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Key Regulatory Topics: Weekly Update 8-14 Sept 2023
Conduct and governance
FCA updates directions for modifications by consent in COBS, COLL and SUP
On 11 September, the FCA published updated directions for modifications of consent relating to COBS, COLL and SUP. The modification to COBS 8.1.1R enables Child Trust Funds (CTFs) providers to move matured CTFs to a protected account or by bulk transfer to a new provider, when reasonable steps have been carried out to contact the client, but the client is deemed a gone away or uncontactable. This modification was originally published in August 2020, and will expire in five years’ time. The modification to COLL 5.6.22R enables managers and depositaries of authorised funds that invest in immovable property to provide guarantees and indemnities to third parties where required by the terms of the purchase to do so. It was initially published in February 2014, and will expire in two years’ time. The SUP 16.23A.6(1)R modification enables the Employer’s Liability Trading Office to be classed as ‘an auditor’ for the purposes of ICOBS 8.4.4R(1)(C) – enabling them to perform Data Assurance Reports on behalf of their members. The modification was first published in February 2019, and will expire in three years’ time. Firms wishing to take advantage of these modifications by consent should email the FCA central waivers team. The FCA will then write to confirm that the modification has been granted and publish each modification direction it grants on its website.
FCA sends portfolio letter to Chief Executives of all wholesale banks active in the UK
On 8 September, the FCA published a portfolio letter it sent to the Chief Executives of all wholesale banks active in the UK, setting out its supervisory work programme for the next two years and its areas of supervisory focus. Areas of supervisory focus include: (i) risk management - the FCA will look to senior management to evidence how they have delivered better risk management and oversight across businesses and how they are comfortable that this is underpinned by a strong culture. The FCA will also look to Boards to evidence how they are ensuring that such improvements are lasting. In addition, the FCA will carry out supervisory testing on the embeddedness of improvements in risk management by looking at the process through which new products and some transactions are produced; (ii) maintaining high standards of control - the FCA will use its testing programme to look at how banks are controlling conduct risks such as financial crime, market abuse and conflicts of interest, including more in person supervisory assessments; (iii) operational resilience - the FCA will continue to review banks’ compliance with the requirements of its policy statement on Building Operational Resilience and their ability to remain within their impact tolerances as soon as reasonably practicable, but no later than 31 March 2025; and (iv) the implementation of the Consumer Duty - the FCA will test the robustness of assessments made and actions taken to implement the Consumer Duty, as well as the effectiveness of the arrangements in place to identify any implications of compliance with the Consumer Duty that might result from changes in activity. Within two months, the FCA expects all CEOs to have discussed this letter with their fellow directors and/or Board and to have agreed actions and/or next steps.
Consumer/retail
FCA publishes key findings from its multi-firm review on later life mortgage advertising and advice
On 14 September, the FCA published the key findings from its multi-firm review on later life mortgage advertising and advice. The review looked at firms responsible for around half of all lifetime mortgage sales. It found in many cases advice did not meet the standards expected. For example, a lack of evidence that sufficient consideration of consumer’s individual circumstances had been given and advice lacked discussion of alternatives. The FCA has required those firms which fell short to improve the quality of their advice and is driving improvements in processes to ensure advice is personalised and shows consideration of customers’ circumstances. Firms are encouraged to review the FCA’s findings and act immediately where necessary.
EP adopts proposed Directive on consumer credits at first reading
On 12 September, the EP announced that it has adopted the proposed Directive on consumer credits (CCD II) at first reading. In a related press release, the EP explains that the CCD II aims to make the credit markets function smoothly while ensuring a high level of consumer protection. The legislation will require, among other things: (i) a creditor, prior to concluding a credit agreement, to make a thorough assessment of a consumer’s creditworthiness, in the consumer’s interest and to prevent irresponsible lending practices and over-indebtedness; (ii) non-bank creditors and credit intermediaries (except micro enterprises and SMEs) to be subject to an admission process, and registration and supervision by national independent authorities; (iii) credit advertising to always contain a clear and prominent warning that borrowing money costs money; and (iv) member states to ensure that consumers have the right to withdraw from a credit agreement without any reason within 14 days. The Council of the EU now needs to adopt the CCD II. Following that, the CCD II will enter into force 20 days after its publication in the OJ. Member states will then have two years to adopt the necessary laws and administrative provisions and three years to apply them.
Fintech
Please see the Other Developments section for the FCA’s speech on international collaboration and modernisation of financial services regulation in the UK.
Fund regulation
Please see the Conduct and Governance section for the updated FCA directions for modifications by consent in COBS, COLL and SUP.
Markets and markets infrastructure
The Central Counterparties (Transitional Provision) (Extension and Amendment) Regulations 2023 published
On 14 September, the Central Counterparties (Transitional Provision) (Extension and Amendment) Regulations 2023 were published on legislation.co.uk, together with an explanatory memorandum. The SI extends the TRR for third country CCPs by 12 months, so that the expiry date is delayed until 31 December 2025. This is to allow third country CCPs in the regime to continue to offer clearing services in the UK whilst they wait for their applications for recognition to be determined by the BoE. It also extends the transitional regime for qualifying CCPs contained within the CRR for an additional 12 months. The expiry date of this transitional regime differs between individual CCPs as it is dependent on when a firm has applied for recognition in the UK. However, for a large percentage of firms within the regime, the expiry date currently falls on 31 December. The Regulations come into force on 1 November.
IOSCO consultation report on leveraged loans and CLOs good practices for consideration
On 14 September, IOSCO published a consultation report on leveraged loans and CLOs good practices for consideration. The consultation report: (i) provides an overview of the leveraged loan and CLO markets and their evolution since the global financial crisis; (ii) explains why the vulnerabilities identified in the leveraged loan and CLO markets could impact IOSCO’s objectives of protecting investors, ensuring that markets are fair, efficient and transparent, and reducing systemic risk; and (iii) describes the twelve proposed good practices grouped into five themes: (a) origination and refinancing based on a sound business premise; (b) EBITDA and loan documentation transparency; (c) strengthening alignment of interest from loan origination to end investors; (d) addressing interests of different market participants throughout the intermediation chain; and (e) disclosure of information on an ongoing basis. The consultation seeks feedback on the proposed good practices and the consultation questions. The deadline for comments is 15 December.
FMSB publishes Precious Metals Compendium
On 12 September, the FMSB published a compendium of its work on precious metals markets, which collates all three FMSB Spotlight Reviews on these markets into one document. The FMSB explains that the purpose of the compendium is to: (i) provide an overview of the FMSB’s examination of the precious metals market; (ii) raise awareness about current challenges and identify opportunities for evolution within the precious metals market; and (iii) offer suggestions that might drive improvements in efficiency, transparency, and market practices. The compendium looks at key aspects of the precious metals markets, including: (a) market structure – an analysis of the current state of the precious metals market structure and an exploration of potential evolutions that could enhance transparency, efficiency, and participation; (b) post-trade processes – an examination of the post-trade landscape which explores opportunities for increased efficiency through the adoption of new technologies and processes; and (iii) data and transparency - highlighting the critical role of data and transparency in fostering trust and confidence within the precious metals markets and outlining steps the gold market can take to support the characterisation of gold as a high-quality liquid asset. The three individual Spotlight Reviews remain available on the FMSB website in their original form. The content of each Spotlight Review in this compendium is substantively the same as the original version.
Payment services and payment systems
PSR consults on revisions to timelines and reporting periods for APP scam reporting
On 14 September, the PSR began consulting on further revisions to its draft guidance on reporting APP scam data in advance of the second transitional period reporting cycle. The revisions relate to the timings and reporting periods, with the PSR proposing to move from 6-monthly to 12-monthly reporting so that the second cycle data-collection period captures all of 2023. The deadline for data submissions would be 16 February 2024 and the PSR will publish the data in July 2024. The PSR considers that this change would streamline the data-collection process as firms would only need to submit their data for both halves of 2023 once, rather than twice. This will allow firms to focus efforts on delivering against the other steps of the reimbursement requirement in advance of it taking effect next year. In terms of reporting data beyond H2 2023, the PSR expects that it will need to run one more cycle (cycle 3). The PSR will confirm the timing and reporting period captured under cycle 3, as this will be dependent upon the progress made with the implementation of its reimbursement measures over the course of 2024. The deadline for comments is 22 September.
