Regulatory Update Jan 2023

In this issue we cover: 

FCA Consumer Duty update

Future disclosure framework for retail investments

PRA Dear CEO letters on 2023 priorities

FCA portfolio letter for wholesale brokers

Payment Services Regulations: HMT call for evidence

HM Treasury review and call for evidence on Payment Services Regulations

FCA webpage update on the Temporary Permissions Regime

ESMA press release on marketing financial products

FCA Decision Notice: Al Rayan Bank

 

FCA Consumer Duty update

The FCA has updated its website for information on their Consumer Duty (the Duty) rules. This includes more details on their expectations for outcomes monitoring; confirmation that the Duty will not apply retrospectively; how the Duty will be used in authorisations from February 2023 onwards; application to non-UK firms and customers and information sharing in the distribution chain.

The FCA states that its expectations for exactly what information firms may use to monitor customer outcomes will vary depending on their size, customer base, and the products and services they offer. Further detail is available in chapter 11 of Finalised Guidance FG 22/5.

As the authorisations process is intended to be forward looking, the FCA has also stated that from February 2023 firms applying for the first time will have to demonstrate their ability to comply with the Consumer Duty.

 

Future disclosure framework for retail investments

Last year the FCA published a discussion paper DP22/6 on a future disclosure framework for retail investments.

The FCA explained that there is a growing trend towards online investment and the digital distribution of disclosure. Therefore, a review of retail disclosure is needed as most disclosure regulations were designed for advised sales and paper-based disclosure.

The FCA invites feedback on how it can design and deliver a new disclosure regime. In particular, they are asking for views on the:

• delivery of retail disclosure;
• presentation of retail disclosure; and
• content of retail disclosure.

Comments can be made on DP22/6 until 7 March 2023. The FCA will then provide feedback and issue a consultation paper.

 

PRA Dear CEO letters on 2023 priorities

The PRA has recently issued three sector-focused ‘Dear CEO letters’ to insurance firms, UK deposit takers and international banks. The letters set out the PRA’s priorities for 2023, which are intended to complement its ongoing supervision and incorporate feedback from the most recent Periodic Summary Meetings with firms.

Insurance firms need to adapt to changes that threaten to disrupt business models, while maintaining high standards of governance, risk management, and resilience that result in their continued provision of vital insurance services to the real economy. The PRA’s focus for 2023 will be on: financial resilience; risk management; implementing financial reforms; reinsurance risk; operational resilience; and ease of exit for insurers.

UK deposit takers need to focus on: credit risk; financial resilience; risk management and governance; operational risk and resilience; model risk; and data. The PRA also outlines its expectations of firms regarding the following continuing key areas of focus: financial risks arising from climate change; diversity, equity and inclusion; and resolution.

International banks need to focus on financial resilience given the challenging operating environment to ensure that the financial sector can continue to support businesses and households. The PRA’s focus for 2023 will also include: risk management and governance; operational risk and resilience; data; and financial risks arising from climate change.

 

FCA portfolio letter for wholesale brokers

Wholesale brokers recently received a Dear CEO letter detailing the FCA’s strategy for supervising this sector for the next two years. It outlines the FCA’s view of the important risks, the drivers behind those risks and therefore what the FCA will focus on during this period.

The main risk factors that the FCA is concerned about for wholesale brokers are market volatility, inflation, and heightened expectations of recession. Therefore, boards should discuss the contents, applicability, and actions to take by the end of February 2023, such as:

Financial resilience – does the firm have sufficient capital and liquidity management to cope with periods of market volatility?

Remuneration structures – is there a risk posed by lower salaries with large cash bonuses and does remuneration comply with MIFIDPRU Remuneration Code (SYSC 19G)?

Governance and culture – is there a suitable mix of skills and experience present on the board, and is the board focused on the risks outlined by the FCA?

Control functions – is there a clear understanding of the risk posed by business models and are there policies and procedures to mitigate and control those risks, particularly around onboarding to prevent financial crime?

 

Payment Services Regulations: HMT call for evidence

HM Treasury has recently published a review and call for evidence on the Payment Services Regulations 2017 (PSRs 2017).

The Treasury is required by law to carry out a review of the Payment Services Regulations and publish a report setting out its conclusions. The review finds that the PSRs continue to act as the foundation for regulating the payment sector and ensuring adequate consumer protection. However, the regulations haven’t gone far enough and the pace of market change means the framework is not potentially working as well as it could, partly because of the emergence of cryptoassets.

Published alongside the review, the call for evidence focuses on how UK payments regulation should evolve to meet the government’s aims and address the specific challenges highlighted in its review. It covers:

• achieving agile and proportionate regulation, which facilitates the international competitiveness of the UK economy through growth and innovation in the UK payments sector
• ensuring appropriate trust and protection for consumers
• ensuring the resilience and integrity of the UK’s payment market
• fostering competition, in the interests of consumers.

The call for evidence closes on 7 April 2023.

 

HM Treasury review and call for evidence on Payment Services Regulations

On 13 January 2023, the Government published a review of the Payment Services Regulations 2017 and a call for evidence on how UK payments regulation should adapt to continue to meet the Government’s aims and address the specific challenges highlighted in the review.

Although the focus of the statutory review is on the Payment Services Regulations 2017, the Government is also using the call for evidence as an opportunity to seek views in relation to the Electronic Money Regulations 2011; the Cross Border Payments Regulation; and other areas pertinent to payment services in the UK. The Government is assessing the current regime against the following objectives: achieving agile and proportionate regulation; ensuring appropriate trust and protection for consumers; ensuring the resilience and integrity of UK’s payment market; and fostering competition, in the interests of consumers.

The deadline for comments is 7 April 2023.

 

FCA webpage update on the Temporary Permissions Regime

On 6 January 2023, the FCA updated its webpage regarding Temporary Permissions Regime (TPR). The FCA focused on four scenarios:

• firms failing to respond to the FCA’s mandatory information requests: the FCA has cancelled the temporary permissions of 4 firms that did not respond to its mandatory information requests;
• firms regulated under the Financial Services and Markets Act 2000 (FSMA), who have missed their landing slot or failed to apply by 31 December 2022 will be expected to voluntarily apply to cancel their temporary permission and either enter the supervised run-off mechanism or leave the UK regulatory perimeter;
• firms that do not intend to apply for full authorisation will be expected to voluntarily apply to cancel their permission and either enter the financial services contracts regime (FSCR) or leave the UK regulatory perimeter; and
• firms whose application for full authorisation is rejected, withdrawn or refused which typically occurs if a TPR firm fails to meet the FCA’s standards will not be able to reapply within the TPR.

 

ESMA press release on marketing financial products

On 16 January 2023, the ESMA published a press release in relation to marketing of financial products. It states that in 2023, ESMA will launch a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MiFID II disclosure rules with regards to marketing communications across the European Union. The purpose of this CSA is to ensure the consistent implementation and application of EU marketing rules, as well as enhance the protection of investors in line with ESMA’s over-arching objectives.

NCAs will review whether marketing communications are fair, clear and non-misleading and how firms select the target audience for the marketing communications. The CSA will closely consider marketing and advertising by firms through distribution channels, including apps, social media and collaborations with affiliates such as influencers.

 

FCA Decision Notice: Al Rayan Bank

On 11 January 2023, the FCA issued a Decision Notice addressed to Al Rayan Bank Plc in respect of a fine for £4,023,600 imposed as a result of poor anti-money laundering systems in breach of Principle 3 of the FCA’s Principles for Businesses.

The FCA found that between 1 April 2015 and 30 November 2017, Al Rayan failed to take reasonable care to organise its affairs responsibly and effectively, with adequate risk management systems and have policies and procedures in place, comprehensive and proportionate to its business activities, to enable it to identify, assess, monitor and manage money laundering risk. In particular, the FCA found that Al Rayan did not have appropriate policies and procedures in relation to the application of enhanced due-diligence and establishing high-risk customers’ source of wealth and source of funds at the point of onboarding despite acknowledging the high-risk of financial crime. Al Rayan was also specifically made aware of the risks by the FCA during the relevant period, but it failed to remediate those weaknesses.

Al Rayan agreed to settle early and so qualified for a 30% discount, thus reducing the financial penalty of £5,748,000 to £4,023,600.