Key Regulatory Topics: Weekly Update 17 - 23 February 2023
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This week in the UK, the FCA published a second batch of letters to certain sectors on implementing the Consumer Duty. The FCA also set out its ideas for the UK’s future asset management regime. In the EU, the ESAs updated their Q&As on a number of topics under the EU Securitisation Regulation, while the EC published a call for advice to the EBA and ESMA to evaluate the prudential framework for investment firms under the IFR and IFD.
Consumer/retail
Please see the ‘Payment Services and Payment Systems’ section for the FCA’s letter to payments and e-money firms on implementing the Consumer Duty.
Council of EU sixth compromise proposal on new Distance Marketing Directive
On 23 February, the Council of the EU published its sixth compromise proposal on the proposed Directive on financial services contracts concluded at a distance. The proposal indicates where changes have been made both to the original EC proposal and the Council’s fifth compromise proposal. The proposed Directive will repeal the Distance Marketing Directive and transfer its contents to the Consumer Rights Directive.
FCA speech on implementing the Consumer Duty
On 22 February, the FCA published a speech by Sheldon Mills, FCA Executive Director, Consumers and Competition, on the final months left to implement the Consumer Duty. Highlights include: (i) the FCA intends for the Consumer Duty to benefit firms as well as consumers. It believes that firms will innovate through the Consumer Duty, by refining systems and ideas. This will improve their offering to the market, drive effective competition and lower costs; (ii) focusing on the areas that will have the greatest impact on consumer outcomes should be every firm’s priority ahead of 31 July, according to the FCA. Over the next five months, the FCA considers it essential for firms to work together across the manufacturing and distribution chain to deliver good outcomes; and (iii) the FCA will be surveying around 600 smaller firms next to check how prepared they feel with their implementation plans.
FCA letters on implementing Consumer Duty for debt advice firms, and debt purchasing, debt collecting and debt administration services firms
On 21 February, the FCA sent letters to debt advice firms, debt purchasing, debt collecting and debt administration services (DPCA) firms on implementing the Consumer Duty. The FCA sets out: (i) a reminder of the implementation timeline, key elements of the Duty and how it applies to these firms; (ii) its expectations for how firms should embed the Duty, including how firms evidence the outcomes their customers are getting; (iii) feedback from the FCA’s recent review of firms’ implementation plans; and (iv) its approach to supervising the Duty and planned next steps. The FCA notes that debt advice firms are likely to see much greater demand for their services from customers in more complex and challenging circumstances given the rising cost of living. The harms the FCA identifies as relevant for this portfolio include: (a) ensuring advice or solutions offered are appropriate in light of customers’ changing circumstances; (b) planning for operational and financial resilience; (c) helping customers in complex or vulnerable circumstances; and (d) the use of technology, automation and ‘robo-advice’. For DPCA firms, the harms identified by the FCA include: (1) customer circumstances, vulnerabilities, and complaints; (2) statute barred debts; (3) firm financial and operational resilience; and (4) business ownership models. In the annexes to the letters, the FCA sets out in more detail particular issues relevant to each of the portfolios.
Financial crime
Please see the ‘Payment Services and Payment Systems’ section for a speech by Chris Hemsley, Managing Director of the PSR, on tackling authorised push payment fraud, and a letter sent by the FCA to payments and e-money firms on implementing the Consumer Duty.
Fintech
Please see the ‘Other Developments’ section for the FSB’s letter to G20 finance leaders and central bank governors setting out its work programme priorities for 2023, including in relation to cryptoassets and decentralised finance.
IRSG response to BoE/PRA/FCA joint discussion paper on AI and ML
On 21 February, the International Regulatory Strategy Group (IRSG) published its response (dated 10 February 2023) to the joint BoE/PRA/FCA discussion paper on the use of artificial intelligence (AI) and machine learning (ML) in financial services. The IRSG identifies a number of recommendations to help advance the policy debate on this topic, including: (i) an outcomes-based approach is likely to be the most appropriate in practice, due to the risk that process-focused regulation of AI may stifle innovation by forcing AI applications and processes into static regulatory categories which are less able to adapt to new innovations; (ii) focusing on the overall adequacy and outcomes of firms’ governance is preferable to introducing new process-focused rules. There may be some specific areas where further guidance could be helpful, for example additional guidance on the application of certain existing rules to AI. Any new guidance on the use of AI within the financial sector should consider carefully how to address specific risks inherent to AI which might impact adversely on existing desired regulatory outcomes; (iii) a sector-specific definition of AI in the regulators' rulebooks is not necessary. There are a wide range of different processes used by firms that are not expressly defined or referenced in either the FCA Handbook or the PRA Rulebook; (iv) the processes and design elements involved in certain AI applications may result in particular oversight considerations that have not existed historically in relation to less novel technologies, and the IRSG would encourage the BoE and the FCA to consider these differences in formulating their regulatory approach to AI; and (v) on the ethical use of AI, the IRSG encourages the regulators to engage with the Information Commissioner's Office, given the multiple intersections with privacy and data protection laws.
Fund regulation
Please see the ‘Other Developments’ section for the FSB’s letter to G20 finance leaders and central bank governors setting out its work programme priorities for 2023.
Council of EU publishes text of proposed ELTIF Amending Regulation
On 22 February, the Council of the EU published the text of the proposed Regulation amending the Regulation as regards the requirements pertaining to the investment policies and operating conditions of European long-term investment funds and the scope of eligible investment assets, the portfolio composition and diversification
requirements and the borrowing of cash and other fund rules (ELTIF Regulation). The Council states in an information note that it should now be in a position to approve the text, which also reflects the EP’s position. The Council is expected to adopt the Amending Regulation on 7 March.
FCA discussion paper on updating and improving the UK asset management regime
On 20 February, the FCA published a discussion paper on updating and improving the UK asset management regime. In the paper, the FCA: (i) gives context about the UK asset management industry and explains the main outcomes it wants to achieve in improving the regime; (ii) requests feedback on whether it could make the structure of the regulatory regime for asset managers clearer and more coherent. The FCA covers the framework of rules for asset managers, the regime for retail funds and the regime for managers of professional funds; (iii) sets out areas that the FCA considers could be addressed to make the regime for asset management and funds work better, including possible changes to the rules relating to fund managers, depositaries and funds; and (iv) discusses how technology can drive change. The FCA looks at how fund managers, distributors and investors interact with one another, and considers structural changes such as fund tokenisation which could support better outcomes for firms and investors. The FCA has not cemented any new proposals at this stage. It aims to promote further discussion and listen to stakeholders’ views about what it should prioritise. The deadline for comments is 22 May. The FCA intends to publish a feedback statement later this year, likely as part of a further consultation.
Markets and markets infrastructure
Please see the ‘Consumer/Retail’ section for the Council of the EU’s sixth compromise proposal for the proposed Directive on financial services contracts concluded at a distance.
Please see the ‘Other Developments’ section for the FSB’s letter to G20 finance leaders and central bank governors setting out its work programme priorities for 2023.
ESAs update EU Securitisation Regulation Q&As
On 17 February, the ESAs updated their Q&As on the EU Securitisation Regulation. Eleven new questions have been added in relation to: (i) the inclusion of early amortisation provisions or trigger for termination of the revolving period in the transaction documentation; (ii) existence of different classes of investors; (iii) whether a step-up margin to be paid to investors could apply in the event the securitisation is no longer STS; (iv) whether mortgages secured by non-owner occupied residential and real estate properties can be homogeneous; (v) the application of the homogeneity criteria to branches; (vi) replacement of the liquidity providers; (vii) which reporting templates should apply to a securitisation backed by project finance loan receivables; (viii) securitisation exposures backed by several collaterals; (ix) the application of EMIR to securitisation transactions; (x) institutional investors’ reporting obligations; and (xi) use of estimated Energy Performance Certificate values.
Payment services and payment systems
Please see the ‘Other Developments’ section for the FSB’s letter to G20 finance leaders and central bank governors setting out its work programme priorities for 2023 including in relation to cross-border payments.
PSR seeks views on papers for card scheme and processing fees market review
On 23 February, the PSR published two papers as part of its card scheme and processing fees market review. One is a call for evidence on initial stakeholder feedback that the PSR has received on the competitive constraints that Mastercard and Visa face when setting these fees. This paper summarises the feedback the PSR has so far received, and outlines four themes it has observed: (i) the intensity of competition and innovation in the payments ecosystem; (ii) differences in the competitive dynamics on the issuing and acquiring sides of the market; (iii) the impact of transparency on competitive pressure at all levels of the value chain; and (iv) the must-take status of Mastercard- and Visa-branded cards (in many retail environments). The PSR intends for these themes to stimulate further discussion and debate. The call for evidence closes on 11 April. The second paper sets out the regulator’s proposed approach to analysing the profitability of Mastercard and Visa’s UK card businesses in order to understand whether their profit levels are what would be expected in a competitive market. The paper includes initial analysis of Mastercard and Visa’s recent European operating profits, which include their UK activities. Following this initial analysis, the PSR has requested further information from Mastercard and Visa and will be looking closely at the additional data to understand what is driving these profits. While engaging with Mastercard and Visa, the PSR has also identified that detailed financial information on their UK-specific activities is not currently routinely collected or publicly reported by either card scheme. Therefore, the PSR is considering whether the two schemes should be required to provide such information on a regular basis in the future, through more formal reporting requirements. The deadline for comments on the PSR’s approach is 6 April. The PSR intends to publish an interim report in its market review in Q4.
Call for evidence on competitive constraints
PSR approach to profitability analysis
FSB priority actions for achieving G20 targets on enhancing cross-border payments
On 23 February, the FSB set out its priority actions for achieving the G20 targets for enhancing cross-border payments. In October 2022, the FSB published a prioritisation plan and engagement model for taking the cross-border payments roadmap forward. The plan reflects that the roadmap has reached an inflection point and needs to move to implementing practical projects to enhance cross-border payment arrangements to achieve the quantitative targets that have been established. Drawing from the analyses to date and the feedback received from stakeholders, the FSB, the CPMI and partner bodies have identified three interrelated themes for orienting and focusing the next phase: (i) payment system interoperability and extension; (ii) legal, regulatory and supervisory frameworks; and (iii) cross-border data exchange and message standards. This report details the specific actions that will be taken under the priority themes to move forward the roadmap and achieve the targets by the 2027 target date. The FSB notes that successfully implementing the requisite changes will require ongoing close collaboration and coordination among the FSB and its partner bodies tasked with taking forward the roadmap, the private sector, and authorities from jurisdictions beyond the G20.
PSR speech on tackling APP fraud
On 23 February, the PSR published a speech by Chris Hemsley, PSR Managing Director, on tackling authorised push payment (APP) fraud. Highlights include: (i) APP fraud remains a significant problem. The most recent full-year figures published by UK Finance show nearly 200,000 incidents of APP scams in 2021, with gross losses of nearly £600 million; (ii) given that fraud doesn’t respect the boundaries of any one organisation, any sector or the differences between the private and public sector, collaboration between all of these areas is critical for tackling this problem effectively. To be successful, the conditions for collaboration need to be in place. This includes making sure that there is clear and reliable evidence of the scale and nature of the problem, combined with clear incentives on all parties to act; and (iii) more needs to be done by tech companies to tackle APP fraud and protect consumers. Mr Hemsley considers four areas where progress can be made: (a) at the source of the fraud – a large proportion of victims appear to be recruited within a social media platform. Mr Hemsley wishes to see greater transparency here; (b) making sure payment firms can manage fraud risks appropriately and proportionately – this could involve some extra friction in payments, in certain circumstances, to allow time to investigate potential frauds; (c) informing and empowering customers to make good decisions – this needs to take the form of risk-based interventions rather than merely generic warnings when notifying customers when a payment is identified as fraudulent; and (d) effective law enforcement.
FCA letter on implementing Consumer Duty for payments and e-money firms
On 21 February, the FCA sent a letter to payments and e-money firms on implementing the Consumer Duty. The FCA sets out: (i) a reminder of the implementation timeline, key elements of the Duty and how it applies to payments firms; (ii) its expectations on how payments firms should embed the Duty, including examples of good and poor practice; (iii) feedback from the FCA’s recent review of firms’ implementation plans; and (iv) its approach to supervising the Duty in the payments portfolio and planned next steps. The FCA states that for many firms in the portfolio, meeting the Duty will require a significant shift in culture and behaviour. Larger payments firms should expect to be asked regularly to provide their supervisors updates on implementation progress and their internal governance papers and minutes, which the FCA will engage with and challenge. Firms of all sizes in the payments portfolio should be ready for the FCA to include them in engagement. The FCA outlines the key things that payments and e-money firms should be considering under the four outcomes of the new Duty, highlighting account freezing and fraud reports in particular. The FCA states that it continues to see poor financial crime controls in some firms, with accounts being frozen disproportionately, for too long and without adequate explanation. The FCA also sees a need under the Duty for firms to ensure that their treatment of customers who feel themselves to be victims of fraud, especially authorised push payment fraud, is not unduly harsh or unsupportive.
Prudential regulation
Please see the ‘Recovery and Resolution’ section for the EBA’s final revised guidelines on deposit guarantee schemes contributions.
EC call for advice to EBA and ESMA on investment firms’ prudential requirements under IFR/IFD
On 20 February, the EC published a call for advice to the EBA and ESMA to evaluate the prudential framework for investment firms under the IFR and IFD that has been in place since 26 June 2021. The evaluation should: (i) provide information about the structure of the market, distinguishing between investment firms' categories and business models. This should be done to enable the EC to assess whether the objective of proportionality, which underpins the framework, has been met without creating any undue risk to financial stability and regulatory arbitrage opportunities; (ii) reflect on the categorisation of investment firms; (iii) analyse the interactions with the CRR/CRD, particularly with regards to prudential consolidation, liquidity requirements, the scope of K-factors, the implications of the adoption of the Banking Package, and remuneration; (iv) consider the impact of ESG risks, in particular climate-related risks; (v) look at how to future proof the IFR/IFD regime; and (vi) provide a first overview on how the current prudential regime, in particular in the fields of liquidity risk and concentration risk, could be extended to energy firms trading actively on commodity markets. Among other things, the impact on the capital requirements of investment firms resulting from any change proposed to the current legislation should be assessed considering each proposed modification individually, as well as in combination. The EBA and ESMA are asked to deliver their joint report by 31 May 2024.
Recovery and resolution
EBA final revised guidelines on methods for calculating contributions to deposit guarantee schemes
On 21 February, the EBA published its final revised guidelines on deposit guarantee schemes (DGS) contributions. The guidelines harmonise the methodology for the DGS to collect contributions from credit institutions in proportion to their riskiness. Following an in-depth review of the application of the existing guidelines over the period from 2015 to 2021, the EBA decided to revise the guidelines, with a view to enhancing the link between the riskiness of a credit institution and its contributions to the DGS fund. The most substantial changes to the existing guidelines include: (i) setting minimum thresholds for the majority of core risk indicators, in line with the applicable minimum regulatory requirements, and adjust their minimum weights to better reflect the indicators’ performance in measuring the risk to the DGSs; (ii) introducing a technical mathematical improvement to the formula for determining the risk adjustment factor of each member institution that ensures a constant relationship between the riskiness of institutions and their DGS contributions; (iii) specifying how to account for deposits where the DGS coverage is subject to uncertainty; (iv) introducing the possibility for DGSs to use a stock-based approach to raising contributions which incentivises banks to reduce their riskiness even after the DGS fund has reached its target level of contributions; and (v) clarifying how to raise contributions following the use of DGS funds. Finally, the EBA streamlined and simplified the wording of the guidelines. The guidelines will apply from 3 July 2024.
Regulatory reform post-Brexit
Please see the ‘Fund Regulation’ section for the FCA’s discussion paper on updating and improving the UK asset management regime.
Sustainable finance
Please see the ‘Other Developments’ section for the FSB’s letter to G20 finance leaders and central bank governors setting out its work programme priorities for 2023, including in relation to climate-related financial risks.
Delegated Regulation incorporating nuclear and gas disclosures into SFDR RTS published in OJ
On 17 February, Delegated Regulation (EU) 2023/363 was published in the OJ. The Delegated Regulation amends and corrects the SFDR RTS set out in Delegated Regulation (EU) 2022/1288 as regards the content and presentation of information in relation to disclosures in pre-contractual documents and periodic reports for financial products investing in environmentally sustainable economic activities. The Delegated Regulation: (i) incorporates nuclear and gas disclosures into the SFDR RTS; (ii) clarifies the applicability of Article 6 of the SFDR; and (iii) corrects errors in the cross-references in the periodic disclosures. It entered into force on 20 February, three days after its publication in the OJ.
Other developments
Two EEA Joint Committee Decisions amending Annex IX (Financial Services) to EEA Agreement published in OJ
On 23 February, two Decisions of the EEA Joint Committee that amend Annex IX (Financial Services) to the EEA Agreement were published in the OJ: (i) Decision No 41/2020, which incorporates Delegated Regulation (EU) 2019/981 amending Delegated Regulation (EU) 2015/35 supplementing the Solvency II Directive. The decision's entry into force date was 21 March 2020, provided that all the notifications under Article 103(1) of the EEA Agreement have been made; and (ii) Decision No 43/2020, which incorporates Implementing Decision (EU) 2019/2211 amending Implementing Decision (EU) 2018/2031 determining, for a limited period of time, that the regulatory framework applicable to CCPs in the UK is equivalent, in accordance with EMIR. The decision's entry into force date was 21 March 2020, provided that all the notifications under Article 103(1) of the EEA Agreement have been made.
FSB letter on 2023 priorities
On 20 February, the FSB published a letter sent to G20 finance leaders and central bank governors ahead of their February 2023 summit. The FSB sets out its work programme priorities for 2023, which in relation to non-bank financial intermediation (NBFI) include: (i) addressing vulnerabilities in the non-bank sector. The FSB's report on the financial stability aspects of commodity markets identifies a number of vulnerabilities and notes that some of the issues are addressed in its work programme to enhance NBFI resilience; (ii) an in-depth study of forms of leverage that are not always apparent in supervisory and regulatory data; (iii) work to address liquidity mismatch in open-ended funds and promote greater and more consistent use of funds’ liquidity management tools; (v) work to enhance market participants’ liquidity preparedness for margin and collateral calls, which were important factors in the March 2020 market turmoil, and to identify data gaps in regulatory reporting; and (iv) in conjunction with IOSCO, a peer review of money market mutual fund policy reform measures, to take stock of members’ progress in implementation of reforms designed to make this sector more resilient. In relation to cryptoassets and decentralised finance, the FSB’s priorities include: (a) finalising its recommendations for the regulation, supervision and oversight of cryptoassets and markets and its recommendations targeted at global stablecoin arrangements; (b) a joint paper with the IMF that synthesises the policy findings from the IMF’s work on macroeconomic and monetary issues and FSB work on supervisory and regulatory issues associated with cryptoassets; and (c) in-depth analysis of the large cryptoasset intermediaries that provide a wide range of services to the ecosystem. In relation to cyber and operational resilience, the FSB intends to deliver in April a revised report to the G20 on achieving greater convergence in cyber incident reporting that incorporates public feedback and to deliver a consultative document to the G20 aimed at strengthening financial institutions’ ability to manage third party and outsourcing risk. In relation to enhancing cross-border payments, the FSB is setting up two new taskforces to work in partnership with the private sector. The FSB states that it continues to coordinate work to address climate-related financial risks through its climate roadmap, and will provide an update later in the year on further progress in climate disclosures and reporting.