UK Regulatory Radar

PRA supervisory priorities for 2024: The PRA has written to the CEOs of UK Deposit Takers and International Banks outlining its supervisory priorities for 2024. Both letters focus on the need for robust governance, risk management and controls to effectively mitigate risks in an `increasingly challenging and changeable operating environment'. Boards and accountable executives can expect to be under enhanced scrutiny. The letters also call out financial and operational resilience, data risk and the risks arising from climate change. UK Deposit Takers are further encouraged to focus on credit risk, model risk and recovery and resolution planning.

Enhancing the UK resolution regime: HM Tresury (HMT) is consulting until 7 March on proposals to enhance the UK's resolution regime for banking institutions. Specifically, a new mechanism is proposed to facilitate the use of certain stabilisation powers to manage the failure of small banks. This would be paid for by a levy on the banking sector and therefore be covered by industry rather than the taxpayer. HMT contends that these proposals would give the Bank of England (BoE) increased flexibility without making significant changes to the bank resolution regime itself and avoiding new upfront costs for firms.

Reviewing the ringfencing rules: The PRA has published a report, in line with its statutory duty under FSMA 2000 to review its ringfencing rules every five years. The overall conclusion is that most rules are performing satisfactorily — they remain an important support for the statutory regime, they discharge the legislative intentions, they are operating effectively, and they appear to be well understood by firms. The PRA has identified some areas for improvement around the provision of services to RFBs from non-ring-fenced parts of a group, arm’s length transactions, governance arrangements and regulatory reporting. Any changes will undergo formal consultation following dialogue with firms.

Leverage ratio framework: The PRA has proposed changes to the leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework. The consultation closes on 8 April.

Framework for a consolidated tape: The FCA has set out its final policy on the UK consolidated tape (CT) framework for bonds and a response to its discussion paper questions on a CT for equities. It is also consulting on payments to data providers and authorisation and supervisory forms for Data Reporting Service Providers. 

Improving transparency for bond and derivatives markets: The FCA has proposed changes to the bond and derivative transparency regime in UK MiFIR. The proposals aim to achieve a better balance between the need to support the ability of market participants to offer liquidity, and the need for better and more timely transparency for the market as a whole. The FCA's plan is that the revised regime will be in place before the bonds consolidated tape goes live.

Listing rules: The FCA has set out detailed proposals for reforming the listing regime. This follows an initial consultation (CP23/10) in May 2023. The proposals aim to encourage a greater range of companies to list and grow on UK markets by creating a simpler, more disclosure-based listing regime with a single commercial company category. 

Supervision of financial market infrastructures: The BoE published its annual report on the supervision of financial market infrastructure (FMIs), summarising its focus over the last year and its future priorities. The work for the upcoming year reflects the wider rule making powers and new objectives granted to the BoE under FSMA 2023, and includes priorities on operational and financial resilience and facilitating innovation in payments, settlement and clearing.

Margin requirements: The PRA and FCA jointly published a policy statement on margin requirements for non-centrally cleared derivatives: amendments to BTS 2016/2251 under UK EMIR. It extends the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements until 4 January 2026. It also contains confirmation of the approach to pre-approval of bilateral initial margin models.

2024 Supervisory priorities: The PRA has issued a `Dear CEO' letter outlining its insurance supervisory priorities for 2024. Insurers will not be surprised to note that reforms related to Solvency UK and stress testing across both life and GI firms are priorities for the regulator. Other areas include Funded Reinsurance, a consultation on ease of exit planning and the development of a liquidity reporting framework. For GI firms, risk management of cyber exposure and claims inflation also feature.

Insurance Distribution Directive: The FCA has set out final rules for insurance firms that transfer and replace retained EU law provisions from the Insurance Distribution Directive (IDD). It has also responded to feedback to CP23/19. The new rules and guidance in the FCA's sourcebooks will replace the provisions of the retained EU law which is being repealed. This will provide continuity of the regulatory regime which applies to insurance-related activities. Rule changes will come into force on 5 April 2024.

