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.
The reactions of governments around the world to events in Ukraine are having primary impacts on financial markets through the imposition of sanctions and significant secondary impacts, such as market volatility. The FCA has summarised its guidance on expectations of firms' compliance with financial sanction obligations, points firms should consider on cyber and operational resilience, as well as a reminder to issuers of securities admitted to UK trading venues of their disclosure obligations under the UK Market Abuse Regulation (MAR).
The Payment Systems Regulator (PSR) is encouraging firms to consider how they can manage the elevated risks of cyber-attack and the resilience of their third party suppliers.
Full details of the sanctions imposed by the HM Treasury in response to the current situation are provided on its website.
The Office of Financial Sanctions Implementation (OFSI) has updated its Russia financial sanctions guidance to reflect recent regulatory changes around transferable securities, money-market instruments, and foreign exchange reserve and asset management.
However, UK policy makers and regulators continue to take forward new regulation around topics such as consumer duty and cryptoassets, amend existing regulation on wholesale markets, and advance work on supervisory priorities such as climate stress testing, consumer protection and credit ratings.
Highlights this month
HM Treasury’s action plan for tailoring MiFID II/MIFIR to the UK market.
Taking forward changes to the UK HM Treasury's action plan for tailoring MiFID II / MIFIR
A summary of the latest ESG regulatory developments impacting financial services firms.
A summary of the latest ESG regulatory developments impacting financial services firms.
The Bank of England (BoE) is consulting on a proposal to withdraw the Financial Policy Committee's (FPC's) mortgage affordability test recommendation. The affordability test is one of two measures introduced in 2014 to guard against a loosening in mortgage underwriting standards which could lead to a material increase in aggregate household debt and the number of highly indebted households:
- The LTI — flow limit - which limits the number of mortgages that can be extended at loan to income (LTI) ratios at or greater than 4.5
- The affordability test — which specifies a stress interest rate for lenders when assessing prospective borrowers' ability to repay a mortgage
The FPC judges that the affordability test can introduce unwarranted complexity and potential unpredictability in the macroprudential framework. It has concluded that the LTI flow test would play a stronger role in guarding against household indebtedness in the scenario of rapidly rising house prices and that the additional insurance provided by the affordability test would be small.
Should the consultation support the proposal to withdraw the affordability test, this would take effect within 12 months of the decision.
The BoE has launched a second round of the Climate Biennial Exploratory Scenario (CBES) and asked all first round participants (banks and insurers) to make further submissions by 31 March. The second round will focus on firms' strategic responses to the three first round scenarios and the associated implications for their business models. Participants will not be required to update the quantitative loss projections they provided as part of the first round. Guidance including detailed questions have been sent to relevant firms. Aggregated results are expected in May 2022.
The PRA is consulting on updates to its rules and supervisory expectations around the definition of capital. This includes the proposed approach to transferring the UK Technical Standards for own funds requirements for institutions (UKTS) into PRA rules, to reflect revisions to the Capital Requirements Regulation (CRR) that had not been written into UK rules before the UK left the EU. The consultation also proposes updates to clarify the PRA's expectations around capital issuances and reductions, including requirements for firms on information which must be provided when seeking PRA permission to reduce capital instruments, the new general prior permission process, and the process for reductions in share premium accounts. There are further clarifications around the quality of capital instruments, expectations for firms to seek PRA views prior to issuing any new Tier 2 instruments which include new or complex features and the requirement to seek PRA permission for any forms of reduction of own funds instruments. Firms should also inform supervisory contacts when there is sufficient certainty regarding capital reduction transactions in order to facilitate publication of the related PRA permission.
The PRA has issued a policy statement on operational resilience and operational continuity in resolution (OCIR). This chiefly introduces the requirement, which must be complied with “within a reasonable time” and by no later than 30 June 2022, for certain operational resilience group obligations to be applied to CRR consolidation entities. CRR firms are expected to assess the ability of group members to remain within impact tolerances for their important group business services, and to ensure that the CRR consolidation entity’s board approves the CRR consolidation entity’s assessment. Supervisory Statement 1/21, on impact tolerances for important business services, is updated to reflect these changes. The PRA has also clarified the definition of important group business services in the Operational Resilience rules for Solvency II firms to state that an important group business service means a service provided by a member of ‘the’, rather than ‘a’, firm’s group — firms must only set important group business services in relation to the group of which they are a member. Other minor amendments and clarifications have been made to the Operational Resilience, Insurance — Operational Resilience and Operational Continuity Parts of the PRA Rulebook.
The European Commission (EC) adopted a new decision to extend equivalence to UK Central Counterparties (CCPs) for another three years. This means that UK clearing houses will be able to continue serving EU clients without restrictions until 30 June 2025. Clearing is now the only remaining area of UK financial services to benefit from EC equivalence.
The FCA published its first portfolio letter to credit rating agencies (CRAs) in which it set out its expectations and supervisory focus on: rating process and methodologies, governance and oversight (especially around the interactions between regulated and non-regulated activity (e.g. ESG ratings)), and operational resilience and in/outsourcing. The letter also highlights priority areas of work that will impact CRAs: the market study on credit ratings data, possible regulation of ESG data and ratings providers and possible expansion of the Senior Managers and Certification regime to CRAs.
In a joint press release on the LIBOR transition, the BoE and FCA commented that sterling markets navigated the LIBOR transition on time and with minimal disruption. The BoE now estimates that, across all asset types, less than 2% of the total sterling LIBOR legacy stock remains. During 2022, the FCA will consult on retiring 1-month and 6-month synthetic sterling LIBOR at the end of 2022, and on when to retire 3-month sterling synthetic LIBOR.
The PSR is consulting on its remedies for the card acquiring market following the conclusion of its market review that the supply of card-acquiring services is not working well for some merchants. The four remedies aim to strengthen competition between providers of card-acquiring services as they compete more vigorously for merchant business:
- Greater transparency
- Access to comparison tools
- Trigger messages
- The ability to change providers easily
The PSR published a consultation to end dual running and also Specific Direction 11. The aim of these proposals is to allow more Payment Service Providers (PSPs) to work together to ensure that more customers are protected by Confirmation of Payee (CoP). The PSR will direct Pay.UK to ensure the Phase 1 environment is closed by 31 May 2022 and Specific Direction 11 came into effect 11 February 2022.
Finally, the PSR also issued Specific Direction 12 (SD12) to Link Scheme Holdings Ltd (LINK), to maintain the broad geographic spread of the UK's free-to-use (FTU) cash machine network. SD12 revokes SD8 and SD8a and provides LINK greater flexibility in the application, and revision of its policies.
Pay.UK has published its new Strategy — `Our foundation for the future 2021-2026'. The strategy sets out its framework to deliver a fast, efficient and well-managed payments platform, and a next-generation payments platform for the future — the New Payment Architecture (NPA).
Retail Conduct updates
The FCA has taken assertive action on a number of fronts to ensure that a firm's actions do not result in consumer harm. This includes a guidance consultation on how firms are operating different approaches to limit their redress liabilities. The FCA has seen an increase in the number of firms developing proposals, such as schemes of arrangement, restructuring plans and voluntary arrangements which do not deliver appropriate outcomes for the end customer. Similarly, the FCA's rules on capping the fee that Claims Management Companies can charge customers have come into effect.
The FCA's latest consumer investments data review summarises the steps the FCA has been taking to reduce scams and inappropriate firms obtaining authorisation. The review notes that it stopped one in four firms from entering this market as well as receiving 16,400 enquires about possible scams between April and September last year.
The FCA has also sent Dear CEO letters to Insurers and Brokers on insurance costs for multi-occupancy buildings. The letters have been issued due to the ongoing concerns about the rising cost of insurance for multi occupancy buildings, with significantly increased costs being passed onto residential leaseholders. They remind firms of their obligations under rules, including consideration of the costs borne by leaseholders when determining whether a product is fair value.
As an indication of how its thinking is evolving as it considers responses to its Consumer Duty consultation, the FCA has published the outcomes of research seeking to drive better outcomes for high-risk investments by looking differently at disclosure and customer journey. This shows that behaviourally informed reminders and information still have an important role to play in bringing attention to and helping consumers understand investment risks. For example, if customers are asked to insert free text to state why they are sophisticated, they are much less likely to proceed than if it they simply have to confirm that they are sophisticated using a tick box.
Finally, along similar lines, the FCA's statement on its recent intervention in the Buy Now Pay Later (BNPL) sector demonstrates its intention to be more `proactive' and `assertive'. Using powers under the Consumer Rights Act 2015, the FCA assessed the fairness and transparency of contract terms of four firms offering unregulated BNPL products, identifying potential areas of consumer harm and raising these with the firms. As a result, the firms agreed to make changes to terms.
There has been further activity to progress the government's Pension Dashboard initiative (which is designed to help customers keep track of all their pensions in a single place). The FCA is proposing new rules requiring pension providers to connect and supply information about personal and stakeholder pensions to the dashboards. This consultation complements the Department of Work and Pensions' consultation on the draft Pensions Dashboards Regulations 2022, which includes corresponding requirements for trustees and managers of occupational pension schemes. The FCA will consult further on the regulatory framework for providers of qualifying pension dashboard services later in the year.
The Pensions Regulator has also been setting out its future framework by consulting on a new code of practice for collective defined contribution (CDC) pension schemes. A CDC pension is a new type of pension scheme and will be an alternative to defined benefit and defined contribution schemes.
The KPMG Financial Services Regulatory Insight Centre monitors and tracks the evolving regulatory landscape. If you would like to discuss any of the topics covered in more detail, please contact a member of the team below:
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