Regulatory Update Apr 2023

In this issue we cover:

FCA and ASA target “Finfluencers”

Regulation of digital assets in the UK

FCA publishes Jessica Rusu’s speech on innovation, AI and future of financial regulation

FCA feedback on ICARAs

FCA’s Consumer Duty – determining “material influence”  

Market abuse – are you protected?

FCA publishes speech on the new simplified advice regime 

Financial Services and Markets Bill update 

ESG benchmarks review 

FCA and PRA discussion paper (DP) and HM Treasury call for evidence on the Senior Managers and Certification Regime (SMCR)  

Financial Conduct Authority Business Plan 

UK investment research review 

 

FCA and ASA target “Finfluencers”

The FCA and Advertising Standards Agency (ASA) have aimed their latest initiative towards “Finfluencers.” They have released an infographic aimed at helping influencers make informed decisions when offered the opportunity to promote financial products.

The infographic provides valuable insights and cautions for influencers to consider before promoting a product:

• The FCA polices the promotion of most financial products and highlights the potential consequences of making an illegal financial promotion;
• The current lack of regulation of firms offering direct investment in cryptocurrency or NFTs, and the risk of followers losing all their money in case of any issues with these products; and
• The increasing prevalence of investment scams and the possibility of influencers unknowingly exposing their followers to criminals.

 

Regulation of digital assets in the UK

The FCA has called for the industry to engage in conversations about the limits of regulation and the appetite for risk in the crypto market. The FCA has been working with the UK government on proposals to regulate stablecoins and the wider crypto asset regime and is part of a Cryptoasset Taskforce with the Treasury and Bank of England. The FCA plans to regulate financial promotions of crypto assets in the same way as high-risk investments, making failure to comply a criminal offence. The FCA also wants to address ESG considerations in the design of the future crypto asset regulatory regime:

• The FCA will have more powers to regulate crypto once the government legislates and the regulation of financial promotions is one area where tangible change will occur;
• The FCA is working with the government on proposals to regulate stablecoins and the wider cryptoassets regime, with input from industry and policymakers being essential; and
• The UK’s Money Laundering Regulations require UK-based cryptoasset exchanges and custodians to apply for registration with the FCA, but this does not apply to overseas firms.

 

FCA publishes Jessica Rusu’s speech on innovation, AI and future of financial regulation

It has been a tumultuous couple of months in the markets with the collapse of FTX, Silicon Valley Bank and Credit Suisse being particularly high profile, in conjunction with increased noise in Tech following the release of ChatGPT, the crackdown on TikTok, and very recently the white paper on AI released by the UK Government:

• The FCA has refreshed its Innovation program with increased TechSprints, PolicySprints, and a new Innovation Pathways service;
• The FCA has used synthetic data to detect automated push payment (APP) fraud and has seen success with 40% of SME participants launching their product, securing partnerships, or funding;
• The FCA will launch a permanent Digital Sandbox service that includes access to data, an API marketplace, a solutions development environment, and connections to academics, government bodies, venture capitalists, and charities;
• The FCA will host a world first global TechSprint in collaboration with its GFIN partners to tackle greenwashing and applications are open as of 17 April 2023; and
• The FCA is working with the Digital Regulation Cooperation Forum to create an appropriate framework for AI in financial services and has taken into consideration feedback from AI Discussion Paper, the machine learning survey, and public private forums with the Bank of England.

 

FCA feedback on ICARAs

The FCA feedback on the first batch of ICARAs is critical for firms to understand where they measure up and to help plan for the future.

The observations included:

• The process of monitoring internal triggers and limits in the risk framework needs to be set out well;
• There is often a lack of challenge and oversight by boards in the ICARA process;
• Firms need to model and assess their wind-down plans and hold enough capital and liquid assets to avoid harm in wind-down;
• Inadequate consideration of what stress will cause the firm to fail; and
• Poor data quality in returns is viewed as a weakness in a firm’s systems and controls.

 

FCA’s Consumer Duty – determining “material influence”

In PS22/09 from July 2022 the FCA laid out its expectations for firms to consider one or more of four customer outcomes, or discretion over customer outcomes, to be able to materially influence retail customer outcomes. The four customer outcomes include: governance of products and services; price and value; consumer understanding; and consumer support. In a recent Dear CEO letter to CFD firms the regulator elaborated its thoughts:

• Firms should conduct a detailed and fact-specific analysis to determine if they have a decision-making role or material influence over retail customer outcomes;
• Firms playing a key role, such as determining a product’s charges or terms and conditions, will have more significant obligations; and
• The extent of a firm’s responsibilities depends on its role and extent of influence over retail customer outcomes.

 

Market abuse – are you protected?

The “Market Watch 73” review aims to improve understanding of CFD providers’ arrangements to identify and report potential market abuse, with a focus on insider dealing and manipulative behaviour that can result from the speculative and leveraged nature of CFDs and spread bets, a major source of suspicious transaction and order reports. In summary:

• The review focuses on market abuse risks, surveillance responsibilities, surveillance systems, market manipulation;
• There is a lack of consideration of market abuse risks in non-equity asset classes and market manipulation, leading to gaps in surveillance;
• Compliance with SYSC 6.1.1R is a key component of the review. Improvements were observed in meeting this obligation, firms generally act appropriately in dealing with clients of concern, but many lack a formally documented framework; and
• Astute CFD firms would heed the advice provided by these Market Watch review, a review of effective policies and procedures will counter the risk they are exposed to regarding market abuse-related financial crime.

 

FCA publishes speech on the new simplified advice regime 

The FCA recently published a speech made by Theresa Chambers, Director of Consumer Investments, to the TISA Financial Advice and Guidance Conference in London.

The speech highlighted that, while the reforms implemented in the last decade following the Retail Distribution Review have had positive impacts, the consumer investment sector should be performing better.

The speech focused on several aspects of the FCA’s work which should help create a market for cheaper and more simplified financial advice for mainstream investments including:

• Consultation and feedback on core investment advice regime (CP22/24);
• The Advice/guidance boundary review;
• The Future Disclosure Framework;
• Consumer Duty; and
• The Regulatory Sandbox.

 

Financial Services and Markets Bill update

The House of Lords has completed its line-by-line review of the Financial Services and Markets Bill and proposed a number of amendments. Included are several attempts to extend the scope of existing regulatory initiatives, protect existing regulations from change, and strengthen the environmental agenda within financial services regulation.

Some of the more significant amendments are:

• Preventing the ring-fencing regime or SM&CR from being modified or revoked without an Act of Parliament;
• Preventing the Bank of England from issuing any digital currency unless being authorised via an Act of Parliament;
• Making “selling, or offering or agreeing to sell, climate and nature offsets” a regulated activity;
• Creating a right of action for consumers in the event of a breach of the Consumer Duty, and for SME customers in the event of a breach of the FCA Handbook;
• Permitting the FCA to overrule the FOS in certain circumstances; and
• Requirements to ensure that financial services firms use artificial intelligence in an ethical manner.

The proposed amendments will now be scrutinised by the Commons, so there’s no guarantee that any of the above matters will make the final Act.

 

ESG benchmarks review 

The FCA published a Dear CEO letter to benchmark administrators expressing concerns about the quality of ESG related disclosures. Its preliminary review assessed a sample of UK benchmark administrators and found the overall quality of ESG related disclosures to be poor.

Issues identified by the review included administrators not providing enough detail on the ESG factors considered in benchmark methodologies and a failure to implement ESG benchmarks’ methodologies correctly, eg, using outdated data and ratings. Some firms had failed to fully implement ESG disclosure requirements.

Given the importance of these benchmarks and the initial review findings, the FCA will be doing more work in this area.

 

FCA and PRA discussion paper (DP) and HM Treasury call for evidence on the Senior Managers and Certification Regime (SMCR) 

The FCA recently published a joint DP with the PRA. They now seek input on potential ways to improve the SMCR, specifically on its effectiveness, scope and proportionality.

The Treasury has launched a call for evidence in parallel and is seeking feedback on the SMCR which should be read alongside the DP.

This DP is relevant to:

• financial services firms covered by the SMCR;
• trade bodies;
• consumer organisations;
• other regulated firms not currently subject to the SMCR; and
• any other interested stakeholders.

Views are requested by 1 June 2023.

 

FCA Business Plan 

The FCA has published its Business Plan for 2023-24 which provides an indication of their priorities for the year ahead and how it intends to deliver them.

The three ‘strategic themes’ are familiar from last year: reducing and preventing serious harm; setting; and testing higher standards, and promoting competition and positive change.

The wider economic outlook is highlighted as a key challenge for the industry and its regulator, both from a market stability (interest rates and inflation) and consumer finance (unemployment and declining household income) perspective. The cost-of-living crisis features along with Consumer Duty.

As in previous years the FCA’s fees for the coming year has also been published alongside the Business Plan. Although the FCA states ‘a material increase in funding in cash terms is needed’ it also recognises the pressure many firms are facing resulting in the minimum and flat rate fees frozen, application fees frozen and overall fee increases kept below inflation.

 

UK investment research review

HM Treasury has published a call for evidence on the UK Investment Research Review. This forms part of the Government’s work to increase the attractiveness of the UK as a location for companies to raise capital.

The review will examine the link between levels of research and the attractiveness of the UK as a destination for companies to access capital in private and public markets. It will gather information and evaluate options to improve the UK market for investment research and provide recommendations on how to improve the research landscape in the UK.

The call for evidence is open until 24 April 2023.