UK Regulatory Radar

Welcome to the October edition of UK Regulatory Radar.

There is a return-to-work atmosphere with regulation developing on many fronts after a quieter summer period. The Financial Services & Market Bill (FSMB) is now being scrutinised by MPs and, in this month's issue, we look in more depth into three areas where changes are likely to be introduced through the Bill. Regulators are exploring ways to address their concerns around the resilience of third parties (including cloud service providers) that provide critical services to financial services firms. At the same time, regulators and policymakers are excited by the efficiencies that distributed ledger technology could bring to financial services and are establishing frameworks to allow its use. Our articles below look at developments in both of these areas in the EU and the UK.

The FSMB also proposes changes to the objectives and accountability of regulators. The PRA's recent discussion paper picks up this theme and outlines how it intends to operate following the proposed reforms. This is likely to be the first in a series of consultations on the future approach to policy.

Focusing on current challenges, the FCA has created a new, standalone cost of living section on its website bringing together relevant publications, letters, updates, and speeches which highlight its expectations of firms' role in supporting consumers facing rising living costs. This theme is also reflected in the FCA's annual letter to the chairs of remuneration committees of large firms which sets out the areas that the chairs are expected to consider when determining remuneration for the year. The letter serves as a useful proxy for the FCA's overall supervisory priorities with its focus on culture & accountability, the new Consumer Duty, operational resilience, ESG, and Diversity & Inclusion.

As policymakers and regulators look to encourage retail investors to diversify their portfolios into wider asset classes to aid economic recovery, we look at the FCA's updated priorities and recent developments in the evolving alternative asset management regulatory framework.

Finally, we are delighted to announce the launch of the KPMG Regulatory Barometer which aims to help firms identify the key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change. The first edition is now available here and we welcome your feedback.

The FCA reported on progress made on the requirements of PS20/17, under which premium listed companies must make TCFD-aligned disclosures on a comply or explain basis. The report should be read in conjunction with the FRC's analysis, which provides best practice examples. Overall, the number of companies making disclosures that were either partially or mostly consistent with the TCFD framework increased significantly compared with 2020. The most common reporting gaps were in respect of the more quantitative elements of the TCFD's recommendations such as scenario analysis, and metrics and targets. The FCA notes that further work is required to build on, and complement, the TCFD's recommendations by introducing a common international reporting standard. The FCA expects the UK Government to consult in due course on a mechanism to adopt the ISSB's standards in the UK. The FCA will consult separately on adapting the existing TCFD-aligned climate-related disclosure rules for listed companies to reference the final ISSB standards. It will also likely consult on moving from the current 'comply or explain' compliance basis to mandatory disclosure requirements for in-scope listed companies. 

Applications have now closed for external experts to join the FCA's new ESG Advisory Committee. The Committee will help to execute the FCA's ESG-related responsibilities, including meeting the Government's expectation that it “has regard' to the UK's commitment to achieving a net zero economy by 2050, when considering how to advance and achieve its objectives and functions. The Committee is expected to meet for the first time in Q4 2022, and quarterly thereafter.

The Climate Financial Risk Forum (CFRF), has published minutes of its latest meeting. Members agreed the importance of ensuring inter-linkages between the Working Groups on scenario analysis, disclosure, data and metrics, and the transition to net zero. The Forum also discussed how it can support the industry through current external challenges and in both near- and longer-term planning around climate-related financial risk and greenhouse gas emission targets. The Forum supported the climate-related disclosure requirements proposed by the International Sustainability Standards Board (ISSB) but noted the importance of interoperability of baseline standards across jurisdictions.

The BoE has published details of the scenario for the 2022 Annual Cyclical Scenario (ACS) stress test, returning for the first time since 2019. The test will be used to assess bank balance sheets and the resilience of the UK banking system.

Key elements of the scenario are:

• UK GDP falls by 5% over the first year of the scenario
• World GDP falls by 2.5% over the first year of the scenario
• UK unemployment more than doubles to a peak rate of 8.5%
• Residential property prices fall by 31% over the first year of the scenario
• UK commercial property prices fall in the scenario by 45% from start to trough
• Inflation peaks at 17% in 2023 and remains persistently high ― averaging around 11% for the first three years of the scenario
• Bank Rate is assumed to rise rapidly to a peak of 6% in early 2023 before reducing gradually to under 3.5%
• Interest rates rise to 4.7% in the Euro-area and 6.5% in the United States by beginning of 2023

This is undoubtedly a more severe scenario than seen previously, reflecting very challenging economic conditions. The eight participating banks and building societies will again be Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, Standard Chartered and Virgin Money UK. However, this is the first time that the ring-fenced subgroups of Barclays, HSBC, Lloyds Banking Group and NatWest Group will also be assessed on a standalone basis. ACS results will be published in summer 2023 and will inform banks’ capital buffers.

The Chair of the UK Treasury Sub-Committee on Financial Services Regulation has written to the PRA concerning its proposed “strong and simple” prudential framework for smaller banks. The Sub-Committee has requested the PRA's views on increasing the proposed balance sheet ceiling from £15bn to £25bn. It has also drawn attention to the risk that thresholds and cliff-edges can create barriers to growth and has asked the PRA for its views on how firms would transition between layers within the Framework.

The PRA's Discussion Paper on its future approach to policy sets out how it intends to operate following the reforms proposed under the FSMB. The DP notes that the FSMB proposals signal a “move back to a more British style of regulation based on the Financial Services and Markets Act 2000 (FSMA), with most of the technical rules made by operationally independent regulators subject to a revised accountability framework”. Wider rule-making responsibilities will enable:

• The PRA to be more responsive when making policy & adapt to changes in the external environment 
• Policy-making to remain proportionate and suited to the circumstances.
• More flexibility to tailor regulation to the UK

However, these changes will require greater transparency and explanation of judgements, for example through stakeholder engagement and a new PRA Rulebook.

The PRA seeks feedback on the proposed approaches to its objectives and regulatory principles, international engagement and collaboration, the policy cycle and the PRA Rulebook by 8 December.

Referencing the FSMB's proposals to amend the Credit Unions Act 1979, the PRA is consulting until 21 December on proposed changes to its regulatory regime for Credit Unions. The changes relate largely to amending and strengthening the regulatory regime in order to address the risks posed by larger, more complex credit unions and would take effect once final policy is published, after the Bill has been passed.

The FCA has provided two updates on its investigation of Link Fund Solutions Ltd (LFS) ― the authorised fund manager of what was the “LF Woodford Equity Income Fund”. As well as imposing conditions on the proposed takeover of the wider Link Group by a third party, the FCA updated that its investigation is now complete and it has issued LFS a draft warning notice. The FCA stated that it has proposed a penalty of £50 million, and its current view is that the redress payment could be up to £306 million. However, this is not a final decision and LFS will have the opportunity to challenge the FCA's findings and the proposed enforcement action. The FCA's wider investigations are ongoing.

The FCA's latest quarterly consultation (CP22/17), proposes amendments to the overseas funds gateway to the UK general public (the section 272 FSMA regime). The proposed changes would amend the FCA's handbook largely to reflect changes already made to the regime by the FS Act 2021 and would take effect from 1 January 2023. They would narrow the scope of notifications to be made by fund managers to the FCA to only “material alterations” to funds (as opposed to any proposed alterations), allow FCA staff to decide whether to exercise the censure power in FSMA, and make small adjustments to accurately reflect the UK's position outside the EU. The FCA plans to consult on the new recognition gateway ― the “Overseas Funds Regime” ― in due course.

In its latest portfolio letter, the FCA outlined its supervisory priorities for benchmark administrators as: disclosure, quality of data and data controls, operational resilience, oversight and governance, and competition. It is particularly concerned about the quality of ESG and crypto-asset benchmarks. The letter also emphasised the need for benchmark administrators to have robust governance and oversight of inputs into benchmarks from third parties.

The FCA has also issued a portfolio strategy letter to trade and securitisation repositories. The main supervisory concerns stem from the small number of repositories in the market leading to operational resilience risk in the event of outages, and lack of competition potentially insufficiently incentivising repositories to provide a high quality of service to their clients or compete on price. The FCA has also observed variations in the effectiveness of the systems and controls that repositories employ to ensure complete and accurate reports are provided to UK authorities.

Preparations continue for the cessation of USD LIBOR, with the Bank of England publishing its final policy updating the derivatives clearing obligation (DCO) from 1 October 2022 to include overnight index swaps (OIS) that reference SOFR. Contracts referencing USD LIBOR will be removed from the DCO on 24 April 2023 to coincide with CCPs contractual conversions of these contracts.

The FCA also published a statement encouraging market participants to continue transition of LIBOR-linked bonds. The FCA highlights that the synthetic JPY and GBP LIBOR rates that some issuers have relied upon will be ceasing at end of 2022 and likely end of 2023 respectively, and urges issuers to schedule consent solicitation processes for conversion to fair alternative rates.

The PSR has published a summary of discussions from its roundtables with issuers, acquirers, and merchants on the scope and approach of its market review on cross border interchange fees. The PSR is currently consulting on the Terms of Reference (ToR) for this review and will use these contributions alongside written submissions to the consultation to help inform the scope and approach of the planned market review. 

The PSR also published its response to the PSR Panels' report on Digital Payments Initiatives (DPI). The DPI was commissioned in response to last year's Access to Cash Working Group's recommendation for further work to enable digital payments. The PSR welcomes the report's conclusions ― it has considered and responded to each of the Panel's recommendations, and identified areas where the PSR is seeking consumer and broader stakeholder views. Actions will be incorporated into the PSR's work programme where identified.

Finally, the Treasury Committee (TC) published its correspondence to Visa and Mastercard requesting a justification for recent increases in card transaction fees. This comes in response to rises in cross-border interchange fees on purchases made by UK consumers to European businesses. Fees increased from 0.2 per cent to 1.15 per cent for debit cards and 0.3 per cent to 1.5 per cent for credit card transactions. The TC is concerned about the impact of the increases on businesses, many of whom are already dealing with rising inflation and other cost pressures.

The FCA has reiterated the importance of ensuring that financial promotions are clear, fair and not misleading. It has warned Buy Now Pay Later firms about a number of misleading adverts, citing examples where the adverts lacked balance and emphasised product benefits without fair and prominent warnings of risks to customers, such as:

• The risk of taking on debt that they cannot afford to repay  
• The consequences of missed payments  
• Any other adverse consequences such as the impact on the customer's credit file   
• Information about when charges become payable

The FCA has also published a policy statement strengthening its financial promotion rules for high risk investments and firms approving financial promotions. The approach supports the FCA's goal of reducing the number of people who invest inappropriately in high-risk products. Rules related to risk warnings for financial promotions of high-risk investments come into effect from 1 December 2022. All other rules will apply from 1 February 2023.

The FCA has launched a paper highlighting a range of recommendations and potential remedies aimed at giving leaseholders greater protections from high insurance prices, and ensure the buildings insurance market operates better for them. Some of the potential remedies proposed include the creation of a cross industry pool to limit risk for individuals insurers and reduce the cost to leaseholders, and making leaseholders' customers of buildings insurance. The knock-on effect of the latter would extend the protections offered under the Consumer Duty to leaseholders.

The FCA has confirmed that its emergency asset retention rules now apply to 101 firms which provided pension transfer advice to former British Steel Pension Scheme (BSPS) members. 26 of these firms are now subject to a full asset restriction. The rules are designed to stop advice firms avoiding their liabilities before they are sold or close down.

On the same broad topic, the FCA published a consultation on redress calculations for unsuitable pension transfer advice as a result of a review of the underlying methodology. Whilst the review found that the approach remained appropriate, the FCA has proposed updates to help ensure the guidance continues to reflect actuarial best practice and is responsive to consumers' individual circumstances. It also aims, as far as possible, to reduce the impact of market volatility on calculations.

The FCA has published a consultation on updates to the Sourcebook of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). The FCA intends the updates to drive improvements in how professional body supervisors (PBSs) reduce money laundering in the sectors they oversee.

The FCA has confirmed new rules to make authorised financial firms more responsible for their appointed representatives (ARs). The changes have been made to improve the management of ARs by their Principals, ensuring that they provide the oversight needed to avoid consumers being mis-sold or mis-led and to make sure markets can operate safely and fairly. Alongside these changes, the FCA will conduct targeted supervision of principal firms across the whole financial services sector, using improved data and analytical tools to focus its work. It is also increasing scrutiny of firms applying for authorisation and as they appoint ARs.

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: