Key Regulatory Topics: Weekly Update 5 May - 11 May 2023
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Conduct and Governance
PRA policy statement on moving SMR forms from the PRA Rulebook
On 9 May, the PRA published a policy statement on moving SMR forms from the PRA rulebook. In January, the PRA consulted on the proposals in CP2/23. In CP2/23, the PRA proposed to: (i) amend the SMR – Applications and Notifications Parts of the PRA Rulebook to remove links to SMCR forms A (long form), A (shortened form), B, E, I, J, and the statement of responsibilities; and (ii) amend the length of employment history required in the form A (long form) from five years to 10 years. Following the consultation, the PRA confirms that it will proceed with both proposed changes. In addition, the PRA also confirms that: (a) it will continue to make downloadable blank template forms available on the SMR section of the website; (b) where a change would result in an additional burden for firms, or represents a change in policy, the PRA will continue to consult; and (c) there is no impact on the six-year regulatory reference requirements as a result of CP2/23. The rules will take effect on 11 May. The SMCR form A (long form) will be updated to increase the length of employment history in due course and simultaneously with the update of the Connect system.
Consumer/Retail
FCA speech on the countdown to the Consumer Duty
On 10 May, the FCA published a speech by Sheldon Mills, Executive Director of Consumers and Competition at the FCA, on the countdown to the new Consumer Duty. Mr Mills reminds firms that they have less than three months to implement the new Consumer Duty, which comes into force on 31 July. Mr Mills explains that after the FSM Bill receives royal assent, the FCA expects to have a secondary objective to facilitate the international competitiveness of the UK economy and its growth in the medium to long term. He is of the belief that the Duty will help UK firms flourish and remain world-leading proponents of financial services, as it makes all firms think harder about innovating and competing to find better ways to serve customers. Mr Mills goes on to highlight four questions firms should be asking themselves when implementing the Duty, including whether a firm’s purpose and culture align with its obligations under the Duty and support the delivery of good outcomes for customers, and whether the Duty is being considered in all relevant discussions such as strategy, remuneration and risk. Going forwards, Mr Mills warns that the FCA will prioritise the most serious breaches and act swiftly and assertively where it finds evidence of harm, or risk of harm, to consumers. In some cases, firms can expect the FCA to take robust action, such as interventions or investigations, along with possible disciplinary sanctions.
FCA findings from review of fair value assessments under Consumer Duty
On 10 May, the FCA published the findings of its review into firms’ approaches to fair value assessments under the new Consumer Duty. Firms need to deliver and assess four outcomes under the Consumer Duty, including price and value. Firms must undertake fair value assessments as a way of demonstrating if the price a consumer pays for a product or service is reasonable compared to the overall benefits they can expect to receive. The FCA has reviewed 14 firms’ fair value assessment frameworks, which set out the approach firms are taking in this area. The FCA asked a range of mainly large firms within four portfolios (retail banking, consumer investments, payments and digital assets, and consumer finance) to provide their frameworks. The FCA notes that larger firms’ fair value frameworks and assessments may understandably be more detailed than those for smaller firms, but many of the FCA’s observations will be relevant to the wider population of regulated firms. The review found that firms had carefully considered both the FCA’s price and value requirements, but that some firms have more work to do to meet the FCA’s price and value outcome rules. The FCA sets out four key areas for firms to focus on: (i) collecting and monitoring evidence that demonstrates that products and services represent fair value; (ii) clear oversight and accountability of the necessary remedial actions if they do not provide fair value; (iii) ensuring, where relevant, sufficient analysis of the distribution of outcomes across groups of consumers in the target market; and (iv) summarising and presenting fair value assessments in a way that enables decision-makers to robustly discuss whether the product or service represents fair value, such as by being clear on any limitations in the analysis or evidence. The FCA advises firms to consider the findings from this review and whether they need to develop their approach to implementing the FCA’s price and value outcome rules in line with good practice.
FCA financial promotions quarterly data 2023 Q1
On 5 May, the FCA published a summary of data generated between 1 January and 31 March from its actions against firms breaching financial promotion rules, and referrals and investigations into unregulated activity. This data provides an overview of how the FCA is working to improve standards across the market so that consumers are provided with clear and fair financial promotions which are not misleading. In Q1: (i) FCA interventions resulted in 2235 promotions being amended/withdrawn by authorised firms; (ii) given the rising cost of living, the FCA did some work focussed on unauthorised and authorised firms who offered debt advice which resulted in nine alerts being issued, and it imposed voluntary requirements on two firms; (iii) the FCA took action against a firm using a trading name which could potentially mislead consumers that the firm was a not-for-profit organisation or part of a government scheme. Firms should not use misleading trading names; and (iv) the FCA reviewed the marketing and promotion of Speculative Illiquid Securities (SIS), including mini-bonds, finding that some investments are being ‘rolled over’, as well as some investors being wrongly categorised as high net worth or sophisticated.
Markets and Markets Infrastructure
Corrigendum to Implementing Regulation on ITS under EMIR with regard to standards, formats, frequency and methods and arrangements for reporting published in OJ
On 11 May, a corrigendum to Implementing Regulation (EU) 2022/1860, laying down ITS under EMIR with regard to the standards, formats, frequency and methods and arrangements for reporting, was published in the OJ. The corrigendum inserts the date of application, 29 April 2024, of the ITS in Article 10 which relates to the date by which derivative contracts are to be reported.
Prudential Regulation
PRA policy statement on risks from contingent leverage
On 11 May, the PRA published a policy statement on risks from contingent leverage which provides feedback to responses to consultation paper (CP12/22) published in October 2022. The policy statement also contains the PRA’s final policy, as follows: (i) updated supervisory statement on the ICAAP and the SREP; (ii) amendments to the Reporting (CRR) Part of the PRA Rulebook; (iii) introduction of reporting templates LV49-52; (iv) updated instructions for reporting on leverage; and (v) updated supervisory statement on the UK leverage ratio framework. The ICAAP expectations for firms undertaking an ICAAP will take effect from 11 May. The reporting requirement for LREQ firms will take effect on 1 January 2024, with a first reporting reference date of 30 June 2024. The PRA notes that it does not currently expect to revisit the reporting requirement introduced through this policy statement, or to redesign the associated templates, as part of the Banking Data Review.
Updated supervisory statement on the ICAAP and SREP
PRA Rulebook: CRR Firms: Leverage Ratio Instrument 2023
Reporting on contingent leverage template
Instructions for reporting on leverage
Updated supervisory statement on the UK leverage ratio framework
Council of EU information notes on proposed CRD VI and CRR III
On 5 May, the Council of the EU published two information notes, from the General Secretariat to the Delegations, containing tables comparing the negotiating positions of the EC, the Council of the EU and the EP on the respective proposals, ahead of trilogues. The first information note (8854/23) addresses the proposal for a Directive amending the CRD IV as regards supervisory powers, sanctions, third-country branches, and ESG risks. The second information note (8855/23) covers the proposal for a Regulation amending the CRR as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor.
Recovery and Resolution
HMT letter on the resolution of SVB UK
On 9 May, the House of Lords Economics Affairs Committee published a letter (dated 27 April) from Andrew Griffith, Economic Secretary, HMT, on the resolution of SVB UK. In the letter, Mr Griffith explains that the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023, laid in Parliament on 27 April, under section 75 of the Banking Act 2009, amends the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 to allow SVB UK to remain exempt from the ring-fencing regime on an ongoing basis. He explains that the second ring-fencing exemption introduced was a necessary condition of the sale, and crucial to protecting the taxpayer, depositors and financial stability. It ensures that SVB UK can be a commercially viable and stand-alone business as part of the HSBC group. The exemption is subject to conditions, specified in the Order, relating to the size of SVB UK’s core deposits, and to the type of business it can undertake. The wider HSBC group remains subject to the ring-fencing regime.
Regulatory and Reform Post Brexit
HMT call for proposals on FCA and PRA secondary growth and competitiveness objectives metrics
On 9 May, HMT published a call for proposals on financial services regulations: measuring success. The call for proposals seeks views on which metrics the FCA and the PRA should publish in relation to the new secondary growth and competitiveness objectives introduced by the FSM Bill. HMT highlights two mechanisms that are particularly relevant for the new objectives: (i) a requirement for the regulators’ annual reports to include an explanation of how, in their opinion, the regulators’ objectives have been advanced, including the new secondary competitiveness and growth objectives; and (ii) a power for HMT to direct the regulators to publish information where ministers consider that it is reasonably necessary for the purpose of reviewing and scrutinising the discharge of the regulator’s functions. During the passage of the FSM Bill, stakeholders and Parliamentarians have been clear that appropriate and transparent public metrics are vital for supporting scrutiny of the regulator’s performance. This call for proposals is intended to help determine what additional metrics it is most appropriate for the regulators to publish, in order to ensure that reporting on the new secondary objectives is sufficient to support scrutiny of the regulators’ work in embedding and advancing their new objectives. The deadline for responses is 4 July. The government will then closely discuss the proposals with the regulators. This will include consideration of whether proposals are most appropriately published by the regulator, or by another body. Following this call for proposals, the regulators may choose to publish a number of the metrics proposed by respondents, either as part of the regulators’ annual reports, or as separate, more frequent publications. The government considers that quarterly is likely to be the right interval for such reporting but is open to proposals on this matter either in aggregate or on individual metrics.
Sustainable Finance
ESMA speech on role in enabling the transition to a low carbon economy
On 5 May, ESMA published a speech by Natasha Cazenave, Executive Director of ESMA, on ESMA’s role in enabling the transition to a low carbon economy. In her speech, Ms Cazenave explains the work that ESMA has done to achieve its priority of promoting transparency and tackling greenwashing. Key points of interest include: (i) Ms Cazenave believes that enhanced corporate sustainability reporting is the cornerstone of the sustainable finance framework and is expected to provide much awaited data to be used across the whole sustainable investment value chain; (ii) ESMA is aware that despite all the work that has been done until now to improve the disclosure framework for financial entities and investment products, the framework remains complex and difficult to navigate for investors. Ms Cazenave explains that there could be merit in exploring whether labels could help better channel savings according to investors’ needs and preferences and therefore support an orderly transition; and (iii) until there can be further clarity on potential changes to the SFDR or the introduction of labels, ESMA believes that some criteria should be required when naming funds that claim to have sustainability characteristics or goals. To conclude, ESMA’s ultimate objective is to support the channelling of the necessary capital flows to meet the EU’s decarbonization targets as well as its environmental and social objectives. Ms Cazenave confirms that ESMA stands ready to contribute to further legislative changes and respond to new market developments.
Other Developments
Letter to EC on deprioritisation of 2023 ESMA deliverables
On 10 May, ESMA published a letter (dated 27 April) to the EC on the prioritisation of its 2023 deliverables. The letter explains that following an assessment of ESMA’s tasks and commitments that were outlined in its 2023 Annual Work Programme submitted to the European Institutions in September 2022, ESMA has identified among its planned work a set of deliverables, which could be deprioritised or postponed. The annex to the letter sets out the EC deliverables for 2023 that ESMA has deprioritised. These include: (i) annual reports to the EC on CSDR implementation; (ii) the annual report on administrative and criminal sanctions and other administrative measures imposed under MAR; (iii) the report on EMIR supervisory measures and penalties under EMIR; (iv) annual reports on transparency waivers and the use of deferred publication arrangements under MiFIR; and (v) the 2023 CCP peer reviews.