Key Regulatory Topics: Weekly Update 28 October – 3 November 2022
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A number of updates from the FCA this week relate to the treatment of borrowers in financial difficulty and ensuring good consumer outcomes. Another area of focus for this week’s updates is sustainable finance, as we approach COP27.
Treatment of borrowers in financial difficulty
On 3 November, the FCA published key findings into firms’ treatment of borrowers in financial difficulty following the coronavirus pandemic. The project assessed a range of retail lending products across the whole payment difficulties lifecycle and firms were assessed against the existing Handbook standards. There was evidence of firms delivering good outcomes, but others need to do a lot better. The FCA identified the following four key areas that lenders need to focus on to improve outcomes for borrowers in financial difficulty; (i) engaging with customers; (ii) effectiveness of conversations with customers; (iii) helping customers to consider and access money guidance and debt advice and; (iv) fees and charges. The report also includes examples of good and poor practices the FCA observed as well as supporting case studies, in the hopes of helping firms in their approaches. Firms are expected to review these findings and take immediate action where necessary, especially as the cost of living is expected to continue to rise in the coming months. The FCA intends to continue to monitor data to assess how firms are considering and delivering forbearance (see further below on the FCA’s cost of living consumer credit data collection by way of example). Where necessary, it intends to use its supervisory and enforcement powers to ensure that customers are protected from poorly performing firms. In some cases, it will also consider asking firms to stop lending. The FCA plans to consult on the future of the Tailored Support Guidance, and that may include proposals to make changes to the Handbook.
LSB committed to drive fair outcomes for customers
On 2 November, the Lending Standards Board (LSB) published the ninth edition of the LSBulletin, providing the latest news from LSB. In line with their business plan launched in April, the LSB has been committed to driving fair outcomes for customers of financial services. This included a review of signatory firms’ adherence to the Contingent Reimbursement Model Code for Authorised Push Payment scams. The LSB has also completed an internal review of the FCA consumer duty requirements against their own outcomes focused Standards of Lending Practice. The LSB considers that firms adhering to the Standards make a commitment to deliver good customer outcomes, and so can use them as a key tool to support their implementation of the FCA consumer duty. The LSB encourages firms and stakeholders to take a look at and share other resources, including the recently produced resources on supporting business and personal customers, which provide insight and practical considerations for achieving good outcomes.
FCA’s key priorities for the financial advice industry
On 2 November, the FCA published a speech by Therese Chambers, Director of Consumer Investments, on key priorities for the financial advice industry. Ms Chambers emphasised the important role financial advisors will play in helping the FCA deliver their consumer investment strategy, the goal being to see more consumers who can afford to do so, investing their money safely. Ms Chambers highlighted the significant shift the new consumer duty poses for firms. The FCA is committed to seeing a change in industry behaviour, and aims to set high and clear standards for consumer protection and to ensure that firms focus on delivering good consumer outcomes. There are four main consumer duty outcomes that the FCA is looking for in the consumer investments sector; (i) good consumer communications to support consumer understanding of their products and services; (ii) products and services that meet consumer needs; (iii) services that offer good outcomes in terms of price and value; and (iv) consumers receiving the support they need, when they need it. The FCA is also undertaking other policy work that will benefit the financial advice industry and in turn, consumers who need support to make investment decisions. Once the FCA has greater rule making powers, under the future regulatory framework, they will be able to do more. This includes making sure the weight of regulation is commensurate with the level of risk to the consumer which will likely include a move away from some of the one-size-fits-all aspects of the MiFID regime. However, this is a complex topic that will require full consideration. To prepare for these changes, the FCA will carry out a holistic review of the boundary between advice and guidance. The FCA is also shifting from a reactive to a proactive approach when trying to tackle problems, on all levels of the organisation.
Financial Ombudsman Service quarterly complaints data
On 2 November, the Financial Ombudsman Service (FOS) published issue 175 of ombudsman news. The topics covered in this issue include guidance on complaints about fraud and scams and its Q2 complaints data. The data showed that from July to September, the FOS received 38,470 new complaints about financial products, up from 35,029 complaints in Q1. The top five complained about products were; (i) current accounts; (ii) credit cards; (iii) car/motorcycle insurance; (iv) hire purchase (motor); and (v) personal loans. The FOS upheld 34% of the complaints received.
FCA cost of living consumer credit data collection
On 1 November, the FCA published a webpage on cost of living consumer credit data collection, along with related FAQs. The FCA is asking a number of regulated consumer credit firms to provide data on their credit activities so they can monitor and assess the impact of the rising cost of living on consumers. Six hundred firms have been selected to provide data either on a monthly or quarterly basis, based on the amount of regulated consumer credit activity they are involved in. Firms required to provide information have or will be emailed directly. Whilst the FCA is not seeking this information under their formal information gathering powers, they do still expect firms to provide data upon request.
ESMA common enforcement priorities for 2022 annual financial reports
On 28 October, ESMA issued its annual Public Statement setting out the European common enforcement priorities for the 2022 annual financial reports of issuers admitted to trading on EEA regulated markets. ESMA along with national enforcers will pay particular attention to these priorities when monitoring and assessing the application of the relevant reporting requirements. The statement covers a number of topics, such as; (i) climate-related matters; (ii) Russia’s invasion of Ukraine; (iii) the macroeconomic environment; (iv) taxonomy-related disclosures; (v) reporting scope and data quality; (vi) identification of APMs and reconciliations and; (vii) block tagging on ESEF. ESMA stresses the importance of these topics and the detailed recommendations included in this statement when management and supervisory bodies of issuers undertake their respective responsibilities in relation to the 2022 annual financial reports and discuss them with their auditors. Issuers should pay particular attention to climate-related matters and their effects when providing a balanced and comprehensive analysis of the development and performance of the undertaking’s business and of its position together with a description of the principle risk and uncertainties, it faces.
Wolfsberg Financial Crime Principles for Correspondent Banking
On 28 October, the Wolfsberg Group published an updated version of their Financial Crime Principles for Correspondent Banking. This document updates the 2014 version and provides guidance and best practices for banks, draws a distinction between Correspondent Relationships and Correspondent Banking activity, addresses entities other than banks who have Correspondent Relationships, and incorporates revised FAQs.
ESMA guidelines on the scope of the CRA Regulation
On 31 October, ESMA published official translations of its guidelines on the scope of the CRA Regulation. The purpose of these guidelines is to provide clarification of the scope of the CRA Regulation, in particular on: (i) the obligation to register; (ii) credit rating activities and exemptions from registration; (iii) private credit ratings; (iv) establishment of branches in third countries; (v) specific disclosure recommendations for credit scoring firms and CRAs established in third countries; and (vi) enforcement of the scope of the CRA Regulation and cooperation with National Competent Authorities. The guidelines apply on 1 May 2024, eighteen months after the date of this publication on ESMA's website of the guidelines in all EU official languages.
EMSA withdraws recognition of six Indian CCPs
On 31 October, ESMA announced that it is withdrawing its recognition of six Indian CCPs. Following its review of recognised third country CCPs (TC-CCPs) in accordance with EMIR, ESMA established that not all of the cumulative conditions for the recognition of some TC-CCPs have been met, because no co-operation arrangements have been concluded between ESMA and the relevant Indian authorities. As a result, ESMA cannot continue to recognise the following TC-CCPs:: (i) The Clearing Corporation of India (CCIL), supervised by the Reserve Bank of India (RBI); (ii) Indian Clearing Corporation Limited (ICCL), supervised by the Securities and Exchange Board of India (SEBI); (iii) NSE Clearing Limited (NSCCL), supervised by SEBI; (iv) Multi Commodity Exchange Clearing (MCXCCL), supervised by SEBI; (v) India International Clearing Corporation (IFSC) Limited (IICC), supervised by the International Financial Services Centre Authority (IFSCA); and (vi) NSE IFSC Clearing Corporation Ltd (NICCL), supervised by the IFSCA. These six TC-CCPs will no longer be able to provide services to clearing members and trading venues established in the EU. To allow time for market participants to make other arrangements and to mitigate the adverse impacts on EU market participants, ESMA will defer the application of the withdrawal decisions until 30 April 2023.
Please see the consumer/retail section for a roundup of the LSB’s news, including their review of signatory firms’ adherence to the Contingent Reimbursement Model Code for Authorised Push Payment scams.
EBA report on the application of the supporting factor to infrastructure lending
On 3 November, the EBA published a report analysing the lending trends and riskiness of infrastructure loans that have benefitted from a capital reduction due to the introduction of the so-called Infrastructure Supporting Factor (ISF) according to Article 501a of the CRR. The data from the report is not sufficient to conclude on the impact of the ISF on lending or the consistency of the riskiness of the affected loans with the own funds requirements. However, the report does conclude that due to the latest Basel III changes, as well as the CRR3 proposal that ensures an increased risk sensitivity of the standardised approach and preserves the IRB risk-sensitivity, the continued application of the ISF could be questioned from a broader prudential perspective.
ECB thematic review on climate-related and environmental risks
On 2 November, the ECB published its thematic review on climate-related and environmental (C&E) risks, which aims to foster the alignment of the banking sector with its supervisory expectations. The ECB has also published a compendium of good practices in C&E risks that were observed in some banks during the thematic review. By way of follow up to the review, each significant institution has received a feedback letter setting out any shortcomings in its practices vis-à-vis the supervisory expectations and the ECB has set institution-specific remediation timelines for achieving full alignment with the expectations by the end of 2024, providing details on intermediate steps. . The ECB expects institutions to reach, as a minimum, the following milestones; (i) by the end of March 2023 at the latest, to have in place a sound and comprehensive materiality assessment, including robust scanning of the business environment; (ii) by the end of 2023 at the latest, to manage C&E risks with an institution-wide approach covering business strategy, governance and risk appetite, as well as risk management, including credit, operational, market and liquidity risk management and; (iii) by the end of 2024 at the latest, to be fully aligned with all supervisory expectations, including having in place a sound integration of C&E risks in their stress testing framework and ICAAP. Expected remediation dates were discussed with significant institutions in dedicated feedback meetings and compliance will be monitored and if necessary enforced.
Council invited to agree general approach in relation to 2021 Banking Package
On 31 October, the Council of the EU published a note to the Permanent Representatives Committee on the 2021 Banking Package which includes two proposals; the first to amend CRDIV as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks (CRDVI). The second amends the CRR as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor (CRRIII). The note reports that the Working Party on Financial Services has examined the proposal and that based on the discussions and written comments received, the Czech Presidency has prepared compromise texts. Those texts have gathered broad support from the Member States during the Working Party held on 26 October, in which Delegations expressed their support for moving the file forward and for inviting the Council on 8 November to agree on a general approach and start trilogue negotiations with the EP.
FCA Handbook and form amendments to reflect prudential requirements in IPRU(INV)
On 31 October, the FCA published Handbook Notice 103, which sets out the changes made to the FCA Handbook and other material made by the FCA on 28 October. The Notice illustrates the changes made to the Supervision Manual (Reporting No 18) Instrument 2022 (FCA 2022/37). The instrument amends form FSA035 in order to reflect the prudential requirements that firms have in the Interim Prudential sourcebook for Investment Businesses (IPRU(INV)) 5.4.3R. The same text also exists in SUP 16 Annex 24R and the guidance on validation in SUP 16 Annex 25G. This instrument also amends labelling errors in SUP 16 Annexes 24R and SUP 16 Annex 25G. The instrument will come into force on 31 December.
FSM Bill public interest intervention power
On 31 October, in a letter sent to Dame Angela Eagle MP, Interim Chair of the Treasury Committee, Andrew Griffith, Economic Secretary to the Treasury, explained that government will be unable to table its proposed amendment to the Financial Services and Markets Bill, to include a public interest intervention power, in time for the deadline for the committee stage. A public interest intervention power is intended to enable the Treasury to direct a regulator to make, amend or revoke rules where there are matters of significant public interest. The government is not able to meet the committee stage deadline in light of the appointment of the new Prime Minister last week and the need for government to consider the detail carefully. The government will bring forward further detail in due course. In response to the letter, on 1 November, Dame Angela Eagle expressed her concern that such a power posed a potential threat to regulatory independence and should be properly scrutinised by parliament. Dame Eagle asked for confirmation that the power will be introduced in the House of Commons, where it can be examined by MPs and for information on the steps the government will take to facilitate scrutiny of the proposals.
GFANZ Financial Institutions Net-Zero Transition Plans Guidance
On 1 November, the Glasgow Financial Alliance for Net Zero (GFANZ) published a final report offering guidance and recommendations on financial institution net-zero transition plans. The report sets out a framework for transition finance, identifying four financing strategies that could facilitate real-economy transitions. These four strategies are; (i) the climate solutions that will enable economies to decarbonise; (ii) business models already aligned with a science-based pathway to achieve net zero; (iii) companies with credible transition plans who are in the process of aligning with a science-based decarbonisation pathway and; (iv) managed phase out of high-emitting assets that will be stranded in the transition to net zero. Alongside this report, GFANZ has also developed a series of related tools, frameworks and other resources to support transition planning across the financial sector, with the goal of financing and enabling the real-economy transition to net zero.
Delegated Regulation incorporating nuclear and gas disclosures into SFDR RTS
On 31 October, the EC adopted a Delegated Regulation and Annexes amending and correcting the SFDR RTS laid down 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 C(2022) 7545 final. The Delegated Regulation amends the SFDR RTS to ensure that investors receive information reflecting the provisions set out in Delegated Regulation 2022/1214. This relates to information that should be provided in pre-contractual documents, on websites and in periodic reports about the exposure of financial products to investments in fossil gas and nuclear energy activities. The Regulation will enter into force on the third day following its publication in the OJ.