Regulatory Updates April 2024

In this issue we cover:

• Green Light for Transparency
• New FCA Guidelines Tighten Rules on Financial Promotion via Social Media
• Consumer Duty – Navigating Vulnerability
• Unveiling the Future – Insights from Digital Securities Sandbox Consultation
• FCA’s Proposal – Flexible Payment Options for Investment Research

 

Green Light for Transparency

The Sustainability Disclosure Requirements (SDR) and investments regime has been implemented to ensure that financial products marketed to consumers are sustainable and meet the claims they purport to have. The FCA has implemented PS23/16 to provide guidance and practical actions.

Launch Date: The SDR is set to take effect from May 2024, revolutionising the way financial products are marketed in the UK with a focus on sustainability.

Primary Focus: The regime will primarily operate as a product labelling system, ensuring that products marketed as sustainable are genuinely so, backed by solid evidence.

 

Core Requirements:

• Product Labelling: Initially targeting fund managers and distributors, ensuring products meet sustainability claims.
• Entity-Level Disclosure: Asset managers with assets of £5 billion or more must disclose their sustainability risk management strategies.
• Anti-Greenwashing Rule: All UK authorised firms must make clear, fair, and non-misleading sustainability-related claims.
• ESG Marketing Standards: The SDR will include stringent guidelines to govern how ESG factors are marketed.

Expansion Plans: The regime aims to eventually broaden its scope to include portfolio managers, pension products, and some overseas funds.

Voluntary vs. Mandatory: While the labelling aspect remains voluntary, compliance with anti-greenwashing rules and entity-level disclosures is mandatory.

Ongoing Commitments: Firms will be required to continually disclose product sustainability characteristics and performance, enhancing transparency for investors.

The SDR sets a new standard for financial product sustainability in the UK, aligning closer to global ESG compliance trends.

 

Guidelines Tighten Rules on Financial Promotion via Social Media

The FCA has released definitive guidelines (FG24/1) that outline the regulatory expectations for firms, including influencers, when promoting financial services on social media platforms.

The FCA stipulates, as per Section 21 of the Financial Services and Markets Act 2000, that any financial promotion, defined as “an invitation or inducement to engage in investment activity or to engage in claims management activity that is communicated in the course of business”.

Replacing previous guidance from FG15/4, this updated directive underscores the applicability of financial promotion regulations to all advertising mediums, social media included. Furthermore, it mandates that each individual promotion must independently adhere to FCA regulations. To aid understanding, the guidance provides instances of what does and does not constitute a compliant social media promotion.

The guidance also holds firms accountable for the promotional activities carried out by their affiliate marketers, such as influencers. Firms are expected to ensure their affiliates adhere to legal and regulatory standards by implementing effective monitoring and oversight. Influencers are also warned that promoting financial products without authorisation from an FCA approved entity may constitute a criminal act.

 

Consumer Duty – Navigating Vulnerability

In a recent analysis, the FCA uncovered gaps in how financial firms support vulnerable customers, prompting a crucial review. Her is a breakdown of what you need to know:

• Understanding Vulnerability: Vulnerability is not confined to age or circumstance; it’s diverse and complex. Factors like health, life events, resilience, and capability can all play a role.
• FCA’s Call to Action: The FCA emphasises the need for tailored care and support for vulnerable customers, urging firms to embed fairness across their operations.
• Practical Steps: Firms must understand their customers’ needs, train staff to recognise vulnerability, and design products with vulnerability in mind. Regular assessments are key to fine-tuning approaches.
• Data Protection: Recording and sharing customer vulnerability information must comply with data protection laws, ensuring consistency across a firm’s operations.
• AI on the Horizon: AI may help in identifying vulnerable customers and predicting their needs, but firms must ensure it complements human empathy and understanding.

 

Unveiling the Future – Insights from Digital Securities Sandbox Consultation

The FCA and the Bank of England have jointly released a consultation paper outlining plans for the Distributed Ledger Technology (DLT) Securities Settlement System (DSS). This initiative aims to promote innovation in securities trading and settlement.

Under the proposed DSS regime, firms will be able to leverage technologies like DLT for issuing, trading, and settling securities such as stocks and bonds. The DSS will cover various instruments including equities, corporate and government bonds, and money market instruments. However, it excludes derivative contracts and unbacked cryptocurrencies.

The consultation paper provides details on how the DSS will operate, including the Bank’s rules and fee structure, along with a draft guidance document for potential applicants. Successful applicants will operate under modified regulations, paving the way for a more technology-friendly securities market regime.

• Innovation in Trading and Settlement: The primary aim of the consultation paper is to foster innovation in the trading and settlement of securities by proposing the implementation of the DLT DSS.
• Scope of the DSS: The DSS regime will cover a range of securities, including equities, corporate and government bonds, and money market instruments. However, it will not include derivative contracts and unbacked cryptocurrencies.
• Utilisation of Emerging Technologies: The proposed DSS regime will enable firms to utilise emerging technologies like DLT for various aspects of securities transactions, such as issuance, trading, and settlement.
• Operation of the DSS: The consultation paper outlines the proposed approach to the operation of the DSS, including rules and fee structures established by the Bank of England. It also includes a draft guidance document for potential applicants interested in participating in the sandbox.
• Modified Regulatory Framework: Successful applicants to the DSS will operate under modified rules and regulations. This adjusted framework aims to create a bridge towards a permanent technology-friendly securities market regime.

 

FCA’s Proposal – Flexible Payment Options for Investment Research

The FCA’s Consultation Paper (CP24/7) proposes changes to investment research payment options, allowing buy-side firms more flexibility in how they pay for research, including bundling research and execution charges. While this signifies a reversal of the FCA’s prior policy position, the proposals aim to strike a balance between flexibility and control. Here are the key points:

• The Investment Research Review’s recommendations prompted the FCA to reconsider its rules on research unbundling.
• The Proposals: The FCA suggests permitting bundled payments for research and execution services, with strict conditions (‘guardrails’) to ensure transparency and fair allocation of costs.
• Guardrails: Conditions include establishing formal policies, setting budgets, ongoing assessments of research price and value, structured cost allocation, agreements with research providers, operational procedures, and client disclosures.
• Limited Carve-Out: The proposals create a limited additional carve-out for buy-side firms opting for Commission Sharing Arrangements (CSAs), emphasising the defence of unbundling.
• Compatibility: The FCA asserts that its proposals align with research payment rules in other jurisdictions, particularly the US, promoting international competitiveness.
• Balancing Flexibility and Control: The FCA anticipates that its proposals will strike the right balance between flexibility and control, with further guidance and standards threatened if firms fail to implement the new option effectively.