UK Regulatory Radar November 2024

NOVEMBER 2024

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.

• Banking
• Capital Markets and Asset Management
• Insurance
• Retail Conduct
• Payments
• Pensions
• Digital Finance and Innovation
• ESG and Sustainable Finance
• Operational Resilience
• Cross Sector

Resolution assessments: in CP12/24, the PRA has proposed amendments to reporting and disclosure dates for the UK Resolvability Assessment Framework (RAF). Specifically, the timing of future submissions would no longer be fixed to two-year cycles. Relevant firms would continue to be subject to reporting and disclosure obligations on their resolvability, but on a periodic basis, with more details to be set out in subsequent changes to SS4/19. 

BoE amendments to the approach to setting MREL: the BoE is consulting until 15 January 2025 on updates to its Statement of Policy (SoP) for setting a minimum requirement for own funds and eligible liabilities (MREL). The proposals are designed to simplify and consolidate the UK's existing MREL framework and make it easier to navigate and implement. The BoE is also seeking to ensure that the framework remains up to date with, and able to respond to, wider developments in financial regulation and markets, that it remains aligned with international standards and that it can adapt over time to reflect lessons learnt. The consultation closes on 15 January 2025. 

Large exposures framework: the PRA is consulting (CP14/24) on implementing the remaining elements of the BCBS large exposures framework. The key proposals include removing the use of internal model methods when calculating exposure values to securities financing transactions and introducing a mandatory substitution approach to calculate the effect of credit mitigation techniques. 

Prudential assessment of acquisitions and increases in control: the PRA and FCA have issued a joint policy statement (PS18/24) providing feedback to responses received to CP 25/23 and final rules. There are no material differences between PS18/24 and CP25/23, but there are new paragraphs, for example on partnership structures and due diligence, and clarifications, including of what constitutes significant influence. The new policy took effect on 1 November.

Bonds and derivatives transparency: the FCA has published PS 24/14 (PDF 2.9MB) on improving the transparency of the bonds and derivatives market. The PS includes changes to the onshored MiFIR regime to: 

– revise the transparency framework for the bond and derivative markets in the UK

– define scope and calibration of the new framework

– clarify exemptions from post-trade transparency

– improve the content of post-trade information: fields and flags

– refine the definition of a Systematic Internaliser (SI).

The FCA's aim is to is to improve the operation of the existing transparency regime by establishing a better balance between supporting the ability of market participants to offer liquidity, and improved and more timely transparency for the market as a whole. The publication also includes as discussion paper on the future of the SI regime.

Investment research payment optionality for fund managers: the FCA is consulting on allowing UK fund management firms the option to make joint payments for research and execution to brokers. This would bring research payment options for fund managers into line with changes already introduced for UK MiFID firms via PS24/9. If fund managers decide to take up this option, they would need to provide their investors with 60 days' notice before going ahead, ensure that certain guardrails are in place and disclosures are made. The FCA's proposed changes would deliver on recommendations outlined in the 2023 UK Investment Research Review.

UK EMIR bilateral margin requirements: the FCA and PRA published PS24/13 finalising changes to the UK EMIR bilateral margin requirements (BTS 2016/2251). The amendments are necessary to reflect the expected changes to UK EMIR that will be made in the Securitisation (Amendment) Regulations 2024. The amendments came into force on 1 November 2024. 

Technology Working Group report on AI in investment management: HMT's Technology Working Group has published a report exploring existing and future use cases for artificial intelligence (AI) within the UK's asset management sector, as well as the internal and external barriers firms have or are anticipated to encounter in adopting AI. The report has recommendations for industry and policy makers including building skills and talent, efforts to counter the malicious use of AI and facilitating international regulatory cooperation and alignment on AI.

Revisions to the UK Stewardship Code: following the launch of its review in February 2024 and changes announced in July, the FRC has launched a public consultation on revising the 2020 Stewardship Code. The consultation is wide-ranging and proposes significant changes that aim to balance ongoing support for effective stewardship and high-quality disclosures whilst removing unnecessary reporting burdens. This is set against the wider context of efforts to bolster UK capital markets. The FRC's proposals would broaden the definition of stewardship, streamline and amend the reporting process, restructure the Code's existing Principles with additional guidance, and permit cross-referencing to information disclosed outside of the stewardship report. For the first time, principles would also be introduced specifically for proxy advisors and investment consultants. A revised Code is expected to be published in H1 2025 and take effect from January 2026.

