The Pensions Regulator (TPR) focus on ESG reporting duties: TPR has notified defined benefit, defined contribution and hybrid schemes that it will review ESG disclosures in the spring and summer of 2023, checking statements of investment principles (SIP), implementation statements (IS) and, where relevant, TCFD-aligned disclosures. Review findings will be shared with industry and TPR will take enforcement action where trustees have not produced the correct disclosures. 

TPR Guidance on Equality, Diversity and Inclusion (EDI):  TPR's EDI guidance, developed with an industry working group, is to be used by pension scheme governing bodies and sponsoring employers to improve the EDI of their scheme's board. It covers (i) the role of the chair, (ii) need for an EDI policy and assessment criteria, (iii) enhancing board diversity, (iv) developing inclusive comms. and (v) making reasonable adjustments. It also sets out the outcomes TPR is seeking coupled with specific case and practical steps that pension scheme governing bodies and employers can adopt.

Prudential Regulation

Financial Policy Summary and Record: The BoE has published the March edition of its regular updates from the Financial Policy Committee (FPC), outlining risks to financial stability and subsequent policy actions. Most significantly, recent overseas bank failures have increased investor caution and the FPC is monitoring these developments closely. In the face of this, UK banks are remaining resilient and strong enough to continue supporting households and businesses. The BoE also notes that consumer and business finances remain under pressure from higher borrowing costs and prices, and that non-bank financial institutions need to improve their resilience. The FPC reiterated the urgent need for reforms in this sector, including on liability-driven investment (LDI) funds (see `Capital Markets and Asset Management' below).

Prudential liquidity framework: The BoE has published FS1/23, summarising feedback to its Discussion Paper on a prudential liquidity framework that supports liquid asset usability. Most respondents agreed that banks are currently reluctant to draw on their stock of high-quality liquid assets (HQLA) in periods of stress out of fear of market overreaction and / or increased supervisory oversight. In order to improve this, respondents suggested (i) regulatory communications clarifying the extent to which Liquidity Coverage Ratios (LCRs) can fall and the time banks have to rebuild HQLA stocks, (ii) adjustments to how the LCR is calculated in stress, (iii) simplifications to liquidity-related disclosures, and (iv) recalibrating the LCR to account for pro-cyclicality. Most respondents also advocated for greater international coordination in regards to this regulatory guidance. 

Depositor protection:  The PRA has published a Policy Statement making minor amendments to the Depositor Protection rules in the PRA Handbook. The amendments clarify that the FSCS depositor protection regime covers eligible customers of e-money institutions, authorised payment institutions, small payment institutions, and credit unions (in respect of e-money) should a credit institution holding such firms' safeguarded funds fail (the Safeguarding Rules proposal).

Thematic findings from the 2022 cyber stress test: The BoE and PRA have published a letter (PDF 0.17 MB) to firms and FMIs outlining the thematic findings of this voluntary test based on a data integrity scenario in retail payments. Firms are expected to draw on these as part of their complementary operational resilience compliance.  The findings — which aim to lessen the impact of a cyber incident — focus on the importance of: 

  • Timely and co-ordinated decision-making and action across the industry.  
  • Consistent, effective and timely communications throughout the incident, including the use of pre-scripted messages. 
  • Re-routing payments via alternative payment systems, where possible.
  • Suitable mitigating actions to maintain public confidence — e.g., providing emergency cash or extending overdrafts.
  • The availability of clean data that can be used to reroute accurate payments via contingency systems and to restore a service. 
  • The undertaking of appropriate planning, preparation, and testing to further strengthen individual capabilities and underpinning assets (including technologies and processes). 

PRA: It's not the plane, it's the pilot: A speech by Shoib Khan, Director Insurance Supervision, PRA addressed the unique combination of risks currently facing the UK's insurance sector and noted that insurers share an important responsibility in looking beyond the mechanics of their models and should:

  • Know when models are not correctly reflecting prevailing conditions.
  • Be confident that management actions will be available if needed during times of stress.
  • Ensure that firms can achieve a safe and orderly exit.

Non-performing exposures capital deduction: The PRA is consulting on proposals to remove the Common Equity Tier 1 (CET1) deduction requirement regarding non-performing exposures (NPE) that are treated as insufficiently covered by banks' accounting provisions. The proposals also include removing the associated reporting requirements for the NPE deduction.  Read more about this here.

Capital Markets and Asset Management

Liability Driven Investment (LDI) strategies: As part of the FPC's publications on 29 March, the BoE published a paper on the resilience of LDI strategies. Written by the Bank's staff and approved by the FPC, it set out recommendations and more detail on the BoE's assessment of resilience. The FPC judged that the size of the yield shock to which LDI funds should be resilient should be, at a minimum, around 250 basis points. The FPC does not have specific regulatory responsibility for pension schemes or LDI funds. However, it expects the paper and its judgements to input into the process to be taken forward by other regulatory authorities, including TPR, when implementing the appropriate steady-state minimum levels of resilience for LDI strategies. A separate BoE speech reflected on lessons learned from the LDI episode.

Review of investment research: As signposted in the UK Government's `Edinburgh Reforms', the independent Investment Research review launched a Call for Evidence to gather information and evaluate options to improve the UK market for investment research. This is the first stage of the review. The questions consider the impact of existing UK requirements on dealing commissions, the MiFID II unbundling rules, and recent revisions to those rules to introduce exemptions for smaller companies. 

Shareholder vote reporting: The FCA has published more information regarding the recently formed "Vote Reporting Group" (VRG) as part of its focus on firms' progress relating to ESG reporting and stewardship. The FCA has convened the industry working group and acts as the secretariat, with members being drawn from across the investment management community. The purpose of the group is to propose a comprehensive vote reporting framework and template for public consultation in order to better meet the needs of asset owners and the wider market. The consultation on the group's recommendations for a vote disclosure framework will be published by May 2023, and a final report that considers industry views by the end of 2023.

Dealing in commodities derivatives: As part of its response to the Wholesale Markets Review consultation, HM Treasury (HMT) published a proposed statutory instrument to remove the requirement on firms dealing on own account in commodities derivatives to report annually to the FCA their reliance on the “ancillary activities exemption”.

UK EMIR: HMT is amending UK EMIR to extend the pension funds exemption from the clearing obligation by a period of two years, from 18 June 2023 to 18 June 2025. HMT will conduct a review of the pension funds exemption ahead of its expiry in 2025. This will consider a longer-term approach with input from industry stakeholders and will incorporate relevant findings from work being undertaken by regulators internationally on financial market fragilities and resilience in the non-banking financial sector. HMT is also amending UK EMIR to extend the temporary intragroup transaction clearing exemption regime by three years to 31 December 2026.

LIBOR: USD LIBOR is due to cease on 30 June 2023. The overnight and 12-month USD LIBOR settings will cease permanently. However, the FCA has announced it will require LIBOR's administrator, IBA, to continue the publication of the 1-, 3- and 6-month USD LIBOR settings until 30 September 2024, using an unrepresentative `synthetic' methodology. The FCA will permit the use of the synthetic USD LIBOR setting on all legacy contracts except cleared derivatives. No new use of the synthetic USD LIBOR settings will be permitted.

Retail Conduct

Consumer Duty stakeholder engagement: As part of its Consumer Duty engagement strategy, the FCA has published Dear CEO letters for payment services and e-money firms, and contract for difference firms, and released a podcast focused on the April implementation milestone when firms are expected to have fully reviewed all existing open products and have shared the outcomes with distributors.

Following the same pattern as the other 18 Consumer Duty portfolio letters, the FCA sets 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. 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 FCA's latest edition of `Inside the FCA' Podcast has focused on this months' implementation milestone. Whilst much of content restates previous FCA communications it is instructive of the regulators' thinking and 'expectations.As with other aspects of the Duty, the FCA is clear that there is no one size fits all solution and that information flows between manufacturers and distributors will need to be tailored to the roles and responsibilities of parties in the distribution chain.The FCA expects this dialogue to continue regularly post implementation. The need for all firms in the distribution chain to work together in order to deliver good customer outcomes was emphasised. 

FCA Handbook updates — Consumer Duty:  The FCA has confirmed Handbook amendments (PDF 0.38 MB) to clarify the scope and application of the Consumer Duty. The FCA has made a number of small updates reflecting stakeholder feedback. The amendments are intended to be consistent with the Consumer Duty rules and therefore should not represent unanticipated changes for the industry as it implements the Consumer Duty certain aspects of the Consumer Duty rules. These include:

  • The application to firms approving or communicating financial promotions.
  • The application to firms in the temporary marketing permissions regime (TMPR).
  • The `closed product' and `existing product' definitions.
  • The application to credit unions.

Proposed amendments on Defined benefit occupational pension schemes, non-retail financial instruments and sectoral sourcebook exemptions are still under consideration 

Mortgage Cost of Living Guidance: The FCA has finalised guidance (PDF 0.21 MB) for firms supporting their existing mortgage borrowers impacted by the rising cost of living. The FCA expects firms to support borrowers in financial difficulty. This guidance confirms how mortgage lenders can support customers who have missed payments or those worried about their ability to make payments in future. It covers options such as extending the term of their mortgage or making reduced monthly payments for a temporary period. 

Payment updates

Dear CEO letter for Payment firms: The FCA has written (PDF 0.17 MB) to the CEO's of its' payment firm portfolio highlighting its ongoing concern that many payments firms do not have sufficiently robust controls and that, as a result, some firms present an unacceptable risk of harm to their customers and to financial system integrity. The FCA expect firms to take appropriate action to deliver three outcomes it has set for payments firms, to ensure: (i) customers' money is safe; (ii) financial system integrity is not compromised; and (iii) customers' needs are met. Under each of these outcomes, the FCA identify its priorities, common failures and the action it expects firms to take. In addition, the FCA also highlight three cross cutting priorities it believes underpin the successful delivery of the outcomes it has set (operational resilience, robust governance and control and regulatory reporting). The FCA expects the Board (or equivalent) to take these risks into account and take action, if required.

Penalty statement revision: The Payment Systems Regulator (PSR) has launched a consultation (PDF 0.30 MB) on changes to the criteria it uses to determine the level of penalty applied for compliance failures. The PSR proposes to amend the approach to calculating the duration of failure and clarify how it takes into account revenue and the seriousness / recklessness of the failure when determine the level of penalty. The PSR's aim is to remove the existing incentive to prolong compliance failures or be uncooperative in working with them in the hope of reducing the relevant revenue and thus supressing the size of a potential penalty. The proposed changes ensure a firm's incentive is always to address any compliance failures and cooperate towards resolving cases quickly. The changes should also improve firms' understanding of how the PSR determines the levels of penalty imposed. 

PSR Annual Plan 23/24:  The PSR has published its Annual Plan (PDF 12.8 MB) which sees a continued focus on its strategic priorities of protection, competition, unlocking account-to-account payments and providing access and choice. Planned work will further advance existing initiatives including combatting APP scams, addressing concerns regarding increased card fees and the wide implementation of confirmation of payee. To ensure effective implementation of regulatory developments and monitor ongoing regulatory compliance, the PSR intends to establish a new Supervision and Compliance Monitoring division. This division will bring together the PSR's existing work overseeing the larger payment system operators with its' work to ensure firms are complying with their statutory and regulatory requirements.

Fraud and Scam data publication: As part of its ongoing work to combat frauds and scams the PSR has confirmed rules  (PDF 0.84 MB) for publishing data on APP scam performance by payment service provider (PSP) groups. The rules direct 14 of the largest UK PSP groups to collect and provide data to the regulator which will cover 95% of consumer payments (by both volume and value, sent via Faster Payments). The first set of data should be delivered to the PSR by 2 May 2023 and will then be published in October on the PSR website. The PSR is publish data with this six-month time lag to allow the PSPs to address any weaknesses identified before publication.

Open Banking: The Joint Regulatory Oversight Committee (JROC) published its recommendations for the next phase of open banking in the UK including a roadmap of priorities over the next two years, covering five key themes:

  • Levelling up availability and performance.
  • Mitigating the risks of financial crime.
  • Ensuring effective consumer protection if something goes wrong.
  • Improving information flows to third party providers (TPPs) and end users.
  • Promoting additional services, using non-sweeping variable recurring payments (VRP) as a pilot.

Shortly before, the Strategic Working Group's (SWG's) report (PDF 3.38 MB) provided the JROC with stakeholders' views on the priorities, long-term governance, and funding options for the Future Entity, that will oversee Open Banking, to ensure it is set up, resourced, and funded on a sustainable and equitable basis for the future. The report identifies a number of gaps/perceived gaps and provides discussion around potential solutions to transition to a future optimal state.

Cross Sector

Financial Ombudsman Service (FOS) plan and budget: The FOS has published its plans and budget for 2023/24. Its compulsory jurisdiction levy and individual case fee will be frozen at £106 million overall and £750 for each case respectively, representing a reduction in real terms. The voluntary jurisdiction levy will be reduced from £700,000 to £600,000 and group-account fee arrangement businesses will not receive any free cases.

FOS Outcome reporting changes: Following a short consultation, the FOS has confirmed the introduction of temporary changes to outcome reporting (PDF 0.54 MB), in its business-specific complaints data for the 2023/24 financial year, which will see it report cases as “proactively settled” where certain criteria is met. This will be a trial for the 2023/24 financial year. The initiative proceeds as consulted on with only one minor change to how it is implemented such that it will only apply to new cases with the service and is designed to help manage FOS's case load.

Fast growing firms: The FCA has published the results of a multi-firm review of 25 fast growing firms. The review was triggered by findings in ongoing supervision and included payment services firms, contract for difference (CFD) providers and wealth managers. The FCA found that most firms had not updated their risk management frameworks, resulting in an inadequate assessment of risks and the potential for harm. Additionally, some firms did not have capital and/or liquid assets commensurate with their size, complexity and growth in business. All firms, especially those that have grown rapidly, or have plans to do so, should read the findings and compare their own arrangements to determine whether they need to make changes.

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:

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