Regulatory Update May 2022
In this issue we cover:
- Critical issues in regulation
- Implementing operational resilience frameworks: PRA speech
- Investment platforms: costs and charges
- Financial promotions: FCA Dear CEO letter
- FCA reminds consumers of cryptoasset risks
- Queen’s Speech: implications to financial services
- FCA CryptoSprint
- PSR Panel’s digital payments initiative
- FCA unveils new reporting platform for sanctions breaches
- FCA publishes market watch 69 on market conduct and transaction reporting issues
- FCA Policy statement: New cancellation and variation power
Critical issues in regulation
The FCA has published a recent speech given by Nikhil Rathi, covering critical issues in financial regulation. Key aspects of this speech included:
- the cost of living crisis leading to increased consumer exposure to risk and reliance on financial services
- the new Consumer Duty will ensure firms take ‘good outcomes’ into account and clear rules here will cut firms’ future costs
- support for innovation will encourage long-term economic growth and international competitiveness
- following Brexit, the regulated entity for firms that are predominantly UK-based should be here to protect investors and market integrity.
The speech also outlined the three overarching focus areas of the FCA’s strategy namely:
- reducing and preventing serious harm
- setting and testing higher standards
- promoting competition and positive changes.
Implementing operational resilience frameworks: PRA speech
The PRA has published a recent speech by David Bailey, PRA Executive Director, UK Deposit Takers Supervision.
This speech discusses the work that the PRA does with UK banks and building societies to strengthen their resilience to any operational disruptions. It places particular focus on the following three areas:
- PRA’s operational resilience policy, including expectations of firms and the links to other key policy areas such as outsourcing and critical third parties
- Sharing initial assessments of firms’ progress based on PRA supervisory work
- What to expect next in the PRA’s operational resilience roadmap, including its expectations regarding what firms should be doing, and the supervisory steps the PRA will be taking.
Overall, firms have made a positive start towards achieving the level of operational resilience set out in the policy published by the PRA just over a year ago. The speech emphasises the importance of continuing to build on the progress made so far, as there are clear developments needed before the deadline of March 2025.
Investment platforms: costs and charges
Following its Market Study in 2019, the FCA has recently published findings from its investment platforms costs and charges review.
The review focused on the experience of non-advised consumers in accessing charging information and whether the information available helped them to understand what they pay. The FCA found that they could generally identify and compare the main platform charges and the fund charges were signposted. Activity-based charges, however, were sometimes harder to locate. The FCA has usefully provided examples of good and bad practice.
Firms are encouraged to take the following steps:
- Review the FCA’s findings and ensure compliance with the applicable Handbook rules
- Become familiar with the FCA’s proposed Consumer Duty
- Be aware of the FCA’s Consumer Investments Strategy
Financial promotions: FCA Dear CEO letter
The FCA has published a Dear CEO letter about ensuring financial promotions are clear, fair, and not misleading. The letter was sent to almost 28,000 credit brokers and firms providing high-cost lending products – and may also be relevant to other firms involved in these activities.
The FCA expects to see an increased demand for credit, including short-term credit, as a result of the cost-of-living crisis. It’s therefore keeping the consumer credit sector under review to ensure that the demand for credit doesn’t result in unaffordable and unsustainable lending.
Firms are encouraged to consider the following:
- ensure any issued or approved financial promotions currently in use comply with CONC 3
- review internal processes and systems and controls for financial promotions
- Board engagement to consider the matters raised.
The letter makes reference to the introduction of new Consumer Duty, but also clarifies that the FCA will act now to improve consumer outcomes.
FCA reminds consumers of cryptoasset risks
Following on from previous warnings, the FCA has recently issued a statement referring to recent social media posts regarding cryptoassets and non-fungible tokens and reminding consumers that the FCA has not been given regulatory oversight over direct investments in these assets. The FCA also highlighted the lack of consumer protection or consumer redress under the Financial Services Compensation Scheme offered to those who buy any of these assets and warned consumers that they “should be prepared to lose all the money [they] invest”.
Additionally, the FCA took the opportunity to remind cryptoasset firms engaged in the marketing of cryptoassets that they must comply with the guidelines set out by the Advertising Standards Authority and state that cryptoassets are not regulated by the FCA.
Queen’s Speech: implications to financial services
Prince Charles delivered the Queen’s Speech on 10 May 2022 to both Houses of Parliament, setting out the government’s legislative agenda for the forthcoming parliamentary year. The government announced a range of bills which will impact the financial services sector, including the introduction of the Financial Services and Markets Bill (FSMB) and the Economic Crime and Corporate Transparency Bill (ECCTB).
The purpose of the FSMB is to create a post-Brexit framework which works for the UK market and responds to the evolving financial services sector. This includes reforming the rules that regulate the UK’s capital markets to promote investment, updating the objectives of the financial services regulators to ensure a greater focus on growth and international competitiveness. It also introduces additional protection for those investing or using financial products in order to make it safer and support the victims of scams.
Meanwhile, one of the key objectives of the ECCTB will be to enable businesses in the financial sector to share information more effectively in order to prevent and detect economic crime, including money laundering and fraud.
The FCA has recently hosted around 100 market participants at a CryptoSprint event to explore how the evolving world of cryptoassets could be regulated in the UK.
Over two days, participants explored some of the challenges facing the industry, including how the FCA can support and balance innovation with high standards that protect consumers and markets.
Separately, the FCA has also issued a reminder to consumers that it cannot comment on individual cryptoassets and non-fungible tokens (NFTs). The FCA has reminded consumers that it has not been given regulatory oversight over direct investments in cryptoassets and NFTs, and there are no consumer protections in place such as the Financial Services Compensation Scheme (FSCS).
PSR Panel’s digital payments initiative
At the request of the Payment Systems Regulator (PSR), the PSR Panel has produced a report looking into digital payments. The objective of the review was to understand the hesitations to taking up digital payments and to identify possible solutions.
The review observed several factors explaining the continued reliance on cash:
- the physical nature of cash making budgeting easier
- concerns around fraud, error and privacy
- lack of financial or digital understanding
- lack of access to digital or financial infrastructure
- delays associated with digital solutions versus cash can present cashflow management issues for small businesses/organisations
- digital solutions may not be available at a price that small businesses are willing to pay
The panel’s recommendations can be broadly grouped into the following categories:
- improving awareness, understanding and trust in digital payments options
- removing barriers to new digital solutions
- reducing digital exclusion
- improving data gathering
FCA unveils new reporting platform for sanctions breaches
The FCA has launched a new financial sanctions evasion reporting platform for regulated entities, in a bid to encourage compliance with the ever-increasing complexity of the UK sanctions framework. Since the beginning of the conflict in Ukraine, the UK has vastly scaled up its programme of both individual sanctions designations and sector-specific sanctions rules known as “sectoral sanctions”.
Over the last few months the FCA has sought to proactively monitor the standard of regulated entities’ financial sanctions controls. The agency has contacted numerous firms directly in regard to their existing procedures and their mechanisms for avoiding breaches of the legislation.
This new reporting tool is voluntary and it aims to tackle breaches of sanctions and weaknesses in companies’ internal sanctions policies and procedures. Reports can be submitted anonymously and will be kept confidential by the FCA. Once the FCA receives a report, it will consider whether further action needs to be taken. However, it urges that, even if formal action is not taken against the individual or entity that has been reported, the report alone will help to build a picture of the firm’s conduct risk
Whilst making use of this reporting tool is voluntary, it is important to bear in mind that a large number of firms are legally obliged to make reports of suspected financial sanctions breaches to the Office of Financial Sanctions Implementation (OFSI). Further, the OFSI reporting regime applies to a wider set of individuals and entities than those regulated by the FCA. For example, those who provide legal services, tax advice, trust advice and estate agents are also subject to this compulsory reporting obligation.
If a report to OFSI is needed, the company should also consider whether to make a Suspicious Activity Report (SAR) for money laundering under the Proceeds of Crime Act 2002 (POCA). The SAR reporting regime is compulsory for entities in the regulated sector (a failure to report knowledge or suspicion represents a criminal offence).
The introduction of this new self-reporting tool fits into a broader pattern of co-ordinated attempts by the government and public bodies to clamp down on economic crime, with sanctions evasion at the forefront of this agenda. One of these new units, dubbed the “Combatting Kleptocracy Cell”, was created within the National Crime Agency in order to target sanctions evasion and money laundering. It also provides support for cross-government sanctions delivery and enforcement.
FCA publishes market watch 69 on market conduct and transaction reporting issues
On 17 May 2022, the FCA published market watch 69 in relation to market conduct and transaction reporting issues.
The FCA, amongst other things, observed that:
- the most effective market abuse risk assessments are those which involve consideration of the different types of market abuse and how they apply across different areas of the business and asset classes;
- some firms do not consider different types of market abuse, the different areas of business in which they operate, how that business is undertaken, and the different asset classes and instruments traded, and as a result they may not be able to adequately identify market abuse risks and align their monitoring programme to them to ensure effective surveillance;
- surveillance arrangements are improving across the industry, however, there continues to be variance;
- some firms have clear, detailed and up-to-date policies and procedures for monitoring market abuse and it appears these may provide a helpful reference point for staff and assist with work in areas such as alert review and escalation although others were vague with limited detail;
- some firms outsource aspects of their surveillance to another part of their organisation, or to a separate organisation and whilst the FCA recognises that there may be organisational benefits in these arrangements, in some cases, there is a limited understanding and/or oversight of the surveillance taking place;
- firms should consider whether their market abuse training is effective and tailored to the risks associated with the desk, asset classes traded, client types and other relevant factors. The FCA also added that front office staff may benefit from clear escalation policies and senior management support in helping them in making appropriate decisions; and
- all the firms asked to complete questionnaires since the FCA published the Chapter 8 of the Financial Crime Guide said that they have read the guide and have policies in place.
FCA Policy statement: New cancellation and variation power
On 19 May 2022, the FCA issued a Policy Statement in respect of changes to its Handbook and Enforcement Guide concerning a new cancellation and variation power. Under the FS Act 2021, the FCA is given an additional power to expedite the process for cancelling permissions of firms. The FCA will provide a firm with two warnings where it believes it is not using its regulatory permission and will then cancel the permission or change it 28 days after the first warning if the firm has not taken appropriate action.
The FCA consulted on these proposals in September 2021 in consultation paper CP21/28 and confirms that it has made some minor changes to its initial proposals. This includes clarifying that the FCA will look at all relevant facts and circumstances when deciding whether to use the new power. The changes apply only to firms authorised or deemed, under the temporary permissions or supervised run-off regimes, to be authorised by the FCA under Part 4A of FSMA. The rules do not apply to payment service providers or e-money issuers, or to firms authorised by the PRA rather than by the FCA.
In an accompanying press release, the FCA states that its new power supports it’s the existing “use it or lose it” initiative, which since May 2021, has seen the FCA undertake 1,090 assessments to see whether firms are undertaking the financial activity for which they have permission.