Regulatory Update February 2021
In this issue we cover:
- The Governor’s speech
- FCA updates on operation of the MiFID Market’s Regime
- FCA publishes its review of how firms implement technology change
- Vulnerable customers
You can find these articles and a searchable archive of all our previous articles at https://objectivus.com
Governor’s speech: The case for an open financial system
On 10 February 2021, the Governor of the BoE Andrew Bailey delivered a speech entitled ‘The case for an open financial system’ where he discussed the benefits of a global financial system and the UK’s current and future role in it.
In the speech Mr. Bailey highlighted the UK’s exit from the EU and argued the case for it to have a “very bright future, competing in global financial markets underpinned by strong and effective common global regulatory standards”. But not one of “low regulation, high risk, anything goes financial centre and system”.
Addressing the issue of equivalence, specifically the EU’s insistence that it needs better to understand the UK’s plans to diverge from EU financial services regulation before it grants equivalence, this, he said, “is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself”. He then referred to three areas of rule changes, in relation to the Basel and Solvency II regulatory frameworks, that the UK is intending to implement, illustrating that UK proposals are not “out of line with the principles and practice of equivalence”. In conclusion he discussed how the financial systems would be central in rebuilding the world’s economies post Covid-19, adding that this is not the time “to have a regional argument”.
FCA updates statement on the operation of the MiFID Markets Regime
On 2 February 2021, the FCA updated its statement on the operation of the MiFID Markets Regime after the end of the transition period after HM Treasury’s recent UK STO equivalence decision for Switzerland. It means that it will soon be possible for UK firms to meet their share trading obligations on Swiss exchanges and for UK trading venues to be able to offer trading in Swiss shares. In addition:
- Transparency – regarding pre and post trade transparency, Swiss shares that resume trading on UK trading venues will be treated as if they are being traded on a UK trading venue for the first time; and
- Tick size – the same logic as above will apply for tick sizes, with an initial estimate updated after 6 weeks by a calculation based on data for the first 4 weeks of trading in the UK. This may result in different tick sizes than currently apply on Swiss exchanges.
FCA publishes its review of how firms implement technology change
On 5 February 2021, the FCA published a report on how firms implement technology change and the steps they can take to protect consumers from harm in the event such changes fail.
The report follows a review of technology changes, which importantly found, that:
- well-established governance arrangements lead to a higher change success rate;
- over 90% of surveyed firms rely on legacy technology to deliver their services. But firms with a lower proportion of legacy infrastructure and applications had a higher change success rate;
- firms with a high change success rate dedicated a larger proportion of their IT budget to change activities than firms with a low change success rate;
- firms that deployed smaller, more frequent releases had higher change success rates than those with longer release cycles; and
- firms that experienced less incidents due to failed changes leveraged a wide range of technical and business knowledge, ensuring potential impacts were well understood.
The FCA has indicated that firms should consider the findings of the review when assessing future technology changes.
The FCA Authority has issued its finalised guidance for how firms should treat vulnerable customers. It follows their Vulnerable Lives survey, which showed that the Covid-19 pandemic had increased the number of vulnerable consumers.
The FCA seeks to “bring about a practical shift in firms’ actions and behaviour”. It wants “vulnerable consumers to experience outcomes as good as other consumers and to get consistently fair treatment.”
The FCA defines a vulnerable customer as, “someone who, due to their personal circumstances is especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care”.
The key causes of vulnerability are considered to be:
- Health – health conditions or illnesses that affect ability to carry out day-to-day tasks;
- Life events – life events such as bereavement, job loss or relationship breakdown;
- Resilience – low ability to withstand financial or emotional shocks; and
- Capability – low knowledge of financial matters or low confidence in managing money, poor literacy, or limited digital skills
A firm’s vulnerable customers’ strategy should entail:
- Understanding the needs of the firm’s market and customer base, including the drivers of the customers’ vulnerability, the impact of this vulnerability and the effect this has on the outcomes they receive;
- Ensuring staff have the right skills and capability to recognise and respond to the needs of vulnerable customers;
- Responding to the needs of vulnerable customers via appropriate product design, flexible customer service provision and communications. Any information about vulnerabilities should be recorded so staff can respond appropriately in future dealings with the customer; and
- Monitoring and assessing whether the firm is meeting and responding to the needs of vulnerable customers and making improvements where this is not happening. Including the review of appropriate management information
In conclusion, senior management have an important role to play in creating a culture where staff are encouraged to treat vulnerable customers fairly.
If you would like help understanding any of these issues, please contact Dan, Simon or one of the team.