This is a new UK regulatory round-up, providing insights on where the agenda is heading and implications for firms. With the post-Brexit negotiations shaping up during 2020, we will track the direction of UK regulation and highlight key developments.
Signals about the future direction of travel of UK regulation are strengthening. They are increasingly indicating a difference between the approach to wholesale capital markets and the rest: a tale of two markets. Much of the high-level commentary around the future EU-UK trade agreement, and whether financial services will receive special treatment, is focussed on the former.
Differences in rules, based on client categorisations, may emerge post-transition: a difference in how the rules apply to professional clients versus retail consumers, and the emergence of a semi-professional category (akin to the old “private client” distinction). These points are also on the EU's list of considerations in the context of the MiFID II/MiFIR review, on which the Commission is consulting.
More immediately, the UK regulators are grappling with questions about implementation of recently adopted EU legislation, which the UK played a significant role in drafting, but whose implementation dates fall in 2021, post the transition period. And they are focussed on their supervisory priorities and the interpretation of existing rules, as evidenced by the outputs on data strategy, bank capital and conduct risks.
The transition period - navigating the new cliff edge
During the current transition period to end-2020, existing EU law and regulation will continue to apply in the UK, as well as any other EU legislation with implementation dates during this year. However, recent and proposed changes to dates in adopted legislation are resulting in deadlines being moved from 2020 to 2021. This is bringing into sharp focus the question of whether the UK should, nevertheless, implement this legislation and, if not, how firms can navigate the new cliff edge at end-2020.
For example, the European Securities & Market Authority (ESMA) has proposed to the European Commission that the date the settlement discipline aspects of the Central Securities Depositories Regulation (CSDR) come into force be amended from 13 September 2020 to 1 February 2021. If the Commission and European Parliament agree to this amended date, it will be interesting to see if, how and when the UK authorities amend the equivalent set of regulation that has been on-shored into UK legislation. Similarly, those parts of the EU sustainable finance regulatory package that were adopted early in the negotiations were expected to have initial implementation dates in 2020. However, their publications in the Official Journal were delayed due to the break for the European Parliamentary election and the first date is now not until March 2021.
Political positioning about the future EU-UK trading relationship may have an influence on UK regulatory decisions during 2020, but the cornerstones of financial stability and consumer protection should be the dominant factors in those decisions. Not proceeding with the CSDR settlement discipline, for example, could have adverse impacts on capital markets, and the UK going its own way on ESG disclosures would be counter to global calls for convergence. For firms operating in the UK and the EU, this underlines the increasing complexity of monitoring regulatory change.
Regulators announce data initiatives
In January 2020, the FCA and BoE announced plans for data reforms across the UK financial sector:
It is clear that data quality, more efficient reporting structures and the ability to leverage new technology are driving both regulators' data reform strategies. Changes to the regulators' own data infrastructures will have implications for firms. We would expect to see evolving requirements in terms of data quality and submission methods. The PRA is already moving forward with a number of s166 skilled person reviews of regulatory reporting, as set out in its 2019 Dear CEO letter.
PRA approach to Pillar 2 capital
On 23 January 2020, the PRA issued a Statement of Policy (PDF 1.62 MB) on the setting of Pillar 2 capital for firms to which CRD IV applies.
Section I sets out the methodologies the PRA will use to inform the setting of a firm's Pillar 2A capital requirement for credit risk, market risk, operational risk, counterparty credit risk, credit concentration risk, interest rate risk in the non-trading book (IRRBB), pension obligation risk and RFB group risk. The PRA will now monitor changes in IRB risk weights at least annually and will consider updating the benchmark where significant changes are observed. The range for the IRB risk benchmark for commercial real estate is also corrected from 60% to 50%. Under the market risk methodology, “available for sale” is amended to “fair value through other comprehensive income (FVOCI)”.
Section II is substantially rewritten from the 2018 version and looks at Pillar 2B: the purpose of the PRA buffer, how it is determined and how it relates to the CRD IV buffers. This section also provides details of the PRA's approach to tackling weak governance and risk management under Pillar 2B and RFB group risk.
Firms should ensure that they have fully digested the methodology changes set out in this updated supervisory statement, particularly those relating to the PRA buffer.
On 28 February the PRA launched a consultation on proposed adjustments to variable Pillar 2A capital in the light of the December 2019 decision to increase the UK countercyclical buffer from 1% to 2% in a standard risk environment from 16 December 2020. The consultation will run until 30 April 2020.
FCA highlights key conduct risks
The FCA is turning its attention to the thousands of firms across the sector that are not directly supervised - so-called “portfolio” firms. It has been issuing letters to firms highlighting the key conduct risks in their sector and outlining what it expects firms to be doing. At the time of writing, ten letters have been issued, with more expected.
Whilst each letter is sector-specific, there are common themes relating to culture, governance and corporate values, and to Brexit-related risks. Although the letters do not contain anything ground-breaking, they are a useful and timely reminder of the key areas that the FCA is concerned about and, critically, exactly what firms should be doing in response. The themes chime with the FCA's comments in its recent sector views publication (PDF 5.1 MB).
It is not immediately clear whether the FCA plans to use carrot or stick. Only time will tell. However, in the meantime, each firm should benchmark themselves against the FCA's regulatory expectations contained within these letters.
Letters issued to date are:
More support for the indebted…
The FCA has published updates on two initiatives designed to help customers who either are in persistent debt (PDF 161 KB) or routinely use overdrafts. It has made changes to the way that overdrafts are charged with the aim of bringing down the costs as well as making them clearer and easier to compare. For those individuals who are in persistent debt, the FCA requires firms proactively to identify and contact these individuals to establish how best to help them. This could include reducing, waiving or cancelling any interest, fees or charges.
…and minimum interest rates for the savers…
The FCA is consulting on requiring banks to set their own basic savings rate, which would be applied after an account had been open for a set period, such as a year. This minimum would be used to standardise rates across all the bank's instant access accounts to ensure vulnerable and loyal customers are not penalised. However, banks are desperately trying to rein in their costs and any additional spend, so we may see the cost of retail lending, be it overdrafts or mortgages, creep up if the FCA's proposals are implemented in full.