This UK regulatory round-up provides insights on where the agenda is heading and implications for firms. As we move beyond the pandemic and as the post-Brexit landscape takes shape, we track the direction of UK regulation and highlight key developments.
Regulators continue to be concerned about firms' resilience and their treatment of customers, but they are already looking ahead to the recovery phase. Temporary concessions or restrictions introduced in response to the pandemic are being reviewed. The dates for reporting, implementation of new rules or to respond to consultations, which had been delayed, are nearing again.
The wider UK regulatory agenda continues. There are changes to relative priorities and timings, but not fundamental change. This is evidenced by the first output of the new Financial Services Regulatory Initiatives Forum. Work is planned across all aspects of regulation - banking, insurance and asset management prudential requirements, and conduct in capital and retail markets. The world after the end of the Brexit transition period is also under consideration.
Sustainable finance and the use of technology will be prominent features of the new reality post-pandemic. Developments in areas, such as artificial intelligence and machine learning, are likely to transform financial services and the way the UK regulates over the next decade. A speech by James Proudman, PRA discusses whether technology can improve the collection of data, make regulations easier for financial firms to work with, and make supervisors' jobs more productive. We pick up on this and other key themes in our wider insights on the regulatory horizon - coming soon.
Highlights featured in this update:
The Financial Services Regulatory Initiatives Forum (FSRIF) has published its first Regulatory Initiatives Grid (PDF 511 KB). The Grid provides transparency to stakeholders about how the individual regulators' timelines and initiatives will be co-ordinated. It will be published at least twice a year and shows the initiatives quarter-by-quarter. The first edition includes 85 initiatives and covers the next twelve months - future editions will cover a two-year horizon.
None of the 85 initiatives is new - they have all been on the table for some time or heralded in recent individual regulators' business plans. Comments are invited on the sequencing of initiatives (but not the fact of them or their substance, which will be handled under the usual consultation processes). There are more initiatives with indicative or indeterminate timings than would be expected in a BAU context, reflecting deferred initiatives in response to COVID-19 and that the regulators await greater clarity on the unfolding situation.
The deferred initiatives would cause a large volume of operational demands on firms to take place at the same time as the end of the post-Brexit transition period. It is therefore likely that there will have to be some extended deferrals to smooth operational impacts for firms and for the regulators, but the impact will differ by sector. Many of the major initiatives in 2021 onwards will be the UK's implementation of globally agreed standards.
COVID-19 has required substantial and prolonged responses from prudential regulators, not surprising given their mandate to support and promote financial stability. Most emergency measures taken by the Bank of England and the PRA (including those relating to capital and liquidity, stress testing and market volatility) remain in place, and, given uncertainty around how the pandemic and economic situation will evolve, we do not expect significant changes in the short term.
However, in the last couple of weeks we have started to see forward-looking thematic areas back in focus - James Proudman's speech on “Managing machines: the governance of artificial intelligence”, as mentioned above, is one such area. Another strategic priority that never went away, but temporarily took a back seat, is climate change.
The Bank and the PRA have continued their international engagement through fora such as the Network for Greening the Financial System (NGFS). On 27 May, NGFS published a technical guide (PDF 2.1 MB) on how to integrate climate-related and environmental risks into prudential supervision. This pulls together the best of global supervisory practices and builds on five key recommendations for actions to be taken by NGFS members. This, coming shortly after the ECB launched a consultation on its guide to climate-related and environmental risks, is a clear sign that the financial risks of climate change are firmly back on the live agenda and need to be a priority for firms.
In a recent speech, Charlotte Gerken, Executive Director for Insurance at the PRA assessed how well Solvency II has withstood the challenges presented by COVID-19 and highlighted the future direction of UK insurance regulation. She identified that:
- the matching adjustment shielded many annuity writers from recognising asset spread increases in the discounting of their liabilities
- insurers should capitalise any credit downgrades
- firms can apply to recalculate their transitional measure for technical provisions (TMTPs) in the light of significant changes in interest rates
- the symmetric adjustment of the equity risk charge enabled firms to release capital buffers
- the volatility adjustment provided some cushion to widening corporate bond spreads
In terms of future direction, Ms Gerken said the PRA had reflected on introducing more dynamic measures that could improve its ability to supervise firms through the economic cycle. She reiterated the intention to revisit the design and implementation of the risk margin, the matching adjustment and reporting requirements.
She also used the speech to highlight the PRA's current areas of supervisory focus:
- Illiquid assets: a number of recent supervisory statements have set expectations around the inclusion in the matching adjustment, management of liquidity risk and the Prudent Person Principle
- Operational resilience: firms should learn lessons from the lockdown phase as this remains a strategic priority for the regulator
- Climate change risk: many firms struggled to allocate their investments as part of last year's insurance stress test and to reflect a range of scenario outcomes in their models, and climate risk management (PDF 881 KB) is not yet embedded in many firms
The Bank and the FCA emphasised in their announcement of 25 March that the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet. However on 29 April, they announced (PDF 209 KB) that some interim deadlines in relation to sterling cash markets would be extended to account for the impact of COVID-19, specifically:
- By the end of Q3 2020, lenders should be able to offer non-LIBOR linked products to customers
- After the end of Q3 2020, lenders, working with their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of end-2021, through pre-agreed conversion terms or an agreed process for renegotiation, to SONIA or other alternative
- All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021
In line with the above, the Bank extended its dates of introduction and increases in haircuts add-ons to collateral referencing LIBOR for use in the Sterling Monetary Framework.
