Regulatory Update August 2023

In this issue we cover:

Financial Lives 2022 Survey

UK Rules on margin requirements for non-centrally cleared derivatives

Cold calling ban consultation

FCA/Treasury joint review on the Advice Guidance Boundary

Cryptoasset businesses complying with the Travel Rule

Consultation on payments regulation

FCA consults on new securitisation rules

 

Financial Lives 2022 survey

The latest edition of the Financial Lives survey, a continuation of the FCA’s 2017 and 2020 surveys, is crucial for all firms affected by the Consumer Duty. The survey echoes previous findings, highlighting the widespread distrust in financial services and the financial strain experienced by many, resulting in a significant portion of consumers demonstrating low financial resilience—a sign of vulnerability. Key takeaways include:

• Difficulties faced by 7.4 million people in contacting financial service providers
• Over 2 million individuals requiring mortgage-related support
• More than a third of the population struggling financially and being vulnerable
• Majority of adults (four out of five) depending on credit, though the use of high-cost credit has declined
• Increased adoption and usage of digital banking.

• Firms should utilise the Financial Lives Survey to continue to enhance their operations regarding consumer duty.

UK Rules on margin requirements for non-centrally cleared derivatives

The UK’s Prudential Regulation Authority (PRA) in Consultation Paper 13/23 (CP 13/23) has outlined amendments to BTS 2016/2251 concerning margin requirements for non-centrally cleared derivatives. Key points include:

• Extension of Temporary Exemptions: PRA and the Financial Conduct Authority (FCA) are extending the temporary exemptions for single-stock equity options and index options from UK bilateral margining requirements until 4th January 2026. This extension period will be used to gather evidence for creating a permanent regime outside the EU. This decision is primarily due to the maintenance of the exemption in several other jurisdictions.
• No model pre-approval requirement: The FCA and PRA have decided not to amend the current supervisory framework by requiring formal pre-approval for the bilateral initial margin models. This decision is based on the sufficiently developed international standards for initial margin models and the existence of a detailed and prescriptive modelling requirements in the UK regime.

Cold calling ban consultation

The government has presented a consultation proposing a ban on cold calling in financial services to curb investment fraud. Although currently prohibited in the pensions sector, the government intends to extend this ban to banking, mortgages, insurance, credit, debt, and investments. The objective is to make it clearer to consumers that any financial services-related cold call is illegal, thereby preventing scammers from using cold calling for investment fraud. The consultation, which is in its initial phase, seeks input on defining ‘cold call,’ identifying persons and products included in the ban, and determining the implementation method. Stakeholders can provide their input until the end of September 2023.

FCA/Treasury joint review on the Advice Guidance Boundary

The FCA, in conjunction with the Treasury, is reviewing the Advice Guidance Boundary as part of the Edinburgh Reforms. While the review is ongoing, the FCA has provided clarification for firms wishing to support consumers, especially during the rising cost of living, without giving a personal recommendation. This is to help firms maximise the support they can provide pending broader regulatory reform. The FCA has also shared examples of good practices for firms to help consumers and comply with the Consumer Duty. Additionally, the FCA confirmed that after receiving feedback on its initial proposals for a Core Investment Advice regime (CP22/24), it has decided to incorporate the development of these proposals into the broader Advice Guidance Boundary review to support more substantial changes being considered.

Cryptoasset businesses complying with the Travel Rule

Starting 1 September 2023, UK cryptoasset businesses must adhere to the ‘Travel Rule,‘ which mandates the collection, verification, and sharing of information about cryptoasset transfers. The Financial Action Task Force (FATF) has urged other jurisdictions to implement the Travel Rule promptly to align cryptoasset transaction practices with those in other financial services sectors.

Key expectations include:

• Exercising due diligence to comply with the Travel Rule
• Maintaining responsibility for Travel Rule compliance, even when using third-party suppliers
• Full compliance with the Travel Rule for transactions to and from firms in the UK or any jurisdiction that has implemented the rule
• Regularly reviewing the Travel Rule’s implementation status in other jurisdictions and adjusting business processes accordingly
• For transactions to jurisdictions without the Travel Rule, firms must determine whether the recipient firm can receive the required information. If not, UK cryptoasset businesses must collect, verify, and store the required information as mandated by the Money Laundering Regulations (MLRs) before executing the transfer.

Consultation on payments regulation

The UK government has initiated a consultation and a request for evidence on payment regulatory reforms, including the Bank of England’s (BoE) systemic payments perimeter. A response to the original consultation has been published.

• The consultation aims to address systemic risks due to the growing complexity and interconnectivity of payment chains, and to establish a consistent and proportionate regulatory approach for all entities involved in payments.
• It invites opinions on the reasoning, principles, criteria, and powers for broadening the BoE’s supervision of systemic payment risks beyond payment systems and associated service providers.
• It also details the government’s intention to introduce new legislation, when parliamentary time permits, that promotes innovation and competition in payments and enhances the BoE and the Payment Systems Regulator (PSR) accountability and transparency in their payment functions.

FCA consults on new securitisation rules

The UK Securitisation Regulation, which is retained EU law regulating securitisation markets, will be replaced by new FCA and PRA rules. The FCA is currently consulting on its proposed new Handbook rules, which include clarifying due diligence obligations of UK institutional investors, amending risk retention provisions to facilitate non-performing exposures securitisation, and making clarificatory changes to the regulation based on market feedback. Additionally, the FCA will run a separate consultation on updates to the reporting regime, including enhanced ESG reporting requirements. The current consultation is open until 30 October 2023.