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Key Regulatory Topics: Weekly Update 3 - 9 Mar 2023

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Blog Post: 04 March 2024

FAQs: UK FCA consults on plans to publicise investigations and amend its Enforcement Guide

Publications: 01 March 2024

Regulatory monitoring

Publications: 01 March 2024

Regulatory monitoring: EU version

News: 01 March 2024

A&O cements its position as a leading private capital firm with PDI award wins

This week, the House of Commons Treasury Committee published responses from the UK regulators to its letters in relation to the PSR’s proposals to introduce mandatory reimbursement for APP scams. In addition, the FCA updated its perimeter report, the FMLC published its response to HMT’s call for evidence on the Short Selling Regulation, and the FCA announced that is has authorised the first Long Term Asset Fund. In Europe, ESMA published a letter from the European Commission requesting that the ESAs, in cooperation with the ECB and the ESRB, conduct a one-off climate risk scenario analysis to assess the resilience of the financial system on the way to the EU’s 2030 climate targets, and the EBA published a report on diversity practices and the gender pay gap at the level of the management body.

Capital markets

HMT publishes terms of reference for Investment Research Review

On 9 March, HMT published the terms of reference for the Investment Research Review that was first announced as part of the Edinburgh Reforms. The Review will consider the provision of investment research and its contribution to the competitiveness of the UK’s capital markets. The Review will focus on: (i) providing evidence on how investment research provision in the UK compares or is perceived to compare with other international financial services centres, in both public and private markets; (ii) considering the amount, quality and type of investment research currently provided on firms listed or quoted, or seeking to be listed or quoted, on UK public markets, and whether that has an effect on the attractiveness of UK markets for issuers; and (iii) considering the current level of demand investors have for research, factors driving this demand, and evidence of whether the amount, quality and type of investment research is sufficient to meet such demands. The Review will evaluate options to improve the UK market for investment research and provide recommendations to this effect, in particular by recommending both legislative and non-legislative measures, including measures that may fall to the FCA to consider, and actions industry should take. As part of this, the Review will consider the impact of the MiFID II unbundling rules on the levels and quality of investment research and evaluate the likely impact of any proposed changes on investment and fees. The Chair, Rachel Kent, has been asked to report within 3 months. The Review will formally launch on 13 March.

Press release

Terms of reference

Consumer/retail

Please see the Financial Crime section for the JMLSG’s revisions to its AML and CTF guidance for the financial services sector.

Please see the Sustainable Finance section for the HoC Treasury Committee’s letter to the FCA which raises a number of issues with the FCA’s proposed sustainability disclosure requirements and investment labels.

Please also see the Other Developments section for the FCA’s updated annual perimeter report.

FOS consults on temporary changes to outcome reporting in its business-specific complaints data

On 6 March, the FOS began consulting on temporary changes to outcome reporting in its business-specific complaints data. The proposals follow on from a successful previous initiative between 1 November 2021 and 31 March 2022, where the FOS amended the way that it recorded the outcomes of certain complaints that were proactively resolved by respondent businesses to incentivise businesses to settle faster. The FOS proposes to create a separate category in its biannual business-specific complaints data to record any complaint that is resolved by a fair and reasonable offer put forward by a business within 14 days of the FOS informing the parties that it is satisfied that the complaint is chargeable. The FOS intends for the amendment to apply for the entirety of the 2023/24 financial year. It will then monitor its effectiveness before making a decision on its longer-term reporting into 2024/25 and beyond. The deadline for comments is 20 March. The FOS will publish its decision and any associated plans by 3 April.

Consultation

Third set of FCA portfolio letters on implementing Consumer Duty

On 3 March, the FCA sent letters to credit brokers, credit unions, mortgage intermediaries, motor finance providers, and retail finance providers 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 of 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. In the annexes to the letters, the FCA sets out in more detail particular issues relevant to each of the portfolios.

Letter to credit brokers

Letter to credit unions

Letter to mortgage intermediaries

Letter to motor finance providers

Letter to retail finance providers

Council of EU general approach on new Distance Marketing Directive

On 3 March, the Council of the EU published its general approach on the proposed Directive on financial services contracts concluded at a distance. The Council adopted the general approach on 2 March. The proposed Directive updates current EU legislation to create a level playing field in the internal market for distance financial services while raising the level of consumer protection. It will repeal the Distance Marketing Directive and transfer its contents to the Consumer Rights Directive. The Council has a mandate to begin negotiations with the EP.

General approach

FCA quarterly consultation no. 39 – changes to annual claims management report form

On 3 March, the FCA published quarterly consultation no. 39, in which it sets out proposed changes to the annual claims management report form: (i) guidance to reflect the additional reporting requirements for claims management companies that were introduced in July 2022; and (ii) minor changes to the numbering of the fields in the form. The deadline for comments is 27 March.

