UK Regulatory Radar

The UK Regulatory Radar is a regular publication from KPMG's EMA Financial Services Regulatory Insight Centre (RIC), providing a summary of the latest industry and regulatory updates impacting the UK.

With the turn of the year, the PRA and Bank of England are setting out their 2022 supervisory priorities for banks, insurers and financial market infrastructure. Not surprisingly, financial resilience, operational resilience, climate-related financial risk and diversity and inclusion remain key priorities, alongside data quality and regulatory reporting, the LIBOR to risk-free rate transition and the development of a targeted resolution framework for insurers.

In its interim statement, the Ring-fencing and Proprietary Trading Review reports that the ring-fencing regime has contributed to a more resilient banking sector in the UK through an increase in capital requirements, and that it has had no significant negative impact on competition in retail banking. However, it does find that the regime creates compliance costs for firms, frictions for customers and that the current rules cause unintended and unnecessary rigidity for customers, banks and regulators. The review also finds that the UK resolution regime is increasingly playing a more prominent role and providing a more comprehensive solution in addressing the problem of too-big-to-fail.

The FCA's update to its strategic review of retail banking has found that greater competition is driving choice and lower prices for consumers and small businesses. There are also signs that large banks' historic advantages are starting to weaken, driven by digital innovation and changing consumer behaviour.

The FCA will be investigating its concerns that competition is not working for wholesale data markets. And HM Treasury and the FCA are consulting to strengthen the rules to protect consumers from the inappropriate promotion of high-risk investments including crypto-assets.

The PRA has sent three Dear CEO letters to UK banks, international banks and insurers setting out its 2022 supervisory priorities – see our article for more details.

The PRA has published a summary (PDF 1.46 MB) of the responses to its 2021 Discussion Paper on a proposed “strong and simple” prudential framework for non-systemic banks and building societies. The majority of respondents were supportive of the long term vision for the framework and supported the approach of layered prudential regimes – most considered two to three layers to be appropriate. Feedback on the design of the simpler regime is also included in the statement. All feedback will be used to inform future consultation papers in 2022 and 2023.

The PRA has issued final policy, effective 1 January 2022, on designating investment firms. This is relevant to all PRA-designated UK investment firms. The policy reflects HM Treasury's proposed amendments to the scope of firms that can be designated (see Part 3, Section 15 of the Financial Services Act 2021). There will now be six, rather than three months between the Prudential Regulation Committee designating an investment firm and it becoming PRA-regulated. The PRA will consider whether or not an investment firm is a clearing member of a central counterparty offering clearing services to other financial institutions (that are not clearing members themselves) when making a designation decision.

The PRA has issued guidance explaining how changes are being implemented in regulatory reporting requirements across the CRR reporting modules. Following publication of its policy statement on implementing Basel Standards, the PRA has incorporated the entire body of the UK version of COREP and FINREP requirements (aligned to the European Banking Authority (EBA) Taxonomy 3.0) into PRA rules to create a single source of reporting requirements for firms.

The PRA has written (PDF 162 KB) to insurers with a second and final request for technical input on the proposed scenarios and instructions for the Insurance Stress Test (IST) due to launch in May 2022. The largest UK life and general insurers will be asked to participate in the stress test. This request seeks input on:

• Plausibility of scenario calibration
• Clarity of the instructions and completeness of the scenario assumptions to be provided by the PRA
• Governance and quality assurance requirements for the stress test submissions
• For General Insurers - which scenarios are material

The PRA has issued updated supervisory and policy statements (PDF 809 KB) providing final rules and feedback to responses to the consultation on Solvency II Reporting (Phase 1). These became effective on 17 December 2021.

See also Payments below for an update on the 2022 PRA cyber stress test.

The FCA has issued a policy statement requiring mandatory climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers on an annual basis and at entity and product level. The new requirements build on the FCA's November 2021 Strategy for Positive Change, and forms part of the FCA's strategy to implement the UK Government's Roadmap to Sustainable Investing through the proposed Sustainability Disclosure Requirements (SDR).

The joint PRA/FCA Climate Financial Risk Forum (CFRF) has published minutes (PDF 2 MB) of its eighth meeting, held in October 2021. The Forum discussed the future strategy of the CFRF and the next phase of work (Session 3). Work will continue on scenario analysis but will pause temporarily on risk management to allow new tools and guidance to be considered and implemented by firms. Other proposals included establishment of a working group focused on the transition to net zero and the rotation of Forum membership. The next meeting will be in Q1 2022.

The Pensions Regulator (TPR) has published finalised guidance, following consultation, on the 'Governance and reporting of climate-related risks and opportunities' for Trustees. This sits alongside the Department for Work and Pensions (DWP)'s statutory guidance.

The PRA has announced that it will invite a number of firms to participate in a voluntary cyber stress test. The test will target the most systemic firms in the end-to-end payments chain and focus on a severe data integrity incident as the disruption scenario. The cyber stress test is a separate but complementary exercise to the PRA's operational resilience policy. However, the PRA expects that firms will be able to draw on their own preparations for the operational resilience policy for the purpose of the cyber stress test.

The Access to Cash Action Group (which includes all major retail banks) has agreed a new approach to protecting cash access in the long term. This work builds on the insights from the Access to Cash Pilots (PDF 7.5 MB), which supported eight communities across the UK to trial and test different ways to allow people access to cash. This new approach will mean that banks will share services to ensure communities have fair access to cash and this will be independently assessed by LINK (which already fulfils this role for ATMs), with the power to commission services to meet community cash needs. Further, shared banking hubs will be deployed alongside free ATMs, enhanced Post Office services, and cashback without purchase.

The pivotal role of financial promotions has been a topic of focus. HMT is consulting on tightening the existing exemptions for High Net Worth individuals. The changes are designed to reduce the risk that the exemptions are used for promotions to investors who do not meet the conditions and that, when the exemption is used, investors understand the regulatory protections they are losing and are able to take responsibility for their investment decisions.

In response to feedback on its July 2020 consultation, HMT will take action to amend secondary legislation Financial Promotion Order to include crypto-assets. This would mean that a business cannot promote a crypto-asset unless they are authorised by the FCA or the PRA, or the content of the promotion is approved by a firm which is. Firms that wish to promote such investments and activities must comply with binding rules that financial promotions must be fair, clear, and not misleading.

On a similar theme, the FCA is consulting on new requirements for financial promotions where they advertise high risk investments, in response to the heightened risk generated by the power of social media to influence and promote investments. This response consists of a tiered approach to the FCA's categorisation of high risk investment – the higher the risk the greater the regulatory requirements (including mandated aspects of the customer journey and risk warning). It also broadens the scope of its financial promotion rules to include crypto-assets. The proposed rules would place greater accountability on firms approving and communicating financial promotions. This paper forms part of the FCA's Consumer Investment Strategy aimed at ensuring customers can make informed decisions.

FCA concerns about the quality of financial advice received by members of the British Steel Pension Scheme (BSPS) has been a persistent theme for a number of years. The Treasury Select Committee (TSC) has shared these concerns and, in July 2021, the FCA agreed with the TCS to consider whether a formal redress scheme (referred to as a section 404) was required to consistently remediate members who has received poor advice. The FCA's Board has now issued a formal statement announcing that it will consult (expected in March) on whether such a scheme is required and how it should be structured. Alongside this announcement, the FCA also published a Dear CEO letter (PDF 162 KB) to firms reminding them of their general obligations and warning them about taking any capital out the business which should be reserved for making compensation payments. This is designed to help reduce the burden on the FSCS.

Finally, and finishing on a more positive note, the FCA has published its latest report on competition in retail banking markets. Whilst there is still work to be done in this sector, the message from the FCA is that the overall trend is positive and that competition and innovation are driving examples of better outcomes for customers. The review explored trends in the retail banking industry in light of significant changes such as COVID-19, increased digitalisation and ring-fencing, and considered what this has meant for competition and overall profitability.