Regulatory Update November 2023

In this issue we cover:

• BNPL Enhanced protection for consumers
• Guidance on crypto marketing
• FCA pursuing digital innovation
• Risk mitigation of Deposit Aggregators
• AFMS incorporating ESG into Guiding Principles
• Remuneration policy considerations
• FATF crowdfunding awareness
• Anti-fraud controls and complaint handling
• Sector harms in wealth management and stockbroking
• Spotlight on FCA’s IFPR: Decoding Key Observations

 

BNPL Enhanced protection for consumers
The Financial Conduct Authority (FCA) has secured changes to improve the fairness and clarity of contract terms for buy-now-pay-later (BNPL) services. This move comes as the FCA’s research shows a significant increase in BNPL usage in the UK, with 27% of adults using it in the past six months. The study also found a link between frequent BNPL use and financial difficulties. While the FCA does not directly regulate BNPL products, it has used its powers under the Consumer Rights Act 2015 to influence changes in the sector, including modifications by PayPal and QVC to make their terms more understandable and fair. The FCA emphasises the need for consumer protection, especially for vulnerable users.

Guidance on crypto marketing

The Financial Conduct Authority (FCA) has issued new guidance to help crypto firms comply with updated marketing rules, particularly for high-risk investments. Lucy Castledine, FCA’s Director of Consumer Investments, highlights the role of industry feedback in shaping these guidelines. The FCA will continue to update its guidance in response to the evolving cryptoasset sector and regulatory environment. Despite these new rules, the FCA warns that cryptoassets remain high-risk, advising consumers to consult its Warning List before investing in order to identify unauthorised firms and make informed decisions.

FCA pursuing digital innovation
The Financial Conduct Authority (FCA) is collaborating with international regulators, including the Monetary Authority of Singapore (MAS), the Financial Services Agency of Japan (FSA), and the Swiss Financial Market Supervisory Authority (FINMA), as part of MAS’s Project Guardian. This initiative focuses on exploring the use cases of fund and asset tokenisation and decentralised finance. The project’s goal is to exchange knowledge and assess the advantages, regulatory hurdles, and practical applications of tokenising assets and funds. Sarah Pritchard, the FCA’s Executive Director of Markets and International, expressed enthusiasm for joining Project Guardian, noting the significant potential of distributed ledger technology in the UK’s asset management sector, which is the world’s second-largest. The FCA is eager to collaborate with global partners to explore the market benefits and regulatory challenges associated with asset and fund tokenisation.

Risk mitigation of Deposit Aggregators

The Prudential Regulation Authority (PRA) has sent a letter to Chief Financial Officers outlining steps to mitigate risks associated with Deposit Aggregators (DAs), who act as intermediaries between savings account providers and customers. The guidance focuses on three areas: ensuring compliance with the Financial Services Compensation Scheme, managing liquidity risks including potential rapid outflows, and handling third-party risks in line with PRA’s expectations for outsourcing and risk management. Firms are encouraged to apply these recommendations to their current and future dealings with DAs.

AFMS incorporating ESG into Guiding Principles

The Financial Conduct Authority (FCA) is set to evaluate how Authorised Fund Managers (AFMs) are incorporating its Guiding Principles into their environmental, social, and governance (ESG) and sustainable investment funds. This assessment aims to ensure that AFMs align with the growing investor interest in these funds and meet investor expectations. The FCA’s Guiding Principles are designed to enhance transparency, consistency, and comparability in the ESG investment sector. The evaluation will involve desk-based reviews and interactions with selected AFMs. The FCA will use the outcomes of this assessment to guide future supervisory and regulatory actions, emphasising its commitment to fostering clarity and reliability in ESG and sustainable investment practices.

Remuneration policy considerations

On October 31, 2023, the Financial Conduct Authority (FCA) sent a letter to the chairs of remuneration committees at investment firms, highlighting key aspects for their remuneration policies. These include adjusting the balance between fixed and variable pay in line with recent policy changes, aligning pay structures with the Consumer Duty, promoting a culture of accountability, ensuring diversity and non-discriminatory pay practices, and integrating sustainability goals into remuneration strategies. The FCA is seeking feedback on the implementation of these guidelines.

FATF crowdfunding awareness

On October 31, 2023, the Financial Action Task Force (FATF) released a report on how terrorists use crowdfunding platforms for financing. The report identifies four main abuse methods: exploiting humanitarian, charitable, or non-profit causes; using dedicated crowdfunding platforms or websites; leveraging social media and messaging apps; and combining crowdfunding with virtual assets. It highlights challenges in detecting and preventing such financing, such as anonymising techniques and insufficient training for identifying suspicious activities. The FATF suggests best practices to counter these threats, including enhanced information sharing, collaboration between public and private sectors, and implementing risk-based measures. The report also provides a list of risk indicators to help in spotting suspicious crowdfunding activities.

Anti-fraud controls and complaint handling

On November 7, 2023, the Financial Conduct Authority (FCA) released findings from its review on anti-fraud controls and complaint handling in firms, with a specific focus on Authorised Push Payment (APP) Fraud. The FCA highlighted both effective practices and significant deficiencies. Key issues included a lack of focus on positive consumer outcomes, management decisions prioritising firm finances over customer impact, inadequate support for fraud victims, poor complaint handling, unclear and sometimes accusatory communication in decision letters, and insufficient consideration of customer vulnerability in fraud claims and complaints. The FCA emphasised the need for payment firms to prioritise customer needs in preventing APP fraud and other types of fraud, and to continually assess and improve their fraud risk identification and defence strategies.

Sector harms in wealth management and stockbroking

On November 8, the Financial Conduct Authority (FCA) sent a Dear CEO letter to the wealth management and stockbroking sector, emphasising two supervisory priorities: preventing financial crime and adhering to Consumer Duty outcomes. The FCA expects firms to thoroughly understand and manage financial crime risks, maintain effective anti-money laundering systems, and ensure compliance heads are skilled and independent. For Consumer Duty compliance, firms should align products with consumer needs, manage identified risks, test consumer understanding of financial promotions, justify complex investments, and assess product value. The FCA warns of more targeted and assertive supervision, including unannounced visits and interventions, and reminds firms to report any significant issues under Principle 11.

Spotlight on FCA’s IFPR: Decoding Key Observations

Following an FCA review, primarily focusing on assessing firms’ capital and liquidity adequacy, this included firms’ wind-down planning strategies under the ICARA framework. Below are highlighted key findings from the review:

1. Firms inadequately focused on cash flow and liquidity challenges, resulting in a subpar evaluation of their liquid asset needs. This situation endangered them with the possibility of cash depletion in stressful scenarios, which could lead to the collapse of the firm.
2. In the majority of firms reviewed, the setup of internal intervention mechanisms was sub-optimal, potentially delaying critical actions needed to avert damage, particularly in cases of firm failure.
3. In the process of planning for a potential wind-down, some firms failed to fully account for the implications of being part of a larger group. This oversight meant that individual firms within these groups may not be fully prepared for a possible collapse.
4. A notable deficiency was observed in the way some firms implemented capital models for managing operational risk, casting doubt on their capacity to allocate adequate resources for harm prevention.