May 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 or topic-specific developments.

Highlights of the month

In this issue:


Model risk management principles for banks: The PRA has published PS6/23, finalising proposals that were originally set out in CP6/22 for establishing an effective model risk management (MRM) framework. The PS retains the original five principles — (1) Model identification and model risk classification, (2) Governance, (3) Model development, implementation and use, (4) Independent model validation and (5) Model risk mitigants — while also incorporating some amendments in light of feedback received. These include a narrowing of scope (until the definition of a ‘Simpler-regime firm’ is finalised) and clarification of specific requirements (e.g. around the SMF function, audit committee reporting and subsidiaries’ use of parent group model validation). The policy will take effect from 17 May 2024 — with firms that receive permission to use internal models being granted a 12-month compliance window. 

PRA Business Plan 2023/24: The PRA has published its 2023/24 Business Plan, setting out the work to be carried out under its four strategic priorities. For more detail, see the article above.

Risks from contingent leverage: The PRA has issued a policy statement (PS5/23) on the risks from contingent leverage, following proposals set out in CP12/22. It is relevant for banks, building societies and PRA-regulated investment firms that perform Internal Capital Adequacy Assessments (ICAAPs) and to firms subject to a leverage ratio minimum requirement (LREQ). The ICAAP guidance for firms is effective immediately. The reporting requirement for LREQ firms will take effect on 1 January 2024 with a first reporting reference date of 30 June 2024.

BoE's approach to enforcement: The Bank of England (BoE) is consulting on changes and clarifications to its approach to enforcement. The proposed amendments seek to consolidate existing enforcement policies and procedures into a single Bank Enforcement Approach and move sections of the current PRA Enforcement Approach Document which relate to the use of statutory tools other than enforcement powers into the proposed PRA Supervisory Decision-Making Policy. In addition, the BoE would clarify its approach and procedures for FMI enforcement investigations and clarify and update the remit of the Enforcement Decision Making Committee. 

Improving depositor outcomes: The BoE, as UK Resolution Authority, has issued an update on its work to improve depositor outcomes in the event of bank or building society insolvency. In particular, the BoE (working with other authorities and industry stakeholders) has been exploring opportunities to minimise the disruption to depositors who are protected by the FSCS but are reliant on their accounts with the failed firm for day-to-day banking and access to money. Three areas for improvement have been identified to improve the continuity of payments and banking services.

FPC medium-term priorities: The BoE's Financial Policy Committee (FPC) has revised its medium-term priorities for the next three years, alongside its ongoing assessment of the risk environment. The four revised priorities focus on improving areas of market-based finance (i.e. the non-bank system), responding to structural changes and new risks, responding to lessons learned for macroprudential policy from recent stresses, and continuing to improve macroprudential oversight of operational resilience. 

BoE Systemic Risk Survey: The BoE has published the results of its H1 2023 Systemic Risk Survey. The survey is published biannually, to quantify and track market participants' view of risks to and confidence in the stability of the UK financial system. In general, respondents remain confident in the stability of the UK financial system, although net confidence had decreased since the 2022 H2 survey. Cyber-attack, geopolitical and inflation risks are still considered the most challenging to manage by a significant margin. Climate change and risks associated with a UK economic downturn are more frequently cited as key risks compared to the previous survey. 

Capital Markets and Asset Management

Improving equity secondary markets: The FCA has published PS23/4  implementing changes to UK MiFIR which were consulted upon in CP 22/12 and originally proposed as part of the HM Treasury (HMT) Wholesale Market Review. The changes are intended to increase efficiency and tailor the onshored MiFIR regime for the UK market. The main changes are to post-trade transparency (taking effect in April 2024), waivers to pre-trade transparency (taking effect immediately), introducing a Designated Reporter regime and setting up an industry taskforce to improve market resilience.

Changes to the listing process: The FCA is consulting on significant reforms to the framework for listing companies' equity shares. This is taking forward recommendations from Lord Hill's UK Listing Review and previous FCA engagement via a discussion paper (DP22/2). The main proposal is to replace standard and premium listing share categories with a single listing category, in the hope that  making the process simpler and more flexible will increase the attractiveness of the UK as a location for company listings. 

HMT consultation on the "Reserved Investment Fund": Following a previous "call for input", HMT is consulting on a new UK fund structure — the "Reserved Investor Fund (Contractual Scheme)". This would take the form of an unauthorised contractual scheme that could have lower costs and more flexibility than the existing authorised contractual scheme. The fund would potentially be able to be promoted to professional and sophisticated investors with an unconstrained investment strategy. The consultation seeks views on the scope of the fund and the design of the corresponding tax regime. 

FCA and TPR — further guidance on enhancing resilience in LDI: The FCA and The Pensions Regulator (TPR) have published further guidance, observations and recommendations for managers and trustees of Liability-Driven Investment (LDI) strategies. These publications are the latest following the Autumn 2022 gilt crisis and related challenges for LDI managers (see our previous summary here). Notably, the FCA states that its expectations extend beyond LDI managers to "other market participants, including asset managers" where they face similar types of risks. The FCA also notes that these firms should consider their own practices and take appropriate lessons from the relevant observations in the publication.

FCA plan to deliver significant redress to Woodford investors: The FCA has published an update on the status of its enforcement case against Link Fund Solutions (LFS). LFS was the authorised fund manager of the LF Woodford Equity Income Fund which started winding up proceedings in 2020. According to the update, LFS (with a material contribution from the Link Group) has agreed to provide a significant redress payment to investors in the fund of up to approximately £235 million. If a sale of the business is completed and the scheme becomes effective, LFS will agree to a settlement of the FCA's investigation — this will end the FCA's enforcement case. If the scheme is not approved, then the FCA will proceed with the enforcement case, which LFS has indicated it will contest. The FCA notes its continued investigation of "other parties" in relation to the suspension of the fund.

Insurance Updates

PRA caution on BPA deals and reliance on funded reinsurance: In a speech on 27 April, Charlotte Gerken cautioned insurers against taking on too many Bulk Purchase Annuity (BPA) deals, following rising interest rates. The PRA is concerned that insurers are expanding their risk appetite and going outside of core expertise, leading to increased structural, liquidity, counterparty and interconnectivity risks. The PRA is also concerned about overreliance on funded reinsurance and is focused on firms' ability to recapture reinsurance, especially in times of stress. It has announced two additional subject expert groups to cover detailed principles for a stress testing regime (with individual results now published) and public disclosures. 

PRA Occasional Consultation Paper: The PRA has released an omnibus consultation (CP8/23) for minor technical amendments, including changes in the methodology for the Volatility Adjustment (VA), treatment of Regional Government and Local Authority (RGLA) bonds and definitional changes.   

Retail Conduct Updates

Countdown to the Consumer Duty: In a speech on the fast approaching Consumer Duty implementation deadline, Sheldon Mills, Executive Director, FCA, highlighted how the Consumer Duty will fundamentally change the FCA's culture as well as that of firms. Whilst reminding firms that there is not much time left on the implementation clock, this speech sought to encourage rather than frighten firms into maintaining momentum to deliver the changes required. According to FCA research, many firms are on track to meet the deadline. Mills also shared key findings from the FCA's review of fair value frameworks and its approach to supervision and enforcement of the Duty. 

Consumer Duty — fair value review findings: The FCA has published the findings of its Consumer Duty fair value framework review. The review considered a non-representative sample of 14 firms' frameworks (mainly large firms within the retail banking, consumer investments, payments and digital assets, and consumer finance portfolios). The review identified good practice and areas for improvement, with some firms unable to provide adequate evidence for why their products or services provide fair value, and examples where frameworks did not demonstrate adequate consideration of outcomes for different customer cohorts. Firms are expected to consider the findings and determine whether any changes to their plans are required to meet the Duty's requirements. 

Payments and e-money webinar: The FCA has published a transcript of its recent payments and e-money Consumer Duty webinar. The session repeated key aspects of the Duty and how it applies to this sector and reiterated key messages from the recent Dear CEO letter on Consumer Duty implementation.

High street bank savings rates: The FCA has responded to the Treasury Committee's questions about increases in high street banks' net interest margins and whether these were driven by banks earning disproportionate profits by increasing mortgage rates quicker than savings rates. The FCA confirmed that the harm to loyal customers earning low savings rates with high street banks is likely to have increased as interest rates have risen. The response highlights ongoing work to monitor how firms are passing on rate changes, and how the FCA has challenged firms on some practices observed. The FCA highlights the upcoming Consumer Duty as a mechanism to help resolve such issues as it will require firms to be able to justify the rationale for the speed with which, and degree to which, they make changes to their various savings rates.  

