The UK Regulatory Radar is a regular publication from KPMG's EMA Financial Services Regulatory Insight Centre (RIC), providing a summary of the latest industry and regulatory updates impacting the UK.
Since the last edition of UK Regulatory Radar, we have seen the FCA substantially advance a number of the key priorities set out in its Business Plan.
The most significant of these is the second consultation on the Consumer Duty initiative. The latest paper re-emphasises the FCA's focus on rebasing consumer protection and the lack of material deviation from the vision of the initial paper should give firms a clear steer about the regulator's continued level of ambition and determination to drive change.
There has been progress on three other FCA priorities too. Firstly, it has confirmed reforms to its decision-making process. The changes will enable the FCA to make faster and more effective decisions by placing more power with front line supervision. Secondly, it is consulting on potential enhancements to its Appointed Representative (AR) regime. The FCA is seeking to improve the governance of these firms as well as their transparency with the FCA. Alongside the consultation, HM Treasury (HMT) has published a call for evidence on wider ranging changes to the AR regime itself. Finally, the FCA has issued a discussion paper that considers reforms to the FSCS compensation framework and its purpose, scope and funding.
The Bank of England's Financial Policy Committee (FPC) has issued its latest Financial Stability Report. This notes that the UK and global economies have continued to recover from the effects of the pandemic but that uncertainty over risks to public health and the economic outlook remains. The FPC continues to judge that the UK banking system remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee's (MPC's) central forecast. This judgement is supported by the final results of the 2021 Solvency Stress Test (SST), published on 13 December. The FPC remains vigilant to debt vulnerabilities (household and corporate) in the economy that could amplify risks to financial stability. In addition, risk-taking in certain financial markets remains high relative to historical levels. The FPC finds that direct risks to the UK financial system from cryptoassets are currently limited, but that they will present a number of financial stability risks as they become more interconnected with the wider financial system.
Highlights features in this update
The 2021 Solvency Stress Test (SST) tested the largest UK banks' and building societies' ability to cope with another severe economic shock, on top of the economic shock from the pandemic. The results showed that UK banks' capital and liquidity positions remain strong, and that they have sufficient resources to continue to support lending to the economy, with all eight participating banks remaining above their reference rates for both CET1 capital ratios and Tier 1 leverage ratios. The aim of the SST was to update and refine the FPC's assessment of banks' resilience and their ability to lend in a very severe intensification of the macroeconomic shock arising from the pandemic. The FPC and Prudential Regulation Committee will not use the test as a direct input for setting capital buffers for UK banks. For 2022, the Bank of England (BoE) intends to revert to the annual cyclical scenario stress-testing framework - further details will be published in Q1 2022.
The FPC also announced that it will increase the UK Countercyclical Buffer (CCyB) rate to 1%, to be implemented by 13 December 2022. If the economy continues to recover, the FPC expects to increase the CCyB to 2% in 2022 Q2, to take effect in 2023 Q2. This decision reflects the view that risks have returned to their COVID-19 level.
The PRA has confirmedt hat in 2022 it will return to setting Pillar 2A requirements as a variable amount i.e. as a percentage of Risk Weighted Assets (with the exception of some fixed add-ons, such as pension risk). This decision reverses the PRA's COVID-19 response measure of setting Pillar 2A as a nominal amount in the 2020 and 2021 Supervisory Review and Evaluation Processes (SREPs) to alleviate unwarranted pressure on firms. All firms currently with a nominal Pillar 2A requirement will be set a variable requirement in 2022. Supervisors will contact firms that do not have a SREP assessment planned in 2022 to amend the requirements by end-2022.
The PRA is consulting on proposals to apply the group provisions in the Operational Resilience Part of the PRA Rulebook relevant to Capital Requirements Regulation firms to financial and mixed activity holding companies. This would apply directly to the holding companies the same substantive policy requirements to which they are currently subject through requirements on individual firms in their groups, thereby establishing 'a group level view' of operational resilience. The proposals are split into two sections, with implementation for any changes resulting from the consultation to be on 31 March 2022 for operational resilience and 1 January 2023 for Operational Continuity in Resolution (OCIR).
The BoE has updated its Statement of Policy (SoP) on the approach to setting a minimum requirement for own funds and eligible liabilities (MREL). Updates will be effective from 1 January 2022 and conclude the second stage of the MREL review. They include the introduction of a three-step “glide path” for growing firms to transition into end-state MREL requirements and the option for firms already transitioning to apply for a two year flexible add-on.
The PRA has issued a Policy Statement on Domestic Liquidity Sub-Groups (DolSubs). From 1 January 2022, HMT will revoke the current provision which permits the PRA to waive (under certain conditions) the application of liquidity requirements at the level of an individual firm and permit a firm to form a DoLSub. As a result, firms may need to apply formally for Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) DoLSub permissions. All applications will be assessed under the final revised framework and will take effect from 1 January 2022.
Speeches from the BoE and PRA this month have outlined their plans for the Solvency II review. Andrew Bailey’s speech highlighted the regulator’s concern around the design of the Matching Adjustment, used to value annuity liabilities by reference to spreads on assets that back them. It argued that the Fundamental Spread does not include explicit allowance for uncertainty around defaults and downgrades and is not sensitive to changes in credit market conditions. Charlotte Gherkin’s speech focused on the investment process for insurers and how the Solvency II review could remove barriers to delivering on sustainable investment commitments.
Wholesale Markets updates
The FCA and the PRA have jointly requested UK-based firms with equity finance (prime brokerage) businesses to carry out systematic reviews of their equity finance businesses and their risk management practices and controls by end of Q1 2022. Following the default of Archegos Capital Management, the regulators' supervisory reviews have found weaknesses in business strategy and organisation; onboarding and reputational risk; financial risk management controls and governance; and liquidation and close-out.