PRA consults on ease of exit planning: UK insurers will need to plan for a solvent exit as part of BAU activities under new regulatory expectations proposed by the PRA on 23 January. Insurers will need to produce and maintain a Solvent Exit Analysis (SEA) and update it at least every 3 years or whenever a material change takes place. Once solvent exit has become a reasonable prospect, a firm would need to produce a detailed Solvent Exit Execution Plan (SEEP) and demonstrate how they would monitor the execution of the solvent exit and keep the PRA and other stakeholders informed of its progress. The rules will apply to all firms apart from those in passive run off and UK branches of overseas insurers.

Consumer Duty implementation: The FCA has published findings from its review of retail banking firms' implementation of the Duty. Although only retail banks were assessed, the findings are relevant to all firms in scope of the Duty. The areas identified include: (i) providing better evidence and justification for residual gaps in outcomes, (ii) improved identification and consideration of vulnerable customers, and (iii) enhancing communication plans for specific customer journeys. In addition to these thematic findings, the FCA also identified specific improvements required with business current accounts and mortgages used for debt consolidation. Firms will need to determine (and evidence) whether any consequential action is required.

FCA priorities for loan-based peer-2-peer lending platforms: The FCA has written to loan-based peer-to-peer lending platforms (P2P) setting out its key areas of focus and expectations. Unsurprisingly, the full implementation of the Consumer Duty and the promotion of high-risk investments are two of the three areas of focus identified. Wind-down planning makes up the third, where the inclusion of a requirement for firms to submit a 'Self-Certification Attestation' signals the FCA's ongoing concern about the risks posed by a disorderly exit. Notably, the FCA re-emphasises its intention to be more data led, supplementing regular returns with direct information requests and intelligence, to assist in identifying outlier firms. The FCA expect CEOs and their boards to proactively assess their firms' exposure to the risks set out in the letter and ensure that they are appropriately managed.

FCA priorities for investment-based crowdfunding platforms: The FCA has issued a letter to the boards of crowdfunding platforms to set out its latest supervisory expectations. Its specific areas of focus include financial promotions (including the new gateway for approvals), its trading venue perimeter guidance, the upcoming Public Offer Platform, full compliance with the Consumer Duty, and financial resilience. The FCA expects firms to assess their compliance in each area and to take action to address any shortcomings.

Fractional shares: The FCA has set out its Consumer Duty-related expectations for firms offering fractional shares to the retail market. This follows HMT's announcement of its plan to allow certain fractional share contracts as ISA investments. The FCA provides specific examples of how the characteristics of fractional share models could impact consumer outcomes, and then sets out its expectations aligned against the four Consumer Duty outcomes. The FCA expects firms to review their practices in line with FCA expectations to ensure compliance with the Consumer Duty.

Expansion of Variable Recurring Payments (VRP): The PSR is consulting on changes to Faster Payments to enable a phased expansion of VRP to additional low-risk use cases as recommended in the VRP working group blueprint. The use cases proposed are: (i) payments to regulated financial services, (ii) regulated utilities sectors, and (iii) local and central government.

Cross border interchange fees: The PSR has published an interim report on its market review into cross-border interchange fees (IF) which has provisionally found that the market is not working well due to ineffective constraints. To remedy this, the PSR proposes to introduce a price cap on IFs and is seeking views on its proposals and market review provisional findings.

APP Fraud: The PSR has finalised its new reimbursement requirements for APP fraud. The policy statement confirms: (i) the maximum level of reimbursement for all consumers will be set at £415,000, (ii) `sending' payment firms can apply a claim excess of up to £100 (excluding vulnerable customers), and (iii) its final position on the consumer standard of caution. Additionally, reimbursement costs will be shared 50:50 between `sending' and `receiving' firms. The reimbursement requirement will come into force on 7 October 2024. Read our article on APP scams above for more detail on these developments.

Card acquiring services: The PSR is consulting on proposals to revise its Specific Directions 14, 15 and 16, which relate to the supply of card-acquiring services. The proposals: (i) update the list of directed legal entities, (ii) introduce a more efficient mechanism to capture future changes, a (iii) add a new supplier to the list of directed parties under the directions. The new mechanism proposed means that where a directed Payment System Provider (PSP) transfers its business to another, the new business automatically becomes a directed PSP.

Open Banking developments: The Joint Regulatory Oversight Committee (JROC) reported its progress on the open banking roadmap. JROC has made significant progress on many actions, including expanding Variable Recurring Payments (VRP) and improving data sharing. However, finalising the structure, governance, and funding of the future entity overseeing open banking has been delayed until Q1 2024. Further, the transition from Open Banking Limited (OBL) to the future entity has been pushed back until Q2 2024.

TPR general code: On 10 January, the TPR's new general code was laid in parliament. The new code brings together ten existing codes of practice in a single set of clear and consistent expectations for pension scheme governance and administration. The code is expected to come into force on 27 March 2024.

ESG data and ratings code of conduct: The FCA-convened working group on ESG data and ratings (D&R) has published the final code of conduct for providers, with ICMA taking ownership of the final output. The code is consistent with other regulatory initiatives in this space, and promotes transparency, good governance, management of conflicts of interest, and the strengthening of systems and controls. It is recommended that the code be applied within six months for ratings providers and 12 months for data product providers. 

Working group on sustainability information for financial advisers: The FCA has set up an industry-led working group for financial advisors to support them in providing competitive and suitable advice to consumers regarding sustainability information. The initiative follows publication of the UK Sustainability Disclosure Requirements (SDR), which introduced new retail-facing product labels for fund managers but did not specifically address the role of financial advisers. The working group may play a role in ensuring that labelled and non-labelled products are appropriately marketed. A report on how financial advisors can be supported in delivering good practice is due in the second half of 2024.

HMT Transition Finance Market Review: A new UK government review panel has been convened to investigate how companies in the UK and abroad can be supported to continue to access the capital they need to decarbonise and deliver the UK's net zero ambitions. The review will consider how transition-focused finance can be scaled and raised with integrity, and how to position the UK economy as a global hub for transition-enabling capital. The panel will report back in July 2024.

Article 10 of the Market Abuse Regulation (MAR): In Primary Market Bulletin 46, the FCA noted that it has received numerous enquiries about Article 10 of the MAR in the context of shareholder cooperation on ESG stewardship. It clarified that the extent to which any engagement between shareholders (or between a company and its shareholders) might contravene UK MAR or raise other market conduct issues will depend on the specific circumstances in any given case.

CBEST thematic report: In December, the BoE, PRA and FCA published the latest annual CBEST thematic report. The CBEST programme assesses the cyber resilience of firms/FMIs' important business services, using an intelligence-led penetration testing approach that mimics the actions of cyber attackers. It is used to improve the resilience of systemically important firms/FMIs and, by extension, the wider financial system. This is the first time that the report, which contains cyber resilience good practice and insights (including from the National Cyber Security Centre (NCSC)), has been published in full. It highlights the importance of building strong cyber hygiene and the need for firms to simulate a range of cyber testing scenarios to remain resilient to threats. Key areas covered include: identity and access management, staff awareness and training, secure configuration, network security, data security, and incident response and monitoring.

FSCS management expenses levy limit: The PRA and FCA are consulting jointly on the FSCS Management Expenses Levy limit (MELL) for 2024/25, proposing a MELL of £108.1m, a reduction of £1.7m from 2023/24. The proposed MELL consists of a core budget of £103.1m and an unlevied reserve of £5m. The core budget is 3.3% higher than 2023/24, reflecting the investment needed to implement the new operating model to address the increasing complexity of claims. The unlevied reserve on the other hand has been reduced by 50% as a result of decreased levels of uncertainty around the potential for firm failure.

Response to Digital Pound consultation: The BoE and HMT published the response to their February 2023 consultation on a digital pound (or UK central bank digital currency — CBDC). The key outcomes include confirmation that neither body would have access to users' personal data with primary legislation to guarantee users’ privacy / control, a commitment to maintaining access to cash (for those who prefer it), and a commitment to further work on certain design choices. The next decision — on whether or not to proceed with the build phase — is expected, at the earliest, in 2025.