The latest regulatory update – April 2022

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Regulatory Update April 2022

In this issue we cover:

  • FCA Thematic Review – Observations on wind-down planning
  • FCA confirms PRIIPs regulations
  • FOS finalises plans and budget for 2022/23
  • Financial sanctions and notification obligations – latest FCA update
  • ESMA Guidelines on aspects of the MiFID II appropriateness and execution-only requirements
  • The FCA publishes its review in relation to the financial crime controls at challenger banks
  • ESMA Letter to the European Commission on the MiFID II suitability consultation
  • PRA publishes its Business Plan for 2022/23
  • FATF Report on the state of effectiveness and compliance with the FATF standards
  • FCA Policy Statement – Diversity and inclusion on listed company boards and executive committees

FCA Thematic Review – Observations on wind-down planning

On 11 April 2022, the FCA published its thematic review on wind-down planning. The focus was on liquidity needs during wind-down, and examined firms’ intra-group dependencies and wind-down triggers. Firms have an obligation under Threshold Condition COND 2.4 to hold adequate resources, however, the FCA found wide-spread weakness in planning and wind-down documentation.

Key observations include:

  • further work is required to ensure wind-down plans are operable. Particular attention should be paid to liquidity and cashflow modelling, intra-group dependency and wind-down trigger calibration;
  • firms need to consider wind-down liquidity needs in their risk appetite and point of non-viability;
  • liquidity issues arising in wind-down come from cashflow timing mismatches, net cash impact of the wind-down and starting the wind-down from a stressed cash position; and
  • testing wind-down planning is the best way of proving to the firm’s governing body or board, and the FCA that the plan is operable.

FCA confirms PRIIPs regulations

The FCA has confirmed the changes it proposed in relation to Packaged Retail and Insurance-based Investment Products (PRIIPs).

These new requirements are designed to address the areas the FCA considers could cause the most harm to investors, and they represent a divergence from EU rules following Brexit.

Firms who manufacture, advise on or sell PRIIPs must produce a Key Information Document (KID) that describes the product they are selling. These changes remove the performance aspects, so that customers are less likely to be misled.

Firms have until 31 December 2022 to comply with the new regulations.

FOS finalises plans and budget for 2022/23

The Financial Ombudsman Service (FOS) has published its plans and budget for 2022/23.

It expects to receive 177,000 complaints and resolve 220,500 complaints while investing in a change programme and additional resource to reduce waiting times. The FOS also plans to invest in digital technology to enable it to be more efficient and easier to interact with both for consumers and businesses.

The overall budget is £291.7 million, an increase of £46 million over the previous year, and the compulsory jurisdiction levy is set at £106 million compared to £96 million last year. While the case fee remains the same at £750, business will see a reduction in free cases from 25 down to three for those outside the group-account fee arrangement, and from 50 down to 15 for those within the group-account fee arrangement.

Financial sanctions and notification obligations – latest FCA update

The FCA has published a reminder about how it expects firms to apply sanctions measures.

While the FCA is not responsible for enforcing asset freezes or sanctions, it expects firms’ systems and controls to mitigate the risk of financial crime including those that enable firms to meet financial sanctions obligations. The FCA also expects firms to notify it under Principle 11 if they (or their appointed representatives and agents) are subject to sanctions. Firms are encouraged to monitor the latest sanctions information at the Office of Financial Sanctions Implementation (OFSI) and report any suspected breaches to them directly. Firms should also report to the FCA under the requirements of SUP 15 if they’re subject to sanctions. This should be done without undue delay and can be achieved by a notification to the FCA’s Contact Centre.

ESMA Guidelines on aspects of the MiFID II appropriateness and execution-only requirements

On 12 April 2022, ESMA issued guidelines to clarify aspects of MIFID II relating to appropriateness and execution-only requirements. The aim of the guidelines is to ensure consistent application and supervisory approach to Articles 25 (3) and 25 (4) of MIFID II and Articles 55 to 57 of the MIFID II Delegated Regulation.

The guidelines state that firms should inform their clients clearly and in good time about the appropriateness assessment and its purpose, and that firms should have policies and procedures in place to enable them to collect the information necessary to conduct the appropriateness assessment. This should include polices to ensure the information is up-to-date, accurate and reliable. The guidelines reiterate that a client’s knowledge and experience, and the relevant characteristics of the product, determine if a product is or service is appropriate for that client. Firms must ensure accurate record keeping and retention and compliance in relation to appropriateness assessments.

Staff involved in appropriateness assessments should have the adequate level of skill, knowledge and expertise to perform their role.

The FCA publishes its review in relation to the financial crime controls at challenger banks

On 22 April 2022, the FCA published a review which found weaknesses in the financial crime controls of some challenger banks.

Key observations include:

  • more work needs to be done by the challenger banks sector to evidence good practice as a whole and challenger banks are requested to review the FCA’s findings and make improvements where necessary;
  • challenger banks should apply a risk-based approach to anti-money laundering (AML) controls and make sure their financial crime controls remain fit for purpose as their businesses grow;
  • the FCA found weaknesses in Customer Due Diligence (CDD). Most challenger banks did not obtain details about customer income and occupation;
  • some challenger banks were not consistently applying Enhanced Due Diligence (EDD) where necessary;
  • some challenger banks had customer risk assessment frameworks which lacked sufficient detail if they were in place at all;
  • the FCA found ineffective management of transaction monitoring alerts;
  • the UK Financial Intelligence Unit within the NCA noted a substantial increase in the volume of Suspicious Activity Reports (SARs) reported by challenger banks. The FCA also raised concerns about the quality of these reports; and
  • the FCA found weaknesses in the effective management of financial crime change programmes.

The FCA will continue to monitor challenger banks’ compliance with their AML obligations and asks challenger banks to consider the key observations and broader findings highlighted in the Review to enhance their financial crime frameworks.

ESMA Letter to the European Commission on the MiFID II suitability consultation

On 19 April 2022, ESMA published a letter regarding the consultation on options to enhance suitability and appropriateness assessments.

The letter emphasises ESMA’s acknowledgement of the importance of appropriateness and the suitability assessment for investor protection under the MiFID II framework and specifically highlights the following:

  • it raises questions as to whether a ‘one size fits all’ approach can effectively serve all retail investors;
  • notes that sufficient guidance and information on the new framework needs to be provided to clients in order to aid their understanding;
  • the sharing of client personal information could impact investors easily switching between brokers and financial intermediaries;
  • concerns regarding how the assessment of costs and benefits of switches recommended to clients could be incorporated into the new proposed suitability regime; and
  • that the consultation does not mention knowledge and experience amongst information to be collected from clients, and highlighting the importance of this.

PRA publishes its Business Plan for 2022/23

On 20 April 2022, the PRA published its Business Plan for 2022/23 for the upcoming financial year.
Its key strategic objectives include:

  • retaining and building on the strength of the banking and insurance sectors delivered by financial crisis reform;
  • being at the forefront of identifying new and emerging risks and developing international policy;
  • supporting dynamic and competitive markets; and
  • running an inclusive, efficient and modern regulator in conjunction with the central banks.

Some of the proposed methods to achieve these include:

  • avoiding slippage for insurers through capital and provisioning levels;
  • prioritising the horizon-scanning programme and focusing on regulatory arbitrage and dangerous practices;
  • renewing the focus on reducing barriers to growth post-Brexit;
  • consulting on the implementation of Basel 3.1 to make changes to the way banks calculate weighted risk assessments;
  • stress testing the financial system using extreme but plausible scenario analysis; and
  • implementing more inclusive recruitment practices within the PRA.

FATF Report on the state of effectiveness and compliance with the FATF standards

On 19 April 2022, the Financial Action Task Force (FATF) published a review of the state of efforts to tackle money laundering and terrorist financing. It found significant progress had been made to establish and enact wide ranging legislation and regulation to counteract money laundering, terrorist financing, with 76% of countries having implemented the Task Force’s 40 recommendations.

The Task Force observed that where governments have not implemented policies and co-ordinated with public and non-public bodies, responses to AML/CTF risks are less effective. The Task Force observed that financial instructions tend to have a good understanding of risks but non-financial institutions such as real estate agents, lawyers and accountants tend to struggle to mitigate money laundering and terrorist financing risks.

Additionally, the Task Force commented that while there are adequate criminal justice frameworks to tackle money laundering and terrorist financing in most jurisdictions, investigations and prosecutions remain rare.

FCA Policy Statement – Diversity and inclusion on listed company boards and executive committees

On 20 April 2022, the FCA issued finalised rules requiring listed companies to report certain information and make disclosures regarding the representation of women and ethnic minorities on their boards and executive management teams. This enables investors easy access to diversity- related information, and the FCA state in its press release that the rules reflect the FCA’s focus on speeding up the pace of change regarding diversity and inclusion in financial services.

The rules require listed companies to include a statement in their annual financial report setting out whether they have met the following board diversity targets:

  • at least 40% of the board should be women;
  • at least one senior board position should be held by a woman; and
  • at least one member of the board should be from a minority ethnic background (excluding white ethnic groups).

These disclosures must be made for the company’s financial year starting on or after 1 April 2022.

The obligations also require an expanded range of diversity reporting obligations which firms must apply on a ‘comply or explain’ basis with respect to the representation of women and ethnic minorities.