The FCA's PS21/20 confirms amendments to UK MiFID to remove the obligation for execution venues and investment firms to produce best execution reports (RTS27 and RTS 28 reports respectively) from 1 December 2021. The policy statement also amends MiFID inducement rules to improve the availability of research on SME firms.
As part of its Primary Markets Effectiveness Review, the FCA is removing some barriers to listing and making its rulebooks more accessible. The changes, detailed in PS21/22, include an introduction of a targeted form of dual class share structure within premium listing. The policy statement also reduces from 25% to 10% the level of shares required to be in public hands at listing and increases the minimum market capitalisation for premium and standard listing segments from £700,000 to £30 million.
In its annual report on financial market infrastructure (FMI) supervision, the BoE outlined its future priorities for the sector. These include reviewing implementation of new operational resilience standards, consulting on FMI outsourcing, further developing the CCP supervisory stress testing framework and continuing to work with HMT and other authorities to develop the UK approach to crypto-assets and stablecoins.
The BoE and the FCA, under their joint responsibility for supervising the UK version of the European Market Infrastructure Regulation (EMIR), are proposing to amend the framework for derivatives reporting to ensure a more globally consistent data set. The FCA is also proposing to streamline the registration and reconciliation processes for trade repositories.
In Market Watch 68, the FCA highlighted its concern around the lack of surveillance over data from web-based trading platforms, in particular the gaps in rates and fixed income order capture. The FCA found firms with formal procedures and good governance for onboarding new platforms, including consideration of surveillance and record keeping obligations, were better able to ensure capture and monitoring of all relevant trade and order data.
The FCA has recognised the updated FX Global Code and the Global Precious Metal Code under its code recognition scheme. In practice, this means by behaving in line with these codes (both in spirit and letter) firms are meeting their obligation to observe `proper standards of market conduct'.
And finally, with the FCA's confirmation that all legacy contracts apart from cleared derivatives can use synthetic LIBOR, the regulatory framework is in place for the LIBOR transition. From 1 January 2022, 24 of the 35 LIBOR settings will no longer be available. Six sterling and yen LIBOR settings will continue for the duration of 2022 in synthetic form for legacy use only. Five US dollar LIBOR settings will continue in their current form until mid-2023 but the FCA is restricting in the UK the new use of US dollar LIBOR from end-2021.
The Payment Systems Regulator (PSR) is consulting on proposals to prevent Authorised Push Payment (APP) scams. The PSR proposes:
- Publication of fraud data by banks every six months
- Improved intelligence sharing, detection and prevention of APP scams
- Mandatory reimbursement for victims of scams who have done nothing wrong
It also intends to consider further measures, how best to use existing powers, and explore how it can facilitate industry coordination and initiatives.
The PSR also set out its regulatory framework for the New Payments Architecture (NPA) central infrastructure services (CIS) following concerns there were unacceptably high risks in the existing NPA programme. The framework is intended to reduce the ability and incentives of a CIS provider to act in ways that distort competition or stifle innovation.
Finally, the PSR is also consulting on proposals to ensure the industry remains on track with establishing a single Confirmation of Payee (CoP) system. The aim is to allow more providers to work together to ensure a greater number of customers are protected and there is an orderly transition between Phase 1 (where UK's six largest banking groups were required to introduce CoP) and Phase 2 (a new technical environment, rules and standards) designed to widen participation.
The FCA published final rules for the Regulatory Technical Standards on Strong Customer Authentication and Secure Communication (SCA-RTS). Amendments have been made to its `Payment Services and Electronic Money — Our Approach' document and its Perimeter Guidance Manual (PERG) consolidating FCA expectations and providing further clarity.
Retail Conduct updates
The FCA is continuing its initiatives to deliver better outcomes for pension savers. The FCA published final rules requiring firms give customers a `stronger nudge' to Pension Wise guidance when they decide to access their pension savings. These rules come into force on 1 June 2022. The FCA is working closely with the Department for Work and Pensions (DWP) as it works on corresponding regulations for occupational pension schemes.
The FCA is also looking to intervene at an earlier stage in the pension lifecycle, by consulting on improving outcomes for non-workplace pension customers. The FCA is proposing firms offer a new 'default' investment option to new non-advised customers to help them save for their retirement. Firms would also be required to issue cash warnings to consumers with sustained and potentially inappropriate levels of cash in their pension.
The FCA has published its Mortgage Prisoner Review. A mortgage prisoner holds their mortgage with a dormant lender, unable to switch to a new mortgage deal (with a new lender or with their existing lender) and could potentially benefit from switching depending on their loan and borrower risk characteristics. The FCA found that removing the regulatory barriers to switching has helped, but the primary barrier to these borrowers switching is the lack of lender risk appetite. The FCA estimate there are still 47,000 mortgage prisoners (24% of the closed book population) and therefore further regulatory intervention may be required.
Claims Management Companies
The FCA set out new rules to restrict the fees Claims Management Companies (CMCs) charge for non-PPI financial products and service claims by creating a cap, calculated as a percentage of redress. The FCA is also amending CMC pre-contract disclosure requirements to improve customer understanding of how CMCs operate and charge for their services. The new rules and guidance will come into force on 1 March 2022.
The FCA is consulting on new rules to ban debt packager referral fees from debt solution providers. This is designed to reduce the risk that consumers receive non-compliant debt advice that is biased towards debt solutions (which may not meet their needs but generate referral fees for the debt advice firm). This inherent conflict of interest present in the business model has led to firms not complying with the rules and creating poor customer outcomes.