Regulatory Update January 2024

In this issue we cover:

• Sanctions Actions
• Reforms to the Financial Promotions Regime
• Designation of Critical Third Parties
• Consumer Tech Becoming a Force for Good
• FCA Sets out to Curb Greenwashing
• FCA Moves to Simplify UK Listing Rules

Sanctions Actions

In response to increased sanctions following Russia’s invasion of Ukraine, the Financial Conduct Authority (FCA) underscores the need for robust sanctions compliance systems within UK financial firms. A review of 90 firms highlighted the importance of proactive risk planning and tailored screening tools for effective sanctions management. Key areas for improvement identified include:

1. Strengthening sanctions knowledge at the senior management level.
2. Ensuring policies are in full alignment with UK-specific sanctions requirements.
3. Reducing dependency on third-party screening tools by enhancing internal oversight and control measures.

The FCA observed common delays in sanctions screenings and customer due diligence, often attributed to resource constraints and outdated systems. Financial firms are urged to promptly report any potential sanctions breaches and to participate actively in the FCA’s ongoing compliance reviews. It’s essential that firms continually refine their compliance frameworks to stay abreast of changing sanctions regulations and to leverage in-house expertise effectively.

Reforms to the Financial Promotions Regime

Under the Financial Services and Markets Act 2023 (FSMA 2023), the UK has updated its financial promotions regulatory structure. As outlined in Policy Statement PS23/13, there’s a new compulsory gateway for authorised firms seeking to approve financial promotions from non-authorised entities. This requirement comes into force on 7 February 2024.

To comply, authorised firms must secure FCA approval during the application window from 6 November 2023 to 6 February 2024. After this deadline, only those who have applied or received approval can legally approve promotions. Firms missing the deadline must cease relevant activities until approval is granted.

Moreover, as of 8 October 2023, specific cryptoassets fall within the financial promotions regime, subject to FCA oversight. Firms granted a deferral must adhere to the direct offer financial promotion rules by 8 January 2024. Compliance with these new regulations is critical for maintaining lawful financial promotion activities in the UK market.

Designation of Critical Third Parties

HM Treasury is set to introduce regulations for key third-party service providers, including cloud services, that play a pivotal role in the UK’s financial sector. This initiative is designed to mitigate the risk of market instability that could arise from the failure of one of these major providers. Entities identified as critical third parties (CTPs) will fall under the direct supervision of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), subject to stringent resilience standards and regular testing to ensure financial system stability.

A joint consultation by the Bank of England, PRA, and FCA was launched on 7 December  2023, focusing on operational resilience. This outlines the proposed regulatory requirements for CTPs, inviting feedback until 15 March 2024. Upcoming consultations are expected to establish disciplinary procedures, promoting a cohesive regulatory framework for these essential service providers.

Consumer Tech Becoming a Force for Good

Nikhil Rathi of the FCA recently spoke on utilising technology to maintain transparency in consumer markets. As the financial sector integrates more tech, balancing consumer protection with innovation is key. Critical discussions are underway to weigh the pros and cons of technological advancements, aiming to use technology to enhance financial access and data security.

The emergence of finance apps that incentivise prudent financial behaviours exemplifies tech’s potential to drive better financial management. However, this digital integration poses challenges around privacy and data governance.

The FCA is navigating between two tech adoption strategies: one favouring comprehensive digital integration and another advocating a more measured, human-centric approach. The regulatory body is actively shaping guidelines to ensure these technologies benefit consumers and manage associated risks effectively.

To support financial inclusivity, the FCA backs initiatives like the Financial Inclusion TechSprint and is focused on crafting regulations that ensure the expansion of digital payment systems does not lead to consumer exclusion.

FCA Sets Out to Curb Greenwashing

The Financial Conduct Authority (FCA) has released its policy statement PS23/16, which sets out new rules for Environmental, Social, and Governance (ESG) disclosures and investment labelling, effective 31 May 2024. This policy introduces an “anti-greenwashing rule” to ensure ESG claims are accurate and not misleading, sustainability labels for products meeting ESG criteria, and limits on using ESG-related terms in product marketing. Adjustments, including a postponed start date and a new “mixed goals” label, were made following industry feedback. The policy impacts all entities regulated by the FCA, with detailed guidance provided for UK fund managers and distributors to promote transparency and informed investment decisions in the ESG space.

FCA Moves to Simplify UK Listing Rules

The Financial Conduct Authority (FCA) is inviting feedback on the initial segment of its revised UK Listing Rules sourcebook. Following a May 2023 consultation, these draft rules propose to consolidate premium and standard listing categories, streamlining the listing process with a greater emphasis on transparency and investor choice. This reform is aimed at attracting a diverse range of companies, particularly high-growth entities, to the UK market.

Proposed adjustments include:

• Reduced minimum market capitalisation and free float percentages for listing eligibility.
• Removal of the three-year financial track record and 12-month working capital prerequisites, facilitating access for earlier-stage high-growth companies.
• More lenient regulations governing dual-class share structures, permitting extended voting rights without fixed duration or ratio constraints.
• Eased ongoing operational requirements, necessitating comprehensive disclosures chiefly for substantial transactions.
• Automatic reclassification of existing premium-listed companies into the new unified category, with an elective transition for standard-listed entities.
• Creation of specific listing segments for international companies desiring a secondary UK listing and for closed-ended investment funds, incorporating tailored rule changes.
• Specialised category allocations for SPACs and shell companies, reflecting recent rule revisions.

The FCA is gathering industry opinions on these proposals until 22 March 2024, with the intention to finalise and implement the updated rules in late 2024.