Consumer/retail
FCA portfolio letters on implementation of the Consumer Duty
On 3 February, the FCA sent portfolio letters on the implementation of the Consumer Duty to firms in the following sectors: asset management, custody and fund services and alternatives, consumer investments, credit reference agencies and providers of credit information services, general insurance and pure protection firms, life insurance, mainstream consumer credit lenders, mortgage lenders and administrators, retail banks and building societies. The letters set out: (i) a reminder of the implementation timeline, key elements of the Duty and how it applies to firms in each sector; (ii) the FCA’s expectations for how firms should embed the Duty in each sector, including relevant examples of good and poor practice; (iii) feedback from the FCA’s recent review of firms’ implementation plans; and (iv) the FCA’s approach to supervising the Duty in each sector and its planned next steps. All firms are expected to particularly focus on: (a) effectively prioritising implementation work; (b) ensuring that the substantive requirements have been carefully considered and embedded; and (c) ensuring information is being shared with other firms in the distribution chain. The FCA states that other sectors will receive letters very shortly.
Portfolio letters
FCA 2022 financial promotions data
On 3 February, the FCA set out its analysis of the data between 1 January 2022 to 31 December 2022, resulting from action taken against authorised firms breaching financial promotion rules and referrals and investigations into unregulated activity. The FCA’s key messages to firms are that: (i) the FCA has significantly increased its intervention activity in response to poor financial promotions compliance in authorised firms and activity involving unauthorised firms and individuals; (ii) in 2022, following FCA intervention, 8,582 promotions were amended/withdrawn which is an increase of 1398%, compared to 573 in 2021; (iii) the FCA issued 1,882 alerts in 2022 to unauthorised firms and individuals, an increase of 34% from 1,410 in 2021. This is despite an overall decrease of 24% of total reports received in 2022 compared with 2021; and (iv) the FCA remains concerned regarding the levels of compliance. The FCA has also published its quarterly financial promotions date for Q4 2022. It is notable that over 50% of the FCA’s interventions relate to the retail lending sector.
2022 financial promotions data
Q4 2022 financial promotions data
Financial crime
PSR consultation on reporting guidance for APP scams
On 9 February, the PSR published its latest consultation on guidance for payment service providers (PSPs) that will have to publish data on their performance on authorised push payment (APP) scams. As part of a wider package of measures, the PSR will require certain PSPs to report data to it and to publish comparative performance data on their handling of APP scams. The PSR intends to publish the guidance in March, at the same time as when it gives its direction. The PSR will review its guidance at least every six months, updating it, when necessary. The PSR is seeking views on both the draft guidance and the reporting template. The deadline for comments is 23 February. The data provided by PSPs will be collected and published on a six-monthly basis, with the first submission by firms due in May. The PSR will collate and publish the first report by October.
Consultation Paper
G7 Cyber Expert Group papers on ransomware resilience and third party cyber risk management
On 3 February, HMT published four papers from the G7 Cyber Expert Group on: (i) ransomware resilience for the financial sector – the document provides entities with high-level building blocks for addressing the ransomware threat. It incorporates the current policy approaches, industry guidance, and best practices in place throughout the G7 member countries; (ii) third-party cyber risk management in the financial sector – the document updates the 2018 version to address subsequent industry developments and extend the scope of the paper to ICT supply chain management. The updated paper stresses the importance of extensive information sharing and transparency to cope with an ever-changing threat landscape; (iii) threat-led penetration testing – the document provides firms with a guide for the assessment of their resilience against malicious cyber incidents through simulation and a guide for authorities considering the use of threat-led penetration testing within their jurisdictions; and (iv) the effective assessment of cybersecurity in the financial sector – the document intends to serve as a tool to guide and drive internal and external discussions on risk management decisions critical to cybersecurity.
Ransomware resilience paper
Third party cyber risk management paper
Threat-led penetration testing paper
Effective assessment of cybersecurity paper
Fintech
FCA synthetic data call for input feedback statement
On 9 February, the FCA published a feedback statement following its call for input on the use of ‘synthetic data’ to support financial services innovation. In this statement, the FCA summarises the feedback it received from its call for input, sets out the FCA’s response to the feedback received and explains its next steps. Based on the feedback, the FCA’s current position is that synthetic data can potentially make a significant contribution to beneficial innovation in UK financial markets. However, the FCA believes that further research is required before the benefits of this technology can be fully realised. The FCA will host a joint industry academic roundtable early this year in partnership with the Alan Turing Institute and the Information Commissioner’s Office (ICO) to understand this challenge further and discuss the various methods to validate synthetic data. The FCA will publish a paper in the coming months outlining its key findings and next steps. The FCA will also continue to explore potential partnerships to address key use cases in the future and leverage the Digital Sandbox and its other firm-facing services to engage with industry and academia. In addition, the FCA is establishing a Synthetic Data Expert Group to create an effective framework for collaboration across industry, regulators, academia and wider civil society on issues related to synthetic data. Applications to join the group will open in February, and the first session will be held in the Spring.
Feedback Statement
EBA speech on embedding responsible innovation: culture, conduct and communication
On 7 February, the EBA published a speech by José Manuel Campa, EBA Chair, on embedding responsible innovation through culture, conduct and communication. In his speech, Mr Campa notes that, now the implementation phase for many of the initiatives under the EC’s Digital Finance Strategy are underway, it is important to reflect on three additional inter-related elements that are essential in fostering innovation: culture, conduct and communication. He believes that financial institutions should have a culture that encourages a positive attitude towards the application of innovative technologies but with a risk mitigation approach front-and-centre. Mr Campa stresses that responsible innovation requires a forward-looking, proactive ‘compliance by design’ approach: building processes, systems, products and services that take account of regulatory requirements that apply today but also those that are expected to apply tomorrow. Equally, every responsible innovation must rely on an approach that takes account of consumer facing considerations. Furthermore, Mr Campa strongly encourages financial institutions to engage in an open dialogue with their supervisors to understand any supervisory expectations toward the deployment of an innovative technology. Supervisors should also take a proactive approach to enhancing knowledge about financial innovations and building skills to supervise effectively the use of innovative technologies in the financial sector. Looking forward, much of the EBA’s focus in 2023 will be on activities relating to DORA and MiCA. The EBA has commenced work with the other ESAs on the policy mandates and broad parameters of the DORA oversight framework for critical ICT third-party service providers. With MiCA’s expected entry into force to be in late-Spring, the EBA anticipates the consultation phase on most of its technical standards and guidelines under MiCA to begin in October.
Speech
BoE speech on the digital pound
On 7 February, the BoE published a speech, given by Sir Jon Cunliffe, BoE Deputy Governor, Financial Stability, on a retail central bank digital currency. In his speech, Sir Cunliffe explains that it is likely that a retail general purpose digital pound will be needed by the end of this decade. However, the Taskforce’s conclusion is that we are not yet at a point where a firm decision can be made to implement a digital pound. However, in view of the likely need and the lead time to introduction, the BoE and HMT will now proceed to the next stage of detailed policy and technical development of the digital pound. This stage will take around two to three years, following which a decision will be made whether or not to proceed to the next stage and implement a digital pound in the UK. A factor in the move towards a digital pound is the belief that ‘public’ money will become increasingly less useful and useable and of shrinking relevance to a large part of the population. Which raises the question of how we can continue to ensure that all of the types of money used in the UK are denominated in Sterling, remain safe, and that each is interchangeable on demand and to all of the other types of money without loss of value. Sir Cunliffe goes on to explain that the government is aware that the experience of digitalisation is that new products and services, enabled by new technology, can be adopted rapidly at scale. The government has identified several characteristics of digital markets that may lead to concentration, and while concentration and market power are not inherently harmful and may reflect innovative products and services, they can damage consumer choice, competition and innovation, something the government is keen to avoid. Sir Cunliffe also explains that the BoE is of the view that the new digital pound may not be best suited to wholesale markets, and that there are other routes that might more quickly and effectively allow for new forms of digital representation, the ‘tokenisation’, of central bank money to be used in financial transactions.
Speech
HMT and BoE consultation on UK retail CBDC
On 7 February, HMT and the BoE began a joint consultation on a UK retail central bank digital currency (CBDC). The digital pound would be issued by the BoE and could be used by households and businesses for everyday payments in-store and online. If introduced, it would be interchangeable with cash and bank deposits. The consultation paper offers insight into how a digital pound might work. In this case, the BoE would provide the central public infrastructure in the form of a ‘core ledger’, which would provide the minimum necessary functionality. Regulated private firms could then use this infrastructure to design innovative, user-friendly services and handle all customer-facing interactions. The digital pound would be subject to rigorous standards of privacy and data protection. It would not be anonymous because the ability to identify and verify users is necessary to prevent financial crime. The intention is to create a digital pound that is inclusive and allows users to be in control of their data. Digital wallets could allow people to seamlessly manage their balance and make payments. Wallets would be used in the same way as current contactless payments and use the same merchant infrastructure. The consultation paper explains that a limit on individuals’ holdings would apply at least in the introductory phase, to strike a balance between both encouraging use and managing risks. These limits could be amended in the future. A decision about whether to implement a digital pound will be taken around the middle of the decade and will largely be based on future developments in money and payments. The earliest stage at which the digital pound could be launched would be the second half of the decade. The deadline for comments is 7 June. The BoE has also published a technology working paper alongside the consultation paper, which focuses on technical requirements and design considerations for the digital pound.
Consultation Paper
Technology working paper
FCA statement on new cryptoasset financial promotions regime
On 6 February, the FCA called on cryptoasset businesses marketing to UK consumers to prepare for the government’s extension of the financial promotions regime to cryptoassets. The FCA highlights the government’s intention to reduce the implementation period for the new requirements from six to four months. The FCA will publish its final rules for cryptoasset promotions once the relevant legislation has been made. Subject to any changes in circumstances, the FCA expects to take a consistent approach to cryptoassets to that taken in its new rules for other high-risk investments. This would mean firms being required to use specific risk warnings and positive frictions (such as a 24-hour cooling off period) in their consumer journeys, in addition to the overarching requirement that their promotions are clear, fair and not misleading. The FCA notes that the government intends to introduce a temporary, bespoke exemption for cryptoasset businesses registered with the FCA under the MLRs, which will enable registered cryptoasset businesses, but who are not otherwise authorised persons, to communicate their own cryptoasset financial promotions to UK consumers. The FCA provides an overview of its expectations for cryptoasset businesses that apply for registration under the MLRs.
Statement
ESMA updates Q&As on DLT Pilot Regime Regulation
On 3 February, ESMA updated its Q&As on the DLT Pilot Regime Regulation to add new questions in relation to the following: (i) transaction reporting – specifically on reporting on behalf of natural persons that are not subject to Article 26 of MiFIR; (ii) financial instruments reference data – specifically in relation to what data should be used to identify the issuer or operator of the trading venue identifier for DLT financial instruments that are the digital representation of a previously issued financial instrument and those that are directly issued using DLT; and (iii) transparency – specifically regarding which identification codes should be provided for the purpose of the post-trade transparency obligations under RTS 1 and RTS 2 in the context of DLT instruments.
Q&As
Fund regulation
ECON report on proposed amendments to the AIFMD and UCTIS Directive
On 7 February, the EP’s Economic and Monetary Affairs Committee (ECON) published a report (dated 2 February) it has adopted on the EC’s legislative proposal for a directive amending the AIFMD and the UCTIS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds. The report includes a draft EP legislative resolution which sets out suggested amendments to the proposed Directive.
ECON Report
ESMA updates Q&As on UCITS Directive
On 3 February, ESMA updated its Q&As on the application of the UCITS Directive to add a new question in relation to issuer concentration. The Q&A clarifies that the term ‘body’ in Article 52(1)(b) of the UCITS Directive means credit institution as mentioned in Article 50(1)(f) of the UCITS Directive, and does not also include any
other counterparty which is not a credit institution.
Q&As
FCA portfolio letter to asset management firms
On 3 February, the FCA sent a portfolio letter to asset management firms to set out its supervision strategy for the sector. In this regulatory cycle, the FCA will focus on assessing the effectiveness of firms’ governance in identifying, considering, and mitigating harms. The FCA’s supervisory priorities include: (i) product governance – the FCA expects firms to meet the new Consumer Duty where they have a material influence over retail customer outcomes. The FCA will be following up with firms identified as outliers in its 2021 Assessment of Value review; (ii) ESG and sustainable investing – the FCA will shortly be publishing the results of a review into some firms’ ESG oversight practices. Its supervisory activities will be focused on the governance structures in place; (iii) product liquidity management – the FCA is in the process of completing a multi-firm review and will focus its supervisory work on those elements of the system that have shown liquidity vulnerability to market stress; (iv) investment in operations and resilience – firms must have appropriate measures to understand their operational health and to allow timely response. The FCA is concerned that the current level of incident reporting is variable; and (v) financial resilience – in H1 2023, the FCA intends to publish initial observations on firms’ implementation of the IFPR requirements.
Portfolio letter
Markets and markets infrastructure
BoE policy statement on FMI outsourcing and third party risk management
On 8 February, the BoE published a policy statement on FMI outsourcing and third party risk management. The BoE consulted on its proposals in 2022. Further to the responses received, minor changes have been made to the supervisory statements and Code of Practice for RPSOs and SSPs. These changes can be summarised as follows: (i) clarification in the final supervisory statements that third parties providing testing summaries and FMIs providing redacted or summarised FMI policies also meet the BoE’s expectations; (ii) small changes to the definitions across the three supervisory statements and the Code of Practice to ensure alignment across the final policy documents; (iii) amendments to the text of the CCP supervisory statement that describes UK EMIR Article 35(1), so that it refers to ‘major activities linked to risk management’ in alignment with the UK EMIR text; and (iv) confirmation that the policy will have a 12-month implementation period. FMIs are expected to comply with the expectations in the relevant supervisory statement by 9 February 2024. Outsourcing arrangements entered into on or after 8 February should meet the expectations in the relevant supervisory statement and/or Code of Practice by 9 February 2024. FMIs should seek to review and update legacy outsourcing agreements entered into before 8 February at the first appropriate contractual renewal or revision point to meet the expectations in the relevant supervisory statement as soon as possible on or after 9 February.
Policy Statement
ESMA updates Q&As on Prospectus Regulation
On 3 February, ESMA updated its Q&As on the Prospectus Regulation to include a new question in relation to the Article 1(4)(d) exemption from the requirement to publish a prospectus. ESMA clarifies that the purchase of securities by a joint account can be considered as "one investor" for the purposes of Article 1(4)(d), as there is no condition regarding the mode of payment.
Q&As
Payment services and payment systems
Please see the ‘Fintech’ section for the BoE and HMT’s joint consultation on a UK retail central bank digital currency.
ECON report on proposed European Single Access Point Regulation
On 7 February, the EP’s Economic and Monetary Affairs Committee (ECON) published its report on the EC’s legislative proposal for a Regulation establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability. The report includes a draft EP legislative resolution, setting out suggested amendments to the proposed Regulation, as well as the text of opinions from the Committees on Legal Affairs (JURI) and on Civil Liberties, Justice and Home Affairs (LIBE).
ECON Report
ECB opinion on proposed Regulation amending SEPA as regards instant credit transfers in euro
On 7 February, the EBC published an opinion (dated 1 February) on the proposed Regulation amending the SEPA Regulation and the Cross-Border Payments Regulation as regards instant credit transfer in euro. The ECB strongly welcomes the EC’s initiative to promote the provision and uptake of instant payments (IPs), as the initiative ties in well with the Eurosystem’s retail payments strategy. In order to promote the smooth operation of payment systems, the ECB notes that it is essential to address fragmentation issues across the Single Euro Payments Area (SEPA). Currently, the provision of IPs is not available in all SEPA jurisdictions on an equal footing. Therefore, measures that further harmonise the provision of IPs across SEPA jurisdictions would increase consumer choice and foster innovation, safety and open strategic autonomy in European payments. In addition, the ECB believes that measures that promote efficiency across SEPA should be supported, and continues to encourage market participants to implement IPs on a pan-European basis and to support end user take-up as soon as possible. The ECB notes the exclusion of electronic money institutions (EMIs) and payments institutions (PIs), which would otherwise be required to offer all of their payment services users (PSUs) a payment service for sending and receiving IPs, as they cannot participate in the settlement systems designated under the Settlement Finality Directive. The ECB understands that if the scope of the Settlement Finality Directive is extended so as to include EMIs and PIs, these PSPs should then also comply with the requirement to offer all of their PSUs a payment service for sending and receiving IPs. The ECB supports the requirement for the affected payment service providers (PSPs) to offer IPs at the same cost as non-IPs, and welcomes the introduction of a simplified sanction screening process to overcome the current transaction-based model, without lowering the effectiveness of sanctions screening. It also supports the proposed introduction of a service for detecting discrepancies between the payee’s international bank account number (IBAN) and name.
Opinion
Treasury Committee concerns about PSR proposals to introduce mandatory reimbursement for APP fraud
On 6 February, the HoC Treasury Committee published a report setting out its concerns in relation to the PSR’s proposals to introduce mandatory reimbursement for authorised push payment (APP) scams. The report sets out the Committee’s concerns about the PSR’s proposal to delegate the mandatory reimbursement of APP fraud to Pay.UK through the Faster Payment scheme rules. Its three main concerns are that: (i) Pay.UK is an industry body and is inherently conflicted. It is a company guaranteed by the very banks and other payment service providers (PSPs) it would be asking to reimburse fraud victims; (ii) it is conducive to further delay to an already unacceptably extended process. Pay.UK’s governance structures and lack of regulatory powers provide opportunities for banks and other PSPs to continue to drag their feet on reimbursement; and (iii) Pay.UK lacks the enforcement powers of a regulator and would need to fall back on the PSR to ensure compliance. The Committee therefore recommends that the PSR use its powers of direction to banks and other PSPs. It also requests that the PSR ensures reimbursement has been fully implemented by the end of 2023 and to provide quarterly updates to the Committee on progress. In its response to the report, the PSR considers that the Committee has misinterpreted its proposal on use of its powers and states that it has clarified this to the Committee. The PSR will publish its final position in May. The Committee has also published letters asking follow up questions to: (a) the BoE, as to whether, as the CHAPS payment system operator, it is taking similar measures to reduce levels of APP scams; (b) the FCA, as to whether it intends to implement similar measures for APP fraud, where the victim and fraudster hold accounts with the same PSP; (c) the PSR, asking why it has proposed a £100 minimum threshold and a £35 excess for reimbursement; and (d) the FOS, asking whether its average resolution time of approximately 6 months could undermine the PSR's proposals.
Report
PSR response
Letter to BoE
Letter to FCA
Letter to PSR
Letter to FOS
Prudential regulation
EBA consults on amending ITS on supervisory disclosure under CRD IV
On 8 February, the EBA published a consultation paper on draft ITS amending Commission Implementing Regulation (EU) No 650/2014, which lays down ITS on supervisory disclosure under the CRD IV. The Implementing Regulation (EU) No 650/2014 sets out the format, structure, contents list, and annual publication date of the information to be disclosed by competent authorities in accordance with Article 143(1) of the CRD IV. The draft ITS put forward by the EBA amend the Implementing Regulation to reflect the changes to the EU legal framework, in particular the changes related to supervisory reporting and investment firms. The EBA believes that the draft ITS will enhance the quality and comparability of the reporting data by supervisors and provide the market with more information, therefore enhancing transparency. The deadline for comments is 9 March.
Consultation Paper
Regulatory reform post-Brexit
ECON-commissioned study on recent trends in UK financial sector regulation and possible implications for the EU
On 9 February, the EP’s Committee on Economic and Monetary Affairs (ECON) published a study on recent trends in UK financial sector regulation and possible implications for the EU, including its approach to equivalence. ECON commissioned the study, carried out by the Policy Department for Economic, Scientific and Qualify of Life Policies, due to Brexit posing a unique challenge for policy makers in the EU, due to the most important financial centre in Europe now being outside the regulatory framework. The study summaries and discusses recent trends in financial sector legislation and regulation in the UK, divergence between the EU and the UK, and threats from this divergence for financial stability in the EU. It explores the possible scenarios of divergence; low, medium and high, and predicts ‘aggressive divergence’ in areas where UK authorities see growth opportunities and feel less constrained by international fora and cooperation initiatives, such as crypto. It also assesses the equivalence policy and strategy of the EU towards the UK and options to deepen regulatory cooperation while ensuring financial stability, market integrity and competitiveness. The study elaborates on the types of equivalence and potential scenarios for future equivalence granted to the UK. It generally considers the granting of equivalence to the UK likely and feasible for only few financial sector segments and critically dependent on the broader political relationship between the EU and the UK, noting that regulatory autonomy for both sides may be difficult to conciliate in the current political climate.
Study
Sustainable Finance
NGFS user feedback survey on climate scenarios
On 6 February, the Network for Greening the Financial System (NGFS) published a user feedback survey on the NGFS climate scenarios. Questions relate to: (i) how the NGFS scenarios are used, including the objectives and scope of climate scenario analysis and what modelling approaches are used; and (ii) what users consider the NGFS should prioritise and the key obstacles they face when using the scenarios. The NGFS plans to publish the key findings in the Spring, and considers that this will serve as important input for the scenario development work plan.
Other developments
FCA speech on how to organise a COO
On 8 February, the FCA published a speech given by Emily Shepperd, FCA Chief Operating Officer (COO) and Executive Director of Authorisations, on how to organise a COO. In the speech, Ms Shepperd explains that COO’s should use the levers of ‘soft’ power such as open communication as much as ‘hard’ power, such as data and rules to mitigate non-financial risk. In the area of non-financial risk, she reinforces the idea that D&I is about far more than targets and data, and that true inclusion means that people feel free to speak out. Another area she believes needs more work relates to ESG. Ms Shepperd goes on to explain that the FCA intends to clamp down on greenwashing and is considering how best to incentivise best practice. In the coming days, the FCA will publish a paper on the role regulations can play in driving positive change in this area. Ultimately, the FCA is an innovator as much as a regulator, embracing change and helping new industries flourish while protecting consumers from harm. Now is a good time for COOs to remind their staff that the new Consumer Duty comes into force in six months. Embracing change and innovation are two skills she considers to be vital as a COO.
Speech