October 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 packed with updates as regulators catch up after the pause in activity due to the election, and the quieter summer period.
ESG and Sustainable Finance
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 flexibility covers the situation where a fund manager has submitted an application to the FCA to approve amended disclosures, is currently using the terms ‘sustainable’, ‘sustainability’ or ‘impact’ in the name of the fund and is intending to use a label or change the name of the fund. The standard deadline is 2 December 2024, however 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 remain unchanged.
Pension trustees and ESG compliance: The Pensions Regulator (TPR) has published an ESG market oversight report, setting out the findings of its review of how pension trustees are complying with their ESG duties. The report finds that, while most trustees meet their ESG-related duties, many achieve only minimum compliance – for example, failing to demonstrate ownership of their policies or key activities in respect of ESG. TPR has made it clear that it expects more than minimum compliance going forward.
Banking
UK implementation of Basel 3.1: The PRA has published the second part (PS9/24) of its package of ‘near-final’ rules for the UK implementation of Basel 3.1 covering credit risk, the output floor and disclosure requirements. Part 1 (PS17/23) was issued in December 2023, covering market risk, credit valuation adjustment risk, counterparty credit risk and operational risk. Both policy statements address the proposals put forward in CP16/22 in November 2022. Only minor changes were made in PS17/23. However, in PS9/24, having received the greatest volume of feedback on the proposals for credit risk and the output floor, the PRA makes more significant amendments. It has sought to balance the feedback from industry with its aim of close alignment with the Basel standards, its views on the bottom-up risks and its secondary objective of competitiveness. Phil Evans, PRA Director of Prudential Policy, notes in his accompanying speech that the goal is for banks to hold “an appropriate amount of capital” – enough to be resilient but not so much that it stifles growth.
The key amendments in PS9/24 relate to:
- SME and infrastructure lending
- Conversion factors (CFs)
- Residential mortgages
- The output floor
Critically, PS9/24 also confirms that the UK implementation timeline will now run from 1 January 2026, with a transitional period to 1 January 2030. This will allow firms more time to apply the requirements and finalise model permission applications but is a slight compression of the transition period which was previously four and a half years. As with the first package, the PRA’s rules are marked ‘near-final’ because of the requirement for some retained EU rules to be revoked before they can be fully implemented. Banks should not anticipate any significant modifications going forward. The PRA intends to set out all the final policy materials, rules and technical standards covered by PS9/24 and in PS17/23 in a single, final PS in due course. To receive a copy of our client alert, please contact michelle.adcock@kpmg.co.uk.
Proposed capital regime for SDDTs: Alongside PS9/24 (see above), the PRA published CP7/24 on capital proposals for Small Domestic Deposit Takers (SDDTs) and SDDT consolidation entities. These proposals are the final component of the ‘Simpler Regime’ first outlined in Sam Woods’ November 2020 Mansion House speech. They will be of particular interest to firms already registered as SDDTs, firms that meet the SDDT criteria and are considering registering as an SDDT, firms that anticipate being subject to the Interim Capital Regime (ICR) and entities that do business with SDDTs. Most importantly, CP7/24 confirms that Basel 3.1 risk weights should be used as the starting point for the Pillar 1 framework for SDDTs, subject to a small number of simplifications. The PRA also proposes widespread simplification of all elements of the capital stack for SDDTs including Pillar 1, Pillar 2A, buffers and the calculation of regulatory capital.
The overall capital requirements for SDDTs are expected to remain similar under the new system, to maintain their resilience against shocks. The PRA’s intention was never to dramatically reduce the amount of capital required, but rather to focus on minimising the operational burden for smaller firms. Following one-off implementation costs, the extensive simplifications should result in lower reporting requirements and the ability to hold lower management buffers.
The SDDT regime will operate on an opt-in basis and will apply from 1 January 2027. Firms meeting the SDDT criteria can enter the regime by consenting to a Modification by Consent (MbC).
Policy framework for capital buffers: In CP10/24, the PRA proposes to streamline the regulatory material on the G-SII framework by deleting the UK Technical Standards (UKTS) and introducing a new Statement of Policy (SoP). This will not result in any policy changes to the PRA's approach to identifying G-SIIs and setting G-SII buffers. The proposed SoP would maintain the UK's alignment with the BCBS G-SIB framework. The PRA also proposes to streamline the regulatory material on the O-SII framework. It is not proposing any policy changes on how it identifies O-SIIs or implements the O-SII buffer. Instead, the proposed changes include reviewing its SoP every three years instead of two, and deleting a historical paragraph that is no longer relevant. It is also proposing minor amendments to its rules and simplifications to G-SII reporting rules, with no changes to the substance or intent of the rules.
Resolvability preparations: The BoE’s second assessment of the resolvability preparations of the eight major UK banks under the Resolvability Assessment Framework (RAF) – Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK, Standard Chartered and Virgin Money UK – considered whether the banks have taken the steps necessary to ensure that the BoE could undertake an orderly resolution that minimises disruption to depositors, businesses and the economy, with recapitalisation costs falling to investors and shareholders. Overall, the results provided reassurance that if any one of the banks were to fail today, it could enter resolution safely.
Rules for international banks: Following bank failures in 2023, the PRA is consulting on new, tougher requirements for international firms operating in the UK. The key proposal in CP11/24 is that foreign banks would be required to set up a subsidiary (rather than a more lightly regulated branch) if they exceed a £300 million threshold for retail and small-business deposits. The proposals also apply more scrutiny to foreign banks where large corporates depend on them as their sole provider of banking services.
Omnibus account reserves: The PRA has published a policy statement (PS14/24) on the leverage ratio treatment of omnibus account reserves and minor amendments to the leverage ratio framework. The PS made only minor changes to the proposals set out in CP28/23, with all requirements taking effect from 5 August.
Special Resolution Regime: HMT has published a response to its January 2024 consultation on enhancing the Special Resolution Regime (SRR) and has introduced the Bank Resolution (Recapitalisation) Bill to Parliament. Both propose to give the BoE, as the UK's resolution authority, more flexibility in how it manages the failure of small banks. Specifically, legislation would be amended to allow funds from the Financial Services Compensation Scheme (FSCS) to be provided to the BoE upon request, to support the resolution of a failing small bank.
Capital Markets and Asset Management
Market Watch 80: In Market Watch 80, the FCA make 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).
Payment optionality for investment research: Following the UK Investment Research Review and an FCA consultation, the FCA finalised new rules (see PS 24/9) that allow for greater flexibility around the way in which asset managers pay for investment research. These changes took effect from 1 August 2024 and are part of wider reforms to strengthen the UK’s position in global wholesale markets.
In a move back towards the pre-MiFID II regime, asset managers may now once more make bundled payments for third-party research and execution services if they meet the FCA’s guardrails. These include for example, a written policy governing the arrangements, a methodology for calculating and identifying the cost of research, and periodic assessments of the value and quality of the research in terms of its contribution to investment decision-making. Compared to the consultation, the final rules have been diluted in some respects – e.g., the FCA will not require asset managers to disclose their most significant research providers or to undertake price benchmarking. Additional, minor changes from the FCA include expanding the list of acceptable minor non-monetary benefits and deleting the post-MiFID rule that allowed combined payments to be made in relation to companies with a market capitalisation under £200m.
Launch of the UK Overseas Funds Regime (OFR): The UK’s Overseas Funds Regime (OFR) will go live at the end of September 2024, following several years of development. The final rules (see PS 24/7) took effect from 31 July 2024 and set out how the FCA will operationalise the OFR and bring it to life. Applications will be accepted in a phased manner – see more on the FCA’s page here. Where the draft rules were amended, the changes were generally positive. For example, the FCA will now permit UK-authorised and OFR funds to have identical names if the UK distribution channel makes the domicile of the fund sufficiently clear. And the FCA has removed the requirement to notify it 30 days in advance of certain changes taking effect in the UK – instead fund managers may in most cases notify the FCA ‘as soon as reasonably practical’ after a change is approved by an EU regulator, or after wider changes or events have occurred.
Key next steps for fund managers should include gap analysis against the obligations in the final rules to understand where they can be met by existing processes or whether enhancements are needed. This should also inform the design of a target operating model or framework that underpins all aspects of the OFR application process and enables the delivery of applications at scale in an accurate and efficient manner. To assist, the FCA has published helpful materials that include the OFR application form, a summary of its approach to fund recognition, and example wording that fund managers may wish to use in their disclosures.
Several pieces of the OFR puzzle are yet to fall into place. These include an upcoming UK government consultation on extending the FCA’s Sustainability Disclosure Requirements to OFR funds, potential equivalence for EU money market funds, and the impact of reforms to the UK PRIIPs framework.
Expansion of the Dormant Assets Scheme (DAS): The DAS was initially set up to allow banks and building societies to pay dormant monies to an authorised reclaim fund, which would then put this money towards funding good causes. Following consultation, the FCA has expanded the scheme to enable dormant investment assets and client money to be made available it. Following the rules coming into force on 2 August 2024, and after putting into place contracting arrangements (currently in progress), Reclaim Fund Limited will be able to accept contributions from the investment assets and client money sectors.
FCA quarterly consultation paper No 45: In its latest quarterly consultation paper, the FCA proposed changing the rules governing NURS (Non-UCITS Retail Schemes) to enable them to better access LTAFs (Long-Term Asset Funds). The change is a result of feedback that the FCA’s rules may not be supporting the LTAF market to develop. The existing rules permit a NURS to invest up to 20% of its portfolio into funds, if each underlying fund does not invest more than 15% of its portfolio into any kind of fund. To better enable NURS to access LTAFs, the FCA proposed to remove the 15% restriction on underlying funds (see COLL 5.6.10R) in the case of LTAFs only. The FCA also proposed wider minor changes to clarify the policy intention of the 20% exposure limit and to ensure that NURS managers can fulfil their redemption obligations when they invest in LTAFs.
Public Offers and Admission to Trading Regulations regime (POATRs): The FCA is consulting on rules for the new Public Offers and Admissions to Trading Regulations (POATRs) which will replace the UK prospectus regime. Companies will still be required to publish a prospectus when first admitting securities to public markets (i.e. regulated markets and primary multilateral trading facilities (MTFs). However, a prospectus would not be required when a company raises further capital except in limited circumstances. The aim of the new regime is to make sure investors get the information they need while significantly reducing the costs associated with further capital raises for companies.
Public offer platforms: The FCA is consulting on proposals for a new activity of operating a public offer platform (POP). These platforms will offer an alternative route for companies to raise capital outside public markets including from retail investors. The introduction of the platforms should promote scale-up capital raising for smaller companies while ensuring that investors get the right disclosures on the key terms and risks of an investment.
UK MiFIR derivatives trading obligation (DTO): The FCA is consulting on changes to the DTO as part of the Wholesale Markets Review. The proposed changes are to include certain overnight index swaps based on the US Secured Overnight Financing Rate (SOFR) within the classes of derivatives subject to the DTO and to expand the list of post-trade risk reduction (PTRR) services exempted from the DTO and from other obligations. The FCA is also consulting on how it intends to use its power to suspend or modify the DTO once the temporary transitional powers granted to it following the UK’s departure from the EU expire.
UK EMIR Refit Q&A: The UK EMIR Refit rules apply from 30 September 2024 to derivatives reporting. The FCA has published a consultation on Q&As that provide guidance to UK Trade Repositories on their operations and how to validate certain fields in industry-submitted reports under UK EMIR Refit. It includes detailed information on field and schema issues.
Insurance
Remaining Solvency II package: The PRA announced that it will publish its final rules for CP5/24, reviewing Solvency II and restating assimilated law, in mid-November 2024. These rules may impact existing PRA waivers or modifications held by insurance firms. Specifically, references to Solvency II assimilated law or the PRA Rulebook in waivers and modifications may need updating to reflect the final PRA rules effective from 31 December 2024. The PRA will contact affected firms in mid-November with further instructions and request consent to vary the wording of their existing directions. The process will be simplified for firms, and they should familiarise themselves with their current waivers and modifications and look out for further communications on the PRA website. Consent to vary the wording is required before 30 December 2024. No new applications for existing modifications are needed.
Secondary growth and competitiveness objective: Shoib Khan, Director of Insurance Supervision, gave a speech on the PRA's approach to meeting its secondary growth and competitiveness objective. Key 'next steps' for the PRA include consulting on changes to its Insurance Special Purpose Vehicle (ISPV) regime, introducing a new pathway for catastrophe bond applications to be reviewed within 10 working days, and working with Lloyd's for more efficient authorisation and supervision of Managing Agents.
Commercial non-investment general insurance: The FCA has published a progressive discussion paper seeking feedback on whether the FCA rules which govern the commercial non-investment general insurance market are appropriately balanced between competitiveness and the protection and safeguarding of customers. The paper seeks views on the extent to which the rules should be dis-applied to the commercial insurance market, based on the size and nature of the customer, as well as adding further clarity about how the rules should apply to situations where multiple firms manufacture insurance products.
Fair value and good customer outcomes: The FCA has published the results of its general insurance and pure protection product governance thematic review, finding that many firms are not fully meeting their obligations to deliver fair value to customers. In particular, that manufacturers are not adequately assessing and evidencing fair value, whilst most distributors do not fully understand their responsibilities to consider their remuneration and its impact on the product’s value. The findings indicate more work is required to meet the requirements of PROD 4, and perhaps more significantly they demonstrate that some manufacturers and distributors have a way to go to fully comply with the Consumer Duty. The FCA expects manufacturers and distributors to urgently consider the findings and promptly address any shortcomings, warning that a failure to do so will result in FCA intervention, which could include requiring firms to withdraw products, as was seen in the GAP insurance market.
Funded reinsurance: The PRA has released a Dear CEO letter on Funded Reinsurance (FundedRe), alongside final policy and supervisory statements, effective immediately. Insurers have made improvements to risk management following the PRA’s thematic work and consultation paper. However, these fall short of regulatory expectations on the volume and complexity of transactions and compliance with the Prudent Person Principle. The PRA has signalled its readiness to use its full toolkit of supervisory powers, including explicit regulatory restrictions on the amount and structure of FundedRe and capital addons. Further rule making seems likely, including when informed by the collateral recapture scenario as part of the 2025 life insurance stress test. The final rules largely mirror consultation proposals. To receive a copy of KPMG analysis on FundedRe, please contact Alisa.Dolgova@kpmg.co.uk
General insurance stress test: Following the announcement in October 2023 of the 2025 dynamic general insurance stress test (DyGIST) exercise, the PRA has announced further details about the timing and nature of the test, as well as selected participants, who will represent around 80% of the UK regulated general insurance market. Further consultation with industry will continue throughout 2024, although the detail of the stress test will not be made available until the test is conducted. The exercise will comprise three stages: 1) a 'live' exercise, where participating firms will be presented with a series of sequential adverse events over a three week period; 2) a final firm assessment and reflection period by the end of July 2025, using quantitative and qualitative templates; and 3) integration into supervisory plans. The findings of the exercise are due to be published in Q4 2025.
Retail Conduct
Appointed Representative oversight: The FCA has published the findings of its review into how Principals are meeting its enhanced Appointed Representative (AR) rules, finding that, whilst the oversight of ARs has improved, there is still more to do. Whilst some firms are implementing the rules effectively, others are taking a minimal approach, failing to meet basic requirements. Key areas for improvement included the completion and quality of annual reviews and self-assessments, and failures to update onboarding and termination procedures.
Consumer Duty: The FCA marked the first year of the Consumer Duty with an event that reflected on progress made and upcoming priorities. Acknowledging the positive steps taken by the industry to deliver the shift required under the Duty, the FCA stressed that firms should not sit back as “this is just the beginning not the end”. Overall, there were no substantive announcements, instead the FCA focussed on the Duty's impact to date, key consideration for firms on outcomes testing and fair value assessments, and how it will approach enforcement. Acknowledging its new secondary growth objective and responding to concerns, the FCA was keen to emphasise the Duty's compatibility with competitiveness and growth. The regulator also trailed its plans to publish its Consumer Duty work programme.
Pure protection market study: The FCA has announced its intention to conduct a market study into the distribution of pure protection products to retail consumers, driven by concerns that competition is not working well in the market and that some products may not be providing fair value. FCA concerns centre on the design of commission arrangements, significant disparities between premiums paid and payouts, and weakening competition in the market. The study will focus on term assurance, critical illness cover, income protection insurance, and whole of life insurance including guaranteed acceptance over 50s plans. The review is due to commence later in financial year 2024/25, however the FCA is seeking views on the study's Terms of Reference.
Motor finance discretionary commission: After a short consultation the FCA has confirmed the extension to the discretionary commission arrangements (DCAs) complaints whilst it completes its review into firms’ practices. It has taken this step as the review is taking longer than planned, predicting to be in a position to set out next steps by the end of May 2025, rather than this year. The FCA proposes that firms will not have to issue a final response on DCA complaints until after 4 December 2025, with complainants given until the latter of 29 July 2026 or 15 months from the date of their final response letter from the firm to refer a complaint to the FOS. For more on the background to this work, read our article here.
Consumer credit regulatory reporting: The FCA has published a consultation on new regulatory reporting returns for consumer credit firms who engage in one or more of the regulated activities of Credit Broking, Debt Adjusting, Debt Counselling and Providing Credit Information Services. The new return tailors questions so they are more readily aligned to firms’ business model and activities, and includes questions concerning activities undertaken and whether permissions are being utilised. The FCA is also updating the language used to better reflect common industry terminology. This information is intended to better reflect how the market operates and better inform the FCA's supervision of the sector.
Credit reporting governance: The credit information market interim working group (IWG) has issued its initial recommendations on the constitution of the Credit Reporting Governance Body (CRGB), which have been welcomed by the FCA. Establishing a CRGB was one remedy identified by the FCA in the Credit Information Market Study in order to address concerns about the inclusivity, transparency, and accountability of industry governance. The IWG's recommendations touch on the governance structure, processes and procedures, and board composition. The FCA will conduct a full review of the recommendations when the final report is released, but has asked the IWG to take into account its comments on fair representation, accountability and funding.
Bank account closures: The FCA has published findings from follow-up work on payment account access and closures. Focussing solely on account denial, the FCA review looked into the four reasons payment account providers gave in its earlier review, for declining, suspending or terminating an account:
- non-specific financial crime concerns,
- reputational risk,
- difficulties relating to certain vulnerable customers, and
- due diligence requirements.
In parallel, the FCA also considered whether closures were because of consumers’ political beliefs or views lawfully expressed. The FCA did not identify any reputational risk-based denials or terminations where the basis for the decision was as a result of political beliefs or views lawfully expressed. However, the following areas for improvement were identified:
- differences in Basic Bank Account (BBA) customer journeys impacting rejection rates,
- firms were poor at making customers aware of BBAs,
- poor data quality, and
- variances in approaching how reputational risk is applied as a reason for account closure.
Politically exposed persons (PEPs): The FCA has published the findings of its multi firm-review on the treatment of politically exposed persons (PEPs) and is consulting on targeted changes to its guidance in response. The FCA's review, which focused on how firms were following its guidance, found most firms had not submitted PEPs to excessive or disproportionate checks, however improvements could be made. Areas for improvement include adherence to PEP and relatives and close associate (RAC) definitions, clarity of communications, and staff training. Whilst the FCA found its guidance remains appropriate, amendments are proposed to reflect legislative changes and improve clarity.
Access to cash: The FCA has confirmed new rules for its access to cash regime. From 18 September 2024, designated banks and building societies need to identify gaps in cash provision, assess a wide range of local needs, and provide additional cash access services promptly if assessments find a significant gap in provision. The final rules remain largely as consulted upon but reflect changes and clarifications in some areas. Most notably, the FCA has extended the deadline for carrying out cash access assessments (CAA) to 12 weeks, extended the time for communities to request a CAA review to 28 days, and included an ability for firms to review the provision of identified cash services after two years. 14 entities have been designated by HMT to be subject to the new regime with two LINK entities designated as operators of cash access coordination arrangements. They will also be subject to the FCA’s new rules, allowing LINK to coordinate cash access assessments on behalf of designated firms.
Separately, in its latest quarterly consultation paper the FCA has proposed small changes regarding the enforcement process. It has proposed amending the Handbook definition of a firm to ensure that the Enforcement Guide (EG) and DEPP manual apply equally to designated firms and coordination bodies, and to ensure that guidance on its approach to enforcing powers against a designated coordination body is consistent with guidance on its power elsewhere.
Complaints data: The FOS has published annual complaints data for 2023/24 closely followed by its Q1 2024/25 data set, both of which show a continuing rise in complaints, and the increased involvement of professional representatives (PRs). As part of these trends:
- 2023/24 saw banking and payments complaints reaching a 10-year high, and travel insurance complaints at their highest since the pandemic.
- Motor finance continues to feature in the top five with an 87% increase in cases when compared to 22/23, likely driven by the FCA’s ongoing motor finance discretionary commission work.
- A 70% rise in complaints made in Q1 24/25 compared to Q1 23/24.
- Complaints relating to frauds and scams at their highest ever quarterly level.
- In 2023/24 across all categories, there was a 7% increase in complaints brought by PRs. More strikingly, Q1 24/25 figures show a 33% increase when compared to Q1 23/24 with PRs now accounting for around 50% of complaints received.
- Uphold rates for PR-originated complaints are substantially lower than those brought direct by consumers (25% vs 40%).
- PRs account for over 90% of motor finance commission complaints (in both data sets).
Digital finance and innovation
Cryptoassets financial promotions: The FCA has published a review of its recent financial promotions rules for cryptoassets. These rules were introduced in October 2023, classifying certain cryptoassets as Restricted Mass Market Investments (RMMIs). 10 months on, the FCA has now issued an evaluation of a sample of firms' compliance - across personalised risk warnings, the 24-hour cooling off period, client categorisation and appropriateness assessments - and provided examples of good and poor practice. All firms involved were also given individual feedback. Critically, the FCA has specifically flagged that firms should not simply rely on comparisons with industry peers to benchmark what is acceptable practice. Instead, they should engage in driving up standards across the sector.
Innovation in money and payments: The BoE has published a discussion paper on its approach to innovation in money and payments. The paper notes that this innovation poses both opportunities and risks in meeting the BoE's monetary and financial stability objectives - and therefore, understanding and preparing for change is of significant importance. Moreover, the BoE notes that the approach laid out cannot be "timeless" but must continue to be agile and adaptive.
Digital Assets Bill: The Property (Digital Assets etc) Bill was introduced in Parliament. Once finalised, digital holdings including cryptocurrency, non-fungible tokens such as digital art, and carbon credits can be considered as personal property under the law.
AI action plan: The UK Secretary of State for Science, Innovation and Technology has appointed Tech entrepreneur and Chair of Advanced Research and Invention Agency (ARIA), Matt Clifford, to lead the new AI Opportunities Action Plan. This Plan aims to identify ways to accelerate the use of AI to enhance growth and productivity, improve people’s lives by making services better and developing new products.
BCBS crypto framework: The BCBS has published its final disclosure framework for banks' cryptoasset exposures and targeted amendments to its cryptoasset prudential standard. Both frameworks have an implementation date of 1 January 2026, but must first be translated into local legislation before becoming legally binding. As things stand, the UK is yet to begin incorporating these standards into its Basel implementation plans.
Digital Securities Sandbox : The BoE and FCA have now opened the Digital Securities Sandbox (DSS) for applications. The DSS – which will be operational until December 2028 – will facilitate the use of developing technology, such as DLT, in the issuance, trading and settlement of securities by allowing firms to operate under a temporarily modified legal and regulatory framework. The sandbox's opening comes after consultation with industry closed in May 2024. Some changes have been made to the original proposal - including allowing non-GBP denominated assets and reducing the minimum capital requirement. However, stablecoins and e-money are still unable to be used as settlement assets, due to financial stability concerns.
Payments
The FCA has published a consultation on updates to its guidance in the FCA’s ‘Payment Services and Electronic Money – Our Approach’ document to reflect legislative changes to tackle authorised push payment (APP) by delaying faster payments. The FCA's proposed amendments explain how PSPs should apply the legislative changes to minimise the impact on legitimate payments, such as determining when to delay a payment where there are ‘reasonable grounds to suspect fraud or dishonesty’ and utilising the four day payment delay period.
PSR annual report: The PSR has published its Annual Report for 2023/24. Key achievements highlighted include tackling APP fraud, advancing open banking initiatives (see updates below), and supporting competition in the card payments market. The report outlines the PSR's ongoing work to address fraud, promote innovation, and maintain free access to cash. It also provides an overview of the PSR's upcoming priorities, including its work on the new Payments Architecture and its ongoing market reviews.
APP fraud mandatory reimbursement: After a short consultation the PSR, in response to industry concerns has confirmed a reduction in the maximum reimbursement limit for victims of Faster Payment Authorised Push Payment (APP) scams to £85,000. This change will still capture 99.8% of all APP scam cases, and result in around 90% of total APP scams value being reimbursed, whilst reducing the impact on smaller payment service providers. Following suit, the BoE confirmed the reimbursement limit for CHAP APP scams will be set at the same level to ensure consistency between the regimes remain. However, the BoE has committed to review this limit within 12 months. All other aspects of the mandatory reimbursement rules remain unchanged and the rules will still come into force on 7 October 2024.
Variable recurring payments: The PSR has published the response to its December 2023 call for views on the expansion of variable recurring payments (VRP). Respondents agreed that greater co-ordination was needed to expand VRPs. However, concerns were raised around the PSR’s ideas for a multilateral agreement (MLA). Whilst there was support for some form of central price, there were mixed views on how best to price Application Programming Interfaces (APIs). Mandated participation was another area where feedback was mixed, with respondents supporting some level of mandated participation but questioning the PSR’s intention to limit it the CMA9 - the nine largest banks and building societies designated by the CMA Order in 2017. The PSR will take responses into consideration, with plans to publish updated proposals in the Autumn.
Rule exemptions and extensions: The PSR has published finalised guidance on how it will make decisions on whether to grant an extension or exemption to a specific direction or requirement, confirming the four factors it will use to guide its decision making - (i) impact, (ii) context, (iii) burden and (iv) risk mitigation. The guidance is largely unchanged, with only minor changes to provide additional clarity. The PSR intends there to be a high bar for granting an exemption or extension such that it expects to use them in very limited circumstances.
Pensions
VfM trust based schemes: The FCA has issued a consultation on a value for money (VfM) framework for trust based pension schemes. This forms part of wider work with TPR and the DWP on a workplace Defined Contribution (DC) VfM framework which requires schemes to consider the value of the pension products against investment performance, quality of service and cost criteria. Under the framework, schemes will be rated red, amber or green, with poorly performing schemes required to improve or transfer savers to better schemes. The upcoming Pensions Scheme Bill will introduce equivalent legislation for trust based schemes resulting in a consistent approach to assessing VfM.
British Steel Pension Scheme redress: The FCA has published a report on its, the FOS’ and FSCS's joint action on British Steel Pension Scheme (BSPS) transfers. To date, £106m in redress has been offered to 1,870 former British Steel Pension Scheme (BSPS) members. Whilst firms’ assessments of advice suitability, as part of the FCA's redress scheme, broadly aligned to FCA's estimates, redress paid through the scheme has been much lower than estimated (£8.7m vs £50m). This reduction is a result of the expected cost of funding a guaranteed retirement income through an annuity falling since the scheme was introduced. This has meant that the amount needed to top up a pension pot to put someone back in the position they would have been in if they hadn’t received unsuitable advice, may be less, and in some cases zero.
Pensions review: HMT has issued a call for evidence to inform the first phase of its pensions investment review which aims to boost investment, increase pension pots and tackle waste in the pensions system. The call for evidence is structured around three topics, with specific questions under each section:
- scale and consolidation,
- cost vs value, and
- investing in the UK.
This phase will also take into account the outcomes of HMT's asset pooling in local government pension schemes (LGPS) consultation from 2023. Questions in the review concerning investing in the UK apply to both defined contribution (DC) and LGPS. The defined benefit market (except for LGPS) is out of scope of this review.
Behavioural research: The FCA has published the outcomes of research examining ways to enhance consumer engagement with pension communications. The study used behavioural insights to design and evaluate various email formats and subject lines, with the aim of overcoming common barriers such as information overload and the tendency to focus on the present. The research found that it is difficult to drive pension engagement through emails, and that whilst some behavioural messaging improved email opening rates, it did not impact engagement within the detail itself. Based on these findings the FCA encourages firms to try innovative approaches to encourage customer engagement rather than rely solely on email communication.
Cross sector
Rule permissions and waivers: PRA PS12/24 sets out its approach to rule permissions and waivers and provides feedback to responses received to CP3/24. The new requirements took effect from late July, and firms will be watching closely how the PRA will exercise its powers to grant waivers and modifications, especially once it extends to the significant portion of the regulatory framework that will now reside in the PRA Rulebook (where this was previously EU Level 2, then converted to assimilated law).
Useful information: The KPMG Regulatory Barometer helps firms identify key areas of pressure across the evolving UK and EU regulatory landscape and measures 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:
Related content
- Philip Deeks
- Kate Dawson
- Michelle Adcock
- David Collington
- Alsia Dolgova