Private markets: Nikhil Rathi, FCA CEO, gave a speech on risks and opportunities relating to private assets, and the regulatory direction of travel. Headlines from the speech touched on:

1. Private market risks and opportunities: Rathi noted the benefits of private markets but stated regulators need more transparency, consideration of liquidity risks and retail investor education.
2. Innovation: nine LTAFs have been authorised and some of them support the transition to net zero. Rathi reminded firms of the industry's blueprint for tokenising funds and the FCA's digital securities sandbox.
3. Value and fees: Rathi stated the FCA is open to a 'holistic discussion' of what it really wants in terms of fair value.
4. Proportionate regulation: Rathi indicated the FCA will collaborate with industry in 2025 on the review of AIFMD Annex IV reporting. 
5. Talent and skills: Rathi noted that the UK's competitive advantage in talent needs 'nurturing' and that firms need to keep investing in capacity and skills. He noted that only 12% of portfolio managers are female - a statistic that has not improved in recent years. Rathi also noted the importance of financial education.

Market Watch 80: in Market Watch 80, the FCA makes observations about what firms can do to manage the risk that they might be used to further financial crime when dealing for overseas clients who operate aggregated accounts that provide no visibility of the ultimate beneficial owners (UBOs). The FCA outlines extra precautions firms may want to take when onboarding and trading with obfuscated overseas aggregated accounts (OOAAs).

Market Watch 81: Market Watch 81 contains observations from the FCA's supervision of the UK MiFID transaction reporting regime. The FCA has found that the root causes of reporting issues are caused by weaknesses in change management, reporting process and design logic, data governance, control framework and governance, oversight and resourcing. It has often observed a connection between these areas. 

Credit Rating Agencies portfolio supervisory letter: the FCA has set out its supervisory priorities (PDF 121KB) for credit rating agencies - governance and oversight, ratings process and methodologies and operational resilience. 

Solvency II: The PRA has published PS15/24 on the restatement of assimilated law. This is the final policy statement to implement the conclusions of the Solvency II review. It finalises PRA rules, policy material, reporting and disclosure templates, and Insurance Special Purpose Vehicle (ISPV) templates and instructions that will replace Solvency II assimilated law. It also confirms the PRA's final rules and policy material for areas where near-final rules were provided in previous policy statements. The statement largely confirms the near-final rules, while providing clarifications in several areas including aspects of rules relating to loss absorbing capacity of deferred taxes, ring-fenced funds and Transitional Measure on Technical Provisions (TMTP).

PRA consults on reforms to UK ISPVs: the PRA has published CP15/24 on reforming the UK ISPV regulatory framework. The PRA proposes to consider applications for certain UK ISPVs, relating to natural catastrophe bonds, within ten working days, rather than the current period of four to six weeks, and make it easier for a wider range of market practices to be undertaken in the UK. The consultation closes on 14 February 2025.

HMT Treasury consults on captives regime: the government is consulting on a new approach to captive insurance companies (vehicles for self-insuring risk from companies within the same group). The consultation will be welcomed by insurers and corporates as a step towards levelling the regulatory playing field with jurisdictions that have established themselves as hubs for captives. It is high level and does not set out specific policy proposals. Instead, it seeks views on the merits of establishing a dedicated captives regime, its potential scope and exclusions, and the applicable regulatory framework (conduct and prudential) and regulatory approach to captive managers.

Motor finance commission: the FCA has published a consultation on proposals to extend the time firms have to respond non-discretionary commission motor finance complaints.  This covers any motor finance complaint where there was a commission arrangement not already subject to the new DCA complaint rules. This has been driven by the Court of Appeal’s judgment in the cases of Hopcraft, Johnson and Wrench, which decided that the broker’s receipt of commission from the lender was unlawful without obtaining the customer’s informed consent to the payment. The proposed rules mirror the DCA complaint rules in most respects, however two options for the extension end date are proposed: 

4 December 2025 - to align end dates for the pause with DCA complaints), or  

31 May 2025 - when the FCA estimate the Supreme Court will have reached a decision on whether to grant permission to appeal  

In an earlier call with market analysts, FCA CEO Nikhil Rathi noted that, pending any further information from the Supreme Court, “motor finance lenders and brokers are required to comply with the Johnson judgment both for new business and when responding to relevant complaints”.   

Premium finance: the FCA has announced a new market study to investigate the premium finance market alongside the new government insurance taskforce. The study aims to assess the effectiveness of competition and quality of consumer outcomes within the market. As part of the study, the FCA will review whether the products represent fair value, how well customers are made aware of their financing options, the role of commission and other potential barriers to effective competition in the motor and home premium finance market. The taskforce, which includes the FCA, aims to identify actions that may stabilise or reduce motor insurance premiums, while maintaining appropriate levels of cover.

Buy-Now Pay Later: HMT has published its long-awaited consultation on the regulation of Buy-Now Pay-Later (BNPL) products. The proposed framework brings BNPL firms within scope of the Consumer Credit Act (CCA) and under the regulatory oversight of the FCA. Once legislation has been finalised, the FCA will set out the rules for BNPL firms including information disclosure requirements, affordability and creditworthiness checks, and FOS complaint rights. BNPL firms will also be subject to the Consumer Duty. Agreements financing insurance are not in scope of the legislation. Other exemptions include merchants which provide their own short-term interest-free products and those that offer BNPL at the point of sale in store. Reflecting concerns about the risk of pressure selling, domestic premises suppliers which offer BNPL will fall within the FCA's regulatory perimeter. Final legislation is expected to be laid in Parliament in early 2025 with the regime in effect by 2026. 

Portfolio letters - FCA strategy 2025: the FCA has issued a series of portfolio letters outlining its strategic priorities for several sectors in 2025. Portfolios covered are retail banks, building societies, life time mortgage providers, non-bank mortgage lenders and mortgage third-party administrators, financial advisers (FAs) and investment intermediaries (IIs), and SIPP Operators. The importance of good governance and controls and the delivery of good customer outcomes is a key message in all the letters. As such, the adequacy and effectiveness of this control environment will form a central plank of FCA supervisory activity. The banking, building societies and mortgage lending portfolios share a number of common themes: 

• Operational resilience
• Consumer Duty implementation
• Customers in financial distress
• Financial crime
• Sustainable finance

The FCA expects retail banks to ensure that customers are not excluded from bank accounts and services. For building societies and mortgage lenders, there is also focus on financial resilience.

Aside from Consumer Duty considerations, the focus areas for SIPP Operators and financial advisers and investment intermediaries differ. For the latter, priority areas include retirement income advice, ongoing advice services and firm consolidation. For SIPP operators, the priorities centre on the discharge of redress liabilities for due diligence failures and the handling and record keeping of scheme money and assets - a growing area of concern. The FCA has not seen the sector make sufficient progress addressing concerns from its 2023 letter, therefore the also remain relevant.

Consumer credit and non-bank mortgage lenders: The FCA's multi-firm review of the financial resilience of consumer credit firms and non-bank mortgage lenders (NBML) found that improvements were required to firms' approaches to risk governance and risk management. The FCA identified three themes - inadequate risk identification and monitoring, under-developed risks and controls, and insufficient wind-down planning. 

Professional representatives case fees: the FOS has published correspondence with the FCA Chair confirming its decision, subject to parliamentary approval of enabling legislation, to introduce case fees for professional representatives (PRs) - e.g. Law firms and CMCs. Largely unchanged from the consultation, PRs will be charged case fees of £250 PRs, reduced to £75 if the case is upheld, where a case is upheld against a PR the fee for the respondent firm will be reduced by £175. The FOS is increasing the number of free cases from three to ten to enable PRs to apply learnings for subsequent cases. Subject to secondary legislation and a FCA FEES instrument, FOS consider the fees could be applied from early 2025. 

Complaints data: H1 2024 data from the FOS shows a 40% increase in complaints volumes, continuing a trend seen over the last couple of years. Banking and consumer credit continue to be the most complained about sector, showing year on year increases. Complaints brought by Professional Representatives (PRs) also continue to rise, accounting for 50% of banking and credit complaints. Disputes about credit cards, unaffordable lending, car finance as well as fraud and scams were the main driver for the rise in these complaints. Much of the increase, and the increasing involvement of PRs, is likely being driven by the FCA's ongoing work on discretionary commission arrangements in motor finance. 

National payments vision: the government has published its National Payments Vision (NPV) setting a clear vision recognising the importance of payments to the UK economy and the need to change the status quo. The NPV sets actions to strengthen the foundations of the payments ecosystem and outlines three key pillars designed to guide future activity – innovation, competition and security. Read more on the NPV here. 