Multi-occupancy leaseholder insurance reforms: The FCA is proposing new rights and protections for leaseholders to improve the transparency of the multi-occupancy leasehold buildings insurance market. Under the proposals, leaseholders would be defined as customers of buildings insurance. The rule changes would (i) explicitly require insurance firms to act in leaseholders' best interests, (ii) prevent firms from recommending a policy based on commission or remuneration levels, (iii) increase transparency by requiring disclosure of key information to leaseholders including remuneration received. The FCA proposes a three- month implementation period. Interestingly, the consultation makes no reference to whether the FCA foresees any implications for firms when considering the scope of the Consumer Duty.

FCA Intervention on overdrafts: The FCA has published an evaluation of the enhanced overdraft rules brought in to help customers who were repeatedly using their overdrafts. The evaluation shows that regulatory intervention has reduced high fees for unarranged borrowing and removed complex charging structures — resulting in a saving of nearly £1 billion for customers. The FCA has also published examples of good and poor practice by firms. 

Redress scheme legal challenge dropped: The FCA has announced that the British Steel Adviser Group's (BSAG) has dropped its legal challenge against the FCA's decision to set up a redress scheme for former British Steel Pension Scheme (BSPS) members. The FCA restates its view that the challenge was pursued unreasonably with little intention to go to trial and notes that BSAG has agreed to make a substantial contribution to the FCA's incurred costs. 

Payments updates

The Payment Systems Regulator (PSR) has published a Policy Statement confirming changes to its fee structure for 2023/2024 from 28 April 2023. The main changes are: 

  1. Setting of a minimum threshold of £100 for issuing fees to payment Service Providers (PSPs) regulated by the PSR. This is unchanged from the consultation proposal and will move smaller firms outside the fee structure, simplifying and reducing costs.
  2. Introduction of a special project fee (SPF) mechanism where payment system operators with a for-profit business model are charged for work related to or arising from their designation. This is a more limited scope than that originally consulted on, in recognition of concerns about how special project fees would be assigned, scoped and costed under a broader mechanism. 

Pensions updates

TPR has published its 2023/24 corporate plan with achieving better value for money (VfM) for savers as its key priority. This will be delivered through on-going work with the FCA and DWP to develop a focused VfM framework. The TPR also sets out its plans for the launch of the new Defined Benefit (DB) Funding Code (now moved to April 2024), increased focus on the quality of outcomes in defined contribution (DC) schemes, tackling scammers and embracing innovation. 

Cross Sector

HMT consultation on secondary objectives and measuring success: For both the PRA and FCA, the Financial Services and Markets Bill (FSMB) introduces a new secondary objective of facilitating growth and competitiveness. HMT is consulting on i) its proposed approach to increasing scrutiny of both regulators, and ii) what metrics both regulators should publish to demonstrate how they have advanced this objective. The consultation closes on 4 July 2023.

Critical third parties: The BoE, PRA and FCA have launched a survey to support analysis into the costs and benefits of a potential critical third-party regime in the UK. The survey asks respondents to provide cost estimates for implementing and ensuring ongoing compliance with potential minimum resilience standards based on those set out in DP3/22

FSRF Wider Implications Annual Report: The financial services regulatory family (FSRF) published its Wider Implications Framework annual report reflecting on the first year of the refreshed framework, key achievements and changes that may be made. The FSRF comprises the Financial Ombudsman Service (FOS), the FCA, the Financial Services Compensation Service (FSCS), TPR and the Money and Pensions Service (MAPs). Achievements highlighted include (i) joint work on the British Steel Pension Scheme (ii) a joint response on pension transfers (iii) work to prevent firm "phoenixing", and (iii) collaborating to achieve consistent and complementary approaches to the Consumer Duty whilst maintaining independence.

FCA — Financial resilience regulatory return: The FCA has published final rules for a new financial resilience regulatory return for certain solo-regulated firms. The 'FIN073 Baseline Financial Resilience Report' replaces the FCA Financial Resilience Survey. From January 2024, relevant firms will be required to submit FIN073 returns on a quarterly basis. The FCA is also consulting on changes to the scope of 'FIN073' to include full permission consumer credit firms. These firms are currently excluded from the new rules as they are captured under the definition of Credit Brokers.

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:

Key contacts