UK Regulatory Radar

Welcome to the November edition of UK Regulatory Radar. 

In this month's issue, alongside our regular round-up, we take a closer look at the impact of new technologies, new entrants and new sustainability disclosure requirements on the regulatory landscape for financial services. We review the PRA's thematic feedback on firms' performance against supervisory expectations for climate-related risk and consider how UK regulators are preparing to deploy their new powers under the Financial Services and Market Bill. We also take a closer look at the impact of the Consumer Duty on wealth, fund, and asset managers. Recent publications from the FCA show its concern about the impact of the rising cost of living and wider economic conditions on consumers. 

These developments, alongside the authorities' continuing interest in developing a future regulatory framework that balances accountability with independence, make for a busy time for regulators and the industry.

To learn more about key regulatory challenges, visit 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.

2022 is the first year in which the Prudential Regulation Authority (PRA) has been actively supervising firms against its expectations on climate-related financial risk. It has now sent a Dear CEO letter to banks and insurers setting out thematic feedback on their performance against the expectations of Supervisory Statement 3/19. For further details, see our article above.

The Financial Conduct Authority (FCA) has issued its long-awaited consultation on Sustainability Disclosure Requirements (SDR) and investment labels. Whilst the majority of the proposed requirements will apply to fund, asset, and wealth managers, all FCA-regulated firms will be in scope of a new anti-greenwashing rule. For more details, see our analysis above.

The October Financial Policy Summary and Record published by the Bank of England's (BoE's) Financial Policy Committee (FPC) noted that:

• Global economic conditions have deteriorated further, and financial markets have been volatile. 
• The BoE responded to severe risks to UK financial stability with temporary and targeted purchases of UK government bonds. The BoE will work with The Pensions Regulator and FCA to ensure strengthened standards are put in place to increase the resilience of Liability Driven Investment Funds.
• Increases in the cost of living and interest rates are putting UK households and businesses under financial pressure. However, people have less debt (relative to income) and the share of high loan-to-value mortgages is much lower than before the global financial crisis. 
• UK banks remain strong and have considerable capacity to continue supporting households and businesses even if economic conditions get worse.

The PRA is consulting on proposals to update its supervisory expectations for firms undertaking an Internal Capital Adequacy Assessment Process (ICAAP) in relation to the risks from contingent leverage, and to introduce a new data reporting requirement for collecting data on trading exposures where these risks are most likely to arise. The proposals in the consultation paper would help the PRA and firms better understand the significance of these risks and manage them better should they materialise.

The PRA is also consulting on proposed amendments to the regulatory regime for credit unions. The proposals are relevant to all credit unions and would result in amendments to the Credit Union Part of the PRA Rulebook and a new Supervisory Statement (SS) `Supervising credit unions' which would supersede the existing SS2/16. The consultation aims to:

• Provide more flexibility for credit unions when investing their surplus funds where they meet specified requirements and consider applicable guidance.
• Set higher requirements and expectations for credit unions that pose greater risk to the PRA's safety and soundness objective (either due to their size or activities undertaken).
• Clarify the PRA's existing expectations in key areas.

For insurers, a recent speech by Sam Woods set out the PRA's plans to publish a revised assessment of Solvency II reforms `very shortly'. The PRA hopes to enable insurers to invest in a wider range of assets, strip unnecessary bureaucracy from the existing regime and ensure credibility by fixing weaknesses in the design and calibration of the Solvency II balance sheet. The PRA had previously expressed support for reforming the approach to risk margin, noting that it was too sensitive to interest rate movements, and also recognised the fact that existing rules around “Matching Adjustment” portfolios do not explicitly cover new asset classes that life insurers are investing in. The consultation on Solvency II reform closed at the end of July 2022.

The PRA has also issued a consultation on Solvency II reporting requirements. The PRA notes that it does not need some of the regulatory reporting data it currently receives, highlighting that some of the existing reporting templates were designed to facilitate member state comparison when the UK was part of the EU. Following the UK's withdrawal from the EU, the PRA is considering how to tailor reporting requirements to reflect the features of the UK insurance sector. Key proposals include removing a number of reporting templates, reducing the frequency of reporting from quarterly to either semi-annually or annually, and introducing proportionality thresholds. 

Nylesh Shah, the PRA Chief Actuary for General Insurance (GI) has written to Chief Actuaries of GI  firms and Lloyd's Managing Agents regulated by the PRA to share insights from the recent thematic review across the GI sector. The PRA expects high claims inflation to affect every GI firm, although the nature of the impact will vary depending upon the firm's business model and risk profile. The impact of a persistent spike in claims inflation may result in a material deterioration of solvency coverage for some firms unless mitigating actions are taken.

The FCA confirmed that the publication of 1- and 6-month synthetic GBP LIBOR will cease at 31 March 2023. It also reminded market participants that synthetic JPY LIBORs will cease permanently at end-2022. The FCA is still considering the appropriate date for the cessation of 3-month synthetic GBP LIBOR as well as whether it will decide to compel ICE Benchmark Administration (IBA) to produce USD LIBOR using a synthetic methodology for a limited period after mid-2023.

The results of the BoE's first supervisory stress-test of UK central counterparties (CCPs) showed that they were resilient to a severe market stress scenario and the simultaneous default of the two clearing member groups. The test was exploratory in nature, aiming to identify potential vulnerabilities or gaps in resilience. The findings will now be used in conjunction with feedback to the BoE's Discussion Paper on CCP supervisory stress-testing to help further develop and refine the CCP supervisory stress-testing regime which is due to be finalised in 2023.

The FCA's thematic review of effectiveness of governance in credit rating agencies (CRAs) found weaknesses in multiple CRAs. These included a diminished roles for UK Boards within global group structures, failures to meet basic Board composition requirements and the independence of INEDs, and poor practice in the operation of Boards (e.g., poor quality Board meeting papers and participation by members). The FCA has requested that all UK-registered CRAs consider the findings of the review and provide it with a Board-approved summary of the CRA's assessment of key risks relating to governance and a detailed of action plans, including timescales, by 30 January 2023.

As part of the Wholesale Markets Review, the FCA is consulting on new guidance on the regulatory perimeter for trading venues. Changes in technology and market structure have enabled a variety of new service providers to emerge, improving efficiency and choice. However, firms can sometimes be uncertain of the regulatory permissions they need. The FCA is not modifying the perimeter, which would require legislative change. Instead, it is seeking to clarify through guidance in its Handbook, the concept of a multilateral system and how this should be applied to specific types of arrangements in financial markets. The FCA is also seeking views on whether the trading venue regime can be made more proportionate for smaller firms. In the EU, ESMA is also in the process of updating its Opinion on the same subject.

The FCA also provided an update to the Department for Work and Pensions (DWP) regarding its work to address the recommendations of a UK task force on pension scheme voting implementation. The FCA updated on its work in three main areas: pension scheme trustees' "expressions of wish", asset managers' voting policies, and asset manager vote reporting. It revealed that supervisory work on ESG funds is already underway and that work to review asset managers' voting policies will begin shortly.

The PSR has made progress with its work aimed to give consumers better protection against frauds and scams:

• Confirming new rules extending Confirmation of Payee (CoP) coverage beyond the six largest banking groups, to approximately 400 payment service providers and,
• Consulting on proposals to reduce APP scams with measures including the mandatory reimbursement of victims by banks, in all but exceptional cases.  

The PSR has continued its work responding to the findings of the card acquiring market review with the introduction of new rules designed to help merchants understand the pricing elements of services, prompt shopping around, and make switching easier. It has also published  the finalised Terms of Reference for its card fee market reviews which aim to understand the rationale behind recent fee increases and whether they indicate the market is not working well.

The Government has also been concerned about card transaction fees, specifically the rise in the cross-border interchange fees and the impact on UK businesses, writing to Visa and Mastercard to request a justification.  In their responses, Visa and Mastercard argue that higher fees are justified by the greater risk of fraud in cross-border transactions, and the costs incurred by banks to prevent and detect such crime. They also point out that they do not benefit directly from fee increases, as it is a customer's card issuer, rather than the card payment system, who receive the additional revenue from interchange fees.    

The FCA's stakeholder engagement on the Consumer Duty has begun in earnest with the addition of an information for firms page to its Consumer Duty webpages to help firms implement the Duty and it hosting of sector specific webinars. The web page provides detail on areas where the FCA has received queries. Currently this includes details on Consumer Duty Board Champions and the definition of closed products. Whilst the webinars largely comprised a reiteration of the Duty and guidance, they also provided some insight into the FCA's supervision strategy where they intend each portfolio to have their own Consumer Duty Strategy. The FCA expects there to be a high degree of commonality however, this approach will also give them the ability to specific about concerns within each portfolio of different business models.  

With the October Consumer Duty implementation plan deadline now passed, the FCA is evaluating the plans of larger firms and will feedback directly to them on its assessment.  Wider communications on lessons learned from this work via a Dear CEO letter will follow shortly.  In the coming weeks, the FCA will launch a survey aimed at gaining an understanding of firms' progress implementing the Duty.

The FCA has published the findings of its Borrowers in Financial Difficulty project which found examples of firms delivering good outcomes for customers, but also identified others where improvements were required. Alongside case studies and examples of good and poor practice, the report highlights FCA expectations for all lenders including that firms encourage consumers to engage earlier, offer tailored support, ensure any fees charged are fair and, where appropriate, firms consider reducing, waiving or cancelling fees. These findings, and FCA expectations are particularly pertinent given the likelihood of the continuing rising cost of living resulting in more consumers needing the help of their lenders. The FCA expect all lenders to learn the lessons from the findings in order to effectively support those in financial difficulty 

In its latest portfolio letter, the FCA outlined its view of the key harms high-cost lending firms pose outlining in this sector and its expectations. The key harms identified include sludge practices, affordability and relending, forbearance and complaint handling. As with other recent portfolio letters, the backdrop is the impact of the cost-of-living crisis. The letter also highlights the requirements of the Consumer Duty, and its expectations that the focus on acting to deliver good outcomes to be at the centre of high-cost firms' strategy and business objectives.

In its latest step to protect customers access to banking services, the FCA published updated guidance, clarifying its expectations of firms when they are considering branch closure or the conversion of free-to-use ATMs (cash machines or cashpoints) widening the scope to include partial closures. These changes have been made in response to the perceived failures of the existing guidance to slow the pace of branch closures.    

The impact of branch closures and free-to-use ATMs on the public's access to cash and vital banking services, particularly among vulnerable populations and in rural communities, is also a concern for the Government.  These concerns have driven it to propose new powers in the Financial Services and Markets Bill to ensure the continued availability of withdrawal and deposit facilities in local communities across the UK.

In October 2022, the FCA published the outcomes of its business interruption (BI) claims review. Whilst identifying good practice where insurers put customers at the heart of the claims process, there were key areas where firms did not meet FCA expectations. These included the handling of claims from vulnerable customers, policy wording record keeping, the ability to identify claims process delays. The report also highlights FCA expectations for claims handling around the cost of living and the Consumer Duty.

In October, The Pensions Regulator (TPR) published its enforcement strategy,  consolidated enforcement policy, and updated prosecution policy. TPR view these documents as key drivers in implementing its long-term corporate strategy, focussing on its work to address issues around pension security. The enforcement and prosecution policies now reflect the new powers given to the regulator under the Pensions Schemes Act 2021 (PSA 21):

• Recourse to new criminal and civil penalties for breaches of pensions law (including three new criminal offences for the most serious breaches).
• Enhanced information gathering powers.
• New notifiable events that are applicable with certain corporate transactions.
• Two new tests allowing TPR to impose contribution notices.

The new enforcement strategy provides insight into the framework TPR applies when selecting cases for enforcement action.

The FCA confirmed new rules and guidance requiring FCA regulated pension providers to connect and supply information about personal and stakeholder pensions to pensions dashboards. Providers will be required to (1) complete connection to the digital architecture operated by the pensions dashboard programme (2) be ready to receive requests to find pensions, and search records for data matches (3) be ready to return pensions information to the consumer's chosen pensions dashboard. The rules must be implemented by 31 August 2023. These rules implement a requirement placed on the FCA by PSA 21.  

The FCA's Annual Public Meeting provided an opportunity to hear the FCA's priorities and its response to a number of topics raised by the audience. In their opening remarks Richard Lloyd, interim FCA Chair and Nikhil Rath, highlighted FCA priorities to

• Help consumers with the cost-of-living crisis.  
• Tackling fraud by regulated firms calling on the Government to make fraud prevention and detection a national priority. 
• Maintain market integrity through economic turbulence.
• Make Buy Now Pay Later safer for consumers.

There was a wide-ranging Q&A session covering topics such as the Consumer Duty, Crypto asset regulation, financial advice, authorisations backlog, the FCA's transformation and accountability.

In October, the Bank of England, PRA and FCA published a joint Discussion Paper (DP) on the regulation of Artificial Intelligence (AI) and Machine Learning (ML) in UK financial services. The DP follows the final report of the AI Public Private Forum in February 2022. The regulators are seeking feedback on whether AI can be managed through the existing regulatory framework or whether an entirely new approach is needed. For more details, see our article above.

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: