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The latest regulatory update – June 2022

Regulatory Update June 2022

In this issue we cover:

PRA speech – Supervisory expectations on operational resilience  

FCA speech – Improving financial inclusion

New FCA appointments

Data reporting services providers

FCA speech – Innovation and Regulation

Future of financial services regulation

FOS future funding model

Updated FCA webpage – Accessing and using wholesale data

HM Treasury policy paper – AML/CFT regulatory and supervisory regime

FCA – Press release on market abuse and market manipulation

FCA – Lenders must support struggling consumers through cost of living crisis

PRA speech – Supervisory expectations on operational resilience 

In a speech given at the Annual Operational Resilience for Financial Institutions Summit, Duncan Mackinnon (Executive Director, Supervisory Risk Specialists) has set out the PRA’s expectations for areas of focus as firms build operational resilience.

With the Bank of England, PRA and FCA operational resilience policies now in force (as of March 2022) impacted firms should have identified important business services and set impact tolerances. With these in place, the next major milestone is 2025 when firms will have to provide assurance that they have built operational resilience. Therefore, the PRA expects attention to turn to scenario testing, implementation and embedding.

FCA speech – Improving financial inclusion

Sheldon Mills, FCA Executive Director, Consumers and Competition, has recently delivered a speech at the Financial Inclusion Virtual Summit 2022. The speech is titled ‘keeping pace with rising costs – improving financial inclusion for consumers’ and notably is one of the first public statements by the FCA concerning the cost-of-living crisis.

The FCA acknowledges the multi-faceted challenges of financial inclusion that are affecting consumers and recognises that regulation alone cannot tackle the issue. Regulators must work with the government, industry and consumer groups to address the current and ongoing challenges.

This speech covers the FCA’s work to understand consumers through its Financial Lives Survey, to widen distribution networks and to address inclusion issues via technology. Importantly in the context of its future activities, the FCA welcomes a discussion on whether it should have a specific objective to ‘have regard’ to financial inclusion.

New FCA appointments

The FCA has been busy making new appointments over the last few weeks. Key among these is Richard Lloyd who has become interim chair of the FCA. He takes over immediately after Charles Randell CBE stood down after four years in the role.

It has also appointed Helen Charlton as the chair of the Financial Services Consumer Panel, and Andy Mielczarek as the chair of the FCA Smaller Business Practitioner Panel; each for a term of three years. These panels are independent and statutory, both representing the interests of consumers as the FCA develops its regulatory approach.

Data reporting services providers

The FCA has published a portfolio letter on its data reporting services providers’ (DRSPs) supervision strategy.

This is the first such letter that the FCA has issued to entities providing the data reporting services of approved reporting mechanisms and approved publication arrangements, referred to collectively as DRSPs.

The letter outlines the regulator’s view of the key risks of harm in the DRSP portfolio and confirms what it expects DRSPs to do to minimise potential risks to consumers and market integrity from failures in meeting regulatory requirements. The letter also sets out key elements of what the FCA will be doing to supervise DRSPs. As part of this engagement, it will enquire about the actions that firms have taken in response to this letter to ensure that consumers and markets are adequately protected.

FCA speech – Innovation and Regulation

The FCA’s Chief Data, Information and Intelligence Officer, Jessica Rusu, has delivered a recent speech at Money20/20 Amsterdam on how innovation and regulation are partners in the success of financial services.

This speech considers whether a regulator can be innovative and whether regulation can be written differently. It acknowledges that technology and external forces are driving change and so the FCA has to transform, leverage data and be proactive in order to be innovative in its approach.

The next few years will bring about significant innovation and change in financial services. As the market faces another period of global economic uncertainty, regulators can harness the same forces that are transforming financial services, to provide more effective, proactive, and scalable regulation that supports and protects consumers.

Future of financial services regulation

The the House of Commons Treasury Committee (HCTC) has released its latest report on the future of financial services regulation as it considers what to do with law derived from European Union directives.

The report covers the following areas:

Growth and competitiveness

  • In part to try to address the difficulties financial services firms have had exporting products and services into the European Union

Financial inclusion

  • Annual report provided to HCTC
  • Considered during rule making

Regulatory framework 24

  • Forward looking schedule to allow firms to plan
  • Quicker authorisation process

Innovation

  • Allowing firms to be bold if they plan for worst case scenario of harm and how they will remediate the harm

Simplification of requirements for smaller banks

Use of internal models to quantify capital requirements

Solvency II

FOS future funding model

The Financial Ombudsman Services (FOS) published a discussion paper on 14 June 2022 setting out possible changes to its funding model.

The paper explains the FOS is committed to considering revisions to its funding model, including those that might incentivise constructive behaviour by the industry, to resolve cases more quickly, and ensure the financial sustainability of the FOS.

The paper explores options for updating both the current levy structure and the case fee structure, for example by introducing a differentiated case fee model to replace the single, flat case fee. Ideas for future funding beyond 2023/24 are also considered, such as charging professional representatives a fee to bring complaints and varying case fees according to their complexity.

The FOS will take feedback to the discussion paper into account in consulting on its budget for 2023/24 later this year. Responses are invited via email by 5 August 2022.

Updated FCA webpage – Accessing and using wholesale data

In June, the FCA updated its webpage on accessing and using wholesale data. The FCA confirmed its trade data review is underway and this is a key strand of its work to promote competition and positive change, and to strengthen the UK’s position in wholesale markets. The FCA stated that the trade data review will inform the development of consolidated tape, being one of the key changes proposed by the Treasury.

The FCA has sent information requests to a sample of trade data suppliers in relation to equities, fixed income and derivatives. The FCA intends on issuing a questionnaire to users of trade data in July 2022, with the aim of publishing findings and any further steps in January 2023.

HM Treasury policy paper – AML/CFT regulatory and supervisory regime

On 24 June 2022, HM Treasury published a policy paper establishing its intention to conduct a review of the UK’s extensive anti-money laundering and countering the financing of terrorism regime to ensure that it continues to evolve to meet the changing nature of economic crime. It is focused on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

The review concentrates on:

  • Systemic effectiveness: A constant agreement on what effectiveness looks like should be maintained as more reforms are implemented and proposals should be considered to measure effectiveness more accurately.
  • Regulatory effectiveness: Those involved on the front line of the UK’s fight against illicit finance should have all the tools and knowledge required to enforce effective risk-based controls and target areas of highest risk.
  • Supervisory effectiveness: The continued reform of the supervision regime in light of building on the recent changes while evaluating the reasons for future changes to the regime.

The intention is to establish an improved range of metrics by which the range of activity and outputs under the MLRs can be measured and considered in detail, to support future assessments of effectiveness. These will be integrated into current reporting mechanisms, such as the HM Treasury annual supervision reports. The review also sets to establish the government’s plan to use the National Risk Assessment of Money Laundering and Terrorist Financing and current public-private forums to evaluate upcoming risks and changes to the scope of the MLRs.

There is also consideration of the potential levers for government to support businesses in increasing their own effectiveness via the relevant use of new technology. Finally, this review looks at possible reforms to the essential structure of the supervision regime in order to enforce effective supervision across all sectors.

Overall, this review only marks the start of the HM Treasury’s reform agenda relating to the anti-money laundering regulatory and supervisory regime. This will also constitute a part of the government’s wider agenda, which will include the second public-private Economic Crime Plan, Companies House reform and the Economic Crime and Corporate Transparency Bill later this year.

FCA – Press release on market abuse and market manipulation

On 17 June 2022, the FCA issued a press release outlining its work in tackling insider dealing and manipulation. The update highlighted the FCA’s data-driven approach, characterised by the publication of annual market cleanliness statistics and Suspicious Transaction and Order Reports collected from market participants. It also revealed the powers at the FCA’s disposal to tackle market abuse, including criminal prosecution, civil enforcement and disruptive activities. These efforts are carried out by approximately 90 enforcement staff, supported by specialist intelligence, legal and cyber resources, as well as primary and secondary market oversight teams.

FCA – Lenders must support struggling consumers through cost of living crisis

On 16 June 2022, the FCA sent a letter to more than 3,500 lenders to remind them of the standards they should meet, as consumers across the country are affected by rising living costs. They voiced expectations that household bills will continue to rise in the autumn, urging firms to act now so borrowers and customers in vulnerable circumstances can access the necessary help. Lenders have been reminded to charge struggling borrowers fair fees, and to direct vulnerable customers towards suitable money guidance or debt advice.