February 2023
Our new issue of UK Regulatory Radar brings you the latest industry and regulatory updates impacting financial service providers in the UK.
Click on the images below for our latest insights and see the 'Further updates' section for other sector-specific developments.
Highlights this month
Further updates
Digital Finance
Digital pound consultation — HM Treasury (HMT) and the Bank of England (BoE), recognising the large technological changes over the last few years in the way payments are made, are looking to future proof retail payments and keep confidence in pound sterling by consulting on a proposed model for a central bank digital currency (CBDC) or digital pound. Once feedback has been taken into account, a period of 2-3 years of development and testing of the model would take place, before a decision would be made on whether to invest the substantial amount that would be needed to create a digital pound. In the proposed model, the BoE would provide the central ledger (it has not committed to using distributed ledger technology) and give access to regulated digital wallet asset providers that would then allow individuals and businesses to make payments. No interest would be paid on holdings and there would initially be limits on how much individuals could hold to prevent commercial bank disintermediation. For more, please see our article here.
ESG & Sustainable Finance
Independent net-zero review — Former UK Energy Minister and Chair of the Net Zero Review, Chris Skidmore, published his independent report (PDF 6.58 MB) on how the UK can deliver on its net zero commitments. The review makes 129 recommendations, many of which relate to 'backing business' and would, if adopted, affect financial services firms. Some notable recommendations for the government are to:
- Review, by the end of 2023, how HMT incentivises investment in decarbonisation, including via the tax system and capital allowances.
- Before Autumn 2023, conduct and publish a review of how the UK should change regulation for emerging net zero technologies.
- Set a clear, robust, and ambitious approach to disclosure, standard setting, and scaling up green finance — including how the strategy will meet existing commitments to implement Sustainable Disclosure Requirements across the economy.
- Create a new cross-sectoral regulatory forum to coordinate on signals being sent to businesses and investors about the net zero transition.
The report does not require financial services firms to take any action. However, it was informed by a call for evidence and as such is a helpful barometer of both public and industry opinion on how the UK Government should proceed with its net-zero ambitions. The Government is expected to respond to the report in March, prior to publication of its Green Finance Strategy.
Discussion paper (DP) on finance for positive sustainable change — The FCA has launched a DP regarding embedding sustainability-related governance, incentives and competence considerations in regulated firms. As part of this, the FCA considers how asset managers and asset owners organise and govern their stewardship activities. The paper signals that the FCA is considering pushing regulated firms beyond existing disclosure requirements, and could ultimately lead to further regulations, including additional measures to promote effective stewardship.
Operational Resilience
2022 CBEST thematic findings — The BoE, PRA and FCA have written (PDF 105 KB) to senior management functions with responsibility for cyber with thematic findings from the latest cycle of CBEST assessments. The letter is intended to raise awareness in senior executive teams, inform the work of risk and internal audit functions and ensure that firms can address any similar weaknesses that they have identified.
Capital Markets and Asset Management
Asset management supervisory strategy — The FCA has published (173 KB) its latest "portfolio letter" and supervisory strategy for asset managers. This supersedes the previous letter that was published in January 2020. As well as an overarching focus on good governance, the FCA's supervisory priorities include ESG, product liquidity management, product governance, investment in operations and resilience, and financial resilience. The priorities in the new letter are largely aligned with those in the FCA's 2020 letter. ESG and sustainable finance, and financial resilience are new priorities, whilst LIBOR transition and EU withdrawal have dropped off the list. CEOs and Boards need to review the letter and take action to ensure that they meet the FCA's expectations.
Insurance
Solvency II Recalculation of the Transitional Measure on Technical Provisions (TMTP) — In its biennial review, the PRA has determined that, given the movements in risk free rates during the second half of 2022, the threshold for a material change in market conditions as set out in SS6/16 has been met. Therefore the PRA will accept applications from firms to recalculate TMTP.
PRA consultation on insurers in distress — The PRA is consulting on the changes needed to implement arrangements concerning insurers in financial difficulties set out in the Financial Service and Markets Bill. The Policyholder Protection Part of the PRA Rulebook will be amended to incorporate how the FSCS top-ups will operate during a write-down. The PRA also outlines its process for consenting to an application for a write-down, a pre-requisite for obtaining a court order.
Retail Conduct
Consumer Duty implementation — There has been more activity relating to the Consumer Duty with the FCA publishing the findings from its implementation plan review, issuing Dear CEO letters to eight sectors and releasing the latest in its 'Understanding the Consumer Duty' podcast series:
- Implementation plan review — The FCA welcomed evidence of firms embracing the cultural shift to focus on consumer outcomes and highlighted a number of good practices it observed. However, it also identified areas where improvements could be made. The FCA wants firms to consider the findings and maintain or apply focus on three key areas: (i) effective prioritisation (ii) embedding the substantive requirements of the Duty and (iii) cooperation with other firms.
- Dear CEO letters — The first tranche of sector-specific letters setting out the FCA's expectation of firms when implementing the Consumer Duty cover the following types of firms:
- Asset Management, Custody & Fund Services and Alternatives (PDF 202 KB)
- Consumer investments (PDF 225 KB)
- Credit reference agencies and providers of credit information services (PDF 157 KB)
- General Insurance and pure protection firms (PDF 167 KB)
- Life insurance (PDF 315 KB)
- Mainstream consumer credit lenders (PDF 138 KB)
- Mortgage lenders and administrators (PDF 230 KB)
- Retail banks and building societies (PDF 314 KB)
The letters emphasise the importance of the initiative and how its implementation should be a top priority for firms. They remind firms of the implementation timetable, signpost to the requirements of the Duty, and summarise the findings from the implementation plan review. The cost of living and the FCA's expectations in that context also feature. Of most interest to firms will be the annexes where the FCA outlines its expectations on how firms in these sectors should embed the Duty.
- Inside FCA podcasts: Consumer Duty series —The FCA has released two new podcasts in its Consumer Duty series:
- Inside FCA: What does the Consumer Duty consumer support outcome mean?
- Inside FCA: Explaining the Consumer Duty consumer understanding outcome
These new podcasts cover the principles behind the outcomes and provide insight into the FCA's expectations in these areas.
Debt packager fee ban proposals — The FCA has confirmed (PDF 1.37 MB) its intention to proceed with proposals to ban debt packagers from receiving fees or other remuneration for referrals to debt solution providers. Following the FCA's original consultation in Q4 2021 the FCA decided to gather and analyse additional evidence on the market before proceeding any further. The enhanced evidence base and the strongly supportive feedback received to the consultation has reinforced the FCA's view that the intervention is appropriate to address the harm. As a result, it proposes to proceed with the rules as consulted upon, subject to some minor clarificatory changes and the inclusion of new perimeter guidance to address the potential harm posed by lead generators.
Retirement income advice thematic review — The FCA commenced a thematic review in Q1 2023 assessing the advice consumers are receiving on meeting their income needs in retirement. The review will focus on the delivery of retirement income advice and will assess the quality of consumers' outcomes. The FCA intends to use the findings to inform its future strategy for the sector and as an important indicator of how firms are implementing the Consumer Duty.
British Steel pension scheme transfers — Regulatory activity in relation to the pension transfer advice provided to British Steel Pension Scheme (BSPS) members has continued with the FCA:
- Confirming the extension of its asset retention requirement (PDF 691 KB) which applied from 31 January 2023.
- Issuing a Dear CEO letter (PDF 136 KB) setting out its expectations of third parties responding to information requests from BSPS advice firms.
- Issuing a statement setting out its concerns that four firms were making unsolicited offers to BSPS members who had not made complaints. The FCA updated that it has now identified 15 firms that it believes are engaged in this misconduct. The FCA expects any firm involved in this practice to:
- Withdraw any existing unsolicited settlement offers pending any consumer agreement.
- Stop making further unsolicited offers to former BSPS members who have not made complaints.
- Treat any pending unsolicited settlement offers as withdrawn.
Alongside this, a legal challenge has been made against the FCA's decision to set up the BSPS redress scheme which argues the scheme is unsuitable and challenges the FCA's decision not to re-consult. The FCA is confident its decision will be upheld and views the challenge as an attempt to delay the payment of redress to former BSPS members.
Pensions
Defined Contribution pensions — Value for Money framework — The Department for Work and Pensions, FCA and TPR have launched a consultation (PDF 1.61 MB) on a Value for Money (VFM) framework which sets out proposed metrics and standards for measuring VFM across Defined Contribution (DC) pension schemes. The proposals aim to shift focus away from solely low costs being a key decision factor to a wider set of performance measures — investment performance, costs and charges and quality of services. Availability and transparency of information on these three factors is a key objective with specified reporting requirements. Given the detailed nature of the proposals, firms could be impacted by needing to prepare new data and reports including the underlying operational, IT and governance arrangements.
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