Regulatory Update December 2023

In this issue we cover:

• FCA acts on double dipping
• FCA & PRA Release PS16/23: Streamlining Pay Rules for Small Firms
• FCA Seeks Input on Commodity Derivatives Reform
• BIS/BCBS Opens Consultation on Climate Risk Disclosure
• FCA Consults on Mandatory Redress Funds for Investment Firms
• IFPR Compliance and Resource Management
• Bridging the Financial Advice Gap

 

FCA acts on double dipping

The Financial Conduct Authority (FCA) has addressed ‘double dipping’ in investment platforms and Self-invested Personal Pension (SIPP) providers, where a survey showed most firms retained customer cash balance interest, contradicting Consumer Duty standards. This practice, intensified by the Bank of England’s rate hike, generated GBP 743 million in June 2023. A December 2023 FCA letter to CEOs critiqued the lack of transparency and additional platform fees. Firms are directed to halt ‘double dipping’ by 31 January 2024, ensuring fair value, clear communication, and revised terms. They must confirm compliance or provide evidence of existing compliance by 29 February 2024, with non-compliance facing potential FCA action. This directive excludes dealings with institutional/professional clients and specific ultra-high-net-worth customer arrangements.

FCA & PRA Release PS16/23: Streamlining Pay Rules for Small Firms

The FCA and PRA released a joint policy statement (PS16/23) responding to earlier consultations (CP5/23 and CP23/11) about remuneration rules for small, dual-regulated firms. The final policy remains as initially proposed in CP23/11, with minor clarifying amendments regarding how proportionality applies to small firms within larger groups. These regulations were enacted on 8 December 2023, affecting the remuneration policies of firms from that performance year onwards. Additionally, on 6 December 2023, the PRA updated its supervisory statement (SS2/17), explaining the expectations for compliance with the remuneration requirements, applicable to remuneration from the performance year starting on or after 29 December 2020.

FCA Seeks Input on Commodity Derivatives Reform

The FCA proposed changes to the UK commodity derivatives market rules through consultation paper CP23/27. The aim is to prevent large trading positions from disrupting market prices or settlement conditions. This initiative, part of the Wholesale Markets Review, seeks to bolster market resilience by introducing:

1. Venue-based position limit setting,
2. Position limits on select contracts,
3. Improved management and reporting of positions,
4. Position limit exemptions, and
5. New guidelines defining ancillary activities.

The rules target UK trading venues for commodity derivatives and market participants, including both commercial and financial traders.

BIS/BCBS Opens Consultation on Climate Risk Disclosure

The Basel Committee launched a consultation on a new Pillar 3 disclosure framework focusing on climate-related financial risks for banks. This framework aims to bolster banking regulations and practices against the backdrop of physical and transition-related climate challenges. The proposal aligns with global efforts, like those of the International Sustainability Standards Board, to promote financial stability. The consultation seeks input on implementing both qualitative and quantitative disclosure norms, deliberating on mandatory aspects and those left to national discretion. The Committee invites feedback on the framework, which is a developing process, with a prospective launch date of 1 January 2026.

FCA Consults on Mandatory Redress Funds for Investment Firms

The FCA issued commentary and consultation paper CP23/24, proposing that personal investment firms (PIFs) proactively allocate capital for possible compensation claims. This move aims to reduce the reliance on the Financial Services Compensation Scheme (FSCS) when consumer harm occurs due to PIFs’ liabilities. The FCA suggests PIFs estimate potential compensation liabilities, reserve capital through a new deduction, and maintain assets in accordance with their capital requirements. The planned amendments would be added to Chapter 13 of the Interim Prudential Sourcebook for Investment Businesses, overseeing PIFs’ financial soundness. The paper also initiates a discussion on enhancing PIFs’ overall prudential framework, and is accompanied by a Dear CEO letter emphasising the firms’ obligations to not evade potential compensation liabilities.

IFPR Compliance and Resource Management

The FCA released its definitive findings on how firms are adapting to the Investment Firms Prudential Regime (IFPR), especially concerning internal capital and risk assessments (ICARA) and reporting as per MIFIDPRU standards. Following initial feedback in February 2023, the FCA’s review highlighted improvements in firms’ comprehension of the new rules but identified persistent shortcomings in liquidity risk assessment, timely internal intervention practices, group impact on wind-down plans, and the application of operational risk capital models.

Bridging the Financial Advice Gap

The FCA, alongside HM Treasury, has issued a Policy Paper on the Advice Guidance Boundary Review, focusing on initiatives to bridge the advice gap. The review underlines the government and FCA’s commitment to creating a reliable advice and guidance structure, acknowledging the challenges consumers encounter when facing financial choices.

The review primarily seeks to tackle key factors contributing to the advice gap:

• Consumers desiring advice but hesitant to pay due to concerns over its quality or value.
• Consumers needing advice but unable to afford it.
• First-time investors requiring help to navigate investment choices but unsure of where to turn.
• Firms wishing to alert retail customers about risks but wary of crossing into advisory territory.