UK Regulatory Radar

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.

The financial services regulatory announcements in the Chancellor's Autumn Statement focused on pension reform and are summarised well in the Chancellor's letter to the CEOs of the FCA and the Pensions Regulator — providing better saver outcomes, a more consolidated market and enabling pension's schemes to invest in a diverse portfolio. Other new announcements include consulting on introducing a UK regime for captive insurance companies and making changes to allow ISAs to include Long Term Asset Funds, open ended property funds with longer notice periods and certain fractional shares contracts. The government also continues to move ahead with repealing and replacing retained EU regulation including Solvency II, Prospectus Regime and PRIIPs.

• ESG and Sustainable Finance 
• Banking 
• Capital Markets and Asset Management
• Insurance
• Retail Conduct
• Payments
• Pensions
• Cross Sector

TPT sector-specific guidance: The Transition Plan Taskforce (TPT) has proposed sector-specific guidance for banks, asset owners and asset managers. Firms have until 29 December 2023 to respond to the consultation. For more on the TPT Disclosure Framework and its wider implications, see the article above.

FCA reviews ESG Guiding Principles for funds: The FCA has reviewed fund managers' compliance with its ESG Guiding Principles, noting that although firms have made efforts to comply, a range of improvements are still needed. For more on the FCA's findings and their implications, see the article above. 

Incorporating sustainability themes in remuneration: The FCA has written to the Chairs of Remuneration Committees to encourage them to incorporate emerging regulatory themes, including sustainability, into remuneration. The letter specifically calls out Consumer Duty, culture, diversity and inclusion initiatives, as well as broader sustainability objectives and the joint FCA/PRA consultation on the proportion of variable remuneration.

Capital requirements for securitisation: The PRA is gathering feedback until 31 January 2024 on the implementation of the output floor under Basel 3.1 for firms with certain securitisation exposure. The three options set out in the discussion paper are: 

1.  Implementation of the output floor without any adjustment to the Pillar 1 framework for determining capital requirements for securitisation exposures.
2. Implementation of the output floor with a targeted and evidence-based adjustment to the Pillar 1 securitisation capital framework.
3. Carve-outs from, or other qualifications to, some or all securitisation exposures.

Removal of 'bonus cap': The PRA confirmed the removal of the 'bonus cap', as proposed in CP15/22. The cap was first introduced in 2014 to limit the ratio between fixed and variable pay and related provisions on shareholder approval and discount rates. However, the PRA now considers that removal of the restrictions will allow firms greater flexibility over their cost base to deal with downturns, improve international competitiveness and better align incentives. The changes apply for firms' ongoing performance year from 31 October 2023 and to future performance years. 

Identification of G-SIIs: The PRA has published final policy and feedback on proposed amendments to the UK Technical Standards (UKTS) on the identification of global systemically important institutions (G-SIIs). The amendments were proposed in order to align the UKTS with the BCBS framework.

Identification of G-SIIs Non-performing exposures capital deduction: The PRA has finalised its policy on the non-performing exposures capital deduction. No material changes have been made following the consultation.

UK Benchmark regulation: HM Treasury (HMT) has announced that the transitional regime for third country benchmarks under the UK Benchmark Regulation will be extended to 31 December 2030. The reason is to continue the availability of the number and variety of important benchmarks in the UK, allowing 'UK companies to plan with confidence that they will not lose access to benchmarks that are critical to their operations'. HMT will consider where reforms are needed to the third country benchmarks regime, and make these changes as part of the implementation of the wider Smarter Regulatory Framework programme (i.e. the review and repealing of EU onshored legislation). 

FCA feedback statement on LTAF FSCS coverage: In June 2023, the FCA consulted on whether regulatory activities relating to Long Term Asset Funds (LTAFs) should be removed from coverage under the Financial Services Compensation Scheme (FSCS). This was due to LTAFs' potential to be complex products with higher investment risk. In a feedback statement published on 30 October, the FCA communicated that it has decided not to take forward the proposals at this time. Instead, it will consider any changes to the scope of FSCS protection for retail investments in the round, rather than excluding activities relating to certain investment products in isolation.

UK asset management regime: Ashley Alder (FCA Chair) delivered a speech on 12 October regarding the FCA's priorities for revising and improving the UK asset management regulatory regime. The FCA's main areas of focus will be on making the regime more proportionate for alternative managers, updating the rules for non-UCITS retail funds, and supporting technological innovation. On the first and second priorities, the FCA will consult on changes in 2024, and will also review the AIFMD reporting regime in 2025. 

2023 CCP Supervisory Stress Test: The Bank of England (BoE) has published results of the second public Central Counterparty (CCP) Supervisory Stress Test. Overall, the results indicate that the three UK CCPs were able to comfortably absorb default losses and maintain higher liquidity balances through the exercises (which were equal to or of greater severity than the worst-ever historical market stresses). From the clearing members' perspective, the results show that the largest liquidity demands from CCPs' margin calls generally fall on the largest financial groups but appear manageable in the context of those groups' liquidity resources. Learnings from these scenarios will be carried forward as the BoE develops its system-wide exploratory scenario (SWES) exercise, as well as informing the supervision of CCPs.

FCA Market Watch 75: In its latest Market Watch, the FCA shares its recent observations on trading during the market soundings (interactions between issuers and investors which help determine interest in a transaction before its announcement) procedure. The FCA also gives guidance on what firms can do to minimise the risk of insider dealing and unlawful disclosure. 

Fund tokenisation: An industry working group under the Asset Management Taskforce — the Technology Working Group — has published a blueprint for implementing fund tokenisation in the UK. It was developed in conjunction with HMT and the FCA. In response, the UK government and the FCA welcomed the publication. In a letter addressed to the group, the FCA also set out the rules that were considered in developing the blueprint, clarifying its interpretation of the relevant regulatory requirements.

PRA consultation and draft supervisory statement on funded reinsurance: The PRA is consulting on its approach to funded reinsurance. The PRA considers that funded reinsurance present significant potential risks of its objectives, and proposes that insurers should address these via risk management, solvency, collateral measurement and contractual/strategic tools. The proposals would impact insurers that use these types of arrangements and how they can continue to support the ongoing transfer of pension liabilities via Bulk Purchase Annuities (BPA).

PRA discussion paper on FSCS general insurance limit: The FSCS is designed to protect eligible customers when financial services firms fail. Currently, when an insurer fails, it will pay eligible policyholders, with a valid claim under an insurance policy, 90% or 100% of the claim value under that contract of insurance. This discussion paper sets out the PRA's analysis of those areas of GI where the PRA has identified additional FSCS coverage could be warranted to secure an appropriate degree of policyholder protection and possible options to support this.

Wealth Management Dear CEO letter: The FCA has issued a decidedly punchy Dear CEO letter to wealth managers and stockbrokers, setting out its revised supervisory priorities. This updates on the FCA's previous priorities that were published in September 2021. The FCA is particularly focused on firms preventing financial crime and fraud, and on "full implementation" of the Consumer Duty. However, whilst the topics may not be very different, the tone from the FCA definitely is. It stated that it will be more targeted, intrusive and assertive. Time for firms to check they are putting their best foot forward on evidencing how they're addressing these core risks. Our further analysis of the letter's content is here. 

Complaints data: The FOS has published complaints data from the first half of 2023 which shows a significant increase in the number of complaints received. FOS attributes this rise to complaints in the banking and insurance sectors, echoing the findings the recent Q1 analysis. There has also been a marginal increase in the uphold rate. This is the first report to include data on funeral planning complaints and the new category of complaints settled proactively with businesses. 

The FCA also published an overview of firms' complaints reported to them during H1 2023 which shows a 5% increase in the total number of complaints received compared to H2 2022. Current accounts continue to be the most complained about product. Data shows complaint increases in decumulation & pensions, investments, insurance & pure protection, and banking and credit cards. These numbers, unsurprisingly, reflect many figures and trends seen in FOS complaints data for the same period.  We will be tracking with interest how these complaint volumes move in H1 2024, following the first full period of post Consumer Duty expectations.

BNPL contract changes: As part of its ongoing work with unregulated Buy Now Pay Later (BNPL) firms, the FCA announced it has secured changes to potentially unfair and unclear contract terms for another two unregulated BNPL firms, building on similar work last year. Research, published alongside this, shows a significant increase in the use of BNPL between 2022 and 2023. The research also reveals  that frequent BNPL users are more likely to be in financial difficulty. Further, adults with characteristics of vulnerability were more likely to have used BNPL within the last 12 months, and more likely to have used it frequently. Relevant firms will want to assess the impacts and ensure that they have been factored into propositions, products, target markets and customer support functions, and that good outcomes against these risk factors can be evidenced.

Future of Payments Review: The Future of Payments Review was included in the Chancellor’s Autumn Statement. Commissioned by HM Treasury and led by Joe Garner, the review provides a number of recommendations on the next steps for the UK to successfully deliver a world leading retail payments ecosystem — please see summary here. 

Cross-border payments: The BoE has welcomed the Bank for International Settlements' Committee on Payments and Market Infrastructures (CPMI) new harmonised ISO 20022 data requirements and confirmed its intention to align the CHAPS ISO 20022 message usage guidelines with the CPMI  data requirements by end-2025, ahead of the end-2027 timeline for global adoption.

Frauds and scams: The regulators continue activity to tackle the continued impact of payment frauds and scams.  

The PSR has published its authorised push payment (APP) fraud performance report marking a significant step towards greater transparency. This represents the most comprehensive data published to date, covering 95% of Faster Payments in the UK by value and volume. The data highlights a range of inconsistent outcomes for customers who report APP fraud and differences in approaches undertaken by sending and receiving payment system providers (PSPs) which firms will want to consider. 

The FCA's recent review of anti-fraud systems highlighted that more is needed to strengthen anti-fraud systems and improve customer treatment.. The FCA was pleased with firm's active engagement with external bodies to gather intelligence and horizon scanning. However, the review also found instances of poor governance and oversight, inadequate complaints handling and a failure to demonstrate how customers vulnerabilities were taken into account.   

The FCA has published key findings from its review of payment account providers' systems and controls against money mule activity. This evaluation included firms' controls during onboarding, monitoring, and reporting. The findings indicate that some firms are working to address the challenges of money mules by implementing a range of measures and technologies to detect and deter fraudsters from using their organisation and harming their customers for illicit gains — others have more to do. The key areas requiring improvements related to (i) governance, MI and risks assessment, (ii) systems and controls (iii) use of intelligence, industry engagement and data sharing, (iv) customer communications and awareness and (v) training.

Open Banking data collection frameworks: Open Banking Limited (OBL) has published two data collection frameworks — 'Levelling up availability and performance' and 'Mitigating the risks of financial crime'. These complete two of its deliverables from Joint Regulatory Oversight Committee (JROC) 'Recommendations for the next phase of open banking in the UK' report. JROC has welcomed the frameworks, and OBL will now conduct the first data collection, completion of which will be on a voluntary basis. The findings of this exercise will inform further policy development. 

The PSR has confirmed its approach to financial penalties in an updated penalty statement. The PSR has made one change to the proposals consulted on removing proposals that awareness of a risk can be assessed on an objective basis, when considering whether a compliance failure is reckless. 

HMT calls for evidence on pension fund clearing exemption (UK EMIR): Under UK EMIR, pensions funds currently have an exemption — until 18 June 2025- from clearing derivatives contracts used to hedge risks which directly relate to their financial solvency. HMT has published a call for evidence on how pension firms hedge and their use of clearing to help determine a long term policy approach and whether any changes are required.

System Wide Exploratory Scenario: The BoE has launched the scenario phase of its system-wide exploratory scenario (SWES). The SWES was announced in June 2023 with the aim of improving the BoE's understanding of system-wide stress impacts and in particular the contribution of market-based finance. The hypothetical scenario launched in November reflects a "sudden, sharp shock to global financial markets due to sudden crystallisation of geopolitical tensions". For more on the scenario, see the article above.

AI and Machine Learning: The BoE (including the PRA) and the FCA jointly published a feedback statement summarising the industry feedback received to their earlier discussion paper . Key feedback themes include (i) the importance of regulatory alignment and adaptability, (ii) links to existing data regulation, operational resilience and model risk management frameworks, and (iii) the perceived sufficiency of SMCR to address risks. 

Financial Regulatory forum: Following the signing of a memorandum of understanding (MoU) in May 2023, the first meeting of the new EU/UK Financial Regulatory Forum took place on 19 October. It was chaired by the European Commission and HMT, and included wider participants from the FCA, BoE, ECB, and European Supervisory Authorities. Given this was the first meeting of the Forum, views were exchanged on operational/practical arrangements for future cooperation under the MoU. Both sides then provided updates on their respective FS agendas and exchanged views on a range of topics. The next meeting is expected to take place in spring 2024. In the meantime, follow up discussions will take place. 

FSCS payouts: The PRA has proposed updates to its rulebook to enable faster pay-outs to eligible depositors of insolvent deposit takers under the FSCS — this supports the BoE's work on improving depositor outcomes. The PRA also proposes to update SM&CR Forms C and D to reflect the requirements of the FCA's Consumer Duty. The proposed implementation date for both changes is December 2023. 

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: