UK Regulatory Radar

March 2021

This UK regulatory round-up provides insights on where the agenda is heading and implications for firms. As we move beyond the pandemic and as the post-transition landscape takes shape, we track the direction of UK regulation and highlight key developments.

COVID-19 and post-Brexit impacts continue to feature in regulatory announcements. The UK regulators are increasingly moving to a UK-specific and more technology-based focus, such as the Bank of England (BoE) plan to transform data collection from regulated firms.

The FCA continues its focus on good customer outcomes, with new guidance on vulnerable customers, which firms are expected to apply through the customer journey. It has also issued its supervisory strategy for retail banking, a report outlining practices firms can consider to reduce consumer harm caused by failed technology changes and a review into the unsecured credit market. HM Treasury (HMT) has announced that buy-now-pay-later products will be regulated by the FCA and the latest report from The Pensions Regulator indicate a 50% increase in enforcement activity.

Banks must put in place tactical solutions for negative interest rates and UK implementation of the remaining Basel 3 standards is under consideration. A reminder of responsibilities under the first cycle of the Resolvability Assessment Framework has been issued. The BoE has decided not to restart the 2019 liquidity Biennial Exploratory Scenario, which it paused in March 2020. Insights from the liquidity BES have already helped to shape aspects of the BoE's response to the impact of COVID-19 and will continue to inform future work. The PRA has clarified its expectations for supervisory benchmarking of internal models and firms have been asked to provide an update on their progress in adopting the recommendations of the Taskforce on Disclosures about Expected Credit Losses within six weeks of finalising their 2020 or 2020/21 annual report. Also, the independent reviews of ring-fencing and proprietary trading are gearing up, with publication of the Terms of Reference and announcement of review panel members.

Insurance firms will wish to monitor closely the PRA's review of Solvency II. The PRA has said it will consider the three pillars of capital, risk management and risk disclosures, and that its objectives are an innovative and internationally competitive sector, policyholder protection and safety and soundness of firms, and enabling insurers to support growth by providing long-term investment. Meanwhile, the PRA has written to Chief Actuaries on the effective value test, used to assess the appropriateness of the matching adjustment benefit that life insurers derive from restructured equity release mortgages. The letter sets out detailed points on economic value, appropriate assumptions, and presentation and submission of results.

Finally, climate change risks remain front of stage. The UK has joined the International Platform on Sustainable Finance, having previously been a member under the EU banner. The BoE led two virtual events in late January designed to increase understanding and engagement with external stakeholders on how the financial sector can help tackle climate change. It is now asking members of the public and businesses to join the debate.

• Continued focus on COVID-19 impacts 
• After Brexit…
• Review of the UK funds regime
• Transforming data collection
• Focus on vulnerable customers
• FCA supervisory strategy for retail banking
• Tactical solutions for negative interest rates
• Implementing remaining Basel 3 standards
• Resolvability Assessment Framework
• Payments update
  

Regulators continue to ensure that firms remain focused on the key impacts of COVID-19, with a series of announcements extending or developing existing provisions to minimise the burden on firms, while ensuring that firms continue to treat customers appropriately. There is new tailored support for consumer credit firms and mortgage lenders, as well as supporting customers in obtaining cancellations or refunds. The FCA has also published guidance for firms using Pay as You Grow options within the Bounce Back Loan scheme.

In line with a joint statement by the FRC and the FCA, the PRA has recognised that COVID-19 may affect the time required by firms and their auditors to finalise firms' annual report and accounts. It will therefore accept a delay of up to two calendar months, where the remittance deadlines set out in the PRA Rulebook fall on or before 31 July 2021. Firms should still submit before the end of the delayed window if they are able to do so and should keep their supervisory contacts fully informed.

Where firms are likely to find it challenging to meet other regulatory reporting deadlines, the PRA is willing to consider flexibility where the remittance deadlines fall on or before 31 March 2021 and where the reporting time is not critical for supervisors. Again, supervisors should be kept informed.

The FCA has asked banks to reconsider branch closures during lockdown. Following on from guidance issued in September 2020, the FCA has reiterated that banks should consider pausing or delaying new branch closures where possible, particularly where this could have significant impact on vulnerable customers.

A speech by Andrew Bailey, BoE Governor on the need for open markets touched on equivalence, global standards, the need for rules to evolve and adapt, and supervisory cooperation. In particular, in relation to the ongoing EU-UK equivalence debate, he said “The EU has argued it must better understand how the UK intends to amend or alter the rules going forwards. This is a standard that the EU holds no other country to and would, I suspect, not agree to be held to itself. It is hard to see beyond one of two ways of interpreting this statement, neither of which stands up to much scrutiny.” He called out three areas of possible rule changes: the Basel regime for smaller banks, treatment of software assets for banks and Solvency II.

It is still not clear whether there will be any further granting of equivalence decisions between the EU and UK. However, the BoE and FCA have signed a memorandum of understanding with each EEA authority and HMT has granted equivalence to Swiss stock exchanges under the Share Trading obligation in UK MiFIR. The UK is also negotiating a mutual recognition agreement with Switzerland that is expected to reduce costs and barriers for UK firms accessing the Swiss market and vice versa, across financial services.

The FCA has outlined its approach to the authorisation and supervision of international firms. The document presents the minimum standards for authorisation, why the FCA may require a firm to operate through a subsidiary rather than a branch, and the FCA's general expectations for international firms. It also outlines how the FCA will assess the risks of harm and expects firms to mitigate these risks to retail customers, client assets and wholesale market integrity.

HMT has called (PDF 435 KB) for input to its review of the UK funds regime. The overarching objective of the review is to identify options that will make the UK a more attractive location to set up, manage and administer funds, and that will support a wider range of more efficient investments better suited to investors' needs. The review is wide-ranging, covering regulatory, tax and other considerations, and is supplemented by other consultations, such as on the tax treatment of asset holding companies and the ability of pension funds to invest in illiquid long-term assets.

Key principles and objectives are that:

• Any changes to regulation will need to support the UK's commitment to upholding the highest standards of regulation and appropriate supervisory oversight and investor protection
  
  
• Any tax reforms should be compatible with the UK's robust approach on avoidance and evasion, and with the UK's international commitments, and ensure the UK can effectively exercise taxing rights over UK source income
  
  
• Enhancing the attractiveness of the UK funds regime will help to open opportunities for asset managers to sell UK funds around the world and offer the potential to further grow assets under management in the UK. 
  
  
• The government remains committed to supporting portfolio delegation from and to the UK as a means to promote market efficiency, investor choice and to reflect the international nature of financial markets
  
  
• The UK funds regime can play a key role in ensuring the asset management sector can fulfil its economic purpose by enabling investors to meet their goals and by allocating capital to the economy
  
  
• Fund administration jobs do not need to be located in existing UK financial services hubs and are already distributed across the country.

The BoE has published its plan for `Transforming Data Collection from the UK Financial Sector” announced in a joint letter to firms from the PRA and FCA and aimed at ensuring that “the Bank gets the data it needs to fulfil its mission, at the lowest possible cost to industry”. 

Key challenges are: ensuring that data collections are worthwhile and valuable exercises for regulators to invest in; enabling industry to better understand and interpret reporting instructions so that high quality data are provided and; removing legacy data, process and technology silos to streamline the reporting process.

The plan seeks to deliver reform in three critical areas: integrating reporting, modernising reporting instructions and defining and adopting common data standards. The BoE is aware of the difficulties in moving away from legacy solutions and recognises that many of the changes required will be cultural as well as technical, with sustained investment required to make the improvements identified. 

The BoE and the FCA will set up a multi-year, multi-phased transformation programme. Each phase will aim to deliver a series of “use cases” focusing on particular collections or types of collections and adding value in their own right, as well as delivering improvements that can then be applied to other collections over time.

Phase 1 will run over the next 24 months with a small number of selected use cases. Phase 2, over roughly the subsequent three years, will focus on expanding the transformation into new areas with an increased focus on integration. Additional phases will scale the transformation to maximise value.

Governance structures are expected to be in place for the programme by end-2021. The core team will comprise staff from the BoE, the FCA and firms from whom data is collected, as well as solution providers. Interested parties are encouraged to contact the BoE.

Whilst COVID-19 has heightened the incidences and awareness of vulnerable customers, the FCA has been championing their fair treatment for over five years. The FCA's latest published guidance is to drive improvements so that vulnerable customers are consistently able to achieve outcomes that are as good as for everyone else. This applies through the whole customer journey from product design through to customer engagement and communications. Firms can expect to be asked to demonstrate how their business model, the actions they have taken and their culture ensure the fair treatment of all their customers.

The FCA's recent Financial Lives research shows that 27.7 million adults in the UK now have characteristics of vulnerability such as poor health, experiencing negative life events, low financial resilience or low capability. Not all people with these characteristics will suffer harm, but they may limit people's ability to make reasonable decisions or put them at greater risk of mis-selling. 

The FCA has also published a Memorandum of Understanding (MoU) (PDF 170 KB) with the Equality and Human Rights Commission (EHRC). This MoU sets out how the FCA will co-operate and work with the EHRC on equalities issues, to help protect people in financial services markets. 

The FCA issued its Supervisory Strategy for Retail Banking (PDF 364 KB) for the next two years, which includes four priority areas:

1. Ensuring fair treatment of borrowers, including those in financial difficulties - the FCA's focus will be on assessing banks' lending activities and delivery of forbearance and other protections.
2. Ensuring good governance and oversight of customer treatment and outcomes during business change - the FCA will want to be sighted on strategic change and business transformation programmes and whether these are appropriately governed. 
3. Ensuring operational resilience - the FCA will focus on controls around material outsourcing of functions, data migrations, risk management and governance of the use of cloud-based technology. 
4. Minimising fraud and other financial crime - the FCA expects retail banks to build greater resilience to fraud and other financial crime through sustained improvement in their systems and controls.

Other important areas of work are:

• EU Withdrawal - firms should have considered how the end of transition period affects their customers and be ensuring fair treatment of those customers.
• LIBOR - the FCA particularly wants firms to manage the conduct risks associated with transitioning loan or mortgage contracts with retail consumers or relevant SMEs.

The letter concludes by reiterating the FCA's focus on firms establishing healthy and purposeful cultures, with leaders clearly articulating values supported by role modelling of appropriate behaviours. 

The PRA has written to firms with the outcomes of its October 2020 request for information on their operational readiness for a zero, near-zero or negative Bank Rate, or a tiered system of remuneration. The PRA concluded that:

• Firms are already able to deal with near-zero rates (to at least two decimal places)
• A zero Bank Rate would pose less of a challenge than a negative rate and would be quicker to implement
• A small number of firms do not need to do any further development work, but most firms would need to make changes to systems and processes to implement either a tactical or strategic solution
• The majority of firms would be able to implement tactical solutions to accommodate a negative Bank Rate within six months, without material risk to safety and soundness

Firms must now ensure that they begin preparations to develop the necessary tactical solutions and are expected to work towards a position where they are able to implement a negative Bank Rate at any point after six months. However, the PRA stressed that this letter (and the earlier information request) should not be taken as an indication that the setting of a negative Bank Rate is “imminent or indeed a prospect at any time”. It also noted that, at this stage, to avoid the need for reprioritisation, firms are not expected to start work to implement strategic solutions unless this is already in their plans. 

Following the November 2020 joint statement from HMT, the PRA and the FCA, the PRA is consulting until 3 May on proposed rules to implement remaining Basel 3 standards in the UK through a new PRA Capital Requirements Regulation (CRR) rule instrument. This includes both Basel 3 requirements and Basel 3 final reform elements (commonly referred to as Basel 4) that were due to be implemented under EU CRR2 but had not been implemented by the end of the transition period. 

The proposed new rules broadly correspond with the set of issues covered by CRR2. Where replication of the standards set out in CRR2 would not be fully consistent with the PRA's objectives, a different approach has been taken. This aims to achieve closer alignment with Basel 3 standards, enhance proportionality and enable the new PRA rules to interact clearly and effectively with the requirements that remain in the CRR, and to be supported by a consistent suite of the UK version of revised supervisory Common Reporting (COREP).

The PRA intends its approach to enable the relevant Basel 3 standards to be implemented from 1 January 2022, providing sufficient time for firms to embed the related supervisory reporting, and building on the progress they have already made.

The consultation covers revisions to capital definitions, revised standards for market risk, Collective Investment Undertakings, counterparty credit risk, operational risk, large exposures, the liquidity coverage ratio, net stable funding ratio (NSFR) and supervisory reporting and disclosures:

It also proposes enhanced proportionality for smaller firms, including: 

• a simpler, more conservative SA-CCR approach (sSA-CCR) for certain smaller firms and amendments to the original exposures method (OEM) 
• a simpler, more conservative NSFR (the simplified NSFR, or sNSFR) that certain smaller firms could choose to use
• updates to the simplified capital requirements calculation for credit valuation adjustment risk
• increasing the scope of more proportionate market risk capital requirements and exemptions from new market risk reporting requirements; and 
• tailored disclosure requirements

No new rules on leverage are introduced to replace proposed HMT deletions from the CRR. The Financial Policy Committee and Prudential Regulation Committee have already announced that they will review the UK leverage ratio framework with this work due to complete in summer 2021.

Ahead of first submissions due in October 2021, the BoE wrote to banks reminding them of their responsibilities under the Resolvability Assessment Framework (RAF). The first submission was delayed by one year due to COVID-19. The annexe to the letter sets out examples of good practice to assist firms in meeting the three resolvability outcomes of:

• Having adequate financial resources in the context of resolution
• Being able to continue to do business through resolution and restructuring
• Being able to coordinate and communicate effectively within the firm and with the authorities and markets so that resolution and subsequent restructuring are orderly

In the first RAF cycle, the Bank will place particular emphasis on how Boards and senior management have approached the responsibilities set out in the RAF and may engage with independent members of firms’ Boards in advance to understand these approaches. The Bank will engage with firms later in 2021 on further operational arrangements.

The New Payments Architecture (NPA) is the payment industry's proposed way of organising the clearing and settlement of most interbank payments in the future, including those that currently use BACS and Faster Payments. Pay.UK (a not-for-profit company) is responsible for delivering the NPA and procuring a provider of the NPA's central infrastructure services (CIS), which will handle clearing and settlement. The Payments Systems Regulatory (PSR) is consulting on approaches to manage the risk that the current programme and intended programme scope, including the CIS procurement, will not deliver value for money and could stifle competition and innovation. It is proposing a phased approach where Pay.UK only buys the services needed to migrate Faster Payments for now and tackles the more complex BACS issues separately. The consultation also addresses the risk that the CIS provider could take advantage of its potentially dominant position within the NPA ecosystem by proposing governance principles for the ecosystem.

The PSR is considering shorter-term changes to the existing systems, with two consultations looking to increase protections in payments. £208 million was lost to authorised push payment (APP) scams in the first half of 2020, the PSR is proposing to reduce this by:

• Requiring Payment Service Providers (PSPs) to publish their APP scam, reimbursement and repatriation levels. 
• Encouraging greater collaboration to share information about suspect transactions, by requiring PSPs to adopt a standardised approach to risk-rating transactions and to share the risk scores with other PSPs involved in the transaction. 
• Introducing mandatory protection of customers, by changing industry rules so that all payment firms are required to reimburse victims of APP scams who have acted appropriately. 

The PSR is also consulting on how customer protections can be improved in interbank payments, particularly the Faster Payments Service, where use by consumers continues to grow and the PSR thinks that existing protections and liabilities may not be sufficient.

The FCA is proposing changes to various parts of its guidance and requirements for payment services and electronic money providers. In particular:

• Amendments to the technical standards on strong customer authentication (SCA) and common and secure methods of communication (the SCA-RTS) to encourage the adoption of open banking.
• Issuing temporary guidance in response to the pandemic on prudential risk management and safeguarding requirements for payments and electronic institutions permanent and consolidated.
• Updating guidance to reflect changes to guidance on SCA made by the EBA and European Commission prior to the end of the transition period and to address changes required in the guidance now the UK has left the EU.