On 7 May the PRA and the FCA announced that they would resume full supervisory engagement with firms on LIBOR transition progress from 1 June 2020. Given the rapidly approaching dates, firms need to continue their efforts to move their exposures away from LIBOR to risk-free rates.
To help with the transition, the Working Group on Sterling Risk Free Rates released a paper (PDF 103 KB) identifying across asset classes where there are LIBOR exposures with difficult to amend contracts. The Working Group proposes that the UK Government consider legislation to address these `tough legacy' exposures. However, it recognises there is no guarantee that such a solution will materialise, that it will materialise across all relevant legal jurisdictions, or that it would be available for all products and circumstances, so market participants should continue to focus on active transition.
The FCA has published a package of measures designed to address weaknesses across the defined benefit (DB) transfer market. In an unprecedented move, the FCA has approached the issue on a holistic basis and from different perspectives. The package covers changes to how firms give advice, how they design and operate their business models (for example, by proceeding with a ban on contingent charging) and the controls they should have in place.
The FCA also seeks to empower customers by providing them with additional information about the transfer process and an advice checker to allow them to assess whether they have received suitable advice (and, if not, how to complain). The package of measures addresses the role of other key regulated firms and contains guidance about Professional Indemnity Insurers and how they offer cover to these advice firms.
Finally, the communications also include feedback on the FCA’s most recent review of transfer advice. While overall advice suitability had increased to 60%, this is still below FCA expectations and concerns remain in the relation to quality of fact-finding.
The FCA has published it latest complaints data for H2 2019 - at both firm-specific level and aggregate level. Whilst the firms with the largest number of complaints naturally tend to be the largest firms, there are also some other useful data points that firms can use to benchmark their current complaint-handling arrangements. For example, the percentage of complaints closed within eight weeks is a useful proxy for relative efficiency. From an aggregate complaints data perspective, as the FCA deadline for PPI complaints occurred during this period, it is no surprise that PPI complaints accounted for 62% of all complaints.
Aligned to the deadline passing, the FCA published a final report on the outcome of its PPI campaign, which it regards as a success, with 32.4m complaints raised and over £38bn redress paid so far. The campaign also led to 6.2 million people visiting the FCA's dedicated PPI website and 110,000 calls to its dedicated PPI helpline.
Similarly, the FOS has published its annual report on complaints. Whilst PPI was the most complained about, the FOS identified a significant increase in complaints about some retail lending products, specifically guarantor loans, point-of-sale loans and instalment loans. In contrast, the FOS received significantly fewer complaints about short-term lending compared to last year.
The FOS also published it future strategy, “Contributing to a fairer financial world”. The strategy, which will run to 2025, sets out three strategic priorities for the service: enhancing the service; preventing complaints and unfairness arising; and building an organisation with the capabilities it needs for the future.
The first and last of these objectives are unsurprising, but how the FOS delivers against the second will be of particular interest for firms. Whilst there is already some liaison between the FCA and the FOS, this strategy indicates a more proactive role for the FOS in helping to shape products and services, firm and consumer behaviour, firm's decision making and educating consumers. The differing scope, remit and approaches will need to be carefully considered in the FOS' interactions with both the FCA and firms.
HM Treasury released a statement on 25 March, outlining the government's intention to retain the regulators' temporary transitional power (TTP) - introduced in case of a no-deal Brexit - for a period of two years from the end of the transition period. The regulators will use the TTP after the transition period as previously communicated in relation to exit day. Therefore, in all but a few areas, regulated firms and FMIs do not need to have completed preparations to implement changes in UK law by December 2020. Transitional relief will be granted on a broad basis for 15 months after the end of the transition period (i.e. until Thursday 31 March 2022).
Specific uses of the TTP, particularly relating to some of the new requirements on firms entering the Temporary Permission Regime, are expected to remain as previously published. Application of the TTP to changes to new EU requirements due to become applicable during the transition period will be considered as part of the ongoing legislative process in relation to those provisions.
At the end of the transition period, originators, sponsors or securitisation special purpose entities will be required to report their public securitisations to a securitisation repository (SR) registered with the FCA rather than ESMA. To ensure a smooth transition, the FCA will shortly publish a draft application form, which can be used by prospective UK SRs to submit a draft application for registration to the FCA before the end of the transition period. Similarly, HM Treasury announced on 30 April that it plans to legislate to enable Trade Repositories to register with the FCA in relation to the functions required by the UK version of the Securities Financing Transactions Regulation (SFTR).
Meanwhile, HM Treasury consulted (PDF 645 KB) until 11 May on a new Overseas Fund Regime (OFR). EU/EEA funds wishing to distribute into the UK could face increased red tape after the transition period, because they would have to go through a formal recognition process to be able to market to retail investors. Instead, the OFR will provide two equivalence regimes - one for retail funds and one for money market funds. The government will make an equivalence determination in respect of another country's regime(s), rather than on an individual fund-by-fund basis. Factors involved in making the determination will include the level of investor protection for retail funds, the comparability of the regulatory regime, and the supervisory co-operation arrangements between the FCA and the other country's regulator.
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