UK Regulatory Radar

June 2024

Our new issue of UK Regulatory Radar brings you the latest industry and regulatory updates impacting financial service providers in the UK.

This edition is a shorter round up than usual, as UK regulators refrain from major policy announcements during the pre-election period. This is resulting in delays, as well as potential changes, in some policy areas. Initial casualties include the PRA's second batch of near final rules for the implementation of Basel 3.1 (see more below), the consultation on capital requirements for the new prudential regime for Small Domestic Deposit Takers, the FCA's PRIIPs replacement proposals and listing regime changes, the review of SM&CR and the advice/guidance boundary review. Whilst they always looked likely to be delayed given industry backlash and ministerial concern, the FCA's proposals to name firms under enforcement investigation are also expected to be impacted by the election hiatus.

Click on the images below for our latest insights and see the 'Further updates' section for other sector-specific developments.

Banking   |   Capital Markets and Asset Management   |   Insurance   |   Retail Conduct   |   Payments   |   Cross Sector

Implementing Basel 3.1: The announcement that the UK general election will take place on 4 July and the start of the `pre-election period', during which regulatory authorities typically refrain from making major policy announcements, has delayed the PRA's publication of the second set of near-final rules for the implementation of Basel 3.1 in the UK. This publication will set out the PRA's expectations for credit risk and the output floor and had been expected before the end of June.  

Strong and simple capital requirements: Again, due to the pre-election period, the PRA's consultation on the capital elements of the new prudential regime for Small Domestic Deposit Takers (SDDT) has been delayed.

Model risk management: The PRA's model risk management principles, as set out in SS1/23, became applicable on 17 May. For more on the implications for firms, see the article above.

International regulatory developments: Nikhil Rathi (FCA CEO) delivered a speech, highlighting key international initiatives relating to asset managers. The first initiative covered systemic risk, specifically regarding liquidity management arrangements in open-ended funds, the use of leverage, preparedness for margin calls, and valuations. The second covered technology and innovation, discussing the tokenisation of funds and the regulation of artificial intelligence. The third discussed demographic changes and the introduction of new products such as the Long-Term Asset Fund. Finally, Rathi summarised how the FCA is making improvements in terms of authorisation efficiency, discussed the distribution of the FSCS levy, and described some of its supervisory interventions. 

PRA authorisation and supervision: The PRA has published its final policy and statement of policy on the authorisation and supervision of insurance branches. There are some changes from the original proposals in the consultation. One key difference between the consultation and final policy is the approach to `broad equivalence' of a home jurisdiction's supervision regime, which is now partly based on the nature, scale and complexity of activities carried out by the applicant third country branch (where this consideration was previously excluded from the CP). The PRA will not publish the results of these equivalence assessments. The regulator's change aims to improve alignment between banking and insurance supervisory policies. Additionally, the PRA will seek and consider the home supervisor's views, where applicable, on the third country branch both during its application for authorisation and in its ongoing supervision. Existing branches and applicants will need to review the final policy carefully to understand if they can continue as branches or if subsidiarisation is likely to be a more appropriate option.

FOS Case fees: The FOS has launched a consultation on the introduction of case fees for professional representatives (PRs), e.g. law firms and CMCs. Although PRs currently bear no charges to bring claims on behalf of consumers, they profit from their clients' awards and utilise FOS resources. The FOS proposes to charge PRs up to £250 to lodge a case, reduced to £75 if the case is upheld. This has been driven by a sharp increase in PR case referrals over the last few years, with fewer than 25% resulting in a different outcome than already offered by the respondent firm. With these changes, the FOS aims to make its funding model fairer by recovering costs from both regulated firms and PRs.

FOS Proactive settlement scheme: The FOS has announced its intention to make the proactive settlement scheme permanent following two successful trial periods, which demonstrated it was beneficial for consumers and firms in resolving complaints quickly. The scheme, which gives firms the opportunity to resolve a complaint early on in the FOS process, will be subject to a few adaptations. These include a reduction in the time firms are given to issue new offers from 21 to 14 days, and FOS will provide guidance to complainants at the point of offer to inform their decision making. These changes will apply from 24 June 2024.

Regulatory cooperation: The financial services regulatory family (FSRF) has published its Wider Implications Framework ('the framework') annual report reflecting on its work together on issues that could have a wide impact across the financial services sector. The FSRF comprises the FOS, FCA, FSCS, TPR and the Money and Pensions Service (MaP). Since the first report last year, the framework has been amended to take into account the new co-operation duty for the FCA, FOS and FSCS, brought in under FSMA 2023. Key achievements highlighted this year include joint work on (i) the British Steel Pension Scheme (BSPS), (ii) SIPPs redress, (iii) Consumer Duty implementation and embedding, (iv) mortgage Standard Variable Rates complaints, (v) motor finance discretionary commission complaints, and (vi) activity to address the impacts of the cost-of-living crisis.

Card fees: The PSR has published an interim report on its market review of card scheme and processing fees, provisionally concluding that the market is not working well as a result of ineffective competition. The PSR's findings highlight Visa and Mastercard's complex charging structures and significant fee increases in the last five years, with no evidence of a comparable increase in quality of service, as areas of concern. To address the competition issues, the regulator proposes a number of remedies to improve transparency and accountability, including requiring the schemes to take their pricing decisions in a more consistent and formalised way, and providing merchants with clearer fee information.

Card acquiring services: The PSR has published its policy statement confirming revisions to its Specific Directions (SDs) 14, 15 and 16, which relate to the supply of card-acquiring services. The PSR is proceeding with its proposals as consulted upon; updating the list of directed entities, and introducing a new method to capture future changes. The new mechanism means that where a directed Payment System Provider (PSP) transfers its business to another, the new business automatically becomes a directed PSP. The PSR will not be proceeding with the proposal to add Checkout Ltd to the list of directed PSPs but intends to keep the list of directed firms under review.  

Cost Benefit Analysis Panel: The FCA announced the appointment of Dr. Felix Martin as the chair of the FCA and PSR's new, independent Cost Benefit Analysis (CBA) Panel. The independent panel of experts was established to provide advice to FCA and the PSR in relation to CBA. The FCA estimates the Panel will review approximately a third of its CBAs, with the referral criteria set out in an updated statement of policy, planned for this summer. The Panel is expected to begin reviewing CBAs from 1 August. The PSR is still in the process of developing its framework of engagement with the Panel. The formation of the Panel is likely to be welcomed by industry as an important lever to improve the rigour of policy development and strengthen the accountability of the regulators. However, the impact the Panel will have on the regulators' policies will take longer to determine.

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: