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 affecting the UK.
The last few weeks have seen a flurry of business plans from the UK regulators setting out expectations and plans for the coming year. See links below for analysis of the PRA and FCA business plans and the payments and retail conduct sections for summaries of the PSR and FOS plans.
More strategically, the UK Government continues to refine onshored EU legislation with HM Treasury's (HMT) proposal to tailor Solvency II to the UK insurance market. The Government is also finalising new regulation in areas such as crypto-assets.
Highlights this month:
New requirements for standard and premium listed companies (issuers).
New requirements for standard and premium listed companies (issuers).
The Bank of England (BoE) has confirmed that it will consult on the UK implementation of Basel 4 (Basel 3.1) in Q4 2022. It has also clarified that it intends changes proposed in the consultation paper (CP) to become effective from 1 January 2025 to provide firms with sufficient preparation time and to align with the published timetables of other major jurisdictions. This timeline would bring the UK implementation in line with the timetable proposed for the EU's Basel 4 implementation under CRR3.
The PRA is consulting (PDF 444KB) until July on proposals for introducing a definition of a “Simpler-regime firm”. This is the first step in creating a strong and simple prudential framework for non-systemic banks and building societies as proposed in last year's Discussion Paper (PDF 1.66MB). The new regime would advance the PRA's safety and soundness and secondary competition objectives.
The final framework is likely to be based on a series of layered regimes based on size and complexity of firms — the PRA proposes to develop the layer for the smallest firms first (the simpler regime) and in two phases. Phase 1, planned for the first half of 2023, is likely to focus on aspects not related to capital (e.g. liquidity regulation). Phase 2, in 2024, will address capital.
The PRA proposes a firm must meet all of the below criteria to be considered a Simpler-regime Firm:
- Size — a maximum size threshold of £15 billion of total assets, where total assets are as defined in the financial reporting framework (FINREP)6 and calculated using the average of the firm's total assets it was required to report during the previous 36 months in accordance with Rule 7.1 of the Regulatory Reporting Part of the PRA Rulebook.
- Limited trading activity — only firms with no or minimal trading books should be in scope. A firm must have an on-and off-balance sheet trading book business that would be equal to, or less than, both 5% of the firm's total assets and £44 million. In addition, the sum of a firm's overall net foreign exchange position, as defined in CRR Article 351, must be equal to or less than 2% of the firm's own funds and a firm must have no commodity positions.
- No internal ratings based approach — due to the complexity of development and validation. However, firms would be able to submit an IRB application while under the Simpler regime and would only cease to meet the definition once approval was received.
- No specialist business models — the PRA proposes to exclude firms providing clearing, settlement, custody or correspondent banking services (including by acting as an intermediary) to another bank or building society, wherever they are based, and also firms that operate payment systems. This is due to their increased interconnectivity with the wider financial system and the specific types of risk that their business model poses.
- Firms' activity should primarily be based in the UK and focused on UK-based customers or counterparties. The PRA proposes that at least 85% of a firm's credit exposures must be to obligors located in the UK.
Eligibility will be assessed at the highest level of the UK consolidation group. Firms that are part of a group based outside the UK may be able to apply for a waiver, subject to meeting the criteria, in order to access similar prudential treatment.
In his speech on Operational Resilience: Next steps on the PRA's Supervisory roadmap, David Bailey, Executive Director of UK Deposit Takers Supervision, reflected that although banks have made progress, there is still work to do to. He presented feedback on identification of important business services, impact tolerances, mapping and testing, and initial supervisory reviews of firms' operational resilience capabilities. He also reminded firms of the requirements to implement all aspects of UK policy by March 2025 and of the need for ongoing dialogue between industry and regulators. Finally, he referenced future exercises such as the BoE's cyber stress test, joint BoE, FCA, PRA and HMT work on Critical Third Parties (CTPs). The BoE, PRA and FCA will issue a Discussion Paper on CTPs later in the year.
The PRA reminded firms that, in line with the BCBS June 2016 statement, they should not engage in capital arbitrage transactions that have the aim of offsetting regulatory adjustments. The PRA is aware that some PRA-regulated firms have conducted, or may be considering conducting, deficit reduction transactions with their defined benefit pension schemes that are structured to limit the regulatory capital impact that would otherwise result. Such actions may not be compatible with a firm's obligations under the PRA's Fundamental Rules and the PRA's approach to banking and insurance supervision.
The FCA published a thematic review (PDF 400KB) of wind-down planning across a variety of business models, focusing on liquidity needs, triggers and intragroup dependencies. The review reiterates the FCA's expectation that firms have adequate financial and non-financial resources to wind-down in an orderly manner, and sets out the following observations:
- Where they existed, most wind-down plans, processes and risk management frameworks (RMFs) remained at an early stage of maturity. Many have substantial gaps and do not reflect the minimum expectations highlighted in the Wind-Down Planning Guidance (WDPG) and `Our framework: assessing adequate financial resources' (FG20/1).
- Significant further work is needed to ensure that the wind-down planning of firms is credible and operable, particularly in relation to liquidity and cashflow modelling, intra-group dependency and wind-down trigger calibration.
- Firms should consider the impact liquidity needs in wind-down have on their assessment of resource adequacy, their risk appetite and point of non-viability.
- Testing the outcomes of wind-down planning is the best way of showing the firm's Board/ governing body, as well as the FCA that the plan and process is credible and operable.
The FCA encourages all firms to review the WDPG and FG20/1, in addition to the observations, and consider whether any changes need to be made to their wind-down planning processes. The FCA may consider the observations when reviewing firms' wind-down plans in the future.
Capital Markets and Asset Management
The FCA published its first portfolio letter (PDF 112KB) and supervision strategy for custody and fund services firms, including firms acting as third-party custodians, depositaries, and administrators.
The FCA expects CEOs to consider and discuss the contents of the letter with their firm's board and to agree on any action needed to meet the FCA's requirements. The FCA's five priorities are:
- Operational resilience and cyber.
- Protection of Custody Assets and Money (CASS).
- Depositary oversight.
- Speculative and illiquid investments.
- Market and regulatory changes (in particular the Investment Firms Prudential Regime).
Separately, the FCA published a CP to address the potential harm caused by UK authorised funds' exposure to assets affected by Russia's invasion of Ukraine and subsequent sanctions.
The proposed approach would allow Authorised Fund Managers (AFMs) to structure a fund differently using separate new classes of units known as "side pockets". Side pockets would hold certain affected investments and separate them from the fund's other investments, potentially reducing the challenges associated with investors entering and leaving impacted funds and allowing some funds to end their current suspension of dealing. The FCA set out proposals on various topics such as the factors AFMs would need to consider before creating a side pocket, changes to fund documentation and disclosures, informing investors about the changes, and on costs and charges.
The FCA notes that the proposed rules are a limited emergency measure and it is not considering allowing the wider use of side pockets in authorised funds. The CP had an unusually short consultation period and closed on 16 May 2022.
In a joint statement, UK regulators including the Office of Financial Sanctions Implementation (OFSI), the FCA, and the BoE, reiterated that sanctions do not differentiate between crypto-assets and other forms of assets. All financial services firms — including the crypto-asset sector — are expected to play their part in ensuring compliance with sanctions.
Innovation in financial services is reliant on access to high quality data to be able to test and build the next generation of products and services. However, financial data is subject to strict data privacy laws. 'Synthetic' data is a privacy-preserving technique that could open up more opportunities for data sharing by generating statistically realistic but 'artificial' data. The FCA launched a 'call for input' to understand industry views on the potential for synthetic data to support innovation whilst appropriately considering potential limitations and risks.
The PSR, HMT, the Competition and Markets Authority (CMA), and the FCA issued a joint statement on the future of Open Banking. This complements the CMA recommendations for the future oversight and governance of Open Banking to support the transition from the Open Banking Implementation Entity (OBIE) to its successor. The statement emphasises the importance of any successor being overseen as effectively as the OBIE has been by the CMA since 2017. Echoing the CMA's recommendations, it sets out expectations of the successor. The statement also announced the creation of a new Joint Regulatory Oversight Committee (JROC), to be led by the FCA and the PSR.
