UK Regulatory Radar

Our new issue of UK Regulatory Radar brings you the latest industry and regulatory updates affecting 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.

ESG and Sustainable Finance 

Prudential

Capital Markets and Asset Management

Insurance

Retail Conduct

Payments

Pensions

Cross Sector

Diversity & Inclusion (D&I) in financial services (FS) — The FCA has published the results of a multi-firm D&I review across multiple FS sectors. 12 firms were involved, eight of which reported large gender pay gaps and four of which reported small pay gaps. The results give an indication of the current state of D&I in UK financial services and aim to encourage further industry action and inform future supervisory approaches.

PRA 2023 supervisory priority letters — The PRA has written to insurers, international banks and UK Deposit Takers outlining its supervisory priorities for 2023. Some of the priorities are common to each sector: financial and operational resilience, financial risks arising from climate change, governance and risk management, and diversity, equity and inclusion. The PRA will prioritise readiness for ISO 20022 messaging in CHAPS as part of the Real-Time Gross Settlement (RTGS) Renewal programme and data quality and accuracy for all banks. UK Deposit Takers should expect continued focus on credit and model risk. For insurers, exit and resolution planning and non-natural catastrophe risk such as large-scale cyber attacks will be on the agenda. 

Bank of England (BoE) Financial Policy Summary — The December 2022 Financial Stability Report set out the Financial Policy Committee's (FPC's) latest views on financial stability risks and policy actions. While it found that UK banks are well positioned to manage the worsening economic outlook, the FPC noted that urgent work is needed to ensure the non-bank sector is equally robust. For the first time, the BoE will run an exploratory scenario exercise for Non-Bank Financial Institutions (NBFIs), with further details to follow in H1 2023. On Liability-Driven Investment (LDI), the FPC was explicit that regulators should set steady-state minimum levels of resilience in the LDI market — see more in our article above. Cryptoassets also featured prominently — although the FPC is not yet concerned about financial stability impacts, it sees the need for enhanced regulatory oversight of crypto markets and activity given the speed of market developments. 

Independent review on ring-fencing and proprietary trading — The government has responded to the recommendations (published in March 2022) of the Independent Panel on Ring-fencing and Proprietary Trading which aimed to reduce the rigidity of the ring-fencing regime and address its unintended consequences. The government plans to consult in mid-2023 on a series of near-term reforms to improve the functionality of the regime and benefit customers, the FS industry, and the economy, while maintaining appropriate financial stability safeguards. The government also intends to issue a public call for evidence in Q1 2023 to review the practicalities of aligning the ring-fencing and resolution regimes.

FCA update on 10% depreciation notifications to investors — The FCA has provided an update regarding the permanent end of 10% depreciation notifications to investors, required under MiFID II. Since March 2020 and the onset of the pandemic, the FCA has allowed for some flexibility with the notifications. The UK Treasury has now laid before Parliament a statutory instrument revoking the 10% notification requirement — this legislative amendment is expected to come into force this month. In the meantime, the FCA statement has extended its existing temporary measures with certain conduct expectations. 

Margin requirements for non-centrally cleared derivatives — Following consultation, the PRA and FCA will update BTS 2016/2251 'Margin requirements for non-centrally cleared derivatives' (under UK EMIR) to address issues previously raised by industry. 

BoE annual report on supervision of financial market infrastructures — The BoE's annual report on supervision of financial market infrastructure (payment systems, central securities depositories (CSDs), and central counterparties (CCPs)) shows its increasing supervisory powers and focus as the UK regulatory framework is updated, through the Financial Services & Markets Bill (FSMB), to reflect financial innovation and the impact of the UK leaving the EU. 

HM Treasury (HMT) — Call for Evidence on the Short Selling Regulation (SSR) — This is the first step in the government's programme to repeal retained EU law and replace it with a regulatory framework tailored for the UK. The call for evidence seeks views on the whole framework as well as views on specific areas of the existing regulation but it does not lay out any proposals. HMT will consider which aspects of the regime should remain in legislation, and which should be delegated to the FCA to set in its rules.

Insurance special purpose vehicles — In December 2022 the PRA issued Policy Statement (PS) 12/22 — updates to Supervisory Statement 8/17, which covers the authorisation and supervision of insurance special purpose vehicles (ISPVs). This PS updates the PRA's position on: legal opinions for non-English law governed contracts, the number of Senior Management Function (SMFs) holders needed for an ISPV, multiple cedants ceding risk via a single contract, the interpretation of quantifiable risk, and the changed requirement for written policies. The policy changes to SS8/17 were effective from 23 December 2022. The changes have eased burdens on firms applying for ISPVs, and have broadened the scope of what may be considered a single cedant under a single ISPV risk transfer contract.

Claims management companies (CMCs) — The FCA has written to CMCs updating its view of the drivers of harm and risks that CMCs pose since its last letter in October 2020. Concerns identified include (i) misleading advertising (ii) legitimisation of non-regulated services (iii) sourcing of customers (iv) claim investigation (v) attitude to regulatory obligations. The letter also reminds CMCs of the need to start preparing for the implementation of the Consumer Duty and includes some examples of how the Duty can apply to CMCs. However, against the backdrop of the FCA citing poor attitude to regulatory obligations in this letter (which indicates more of a cultural challenge for firms) Consumer Duty is likely to be an area of continued interest for FCA.

FSCS framework review — In its feedback statement on the framework for protection provided through the FSCS, the FCA has identified two main feedback themes which it intends to focus on: (i) the importance of firms improving their conduct so there were fewer calls on the FSCS and (ii) the need for firms to be more financially resilient to address the underlying causes of high redress liabilities. The FCA will consult on any proposed changes to the compensation rules during 2023/24 with a view to confirming any changes by the end of that financial year.

Remedies for credit information market —The FCA has published interim findings from its market study into the credit information market which has identified some areas that are not working well. These areas include governance, barriers to entry and switching, and poor consumer understanding. Indeed, these findings reinforce many of the FCA's concerns that has driven the development of the Consumer Duty. The paper includes proposals to address these concerns which include a new industry oversight body, quality improvement measures and simplified dispute processes. The final approach to any remedies will be considered in the context of the Consumer Duty. 

Financial Ombudsman Service (FOS) strategic plans and budget (2023/24) — FOS published proposed changes to its funding model for the next financial year. Recognising the current economic climate and the cost pressures firms are facing, firms will be comforted to know that FOS will not raise its levy or case fees. As part of this consultation, the FOS are seeking views on taking forward its future funding model proposals issued in November 22 which seek to incentivise constructive behaviour in industry such that businesses who generate complaints bear the costs of FOS' service to resolve them.

Cross border interchange fees — As part of its market review on cross-border interchange fees, the Payments Systems Regulator (PSR), prompted by concerns regarding the rise in these fees, has issued a working paper outlining what it sees as the potential impacts on UK businesses and consumers, and how merchants or acquirers might mitigate the impact of the increases. The PSR is concerned that whilst larger merchants can absorb the increased costs, smaller merchants may be forced to pass these on to consumers leading to higher prices. These increased costs may prompt some merchants to consider relocating from the UK to avoid the fees.

Wholesale cash distribution — the BoE outlined proposals for its use of new powers to ensure access to cash remains effective, resilient, and sustainable. This will underpin continued retail access to cash for individuals and businesses. The new powers are contained in the FSMB which is currently before Parliament. The BoE's proposals cover its principles for a Wholesale Cash Distribution Market Oversight regime, high-level codes of practice for participating members and the fees required to fund its supervision.

Open banking update — In a joint statement (HMT, CMA, PSR and FCA) updated on the work of the joint regulatory oversight committee on open banking. They reassert their vision for open banking as well as emerging thinking on the design of the future delivery entity. In the first quarter of 2023, the committee will publish a further statement including a roadmap to deliver their vision for open banking. Further clarity on the regulators plans, expectations and timescales are likely to be welcomed by industry to support further innovation in the sector and will provide renewed vigour to the evolution of open banking in the interests of both industry and consumers.

Funding code and twin track regime — The Pensions Regulator (TPR) is consulting on a revised funding code of practice for defined benefit pension schemes and a new twin track regulatory regime to help filter out schemes that require minimal engagement. Under the new code, schemes will be required to improve risk management and set long-term objectives and a journey plan to get there. With its `twin track regulatory regime' TPR is proposing two approaches to assessing valuations — Bespoke and Fast Track. The new Fast track will provide a valuation approach providing a simplified path to demonstrating compliance that acts as a filter for TPR's assessment of actuarial valuations. The bespoke route is similar to the current arrangements for scheme valuation providers. 

Non-workplace pensions — the FCA has published final rules and guidance on default options and cash warnings for non-workplace pensions. The respondents were largely supportive of the new rules and therefore the main substance of the rules remain largely unchanged from those consulted upon. These new rules require providers to (i) offer non advised consumers a default investment choice and (ii) send a cash warning to consumers with significant and sustained levels of cash to warn them that their pension savings are at risk of being eroded by inflation. 

FCA approach to implementing the Future Regulatory Framework (FRF) — The FCA has set out its approach to implementing the draft FRF measures contained in the FSMB. The plan includes steps to: implement the new secondary objective on growth and international competitiveness; increase accountability, scrutiny of activities and stakeholder engagement; and transfer the rules contained in retained EU legislation into the Handbook. 

Bonus cap removal — The joint FCA & PRA consultation proposes to remove the current limits on the ratio between fixed and variable components of total remuneration i.e. the bonus cap. The regulators' view that this would strengthen the effectiveness of the remuneration regime by increasing the proportion of compensation at risk that can be subject to the incentive setting tools within the remuneration framework — including deferral, payments in instruments, and risk adjustment.

Regulatory operational effectiveness — The CEO's of the FCA and PRA have both responded to requests from the Chancellor on their plans to increase operational effectiveness. The FCA outlined it plans to improve transparency in the area of firm authorisations. The PRA is focusing on enhancing the metrics it publishes on the handling of regulatory transactions.

Useful information: 

The KPMG Regulatory Barometer helps firms identify key areas of pressure across the evolving UK and EU regulatory landscape and measure the impact of the likely change

The KPMG Financial Services Regulatory Insight Centre monitors and tracks the evolving regulatory landscape. If you would like to discuss any of the topics covered in more detail, please contact a member of the team below: