Regulatory Update Mar 2023

In this issue we cover:

2023 Regulatory Initiatives Grid published

FCA seeks views on updating asset management regulation

Dual-Regulated Firms Remuneration Code

Putting customers first helps innovation

FCA to tackle competition problems in trade data market

FCA Perimeter Report

FCA to collect economic crime levy from July

JMLSG Part II Guidance update

FCA’s Fast-Growing Firms multi-firm review

FCA Temporary Permissions Regime

 

2023 Regulatory Initiatives Grid published

The 2023 Regulatory Initiatives Grid, setting out the approximate timelines for upcoming regulatory changes, has been released. Of the 144 initiatives contained in the grid, 41 (28%) are new. Most of the new initiatives are multi-sector (11) or relate to banking, credit and lending (10), or payments and cryptoassets (10), which largely reflects the combined impacts of the Edinburgh Reforms, and the forthcoming Consumer Duty.

The Grid contains environmental, social and governance (ESG), and climate-related initiatives, including an FCA discussion paper, an updated UK Green Finance Strategy, a Regulatory Initiative from The Pensions Regulatory and a consultation on implementing International Sustainability Standards Board disclosure standards within the FCA listing or transparency rules.

The review of the Senior Managers and Certification Regime is also scheduled to commence with a Call for Evidence from HM Treasury and FCA and PRA Discussion Paper due in Q1 2023.

 

FCA seeks views on updating asset management regulation

The FCA recently published a discussion paper (DP23/2) on updating the UK regime for regulating funds and asset managers. It seeks views on what regulatory change could help the UK’s asset management industry innovate, better support the investors it serves and boost competition.

The FCA explains that if it changes asset management regulation, the changes must:

• better meet the needs of investors, both domestic and international, and retail and professional
• enable technological development, innovation, and better use of data
• are consistent with international standards and take account of rules in other jurisdictions, so that firms can continue to operate efficiently on a global basis
• are effective and proportionate, simplifying and standardising requirements where possible.

 

Dual-Regulated Firms Remuneration Code

On 27 February 2023, the FCA updated its Remuneration Code (SYSC 19D) webpage by adding a new section titled: “Publication of PRA (CP5/23)Remuneration: Enhancing proportionality for small firms”.

CP5/23 outlines proposed changes to the application of proportionality for dual regulated firms, linked to the PRA’s Strong and Simple framework proposals. The FCA confirmed that they are working with the PRA to consider the changes that may be required to their own rules and the timing of these.

 

Putting customers first helps innovation

Sheldon Mills, FCA Executive Director, Consumers and Competition, delivered a speech on Consumer Duty implementation in which a key theme was the potential benefits for the industry as a result. He highlighted how some firms are discovering unexpected benefits from their implementation programmes, as the process of reviewing all products, processes and systems from a purely customer-centric perspective has led to new viewpoints and subsequently new innovations.

The speech also gave indication of the FCA’s plans to support the industry in Consumer Duty implementation. These include a survey of c.600 smaller firms to investigate their preparedness, and separate multi-firm work within some specific sectors to review implementation plans.

 

FCA to tackle competition problems in trade data market

The Financial Conduct Authority (FCA) has published its trade data findings report which suggests that the market currently does not work as effectively as it could in allowing effective competition and innovation.

Key findings of the FCA’s report include:

• some trading markets are concentrated among a few firms so there’s little choice for users not to buy this important data, and switching supplier is not an easy option
• the way data is sold can be complex, making it harder for data users to make informed choices
• complexity and limited choice result in additional costs to data users – these are likely to be passed on to UK retail investors and savers
• despite rules in place requiring delayed data to be distributed for free, many users end up with little choice but to pay for data.

Alongside its findings on competition in the market for trade data, the FCA has launched a market study. This new wholesale data market study will investigate potential competition problems in the markets for benchmarks, credit ratings data and market data vendor services and whether they could be resulting in higher costs for investors, less effective investment decisions, and preventing new firms entering these markets.

 

FCA Perimeter Report

On 6 March 2023, the FCA published its annual perimeter report, which sets out what does and does not fall within the FCA’s scope of regulation.

The key points from this report include:

• SMCR: the Financial Services and Markets Bill contains provisions for extending the SMCR to recognised exchanges firms and credit rating agencies firms, but not to payments and e-money firms.
• the Overseas Persons Exclusion: the FCA is working with HM Treasury to consider whether the current operation of the regime suitably balances market integrity and consumer protection, the promotion of competition, and openness whilst protecting financial markets’ resilience;
• Cryptoassets: current activities are outside of the FCA’s regulatory perimeter but the FCA is working with HM Treasury to consider whether regulatory or legislative change is needed to build a future regime for cryptoassets; and
• Online Safety Bill: the FCA will work closely with the Government and regulatory partners on the Online Advertising Programme and as the Bill continues its legislative journey.

 

FCA to collect economic crime levy from July

The FCA will begin collecting an annual economic crime levy that will apply to anti-money laundering-regulated businesses from July 2023. To ensure firms are charged the right amount, all impacted firms must submit their data via the new Reg Data Report (FIN074).

 

JMLSG Part II Guidance update

On 5 March 2023, the Joint Money Laundering Steering Group (JMLSG) revised its guidance related to:

• wealth management (sector 5);
• financial advisers (sector 6);
• consumer credit providers (sector 11A);
• private equity (sector 13); and
• cryptoasset exchange providers and custodian wallet providers (sector 22).

Which are awaiting ministerial approval, following submission to HM Treasury.

 

FCA’s Fast-Growing Firms multi-firm review

On 10 March, the FCA published a new multi-firm review focusing on FGFs, specifically CFD providers, wealth managers and payment services providers. Firms that the FCA has identified as being an FGF should take full notice of this review.

For firms not considered part of the FGF group, the feedback is also relevant, and we have referenced a few key takeaways which should be considered when reviewing your firm’s ICARA.

1. Risk management– Firms should regularly update their risk management frameworks, including risk appetite and limit frameworks. These risks must be regularly updated as the business changes, it is exposed to new threats, or others fall away. This includes reviewing the resourcing needs of risk, compliance, and audit functions. In addition, firms should consider their second and third lines of defence, especially where these activities are outsourced.
2. Assessment of adequacy of financial resources– Firms should be conducting stress testing and scenario analysis, which is proportionate to the complexity of the business and correspond to its growth. If the firm cannot effectively forecast its liquidity and capital needs, this will be a concern for the FCA. The lack of adequate capital and liquidity needs can disrupt the ability of the business to operate as a going concern in times of stress. In addition, failing to assess financial resources adequately can lead to a penalty of a governance scalar in individual capital guidance.
3. Wind-down plans– Firms should account for a reasonable wind-down period and not underestimate the cost or time to carry out an effective wind-down. Does your wind-down plan effectively prepare the firm and its senior management to take timely and appropriate action? Are the triggers and early warning indicators effective in identifying stressed events? Are the stress tests and reverse stress tests realistic?

 

FCA Temporary Permissions Regime

On 7 March 2023, the FCA updated its temporary permissions regime (TPR) webpage, noting that the TPR ends on 31 December 2023 and firms that wished to apply for full UK authorisation should have done so by 31 December 2022. The FCA stated that they expect most applications will be determined by the end of June 2023, although the exact timeframe for each application will depend on a number of factors. These factors include the firm’s landing slot (i.e. when the firm applied) and the complexity and quality of the application. Firms seeking an update on their application can contact their case officer.

As a reminder, the FCA stated that they expect firms without a valid reason for not seeking full authorisation to voluntarily apply to cancel their temporary permission and either enter the Financial Services Contracts Regime to run-off their UK business (if eligible) or leave the UK regulatory perimeter. The FCA reiterated that they intend to take action to cancel the temporary permission of firms which do not take these steps voluntarily.