Quarterly consultation

Financial crime 

Please see the Payment Services and Payment Systems section for the responses from the PSR, BoE, FCA and FOS to the Treasury Committee’s letters in relation to the PSR’s proposals to tackle APP fraud.

Please also see the Markets and Markets Infrastructure section for the updated MoU signed by ESMA and ACER.

JMLSG finalises revisions to AML and CTF guidance

On 6 March, the JMLSG published revised versions to Parts I and II of its AML and CTF guidance for the financial services sector. Amendments have been made to Part I, Chapter 6, Paragraphs 6.70-6.71, to highlight the ability the FOS has to effectively handle complaints with a money laundering element. In Part II, amendments have been made to: (i) sector 5 on wealth management; (ii) sector 6 on financial advisers; (iii) sector 11A on consumer credit providers; (iv) sector 13 on private equity; and (v) sector 22 on cryptoasset exchange providers and custodian wallet providers. The JMLSG has submitted the revisions to HMT for ministerial approval.

Press release

Revised versions

Fintech 

Please see the Financial Crime section for the JMLSG’s revisions to its AML and CTF guidance for the financial services sector, including in relation to cryptoasset exchange providers and custodian wallet providers. 

Fund regulation 

Please see the Financial Crime section for the JMLSG’s revisions to its AML and CTF guidance for the financial services sector, including in relation to wealth management.

Please also see the Sustainable Finance section for the HoC Treasury Committee’s letter to the FCA, which raises a number of issues with the FCA’s proposed sustainability disclosure requirements and investment labels.

FCA authorises first LTAF

On 9 March, the FCA announced that is has authorised the first Long Term Asset Fund (LTAF). The FCA finalised the regulatory regime for LTAF in October 2021, while final rules on broadening retail access to the LTAF are expected during the first half of this year.

Press release 

Council of EU adopts proposed Regulation amending ELTIF Regulation

On 7 March, the Council of the EU adopted the proposed Regulation amending the Regulation on European long-term investment funds (ELTIFs). The amendments are intended to increase the uptake of long-term investment vehicles and make them more appealing to investors. The key changes include: (i) differentiating between ELTIFs marketed to professional investors and those to which retail investors can have access; (ii) removing barriers to retail investor access to ELTIFs; and (iii) establishing an optional liquidity window mechanism for redemptions, for cases where investors need to exit early. The proposed Regulation, once published in the OJ, will enter into force after 20 days and will apply nine months after entering into force.

Voting result

Markets and markets infrastructure 

Please see the Recovery and Resolution section for the publication in the OJ of two Delegated Regulations containing RTS supplementing the CCP Recovery and Resolution Regulation.

ECON report on CSDR Refit Regulation

On 8 March, the EP’s ECON published a report it has adopted on the EC’s legislative proposal for a Regulation amending the CSDR. The report includes ECON’s proposed amendments to the EC’s original proposal. The aim of the Refit initiative is to simplify the requirements in certain areas to ensure efficient and resilient post-trading infrastructure. The Refit’s proposed measures include: (i) a passporting mechanism with simplified requirements for CSDs and Authorities; (ii) colleges of supervisory authorities in order to improve supervisory convergence; (iii) a review of the thresholds under which CSDs can provide banking-type ancillary services; and (iv) a review of the scope and the mechanisms of the settlement discipline introduced by article 7 in order to address settlement fails more appropriately and proportionately.

Report

FMLC response to HMT call for evidence on SSR

On 8 March, the FMLC published its response to HMT’s call for evidence on the Short Selling Regulation (SSR). The FMLC sets out a number of uncertainties which the FMLC recommends HMT should address in its review: (i) emergency intervention powers – should HMT choose to retain the FCA’s emergency intervention powers, the FMLC recommends that the SSR should require the FCA, when exercising these powers, to clearly describe the scope of the ban, including its impact on long positions, derivatives and the rolling of existing positions; (ii) disclosure of net short positions as a percentage of issued share capital – if HMT chooses to retain the requirement for persons to publicly or privately disclose this information, the FMLC recommends the FCA be either required to maintain a source of this information which participants can refer to, or provide a list of sources which participants are able to rely on for the purposes of the disclosure. This would provide firms certainty as to which figure, or figures, they should be using for their disclosure, as there is currently no “golden source” of information; (iii) determination of a notifiable position in shares whose principal venue lies outside of the UK – the FCA’s current list of exempted shares is only required to be updated every two years, creating uncertainty. To minimise this uncertainty, either: (a) the FCA could be required to ensure the list of exempted shares is updated at least once per month; (b) firms could be permitted under the revised SSR to be able to make their own determination, on reasonable grounds, about whether a share’s principal venue for trading is located outside the UK without being required to refer to the list; or (c) the FCA could instead be required to publish and maintain a list of all in scope shares (rather than an exempt list).

Response

ESMA and ACER sign updated MoU to strengthen cooperation

On 6 March, ESMA and the EU Agency for the Cooperation of Energy Regulators (ACER) signed an updated MoU which strengthens collaboration between the two institutions. The main areas covered by the MoU are: (i) a coordinated and consistent approach to the market abuse framework under the Regulation on Wholesale Energy Market Integrity and Transparency and MAR to further enhance market integrity in energy and energy derivative markets; (ii) technical cooperation on data and knowledge with respect to the functioning of energy and energy derivative markets; and (iii) liquefied natural gas price assessments and benchmarks administered by ACER and other energy-related benchmarks relevant for ESMA’s or ACER’s mandates. The MoU notably incorporates new cooperation areas under the Market Correction Mechanism Regulation and benchmarks related to the energy sector. It also details the role of the recently established ACER–ESMA Task Force.

Press release

MoU

ECON reports on proposed amendments to MiFID II and MiFIR

On 3 March, the EP’s ECON published reports (dated 2 March) that it has adopted on the proposed Directive and Regulation amending MiFID II and MiFIR, as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders. The reports set out ECON’s draft legislative resolutions and the amendments to the EC’s proposals that were published in November 2021. The proposed legislation intends to enable the establishment of an EU-wide consolidated tape for shares, bonds, exchange-traded funds and derivatives, as well as make targeted changes to market structure, so as to increase transparency and strengthen the competitiveness of EU financial markets.

MiFID II report

MiFIR report

Payment services and payment systems 

 

Please see the Other Developments section for the FCA’s updated annual perimeter report.

ECON draft report on proposed Regulation on instant credit transfers in euro

On 6 March, the EP’s ECON published its draft report on the EC’s legislative proposal for a proposed Regulation amending the Single Euro Payments Area Regulation and the Cross-Border Payments Regulation as regards instant credit transfers in euro. The draft report includes a draft EP legislative resolution, the text of which sets out suggested amendments to the proposed Regulation. These include: (i) clarification with respect to how the process of effecting bulk and paper payments might be made, with the view to stress that the entire process of this type of payment is not expected to be immediate, but rather the payment should be made as soon as possible from the moment all the necessary details have been processed; (ii) clarifying the sanctions requirements and encouraging a move from transaction-based checks to client-based ones; (iii) a call to re-visit the Settlement Finality Directive in an effort to broaden the scope of the PSPs included in the current legislation, thereby reflecting the current payments landscape more accurately; and (iv) requiring that IBAN checks would be provided free of charge.

Draft report

Regulators’ responses to Treasury Committee’s questions on approach to tackling APP fraud

On 4 March, the HoC Treasury Committee published responses from the PSR, BoE, FCA and FOS to its letters in relation to the PSR’s proposals to introduce mandatory reimbursement for APP scams. Key takeaways from their responses include: (i) the PSR sets out the rationale behind the £100 threshold for reimbursement and £35 excess for reimbursement payments. It sets out the factors it considered ahead of consulting on the £100 minimum threshold for reimbursement and notes that its proposals gave firms the ability not to impose the threshold. The £35 excess was proposed to align the requirements with section 77 of the Payment Services Regulations 2017 (PSRs) and to mitigate against potential increased moral hazard, reduce administrative costs for firms and reduce the likelihood that PSPs were reimbursing civil disputes. The PSR also discusses how the gross negligence exception will be defined by the FOS and its usage monitored. The PSR will publish its final policy statement in May 2023; (ii) as operator of the CHAPS payment system, the BoE is discussing with HMT and the PSR as to how the outcomes in the PSR’s consultation can be implemented. CHAPs has some unique characteristics that will need to be managed due to it predominantly being used by financial market participants or for corporate treasury management; (iii) the FCA is considering whether legislative changes will be needed to the PSRs to assign statutory liability to a PSP for APP fraud to tackle ‘on-us’ transactions where both payment accounts are held with the same PSP; and (iv) the FOS plans to set up a dedicated team to fast-track cases about mandatory-scheme claims that are rejected due to allegations of gross negligence or complicity, or where there is a dispute over the amount of redress. The FOS does not consider that the slower reimbursement of complaints will undermine the effectiveness of the PSR’s proposals. Only a small minority of claims for reimbursement are expected to be disputed and become complaints against a firm, which need time to be properly investigated. Interest and additional compensation is usually provided to compensate complainants that are successful.

PSR response

BoE response

FCA response

FOS response

Prudential regulation 

Delegated Regulation on RTS on calculation of risk-weighted exposure amounts of CIUs under CRR published in OJ

On 9 March, Delegated Regulation (EU) 2023/511 supplementing the CRR with regards to RTS for the calculation of risk-weighted exposure amounts of collective investment undertakings (CIUs) under the mandate-based approach was published in the OJ. Where the conditions of Article 132(3) of the CRR are met, institutions may determine the risk-weighted exposure amount of a CIU’s exposures in accordance with the approaches set out in Article 132a of the CRR. Institutions that do not have sufficient information about the individual underlying exposures of a CIU to use the look-through approach, may instead calculate the risk-weighted exposure amount of those exposures in accordance with the limits set in the CIU’s mandate and relevant law – the mandate-based approach. The RTS clarify the steps to be taken as part of this approach. The Delegated Regulation enters into force on 29 March, 20 days following its publication in the OJ.

Delegated Regulation

Recovery and resolution 

 

BoE Dear CFO letter on preparing firms for the second RAF assessment

On 7 March, the BoE published a Dear CFO letter to provide information to support firms’ planning and ongoing work to maintain and enhance resolvability ahead of the second Resolvability Assessment Framework (RAF) assessment that will begin in October. The BoE expects the second RAF to assess: (i) firms’ overall ability to achieve the three resolvability outcomes; (ii) the progress that firms have made in addressing the issues identified in the first RAF assessment. The BoE expects firms to address previously identified issues, including shortcomings and areas for further enhancement, as a priority; and (iii) firms’ preparations in more detail, including a more detailed assessment of firms’ ability to achieve the “adequate financial resources” outcome. Further detail on the nature of this assessment will be provided later in the year, but will include requests for data, documentation or live evidence or demonstrations consistent with the examples of the types of evidence the BoE may request from firms in the RAF SoP. The BoE’s June 2024 public statement will include an updated assessment of each firm’s ability to achieve the three resolvability outcomes, highlighting progress that each firm has made in addressing the issues identified in the first assessment as well as newly identified issues from the second assessment. The Annexes to the letter include: (a) guidance to support firms’ understanding of some aspects of the BoE’s SoP; and (b) thematic and generic findings from its review of the implementation of the PRA revised Operational Continuity In Resolution policy.

Letter

Two Delegated Regulations on RTS under CCP Recovery and Resolution Regulation published in OJ

On 3 March, two Delegated Regulations containing RTS supplementing the CCP Recovery and Resolution Regulation were published in the OJ: (i) Delegated Regulation (EU) 2023/450, containing RTS specifying the order in which CCPs are to pay recompense to non-defaulting clearing members, the maximum number of years during which those CCPs are to use a share of their annual profits for such payments to possessors of instruments recognising a claim on their future profits and the maximum share of those profits that is to be used for those payments; and (ii) Delegated Regulation (EU) 2023/451 containing RTS specifying the factors to be taken into consideration by the competent authority and the supervisory college when assessing the recovery plan of CCPs. The Delegated Regulations will enter into force on 23 March (20 days after their publication in the OJ).

Delegated Regulation 2023/450

Delegated Regulation 2023/451

Sustainable finance

Please see the Other Developments section for the FCA’s updated annual perimeter report.

EC invites ESAs, ECB and ESRB to conduct climate risk scenario analysis

On 9 March, ESMA published a letter (dated 8 March) from the EC, requesting that the ESAs, in cooperation with the ECB and the ESRB, conduct a one-off climate risk scenario analysis to assess the resilience of the financial system on the way to the EU’s 2030 climate targets. The EC requests both: (i) an assessment of the extent to which early climate-risk related shocks could already generate significant stress for the financial system as a whole in the period up to 2030; and (ii) an assessment of the materialisation of climate-risk related shocks in an adverse macrofinancial scenario. The EC requests that the one-off exercise goes beyond the usual climate stress tests, as a cross-sectoral exercise looking also at contagion and second-round effects. As part of this work, the EC would also appreciate any insights into the financial system’s capacity to support green investments under stress. The EC requests that any policy-relevant conclusions are provided no later than Q1 2025.

Letter

Request

Treasury Sub-Committee letter to FCA on concerns with proposed sustainability disclosure requirements and investment labels

On 9 March, the Treasury Sub-Committee on Financial Services Regulations sent a letter to the FCA to raise a number of issues with its proposed sustainability disclosure requirements and investment labels, and to ask further questions. These concerns include: (i) that the FCA’s cost benefit analysis of the proposed new regulations has not evaluated how much this will cost consumers; (ii) that the FCA does not intend to investigate and enforce against greenwashing prior to the rules coming into force. The Committee highlights that the FCA itself has stated that a fundamental principle in its rulebook is of being fair, clear and not misleading. If, as stated, the FCA is aware and concerned that consumers are being misled by greenwashing, then the Committee believes it should be a cause for enforcement. The Committee is further concerned that the FCA will not be seeking redress for those customers that have been misled, who may also have to pay to divest from those funds; and (iii) that there is a risk that tighter regulations could drive funds away from ESG investing or out of the UK, reducing consumer choice. The Committee requests a response by 23 March.

Press release

Letter

Other developments

 

BBRS post implementation review part 2 and SME Liaison Panel response

On 7 March, the Business Banking Resolution Service (BBRS) published a review into its operational effectiveness. Amongst other things, the report found that the BBRS is doing what it was set up to do and cases are being assessed competently and independently. However, the report identifies that the original assumptions of case volumes were over-estimated and that the agreed remit of the BBRS and expectations of some SME representatives has caused frustration. The report also sets out ten recommendations to be actioned to address these and other issues. In its response to the report, the SME Liaison Panel highlights that the BBRS has fallen significantly short of expectations. The Panel remains willing to engage with the banks and the BBRS to find a way forward, but considers it essential that there is a proper debate about the ways in which the BBRS has not fulfilled all of the broad objectives which led to establishment, rather than simply a narrow and legalistic debate about the details of the rules.

Review

Response

EBA report on diversity practices and gender pay gap

On 7 March, the EBA published its report on diversity practices and the gender pay gap at the level of the management body (2021 data). Key findings include: (i) despite the legal requirements in the CRD, 27.05% of institutions (41.61% in 2018) have still not adopted a diversity policy. While the share of institutions that have a diversity policy in place increased, only 76.78% (2018; 69.61%) of institutions that have a diversity policy promote gender diversity by setting a target for the underrepresented gender; (ii) only 18.05% of executive directors are female, with 56% of the institutions in the sample and nearly half of the larger credit institutions having no female executive director; (iii) gender balance in Northern and Eastern Europe is generally better than in other parts of the EU; (iv) a clear positive correlation between gender balance and “return on equity” (RoE) exists. Credit institutions with a gender-diverse management function have on average a RoE of 7.88%, while credit institutions with executive directors of only one gender have on average 5.27%; and (v) women earn on average 9.43% less than male executive directors and 5.90% less than male non-executive directors. The EBA calls on competent authorities to take appropriate supervisory measures to ensure that all institutions comply with the legal requirements in the CRD to adopt a diversity policy and set appropriate gender balance targets.

Press release

Report

FCA updates annual perimeter report

On 6 March, the FCA updated its perimeter report. The report sets out the FCA’s approach to regulating its perimeter and describes specific issues that it has identified and the actions it is taking in response. The report covers particular firm business models that are on the edge of the perimeter, lending, consumer investments, technological changes and wholesale markets. Points of interest include: (i) deferred payment credit (Buy Now Pay Later) – the FCA intends to consult on conduct standards for the sector through changes to its Handbook, but the extent of this will be dependent on the Government’s legislation covering the scope of firms and activities to fall under regulation as well as the authorisation gateway. In the meantime, where the FCA sees harm, it will act using its existing powers and non-FSMA consumer protection powers which can apply to unauthorised firms where the FCA sees poor practices; (ii) ESG data and ratings providers – HMT is preparing to consult on bringing ESG data and ratings providers within the FCA's regulatory perimeter; and (iii) SMCR – the FSM Bill could enable the extension of the SMCR to recognised investment exchanges, and credit rating agencies, but does not include proposals enabling extension to payments and e-money firms. However, the FCA sees value in extending the SMCR to these firms and is exploring possible options with HMT.

Perimeter report

HoL Economic Affairs Committee inquiry to examine operational independence of BoE

On 3 March, the HoL Economic Affairs Committee launched a call for evidence as part of an inquiry into the operational independence of the BoE. The inquiry will focus on: (i) the BoE’s role and remit; (ii) whether the governance structures are appropriate; and (iii) how it is being held accountable for its actions. The inquiry will not look at individual policy decisions. Questions include in relation to: (a) the role of secondary objectives in the remit of the BoE; (b) the BoE’s relationship with HMT; (c) whether its PRA responsibilities affect its aim to maintain monetary and financial stability; and (d) whether the right balance has been struck between accountability and independence. The deadline for responses is 13 April.

Press release

Inquiry

Call for evidence