Consumer Duty implementation: the FCA has published the outcomes of its review into payments firms' implementation of the Consumer Duty. It found that just under half of the firms reviewed presented a moderate or higher risk of delivering poor consumer outcomes due to insufficient implementation of Consumer Duty, raising concerns that a substantial minority of payment firms may be uncompliant with the Duty. This included target markets being set too widely, insufficient agent oversight, insufficient explanations of fair value assessment outcomes and a lack of demonstrable consideration of the Duty in governance arrangements. 

 APP Fraud: the FCA has written to the CEOs of payment and e-money institutions, and banks and building societies, outlining its expectations of firms surrounding the new APP fraud reimbursement rules. These centre on anti-fraud systems and controls, interplay with the Consumer Duty, and the handling of 'on us' APP fraud. Additionally, the FCA reminds payment and e-money firms of the importance of considering capital and liquidity implications in light of the new rules. 

Pensions Dashboard Service regulatory framework: the FCA has confirmed the regulatory framework for Pension Dashboard Service firms. The final rules adopt the framework largely as consulted upon in December 2022 and March 2024 with only minor amendments made to clarify requirements. Whilst the FCA's approach is now clearer, the launch of private sector dashboards is still some way into the future as the Government has directed the Pensions Dashboard Programme to focus on the connection and launch of the non-commercial dashboard provided by MaPS (MoneyHelper), before turning to commercial dashboard service connection.

Collective Defined Contribution (CDC) schemes: The Pensions Regulator (TPR) has issued its compliance and enforcement policy for CDC pension schemes which outlines how providers can expect it to supervise them. TPR will supervise CDC schemes through a collaborative and proportionate process, with an emphasis on preventing compliance breaches and harm to savers. Schemes will receive an annual evaluation, which will set out the TPRs intended supervisory intensity, the key risks observed, expectations and planned future engagement timetable.

Project Guardian: The FCA has welcomed the publication of Project Guardian's report on fund tokenisation. The report sets out a phased vision of how distributed ledger technology (DLT) can be used in asset management for fund tokenisation, and discusses standards needed to scale use cases for tokenisation, enabling firms and investors to benefit. The FCA also announced that it will collaborate with the Monetary Authority of Singapore (MAS) in 2025 to explore tokenisation considerations for the wider wealth and asset management sector. 

FCA AI Lab: the FCA has launched its AI Lab which brings together the FCA, firms and wider stakeholders to engage in AI-related insights, discussions and case studies. It includes the AI Sprint on 29-30 January where participants will discuss how AI will accelerate and impact financial services over the next 5 years and whether the regulatory framework needs to be updated. 

PRA Dear CFO letter on climate risk: the PRA has shared thematic feedback with banks on accounting for IFRS 9 expected credit losses (ECL) and climate risk. For more information, see the article above.

Updated NGFS climate risk scenarios: the Network for Greening the Financial System (NGFS) has published its latest iteration of climate risk scenarios. The updated scenarios include the most recent country-level climate commitments as of March 2024, as well as a new 'damage function' which integrates the latest scientific evidence about the economic impacts of a warming climate. In all scenarios, the impact of physical risk rapidly outweighs the impact of transition efforts. The NGFS notes that limiting the temperature increase to 1.5 degrees in an orderly fashion is within reach but will require substantially more intensive efforts. 

New CFRF guides: the Climate Financial Risk Forum (CFRF), a financial services industry forum established jointly by the FCA and the PRA in 2019, has published 3 new guides on key areas of climate risk: nature-related risk, short-term scenarios and adaptation finance. The CFRF's guides are written by industry, for industry and are intended to help develop effective practice in relation to climate-related risks and opportunities. They do not necessarily reflect the views of regulators and do not constitute regulatory guidance.

FCA good and poor practice for SDR pre-contractual disclosures: the FCA has published examples of good and poor practice for labelled funds and their pre-contractual disclosures under the Sustainability Disclosure Requirements (SDR) regime. Examples are provided for two Sustainability Focus funds and one Sustainability Improvers fund. None are provided for Impact or Mixed Goals funds, but the FCA notes that much of the illustrative practice should be relevant to all labels. Examples of good practice include specific sustainability objectives and clear explanations as to why the standard was chosen and how compliance will be monitored. Examples of poor practice include not disclosing manager override for asset selection, and where the disclosed asset selection process does not link to the specified sustainability objective. 

Temporary flexibility for firms on SDR naming and marketing rules: the FCA has announced temporary flexibility, in certain narrowly defined circumstances, for fund managers to comply with the SDR naming and marketing rules. The standard deadline is 2 December 2024, but firms meeting the specified conditions will have until 2 April 2025 to comply with the rules. Where firms can comply with the rules without requiring any flexibility, the FCA requires them to do so. It also expects firms to comply with the rules as soon as they can, without waiting until 2 April 2025. 

All other aspects of the SDR implementation timeline for UK funds remain unchanged. More broadly, the FCA's final SDR rules for portfolio managers have been delayed until Q2 2025, and a UK government consultation on extending the SDR to EEA funds was due in Q3 2024 but has not yet been published.

Case for a UK Green Taxonomy: the UK government is consulting on the value case for a UK Green Taxonomy. The primary purpose of the consultation is to establish whether a UK Taxonomy would be additional and complementary to existing policies in meeting the objectives of mitigating greenwashing and channelling capital in support of the government's sustainability objectives. The government has requested market and regulatory use cases as well as feedback on how to maximise the usability of a UK Taxonomy, with particular consideration of key design features and challenges. At this stage, the government is not seeking detailed feedback on specific activity-level standards. The consultation closes on 6 February 2025. 

Regulating ESG ratings providers: the UK government has published its response to the consultation which closed at the end of June 2023, together with draft legislation to bring ESG ratings providers into regulation. The consultation response sets out the details of the scope of the regulatory regime, including which activities will be captured, and this is presented in a draft Statutory Instrument (SI) to amend the Regulatory Activities Order. The government will finalise the legislation in 2025 and the FCA will then consult on the specific requirements. Technical comments on the draft SI can be submitted until 14 January 2025.

Integrity of voluntary carbon and nature markets: the UK government has put forward a set of principles for the integrity of voluntary carbon and nature markets. The six principles have been launched in response to concerns about the quality and integrity of some credits available in the market and how they are used to make claims about environmental impact. To use credits responsibly and appropriately as part of meeting their climate or environment goals, buyers such as businesses or other organisations, should:

1. Use credits in addition to ambitious actions within value chains
2. Use high integrity credits
3. Measure and disclose the planned use of credits as part of sustainability reporting
4. Plan ahead (where organisations are making relevant transition plan disclosures)
5. Make accurate green claims using appropriate terminology
6. Co-operate with others to support the growth of high integrity markets

The government will consult in early 2025 on how the principles could be applied through guidance, standards and regulatory oversight.

For changes to the Stewardship Code in relation to sustainability, see Capital Markets and Asset Management.

Final rules for critical third parties to the UK financial sector: the BoE, PRA and FCA have jointly published a package of measures to establish an oversight regime for critical third parties (CTPs) to the financial sector. The package includes policy and supervisory statements on the identification of potential CTPs, recommendation for designation by HMT, CTP fundamental rules, operational risk and resilience requirements, incident reporting, the regulators' oversight regime and enforcement. A separate supervisory statement (BoE/PRA SS7/24) addresses reports by skilled persons on CTPs. For more details see the article above.

On 15 October, the latest UK-Switzerland financial dialogue meeting took place in London. It was the first formal meeting since the UK-Switzerland mutual recognition agreement (MRA) on financial services was negotiated in December 2023 (the Berne Agreement). The following themes were discussed:

1. Economic outlook and financial stability: both sides provided an update on domestic matters and discussed international measures to enhance the stability of the global financial system.
2. Berne Agreement: the ambition for both sides is to complete implementation of the agreement as soon as possible, and by the end of 2025 at the latest. The agreement would enter into force shortly after. Both sides committed to supporting the industry in unlocking the full benefits of the agreement. In addition, a UK-Swiss supervisory memorandum of understanding should be concluded soon.
3. Sustainable finance: both sides explored common strategic priorities covering disclosures, transition plans and transparency, and ensuring the interoperability of standards.
4. AI and innovation: both sides discussed reflections on global AI and digital regulation practices with a particular focus on the potential impacts on markets and financial stability.
5. Capital markets regulation: topics discussed included T+1 settlement and the need for collaboration across Europe.

The next meeting will take place in the second half of 2025.

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.

KPMG's 14th edition of the Evolving Asset Management Regulation report explores a broad range of regulatory priorities, developments and proposals affecting the asset management industry around the world.

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: