Key Regulatory Topics: Weekly Update 23 – 29 April 2021
29 April 2021
Our weekly update on key regulatory topics affecting the financial services sector.
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The eagerly anticipated Financial Services Act 2021 received Royal Assent this week and is described by HMT as a major milestone in shaping a regulatory framework for UK financial services outside of the EU. Please see our “other developments” section for more detail.
FCA speech on compliance, culture and evolving regulatory expectations
On 26 April, the FCA published a speech by Mark Steward (Executive Director of Enforcement and Market Oversight) on compliance, culture and evolving regulatory expectations. The speech notes that: (i) the SM&CR regime has wrought some profound changes in the way firms allocate responsibilities, align those responsibilities to relevant controls and ensure oversight as to how these controls operate down the line; (ii) by imposing personal liability, the regime uses self-interest to avoid the bear pit of enforcement – this is a virtuous circle, as what protects senior management from liability also reduces (though cannot guarantee) the risk of non-compliance more generally within firms; (iii) the FCA has undertaken a uniquely nurturing role in this transformation and developed a new tool, the 5 conduct questions (5CQ), expressly to help firms implement more effective change programmes as well as helping the FCA to interrogate progress; (iv) the 5CQ start with ‘tone from the top’, and are increasingly focussing on ‘tone from within’ which requires every person in an organisation to be personally accountable and engaged. The FCA is currently considering a sixth conduct question in its future work that will interrogate firms on diversity and inclusion; (v) the Regime and the FCA’s 5CQ are drivers of a different approach because they require firms to think about behaviour at the point it might fail – this focus on points of failure not only encourages greater awareness, it also promotes better calculations of judgement; and (vi) in terms of whether the law can change the mores of an organisation, the point of failure is not necessarily a failure of compliance and, for enforcers of the law, it is human nature that is the real challenge – failures are not necessarily failures of compliance, but the consequence of choices made by individuals.
Please see our Other Developments section for updates on the: (i) Financial Services Bill receiving Royal Assent; and (ii) FCA’s speech on reshaping itself for the future post-pandemic world.
FCA discussion paper on strengthening its financial promotion rules for high-risk investments and firms approving financial promotions
On 29 April, the FCA published a discussion paper (DP) on strengthening its financial promotion rules for high-risk investments and firms approving financial promotions. The FCA wants to use this DP to help it calibrate rule changes that it will propose later in the year. The issues discussed in the DP primarily relate to financial promotions for high-risk investments. In summary, the FCA considers any investment which is subject to marketing restrictions under its rules to be a ‘high-risk investment’. Furthermore, the FCA has identified three main areas where it could strengthen its rules: (i) classification of high‑risk investments – the FCA wants to ensure that it captures all investments that pose the highest risk to consumers and that investments with similar characteristics are treated in a similar way to prevent arbitrage. Thus, the FCA is asking for thoughts on whether there are any investments which are not subject to marketing restrictions which should be, and it is also asking for views on potential changes to the current classification of certain types of investments and consequently the level of marketing restrictions that apply to them; (ii) further segmenting the high‑risks investments market – the FCA is concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments which do not meet their needs. Therefore, the FCA plans to strengthen its rules to further segment high-risk investments from the mainstream market, and it is seeking views on certain aspects of this; and (iii) the role of a section 21 approver – given the key role that section 21 approvers play in ensuring that financial promotions meet the standards that the FCA expects, the FCA thinks that they should also have clear responsibilities to ensure compliance on an ongoing basis, and it is asking for views on what these responsibilities should look like. The deadline for comments is 1 July.
EBA consults on draft guidelines on the delineation and reporting of available financial means of Deposit Guarantee Schemes (DGSs)
On 28 April, the EBA published a consultation paper on its draft guidelines on the delineation and reporting of available financial means of DGSs. The EBA states that the purpose of the guidelines is to ensure that only funds that credit institutions contributed, or that stem indirectly from such contributions such as recoveries or investment income, will count towards reaching the target level of the DGS fund – conversely, funds that stem directly or indirectly from borrowed resources should not count towards the target level. This clarification aims at preventing the situation where a DGS could meet the target level by taking out a loan. The guidelines follow the EBA’s recommendations made in its opinion on deposit guarantee scheme funding and uses of deposit guarantee scheme funds published on 23 January 2020. The opinion recommended clarifying the Deposit Guarantee Schemes Directive (DGSD), by confirming that borrowed funds or funds stemming from borrowed funds should not count towards reaching the minimum target level for DGS funds. The EBA notes that given that a review of the DGSD is still several years away from being proposed, negotiated and finalised, the proposed guidelines provide such a clarification ahead of any such changes, using the existing DGSD as a legal basis – more precisely, the draft guidelines clarify that available financial means (AFM) are comprised of two subsets: (i) qualified AFM (QAFM) – funds stemming directly or indirectly from contributions of DGS member institutions, which qualify towards reaching the target level of the DGS fund; and (ii) other AFM – funds, which are not QAFM, including borrowed funds that stem from liabilities such as loans, and hence do not count towards reaching the target level of the DGS fund. Furthermore, the EBA states that in terms of reporting, the proposed guidelines will extend the reporting requirements from DGSs to the EBA in order to reflect the clarified concept of AFM, QAFM and other AFM proposed earlier in the Guidelines – they also require the reporting on outstanding liabilities of DGSs, unclaimed repayments, and high-level information on alternative funding arrangements that are in place. The deadline for comments is 28 July.
HOL Liaison Committee follow-up report on tackling financial exclusion
On 24 April, the HOL’s Liaison Committee published a report examining the progress made by the Government in the implementation of the recommendations made by the Select Committee on Financial Exclusion in its 2017 report ‘Tackling Financial Exclusion: A country that works for everyone?’. In the Liaison Committee’s report ‘Review of House of Lords Investigative and Scrutiny Committees: towards a new thematic committee structure’ published in July 2019, the Committee recommended that the Liaison Committee could hold follow-up evidence sessions on a former special inquiry committee’s recommendations, followed by the publication of a report – this is the third occasion on which this new procedure has been utilised. Key points include that: (i) over half of the population are classed by the FCA as having characteristics of financial vulnerability; (ii) a clear Government strategy and increased FCA powers should be brought forward in order to stop people experiencing financial exclusion. Non digital access to financial services should remain possible; and (iii) the Government should introduce a requirement for the FCA to establish a statutory Duty of Care that banks and other financial services providers must operate toward their customers – the Committee states that this should replace the current insufficient requirement to ‘treat customers fairly’. Other recommendations in the report include that the: (a) proposed legislation to protect access to cash should be brought forward without delay; (b) Government should publish the timescale and details on the no-interest loan pilot; (c) powers of the FCA to mitigate the trends in bank branch and free ATM closures should be reviewed and enhanced; and (d) . Government should also consider incorporating the banking framework agreement into the proposed legislation for protecting access to cash and make membership of the banking framework agreement compulsory for all retail banks operating in the UK.
Please see the other sections for product-specific updates relating to Covid-19.
Please see our Other Developments section for an update on the FCA’s insights from the 2020 Cyber Coordination Groups.
The Global Anti-Corruption Sanctions Regulations 2021
On 26 April, the Global Anti-Corruption Sanctions Regulations 2021 were published and came into force. The instrument enables the Secretary of State to impose financial sanctions and travel bans on persons involved in serious corruption. In addition, as required by Section 43 of the Sanctions and Anti-Money Laundering Act 2018, HMT has published guidance by the Foreign, Commonwealth & Development Office and the Office of Financial Sanctions Implementation to assist in the implementation of, and compliance with, the Regulations. The guidance specifically covers the prohibitions and requirements imposed by the Regulations, as well as best practice for complying with the prohibitions and requirements, the enforcement of them, and circumstances where they do not apply. HMT has also published an information note for non-government organisations. Sanctions under the regime were also announced on 26 April. The full list of designations under regulations made under the Sanctions and Anti-Money Laundering Act 2018 can be found on the UK sanctions list on GOV.UK.
FCA evaluates the digital sandbox pilot
On 27 April, the FCA published a report on supporting innovation in financial services, evaluating the digital sandbox pilot. In the report, the FCA provides an overview of the digital sandbox pilot, evaluating how it was used by participants, and the key lessons learned for future iterations. The FCA states that the key lessons from the pilot are that: (i) there is significant industry demand, particularly from early-stage firms and start-ups, for a digital testing environment; (ii) access to the digital sandbox was successful in accelerating early stage ‘Proof of Concept’ development and improving product design, to varying degrees – however, the FCA received valuable feedback on changes to the testing environment which would enable participants to make further progress; (iii) the synthetic data was the most valuable feature cited by participants while simultaneously the one with greatest potential for improvement; (iv) future cohorts should have a narrower focus – a narrower focus in the future would result in more sustained engagement from a closer-knit ecosystem, and fewer data assets being required to meet the use cases, resulting in greater depth and granularity for those produced; (v) the core set of tools/features made available in the pilot successfully met an underserviced market need; (vi) the application and approval process should be brought forward, and successful applicants onboarded earlier in the process; and (vii) participants would benefit from a more structured journey through the cohort, rather than the digital sandbox being a ‘self-service’ platform. Based on the feedback collected throughout the pilot and an independent evaluation, and to support the Kalifa Review recommendation of a permanent digital testing environment, the FCA and City of London Corporation will: (a) run a second cohort of the digital sandbox in late 2021; (b) further iterate and improve the digital sandbox testing environment by incorporating the lessons learned from the initial pilot and making the suggested improvements to the platform; (c) expand on the use of the digital sandbox testing environment to highlight the opportunities and value it contributes to the financial services ecosystem; (d) focus the efforts of the second cohort around the theme of sustainability and climate change to support the UK’s green finance ambitions ahead of hosting COP26 in November; and (e) explore, with industry and other stakeholders, viable sustainable operating models for a future, permanent version of the digital sandbox.
The Recognised Auction Platforms and Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2021
On 28 April, the Government published the Recognised Auction Platforms and Greenhouse Gas Emissions Trading Scheme Auctioning (Amendment) Regulations 2021 (Amending Regulations). As explained in the Explanatory Memorandum that was published, the Amending Regulations amend the Recognised Auction Platforms Regulations 2011 (the RAP Regulations) and Greenhouse Gas Emissions Trading Scheme Auctioning Regulations 2021 (the Auctioning Regulations). The RAP Regulations ensure the appropriate regulatory treatment is in place for the auctioning and trading of UK emissions allowances. The Auctioning Regulations make detailed provision for the auctioning of emissions allowances to emit 1 tonne of carbon dioxide equivalent under the UK Emissions Trading Scheme (ETS) and introduces mechanisms to support market stability in this new scheme. The Amending Regulations clarify the position in the Recognised Auction Platform Regulations 2011, as well as clarify the position and correct errors in the Auctioning Regulations – these amendments need to be in force in advance of the first UK ETS auction on 19 May.
FCA consults on changes to UK MIFID’s conduct and organisational requirements
On 28 April, the FCA published a consultation paper proposing changes to UK MIFID’s conduct and organisational requirements. This is the first consultation as part of the FCA’s work with HMT on capital markets reform. The FCA has: (i) spoken to a range of market participants about reforms that it can make to ensure that the rules achieve their objectives and reduce compliance costs without compromising high standards of investor protection; (ii) considered responses that UK market participants gave to a consultation the EC ran last year on possible changes to MiFID II which led on to the ‘quick-fix’ changes to MiFID II that the EU has enacted as part of the Capital Markets Recovery Package – the changes that the FCA is proposing to UK MiFID includes changes in two areas covered by that package, though it believes that several other changes in that package are best made through changes to the UK MiFID delegated regulation, and HMT will propose changes to the delegated regulation in due course; and (iii) considered issues in the light of its objectives, the specificities of the UK market and the letter of 23 March from the Chancellor to the FCA’s Chief Executive which recommends the aspects of government economic policy that the FCA should have regard to in deciding how to act. The FCA’s proposed changes cover: (a) SME and Fixed Income, Currencies and Commodities (FICC) research – specifically, changing the existing inducements rules relating to research, broadening the list of what are considered minor non-monetary benefits to include research on SMEs with a market cap below £200m and FICC research, so that it is not subject to the inducement rules. The FCA has also made rule changes on how inducement rules apply to openly available research and research provided by independent research providers; and (b) best execution reports – removing two sets of reporting obligations on firms: (1) the obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (RTS 27 reports); and (2) the obligation on investment firms who execute orders to produce an annual report setting out the top 5 venues used for executing client orders and a summary of the execution outcomes achieved (RTS 28 reports). The deadline for comments is 23 June.
Working Group on Sterling Risk-Free Reference Rates (RFRWG) statement on the active transition of legacy GBP LIBOR contracts
On 23 April, the RFRWG published a statement recommending the active transition of contracts ahead of GBP LIBOR cessation as the primary method to ensure contractual certainty and retain economic control. Specifically, the RFRWG strongly encourages market participants to engage with their financial providers to agree, as soon as possible, when and how their legacy GBP LIBOR contracts will change. The statement sets out a range of considerations to help market participants assess and prioritise the active transition of legacy GBP LIBOR contracts to SONIA. In addition, the RFRWG has published a paper providing infrastructure and operational considerations for derivatives markets participants to consider in order to inform planning and preparation for the operationalisation of fallbacks in non-cleared linear GBP LIBOR derivatives.
Draft Payment and Electronic Money Institution Insolvency Regulations 2021
On 26 April, the Government published the draft Payment and Electronic Money Institution Insolvency Regulations 2021. The accompanying draft Explanatory Memorandum explains that the instrument creates a new insolvency procedure for payment and electronic money institutions (known as the payment institution special administration or electronic money institution special administration, or “pSAR”) to operate as an alternative to liquidation or administration under the Insolvency Act 1986. The pSAR will create three special administration objectives which administrators will have a duty to follow: (i) to ensure the return of relevant funds as soon as is reasonably practicable; (ii) to ensure timely engagement with payment system operators, the Payment Systems Regulator and the Bank of England, HM Treasury and the FCA; and (iii) to either rescue the institution as a going concern, or wind it up in the best interests of the creditors. The administrator has the flexibility to prioritise these objectives as appropriate in order to achieve the best result overall for customers and creditors. The instrument also provides for Part 24 of FSMA (which makes provision for insolvency) to be applied to payment and electronic money institution insolvency – the extension of these provisions will provide the FCA with the same powers to participate and protect consumers in an insolvency process for payment and electronic money institutions as it does for other FCA supervised firms. Moreover, the instrument also makes an amendment to the Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 and corrects a minor defect in the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020. In addition, HMT has published its response to its consultation on insolvency changes for payment and electronic money institutions. Amongst other things, HMT notes that it accepts that the proposed rules to accompany the draft Regulations should require office holders to provide a reasonable notice period before a bar date (a deadline by which claims need to be submitted, if used) comes into effect and require notice of a bar date to be given to all persons who might have a right to assert an interest in any monies.
PRA sets out a new prudential regime to safeguard the stability of the UK’s financial system
On 29 April, the PRA published a speech by Victoria Saporta (Executive Director, Prudential Policy) setting out a new and simpler prudential regime that is robust enough to safeguard the stability of the UK’s financial system, given that the UK is able to take a new approach to regulating banking and insurance services post-Brexit. Alongside the speech, the PRA has published a discussion paper which sets out the PRA’s thinking about how it could deliver a simpler regime for the smallest non-systemic banks and building societies as a first step in building a strong and simple framework that could eventually extend simplification to larger, but still non-systemic, UK domestic firms. The discussion paper considers the trade-offs – between increasing simplicity, maintaining resilience, and avoiding further barriers to growth – and seeks to highlight different options for designing a strong and simple framework. In particular, the PRA: (i) has identified options for determining which firms should be in scope of this first step, including possible criteria based on geographical footprint, size, and activities and risk exposures; (ii) has considered the key options for determining the shape of prudential requirements under this first step and identified two types of design approach that can be thought of as representing two ends of a spectrum - a ‘streamlined’ approach that takes the existing prudential framework as a starting point and modifies those elements that are over-complex for smaller firms and a ‘focused’ approach based on a much narrower but more conservatively calibrated set of prudential requirements; and (iii) discuss whether there may be scope to reduce mandatory prudential disclosures, such as under Pillar 3. The PRA invites firms’ and other practitioners’ views on the various options, to help the PRA understand preferences and wider implications. Those comments will help as the PRA undertakes the detailed design work ahead of consultation and implementation of any proposals in the future. The deadline for comments is 9 July.
EBA consults on draft regulatory technical standards (RTS) specifying how to identify the appropriate risk weights and conditions when assessing minimum LGD values for exposures secured by immovable property
On 29 April, the EBA published a consultation paper on its draft RTS specifying the types of factors to be considered for the assessment of appropriateness of risk weights and the conditions to be taken into account for the assessment of appropriateness of minimum loss given default (LGD) values for exposures secured by immovable property. The EBA explains that the relevant authority, as designated by the Member State, may set higher risk weights or impose stricter criteria on risk weights, or increase the minimum LGD values when the following two conditions are met: (i) the risk weights do not adequately reflect the actual risks related to the exposures secured by mortgages on residential property or commercial immovable property, or that the minimum LGD values are not adequate; and (ii) the identified inadequacy of these risk weights or minimum LGD values could adversely affect the current or future financial stability in the Member State. The EBA notes that the draft RTS focus on the first condition. For institutions applying the standardised approach (SA), these draft RTS specify the types of factors that authorities should consider during the risk weight assessment on the basis of the loss experience of exposures secured by immovable property and forward-looking immovable property market developments. For institutions applying the internal ratings-based (IRB) approach to retail exposures secured by residential or commercial immovable property, these draft RTS provide conditions to be considered when assessing the appropriateness of minimum LGD values. The deadline for comments is 29 July. The EBA will hold a public hearing on 30 June.
EBA consults to enhance proportionality in liquidity reporting under the CRR
On 28 April, the EBA launched a consultation on its draft Implementing Technical Standards (ITS) on supervisory reporting with respect to Additional Liquidity Monitoring Metrics (ALMM) under the CRR. Following the mandate laid down in CRR II, the EBA is proposing to introduce some proportionality considerations in ALMM reporting for small and non-complex institutions. The EBA states that additional amendments to the templates are introduced with the aim of streamlining reporting requirements, filling in data gaps and further clarifying the reporting instructions. In particular, small and non-complex institutions could be exempted from reporting metrics regarding concentration of funding by product type, the funding price for various lengths of funding and information on roll-over of funding. The liquidity metrics and related reporting are thus reduced to the maturity ladder-monitoring tool, concentration of funding by counterparty and by counterbalancing capacity. The EBA is also proposing to exempt medium-sized institutions from reporting metrics on roll-over funding. The amendments to the reporting templates and annexes aim to clarify inconsistencies and gaps in the reported data as well as to streamline the reporting requirements in certain areas and incorporate clarifications brought forward by a series of Q&As. A public hearing will be held on 28 May. The deadline for comments is 28 July.
EC consults on draft Implementing Regulation extending transition period relating to treatment of exposures to third-country central counterparties (CCPs)
On 28 April, the EC published for consultation a draft Implementing Regulation on the extension of the transitional provisions related to own funds requirements for exposures to CCPs set out in the CRR. The EC explains that if the transitional period is not extended, institutions established in the EU, or their subsidiaries established outside the EU, having exposures to third-country CCPs that have not been recognised in accordance with EMIR, will be required to increase their own funds for those exposures significantly. Therefore, the EC states that it is necessary to extend the transitional provision in Article 497(1), point (b)(iii), of the CRR by 12 months, until 28 June 2022. The EC notes that the extension of the transitional provision would leave time for the Commission to finalise its equivalence assessments in accordance with Article 25(6) of EMIR and to adopt equivalence decisions where the relevant conditions are met. Furthermore, it would leave time for ESMA to recognise the third-country CCPs concerned. The deadline for comments is 26 May.
PRA statement on the disclosure of exposures subject to measures applied in response to Covid-19
On 27 April, the PRA published a statement updating its stance on the implementation of the EBA’s guidelines addressing gaps in reporting data and public information in the context of the Covid-19 pandemic. In July 2020, the PRA issued a statement providing guidance on the disclosure of exposures subject to measures applied in response to the Covid-19 crisis. Given the continued use of Covid-19 support measures in lending by UK firms, the PRA states that it continues to see substantial benefit to its objectives in the disclosure of information on the effects of the measures that UK firms have taken in response to Covid-19. Thus, the PRA confirms that firms should continue to use the templates published with its statement from July 2020 for semi-annual disclosure reference dates up to, and including, 31 December. Furthermore, the PRA states that firms may continue to disclose on a semi-annual basis as at 30 June and 31 December. Firms may also disclose at the half-year and year-end dates for their financial year, if they have an accounting reference date other than 31 December.
PRA consults on correction to the definition of ‘higher paid material risk taker’
On 26 April, the PRA published a consultation paper (CP) on correcting the definition of ‘higher paid material risk taker’. The PRA states that the purpose of this proposal is to align the ‘higher paid material risk taker’ definition with its intention of continuing the approach outlined in its Supervisory Statement 2/17 ‘Remuneration’. This CP follows the PRA’s statement published on 25 February, which explained its position in relation to the definition. The deadline for comments is 26 May.
BoE provides information on its 2021 Climate Biennial Exploratory Scenario (CBES)
On 23 April, the BoE updated its webpage on stress testing, providing information for firms participating in its 2021 CBES. The BoE states that the CBES will cover risks to the UK financial sector from climate change and will be launched in June. In addition, the following items have been published for the use of participating firms: (i) CBES data templates; (ii) CBES data dictionary; (iii) CBES qualitative questionnaire; and (iv) the 2021 Biennial Exploratory Scenario on the financial risks from climate change, containing notes to accompany the Structured Data Templates and the Qualitative Questionnaire.
Please see our FinTech section for an update on the FCA’s report on the digital sandbox pilot.
Please see our Prudential Regulation section for an update on the BoE providing information on its 2021 Climate Biennial Exploratory Scenario.
ECB speech on guiding banks towards a carbon-neutral Europe
On 29 April, the ECB published a speech by its Vice-Chair of the Supervisory Board and Member of the Executive Board, Frank Elderson, on guiding banks towards a carbon-neutral Europe, with a focus on how climate change considerations will be taken into account by ECB Banking Supervision: (i) climate change creates material risks for banks, so it is the ECB’s job to ensure that the banks under its supervision address these risks adequately and proactively; (ii) by compelling banks to adequately assess and manage climate-related risks, the ECB is, in effect, safeguarding the financing of the transition to a low-carbon economy as well. If banks proactively manage climate-related risks, they will not be blindsided by stranded assets, meaning that capital will be preserved and can be used to finance investments in the low-carbon transformation. Climate-related risks being adequately represented on banks’ balance sheets will also contribute to these risks being appropriately priced; (iii) the main risk drivers for banks are physical risks and transition risks both of which will become increasingly material for banks in the coming years. Recently, a Task Force on Climate-related Financial Risks that operates under the BCBS looked into the effects of physical and transition risks on banks and concluded that climate-related risks can be captured in risk categories that are already used by financial institutions, e.g. credit risk, market risk, liquidity risk and operational risk. However, there is still need of an enhanced toolbox that can better measure climate risks. This is why the ECB is encouraging banks to enhance both the quantity and the quality of their climate-related disclosures, and to become more transparent about their overall exposures to climate-related risks. The ECB consider that Euro area banks need to drastically improve their capacity to manage climate-related and environmental risks and start acknowledging how these risks can drive others, including credit, market, operational and liquidity risks; (v) the ECB has already started work on incorporating climate-related risks into its SREP methodology. This year the outcomes of these assessments will not be translated into quantitative capital requirements across the board, but the ECB may impose qualitative or quantitative requirements on a case-by-case basis. The ECB expects the actions taken in 2021 to result in banks being adequately prepared for the full supervisory review in 2022; and (vi) as banks become better prepared to face the risks posed by climate change, they need to be led by people who are also better prepared to deal with these topics. When assessing the suitability of prospective members of the management body of banks, knowledge and experience of climate-related and environmental risks will be among the areas of general banking experience against which suitability will be assessed. The ECB will seek to include an understanding of climate-related and environmental risks as a specific area of expertise within the collective suitability of a bank board.
FCA webpage on climate change and sustainable finance
On 23 April, the FCA published a webpage on climate change and sustainable finance. The FCA states that its sustainable finance strategy is based on 3 themes, which reflect the priorities set out in its feedback statement 19/6: (i) transparency – promoting good disclosures along the investment chain; (ii) trust – ensuring that the market delivers sustainable finance instruments and products that genuinely meet investors’ sustainability preferences; and (iii) tools – Government, regulators and industry all working together to share experience, develop guidance and tools, and provide mutual support as the challenges of climate change are addressed. The FCA notes that the Chancellor’s remit letter to it in March stated that it should consider the Government’s commitment to achieve a net-zero economy by 2050 when it works to advance its objectives and perform its functions as a regulator – the FCA will thus continue to broaden and deepen its sustainable finance strategy. Amongst other things, the FCA also highlights that: (a) it will continue to work closely with the Financial Reporting Council, other regulators and industry as firms continue to develop their stewardship strategies; (b) the FCA is a member of the Sustainable Finance Taskforce (STF) under the International Organization of Securities Commissions and co-chairs the workstream on issuers’ sustainability disclosures – this workstream is collaborating closely with the International Financial Reporting Standards Foundation, which is working towards establishing a Sustainability Standards Board to develop a corporate reporting standard on sustainability; and (c) the STF work also aims to improve asset managers’ sustainability disclosures and investor protection, as well as considering the role of the ESG rating and data providers.
FCA insights from the 2020 Cyber Coordination Groups
On 29 April, the FCA published its insights from the 2020 Cyber Coordination Groups, giving a broad overview and insight into the discussions held at quarterly meetings, with the aim of sharing the valuable insights found in these groups to the wider financial sector. The key insights discussed in the publication are: (i) some of the major cyber threats and risks that CCG member firms have been faced with include: ransomware attacks, denial of service attacks, cloud security, insider threats and inadequate supply chain oversight and security; (ii) CCG firms have identified Zero Trust Security models and Artificial Intelligence as some of the emerging fields within cyber-security; (iii) the change to remote working as a result of the Covid-19 pandemic has put additional strain on cyber-security teams and systems, requiring the need to re-evaluate existing cyber risks and controls – the changed ways of working have also exacerbated the challenges caused by ransomware, supply chain security and insider threats; and (iv) there are several common good practices that can be used to mitigate supply chain risks – CCG members identified fourth-party supply chain and Cloud Service Provider risks as unique challenges in this space and shared potential mitigation strategies, and CCG members have also identified shared assurance models as potentially promising improvements to the way firms assess supply chain risk.
Financial Services Bill receives Royal Assent – Financial Services Act 2021
On 29 April, HMT published a press release announcing that the Financial Services Bill 2019-21 (now the Financial Services Act 2021) has received Royal Assent. HMT states that measures in the Act will: (i) enhance the UK’s world-leading prudential standards and promote financial stability by enabling the implementation of the remaining Basel III standards and a new prudential regime for investment firms, and giving the FCA the powers it needs to oversee an orderly transition away from the LIBOR benchmark; (ii) promote openness between the UK and international markets by simplifying the process to market overseas investment funds in the UK and delivering a Ministerial commitment to provide long-term access between the UK and Gibraltar for financial services firms; (iii) maintain an effective financial services regulatory framework and sound capital markets with a number of smaller measures, including measures to improve the functioning of the Packaged Retail and Insurance-based Investment Products Regulation and increase penalties for market abuse; and (iv) protect consumers who use a range of financial services, by bringing interest-free buy-now-pay-later products into regulation, and improving access to cash by making it easier for retailers of all sizes to offer cashback without a purchase. Prior to the Royal Assent, on 26 April, the HOC held a debate on amendments made by the HOL to the Financial Services Bill 2019-21, and a record of the proceedings was published. First, the HOC voted to insert a new clause containing amendments to FSMA requiring the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers, and the FCA must publish its analysis of the responses to this consultation by the end of this year and make final rules before 1 August 2022. The FCA intends to consult on the duty of care this year in May. This new clause replaces a clause proposed by the HOL that would have amended FSMA to make rules introducing a duty of care by 6 April 2022, as well as introducing a new regulatory principle for the FCA relating to firms' exploitation of consumers' vulnerabilities. Secondly, the HOC voted to reject a HOL clause relating to mortgage prisoners, which would have amended FSMA to impose a cap on the standard variable rates charged to mortgage prisoners and enable certain mortgage prisoners to access new fixed-term interest rate deals. The HOC voted to agree to the other amendments made by the HOC. The amendments made by the HOC on 26 April were approved by the HOL on 28 April.
FCA speech on reshaping itself for the future post-pandemic world
On 23 April, the FCA published a speech by Charles Randell (Chair of the FCA and PSR) on transforming the FCA to be as effective as it can be in the future post-pandemic world. Mr Randell stresses the large scale of change that is required to transform the organisation for a world that Covid-19 has changed fundamentally – Mr Randell notes that this new world is one in which the digitisation of many financial services has accelerated. The speech states that firms must identify if consumers are trapped in a cycle of unaffordable debt and take action to break that cycle, such as forbearance, support and referral to appropriate debt advice, rather than extracting further rents from the most vulnerable – if they do not, the FCA must be ready to take strong enforcement action against both the firm and the senior managers who are accountable for product design and consumer outcomes. Furthermore, Mr Randell notes three big changes needed to transform the FCA, these being that the FCA: (i) needs to make sure that the firms which have FCA authorised status are good enough as over the last seven years, the number of firms given to the FCA to regulate has more than doubled, and it continues to grow as it is given more responsibilities – thus, not only does the FCA need to be rigorous with firms at the point when they apply, it needs to know whether they are using their authorisation (if they are authorised) and what for, and it needs to quickly remove the authorisations of firms which are not using them or which are misusing them; (ii) must focus on the basics – in 2019 the FCA decided to underline four priorities for basic consumer protection (safe and accessible payments, sustainable credit, clear and safe investment choices, as well as fair product terms, including price) and the FCA will continue to focus on these priorities because aspects of consumer financial services are not yet in a satisfactory place; and (iii) must focus on outcomes, whilst making sure that firms do the same. Moreover, Mr Randell highlights that in order to regulate in this world, the FCA needs to: (a) be more agile and confident in using its Principles for Businesses to take action against those firms which are not doing the right thing; (b) reset its approach to the Principles, in particular its Principle that firms should treat their customers fairly – the FCA has been giving consideration to a New Consumer Duty and it will be making further announcements about this; and (c) use the additional speed and scope to adjust its rules that it has, now that the UK has left the EU.