Prudential regulation
Implementing Regulation amending ITS on closely correlated currencies under CRR published in OJ
On 11 September, Implementing Regulation (EU) 2023/1718 amending the ITS laid down in Implementing Regulation (EU) 2015/2197 with regard to closely correlated currencies in accordance with the CRR, was published in the OJ. The Regulation replaces the text of the Annex to Implementing Regulation (EU) 2015/2197, to ensure that the currency pairs reflect the actual correlation between the relevant currencies based on recent data. The data refers to 31 March as the end date for calculating the three and five year data series required to assess the currency pairs. The Regulation will enter into force on 1 October, twenty days after its publication in the OJ.
Recovery and resolution
EP publishes draft report on proposal for Directive amending the BRRD and SRM Regulation
On 12 September, the EP published a draft report (dated 11 September) on the EC’s proposal for a Directive amending the BRRD and SRM Regulation as regards certain aspects of the minimum requirement for own funds and eligible liabilities (MREL). The draft report contains a draft EP legislative resolution, comparing the text proposed by the EC and the suggested amendments.
Sustainable finance
Please see the Other Developments section for the FCA’s speech on international collaboration and modernisation of financial services regulation in the UK.
EC consults on the SFDR
On 14 September, the EC published a targeted consultation and a public consultation seeking feedback on the SFDR. The consultations aim to assess potential shortcomings within the SFDR framework. These relate to legal certainty, the useability of the legislation and its ability to stop greenwashing. The EC is particularly interested in understanding how the SFDR has been implemented and what issues stakeholders have faced, including its interaction with other parts of the European sustainable finance framework. The EC has organised an online event to discuss the consultation on 10 October and the deadline for comments is 15 December. The EC intends to adopt a report on the SFDR in Q2 2024.
The Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2023 published
On 13 September, the Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2023 were published on legislation.gov.uk, together with an explanatory memorandum. The SI amends the Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 (the Auctioning Regulations), which make provisions for the auctioning of emissions allowances to emit 1 tonne of carbon dioxide equivalent under the UK Emissions Trading Scheme and introduce mechanisms to support market stability in this scheme. The amendments to the Auctioning Regulations will set the auction share and therefore the number of allowances that enter circulation in line with the proposed net zero consistent cap. The Regulations come into force 21 days after the Regulations were laid before the House of Commons (with the exception of Regulation 4(3), which comes into force on 1 January 2024).
EC proposal for amending delegated directive on adjustments to thresholds in the Accounting Directive
On 13 September, the EC published a draft delegated directive amending the Accounting Directive as regards the adjustments of the size criteria for micro, small, medium-sized and large undertakings or groups. In view of the inflation trend in the euro area in recent years, the EC considers it necessary to amend the size criteria in the Accounting Directive by 25% to adjust for the effects of inflation. The increase would result in micro, small and medium-sized enterprises not being subject to many EU financial and sustainability reporting provisions applicable to larger companies under the CSRD and the Taxonomy Regulation. The EC explains that the adjustments to the monetary size criteria aim to maintain the status quo, i.e. to avoid a situation where due to inflation, micro and small companies in particular would become unwittingly subject to the more demanding requirements applicable to larger companies. The deadline for comments is 6 October.
Other developments
FCA speech on international collaboration and modernisation of financial services regulation in the UK
On 14 September, the FCA published a speech by Ashley Alder, FCA Chair (delivered on 13 September), on open markets and common causes: international collaboration and the modernisation of financial services regulation in the UK. Mr Alder explains that the FCA welcomes the recent signing of the UK-EU MoU on Regulatory Cooperation in Financial Services, and is looking forward to the first Regulatory Forum later this year. The FCA also welcomes dialogue on the broader international agenda, where more often than not the UK and EU have very similar views and ambitions. Mr Alder then goes on to touch on some aspects of global cooperation in which he believes the FCA is playing a pivotal role, including: (i) climate - a key area of focus has been the effort to build sustainability-related reporting standards at the real economy level. The FCA is proud to have co-chaired the work on the endorsement by IOSCO of climate reporting standards issued by the ISSB, helping pave the way for international adoption of a reporting framework, which should limit greenwashing and underpin the credibility of the whole sustainable finance agenda. The FCA is now looking forward to working with its European partners to embed the ISSB standards across international capital markets. Launching in October, the FCA is also aiming to take climate reporting to the next level by consulting on critical guidance for climate transition plan disclosures under a new framework developed by its Transition Plan Taskforce; (ii) crypto - because of the ways in which crypto businesses routinely transcend national borders and evade accountability, it makes sense to look at ways in which the FCA can tackle the risks in this sector in lockstep with its global counterparts. The FCA has been leading 130 EU and global regulators to develop critical global standards, delivering a comprehensive crypto and digital asset consultation report earlier this year; and (iii) NBFI - the FSB and IOSCO are heading towards a set of concrete policy outcomes for NBFI activity informed by analysis and data drawn from both market regulators and central banks. Shifting to the domestic arena, Mr Alder emphasises how the FCA’s own remit has been fundamentally reshaped following July’s passage of FSMA 2023. He sets out some basic principles on the international dimension of FSMA 2023, highlighting that the FCA will: (a) ensure that any reforms are effective and proportionate, simplifying and standardising requirements where possible; (b) work alongside EU and global partners who are also pursuing pathways to sustainable economic prosperity whilst tackling the same financial sector risks, sharing and reflecting on best practice; (c) contribute to and promote strong global regulatory standards; and (d) in developing its rules, ensure that it considers the costs to firms who are globally active and are thereby subject to different regulatory regimes. Mr Alder notes that in a number of key areas the EU and UK are pursuing similar reforms which, although not identical, signal common causes. Mr Alder concludes his speech by emphasising that UK markets will remain open, effective and grounded in world-leading standards.
FOS quarterly complaints data: Q1 2023/24
On 14 September, the FOS published its quarterly complaints data on financial products and services for Q1 2023/24. The data shows that complaints relating to motor and buildings insurance have reached their highest level in five years. Current accounts remain the most complained about product, up by a third compared to the same quarter last year. Meanwhile, travel insurance complaints have doubled in a year, increasing from 504 complaints in the first quarter of 2022/23 to 1,101 in the same quarter this year, which is the highest Q1 figure for travel insurance complaints in more than a decade. There has also been a small increase in the percentage of cases upheld year on year. Fraud and scam complaints, across all financial products, have increased by almost 39% to 6,094 complaints when compared to Q1 2022/23. The FOS continues to uphold almost half of these complaints in the consumers’ favour. Approximately 50% (2,932) of these fraud and scam complaints relate to APP scams, many of which are covered by the standards set out by the voluntary Contingent Reimbursement Model Code, to which certain banks have signed up. On average, the FOS upheld 37% of the cases it resolved, up from 34% in the same period last year.
FCA policy statement on introducing a gateway for firms who approve financial promotions
On 12 September, the FCA published its final policy positions and its response to the feedback it received to its consultation on introducing a gateway for firms who approve financial promotions. The policy statement supports legislative changes by the Government within FSMA 2023. Once the new gateway comes into effect, all authorised persons that want to continue to approve financial promotions for unauthorised persons will need to apply to the FCA for permission to do so (subject to certain exemptions). The FCA’s finalised approach, includes: (i) how it will assess applicants at the gateway and the basis for granting or refusing applications; (ii) reporting requirements for firms that are granted permission to approve financial promotions; (iii) not extending the compulsory jurisdiction of the FOS to the approval of financial promotions; (iv) updates to the FCA non-Handbook guidance for firms that approve financial promotions for investments; and (v) a review of the FCA approach within 24 months of the rules coming into force. In CP22/23, the FCA also consulted on the fees for gateway applications and the policy statement summarises the feedback on this, as well as setting out the near-final rules and guidance on fees, applications and approvals. The FCA intends for firms to be able to submit applications for permission to approve financial promotions from 6 November. The initial application period will close on 6 February 2024, with the new legislation coming fully into force on 7 February 2024. Following this, firms that have not applied to the gateway will no longer be able to approve financial promotions (subject to exemptions). In addition to the policy statement, the FCA also published a new webpage on applying to approve financial promotions for unauthorised persons. The webpage sets out how to apply to the FCA for permission to approve financial promotions for unauthorised persons and provides information on what exemptions are available.
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