Regulatory Updates July 2024

In this issue we cover:

• Derivatives Trading Obligation and Risk Reduction Services
• Finalised Payment for Investment Research
• Movements in the Overseas Funds Regime
• Consumer Duty One Year On

Derivatives Trading Obligation and Risk Reduction Services

The FCA’s consultation paper CP24/14 includes certain US SOFR-based overnight index swaps within the derivatives trading obligation (DTO), which are aimed at enhancing transparency and liquidity in the UK OTC derivatives markets. The proposals for expanding the exemptions for post-trade risk reduction (PTRR) services anticipates a reduction of risk in swap markets, which will push for enhanced system resilience and a reduction of systematic risk. The paper details how Article 28a of UK Markets in Financial Instruments Regulation (MiFIR) provides the FCA with the power to suspend or modify the DTO to prevent market disruption post-Brexit. The FCA will consult with the BoE and PRA and seek treasury consent prior to taking action. These changes aim to enhance transparency, reduce systemic risk in the UK derivatives market, and support firms’ risk management practices. This consultation will be highly relevant to:

• Providers of PTRR services
• Trading venues which admit to trading or trade derivatives
• Investment firms and banks dealing in derivatives
• UK branches of overseas firms undertaking investment services and activities

Finalised Payment for Investment Research

The FCA’s policy statement PS24/9 addresses “Payment Optionality for Investment Research,” which has been drawn from feedback based on CP24/7. The highlights of which include:

1. Introduction of a New Payment Option: The FCA introduces a new option for firms, such as asset managers, to pay for investment research using joint payments for third-party research and execution services. This option exists alongside existing ones, offering additional flexibility.
2. Responses and Feedback: The consultation received 44 responses, broadly positive, supporting the new payment option’s potential benefits for competition, market integrity, and international competitiveness. However, concerns were made over budgeting, price benchmarking, research provider disclosures, and cost allocation.
3. Implementation and Next Steps: The FCA aims to implement the rules by 1 August 2024. The FCA plans to consult further on related changes to ensure consistency across different regulatory regimes.
4. Consumer Protection and Market Integrity: The new payment option includes guardrails to ensure consumer protection and maintain market integrity, focusing on budgeting, fair cost allocation, transparency, and best execution requirements.
5. International Competitiveness: The changes aim to align with international standards and facilitate UK asset managers and provide more access to global research, enhancing their international competitiveness.

The new option should reduce operational complexity for firms, particularly small and growing firms, and improve the ease of entering and competing in the market.

Movements in the Overseas Funds Regime

The FCA issued a policy statement (PS24/7) detailing the enactment of the Overseas Funds Regime (OFR). This follows their consultation paper (CP23/26) that outlined proposed rules and guidance for implementing the OFR. Key features of this policy statement include:

1. Detailed criteria for recognition applications under the OFR.
2. Obligations for OFR fund operators to inform the FCA about significant changes to the fund.
3. Clarity for UK investors regarding the coverage of OFR funds by the Financial Ombudsman Service and Financial Services Compensation Scheme, aiding in informed investment decisions.
4. Establishment of procedures for the FCA to issue public notices on violations of OFR regulations, to suspend or withdraw a fund’s recognition to safeguard UK investor interests. 

Consumer Duty One Year On

In a recent update, the FCA celebrated the progress made by financial firms in enhancing consumer outcomes under the Consumer Duty, which went into effect one year ago. The Duty emphasises outcome-based measures aimed at fostering a competitive and growth-oriented environment while securing positive results for consumers. The focus continues to be on how firms are incorporating the Duty and addressing any potential harm.

Firms are taking a more proactive role in communications and outreach efforts. The FCA has observed that firms are reaching out to customers to provide details about products which may be more suitable, whilst assessing the impact of these efforts to refine their processes. Communication from several firms demonstrates clearer and easier to comprehend language and messages being prioritised. As firms continue to align with the Duty, they are encouraged to continue to share information on best practices, fostering industry improvements and promoting better outcomes.

Since the introduction of the Duty, firms have made continuous efforts in adapting their operations, which has led to tangible improvements in consumer financial outcomes. This includes quicker adjustments to savings rates following base rate changes and reforms in financial product structures to enhance transparency and fairness. The FCA highlights that these efforts have already contributed an additional £4 billion annually to consumers through better interest payments and savings on insurance products.

Looking forward, the FCA is committed to continuing its oversight and support for firms, with a particular focus on adapting regulations to keep pace with technological advancements and changing consumer needs. The upcoming steps involve further detailed reviews and sharing of best practices to ensure that firms fully embed the Consumer Duty in their operations, with ongoing adjustments to enhance consumer protection and support sustainable economic growth.