The PSR's Annual Plan (PDF 3.88MB) sets out four strategic priorities which will underpin all of the PSR's work in 2022/23:
- Access and Choice — including activities relating to cash coverage and the regulation of new payment systems.
- Protection — the focus on protecting consumers from authorised push payment fraud (APP).
- Competition — including oversight of Pay.UK's implementation of the New Payment Architecture and introducing remedies to concerns raised by the card acquiring market review.
- Unlocking account-to-account payments — including work with the CMA, FCA and HMT on the future regulation of open banking (see below).
The PSR also published a non-confidential decision on anti-competitive conduct in the prepaid card services sector. This follows the conclusion in January 2022 of its investigation into cartels in the prepaid cards market and its decision to impose fines on five parties for breaking competition law. The investigation found that two cartels in the prepaid card market were in violation of the Competition Act. The PSR imposed fines totalling more than £33 million.
Retail Conduct updates
The FCA continues assertive action to protect consumers using, for only the second time, its Section 404 powers to for former members of the British Steel Pension Scheme (BSPS). This action was prompted by the finding that 46% of the advice to BSPS members to transfer out of the scheme was unsuitable. The proposed scheme is intended, as far as practically possible, to put BSPS members who suffered a loss because of unsuitable advice back in the position they would have been if the advice had been suitable and complied with FCA requirements.
The FCA published an updated Dear CEO letter (PDF 151KB) setting out the actions it expects impacted advice firms to take with immediate effect together with a policy statement outlining new temporary asset retention rules. These rules, which were not consulted upon, require firms to have sufficient funds to meet redress liabilities if they provided unsuitable advice to BSPS members.
The FCA has found some challenger banks (CBs) need to improve their financial crime controls, with many failing to conduct adequate customer due diligence (CDD) or have CDD procedures in place. The FCA also noted a rise in Suspicious Activity Reports (SARs) submitted by CBs, raising concerns about the adequacy of customer onboarding checks. The FCA expects all CBs to consider its findings and make enhancements where required. The review, conducted in 2021, was focused on CB that were relatively new to the market and offered a quick and easy application process. Whilst this predates sanctions against Russia, the FCA's statement emphasises that the main financial crime and money laundering controls assessed apply equally to firms' management of sanctions, specifically in respect of the risk that firms are utilised for sanctions evasion.
The FCA has sent portfolio letters to retail mortgage lenders (RML) (PDF 155KB), building societies (PDF 169KB) and non-bank mortgage lenders on continuing challenges around customer treatment and operational issues in the mortgage sector. The letters focus in particular on the FCA's expectations of the treatment of vulnerable customers and those in financial difficulty, the continued importance of responsible lending and firms' responsibilities towards customers with an interest-only product.
The FCA has also published a policy statement on changes to the PRIIPs regulation including new rules clarifying the scope of the regulation for corporate bonds, its views of certain products such as listed investment companies, and amendments to the Regulatory Technical Standards (RTS). These changes have been made to address the lack of clarity in the scope of the PRIIPS regime and concerns about misleading information being presented in the key information document (KID) for some products as a result of prescribed methodologies in the RTS. The transition period ends on 31 December 2022.
The FOS's 2022/23 Plans and Budget (PDF 1.01MB) reveal that its budget is set at £291.7m in order to implement changes to improve and run its service whilst also reducing case queues. The compulsory jurisdiction levy has increased by £10m to £106m and a reduction in funds raised from the voluntary jurisdiction (£700k rather than £760k) is forecasted. The FOS has reduced the number of free cases for individual firms and Group Account fee arrangements (from 25 to 3 and 50 to 15 respectively). The individual case fee remains £750. Finally, all PPI will be subject to the standard fees as the special case fee provisions are removed.
The Government and regulators continue their work to improve Defined Contribution (DC) pension schemes' value for money. The Department of Work and Pensions (DWP) is consulting on proposals to help pension savers benefit from more diversified investment portfolios, making it easier for DC schemes to invest in illiquid assets. The consultation also proposes to amend the restrictions on employer-related investments (ERI) for authorised master trusts with 500 or more active employers. Given the mixed response to the DWP's proposals in its November 2021 consultation, plans to exclude well-designed performance fees from the DC charge cap are on hold whilst the DWP considers next steps.
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: