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.

• ESG and Sustainable Finance 
• Prudential
• Capital Markets and Asset Management
• Retail Conduct 
• Payments
• Pensions
• Digital Finance
• Cross Sector

UK Green Taxonomy: The Green Technical Advisory Group (GTAG) published a report on streamlining and increasing the usability of the Do No Significant Harm (DNSH) criteria within the UK Green Taxonomy. The GTAG found that there has been a near-global adoption of DNSH in taxonomies under development internationally, and that the market strongly supports the concept. However, it notes that DNSH criteria as drafted in the EU have been challenging because they are overly repetitive, difficult to measure and ambiguous in their drafting. The GTAG has made a number of recommendations on how to include DNSH criteria more effectively in the UK Green Taxonomy — a consultation on the UK Green Taxonomy is expected this autumn. 

UK Sustainability Disclosure Standards (SDS): The Department for Business and Trade announced the development of UK Sustainability Disclosure Standards (UK SDS). The UK SDS will set out requirements for corporate disclosures on the sustainability-related risks and opportunities that companies face and will form the basis of any future legislative or regulatory requirements. They will be based on the recently finalised ISSB standards, IFRS S1 and IFRS S2. The Secretary of State for Business and Trade will consider endorsement of the ISSB's standards to create the UK SDS by July 2024. UK-endorsed standards will only divert from the global baseline if absolutely necessary for UK-specific matters. 

Transition plans: The UK Transition Plan Taskforce (TPT), created by HM Treasury (HMT) to develop a gold standard for transition plan disclosures, published a status update summarising responses to its earlier consultation. The report notes that respondents `strongly endorsed' the proposed Disclosure Framework and supported the `commitment to building international consistency and coherence'. Respondents also called for further transition plan guidance and examples, which the TPT will consider as it finalises its work. The final TPT Disclosure Framework will be released in October, after which the FCA is expected to clarify its transition plan disclosure expectations. Sector-neutral guidance will also be published in October, with sector-specific guidance following later in the year for finalisation in early 2024. 

FCA/PSR transition plan: The Financial Conduct Authority (FCA) and Payments Systems Regulator (PSR) published their joint Net Zero Transition Plan. The FCA is an active member of the TPT and used the TPT framework to develop its plan, noting that `we hold ourselves to the same standards we expect of others'. As for the Bank of England (BoE), which published its transition plan in the first half of July, the majority of FCA and TPR emissions are scope 3 indirect emissions. 

Thematic review of TCFD disclosures: The Financial Reporting Council (FRC), in collaboration with the FCA, published a thematic review of climate-related metrics and targets. The review looked at the TCFD metrics and targets disclosures of 20 UK premium and standard listed companies and considered whether reporting had improved since 2022, the consistency and comparability of metrics, and whether the companies were adequately disclosing transition plans and explaining how their targets affected the financial statements. The review presents cross-sector and sector-specific observations alongside examples of better practice to support companies in developing their disclosures further.

Annual cyclical scenario results: The results of the 2022/23 annual cyclical scenario (ACS) stress test indicated that all major UK banks were resilient to a severe stress scenario that incorporated persistently higher advanced economy inflation, increasing global interest rates, deep simultaneous recessions in the UK and global economies with materially higher unemployment, and sharp falls in asset prices. All banks were safely above the hurdle rates for CET1 and leverage ratio. However, there was a clear warning to investors that in the event of a severe stress, banks would reign in distributions (dividends, variable remuneration, and AT1 discretionary coupons). This was the first time the ACS has required banks to run the test at both group and ring-fenced bank level — no capital inadequacies were revealed, and no banks were required to submit revised capital plans at either level.

Credit Unions regulatory regime: The PRA has published a policy statement on changes to the Credit Union (CU) regulatory regime, with no material changes to the original proposals. The new rules provide greater flexibility for CUs when investing their surplus funds, set higher requirements and expectations for CUs that pose greater risk to the PRA's safety and soundness objective, and clarify the PRA's expectations for firms. 

Pillar 3 remuneration disclosures: The PRA is consulting on proposals to enhance proportionality in Pillar 3 remuneration disclosure requirements, by reducing the number of disclosures required for many smaller banks and building societies. The PRA considers that Pillar 3 disclosures support effective market discipline by allowing market participants to assess the quality of remuneration practices and firms' remuneration policies. However, it also recognises the need for an approach that is proportionate to the nature, scale, and complexity of institutions.

Approach to supervision: On 31 July, the PRA published updated versions of its Supervisory Approach documents for banking and insurance, refreshing the 2018 documents. Updates largely reflect evolutionary changes that have been reflected in policy over the last decade, alongside changes in the PRA's rulemaking role and objectives as a result of FSMA 2023.

Fund assessments of value: As trailed in its portfolio letter, the FCA has published the findings from its latest review of fund managers' annual assessments of value. The FCA found significant improvements compared with its 2021 review but noted there is still further room for improvement. It expects firms to consider its findings and make changes where required. The FCA noted that the examples of good practice in this review may be relevant to wider aspects of applying the Consumer Duty.

FCA Supervisory Strategy for Principal Trading Firms (PTFs): PTFs derive the majority of their revenue from trading (dealing) as principal. This may include algorithmic trading, which could be high frequency, as well as market making. The portfolio also includes firms that trade as principal in commodity markets. The FCA has published its portfolio letter and supervision strategy for these firms, which will focus on algorithmic trading controls, financial resilience, avoiding market disruption arising from commodity market volatility, operational resilience, and Brexit impacts.

FCA Market Watch 74: The FCA's latest Market Watch contains the FCA's supervisory observations on MiFIR transaction reporting (RTS 22) and the submission of financial instrument reference data (under RTS 23). Firms should review the findings against their transaction reporting procedures and outputs as the FCA may conduct further work on the areas covered in the Market Watch to ensure appropriate remedial actions are undertaken by firms. 

FCA supervisory flexibility on certain fields in MiFIR transaction reporting: While the FCA is reviewing certain MiFIR transaction reporting fields (specified in RTS 22), it has confirmed that it will not take action against firms which do not meet requirements for certain specified fields. 

Margin requirements for non-centrally cleared derivatives: The PRA and FCA have published a consultation on proposals to extend the temporary exemptions for single-stock equity options and index options from the UK bilateral margining requirements from 4 January 2024 until 4 January 2026. The consultation also sets out the PRA's and the FCA's proposed approach to model pre-approval in relation to bilateral initial margin models.

BoE approach to discretionary payments by CCPs: The Financial Services and Markets Act 2023 gives the BoE power to temporarily restrict or prohibit discretionary payments to shareholders or employees of central counterparties (CCPs) in severe circumstances to ensure the continuity of critical clearing services. The BoE is consulting upon the type of factors it may consider when assessing whether to use its power and its approach to using the power.

Short Selling Regulation (SSR): Respondents to HMT's call for evidence on the SSR largely did not see the need for a fundamental reform of the current regime, but rather that modifications to the existing framework are needed to improve the effectiveness and efficiency of the regime. Under FMSA 2023, HMT will give the FCA rule making powers to set the rules (in light of the feedback from the Call for Evidence). However, HMT will make two key changes:

i) The current public disclosure regime based on individual net short positions will be replaced with an aggregated net short position disclosure regime.

ii) The current disclosure threshold for net short position reporting to the FCA will be increased from 0.1% to 0.2%. HMT is also now consulting on whether it should delete the aspects of the SSR related to sovereign debt and credit default swaps (this was not covered in the original Call for Evidence).

Financial Lives Survey: The FCA has published the results of its May 2022 Financial Lives Survey. Unsurprisingly, findings reveal the detrimental impact of the rising cost of living. A comparison of survey results with past years reveals changes in the market, including a growing number of people regularly using digital services. However, it is worth noting that many people still rely on face-to-face services and are heavy users of cash. Aligned to two Consumer Duty outcomes, the survey highlights specific concerns around customer support and fair value.

Temporary regulatory mortgage forbearance: To support the implementation of the Government's Mortgage Charter, the FCA has introduced changes to its rules to enable firms to allow mortgage borrowers to: (i) reduce their capital repayments for up to six months or (ii) fully or partly reverse a term extension within six months of extending the term. Where a contract is varied in this way, firms must give the borrower personalised information before the change takes effect. This is important to enable consumers to make an informed choice when agreeing to a variation. The FCA is allowing firms time to bring their systems into compliance to deliver these changes — as soon as possible but by no later than January 2024. 

High street banks' savings rates: There has been further activity regarding the savings rates offered by high street banks. This has been driven by concerns raised by the Treasury Committee (TC) that savings customers may not be benefitting from interest rate rises in a fair manner:

• Action plan on cash savings: The FCA has set out a 14-point action plan to ensure banks and building societies are appropriately passing on interest rate rises to savers. The plan also emphasises the need for effective communication with customers and offering better savings rates. There is a strong Consumer Duty thread running through the action plan — most notably the inclusion of a requirement for firms offering the lowest savings rates to have submitted their fair value assessments to the FCA by 31 August. Another challenging requirement is for firms to produce a biannual analysis of their easy access savings rates (on sale and off sale), which the FCA will consolidate and publish — listing distribution from best to worst (commencing H2 2023). Other measures are designed to get firms to evaluate whether enough is being done to educate and engage with customers about savings rates, as well as to assess the quality of Management Information (MI) and fair value assessments. 
• Supporting savings customers: The Information Commissioner's Office (ICO) and FCA have clarified that data protection regulations do not prevent firms from telling savings customers about better deals. The letter states that "too many customers are sitting on low rates or not accessing products that may offer better value." The ICO and FCA believe that firms should use their data to contact customers about better deals, as this is in the best interests of consumers. The letter also provides guidance on how firms can comply with data protection regulations when contacting customers about better deals. 
  

Review of the advice/guidance boundary: The FCA has set out the basis for a joint review of the advice/guidance boundary with HMT. Whilst light on specifics, it does contain early indicators about how the review will be shaped. The FCA has also (re)published existing guidance designed to help firms provide more support to customers making investment decisions. Whilst the broader advice/guidance review takes place, the FCA will pause its proposals for a "core investment advice regime".

Social media guidance: The FCA has published a consultation on new guidance for financial promotions on social media. The new social media guidance sets expectations for firms that communicate or approve financial promotions on social media, as well as for influencers and unauthorised persons who promote regulated financial products or services on social media. The consultation runs until 11 September.

Ban on cold calling for consumer financial services and products: As announced in its May 2023 Fraud Strategy, the Government will extend the existing pensions cold calling ban to cover all consumer financial services and products. Consequently, HMT is now consulting on how best to design and implement this ban to prevent scam calls from reaching the public, while allowing legitimate and beneficial communications to continue. The consultation also includes a call for evidence to better understand the impact on businesses. 

Payment account termination: HMT has published a (partial) policy statement on payment account contract termination and freedom of expression. Consequently, the Government intends to make the following changes to (i) improve transparency for users in receiving a clear understanding why their payment account contract has been terminated, and (ii) require that customers must be provided with (in normal circumstances) at least 90 days' notice when a contract is terminated. Given the recent press coverage on this issue, HMT has only issued a partial policy paper covering this specific issue. A fuller response to the call for evidence will be published later in 2023. 

The FCA has published a letter responding to the Chancellor's enquiries on the provision of banking services and concerns of unjustified payment account termination. The letter outlines the FCA's support of the Government's plan to increase the required notice period for closure of accounts from 60 days to 90 days, highlighting its intention to work with the sector to ensure effective implementation. To enable a greater understanding of the scale of the issue, and drivers of account terminations, the FCA will shortly ask the largest banks and building societies to provide data on the number of account terminations. This exercise will be kept separate from its ongoing work to review the treatment of politically exposed persons (PEPs) and their family members, as commissioned by the Financial Services and Markets Act 2023.

Payments Regulation and the Systemic Perimeter: HMT has issued a consultation response on reforms to the BoE and PSR statutory perimeters over payments, confirming its intention to proceed. HMT will now commence work to enact these reforms. 

Authorised push payment fraud: The PSR has launched two consultations to further the implementation of its new authorised push payment (APP) fraud reimbursement requirements. The first consultation covers the Consumer Standard of Caution which sets the express standard of care the PSR expects customers should take when executing APPs in order not to be deemed grossly negligent and therefore exempt from mandatory reimbursement rules. It also covers its expectations for how Payment Service Providers (PSPs) should apply the gross negligence exemption. The fraud reimbursement limits consultation proposes a £415,000 maximum reimbursement level for victims of APP fraud on Faster payments or CHAPS, alongside options for setting a claims excess.

Cash access policy statement: The Financial Services & Markets Act 2023 (“the Act”) gives the FCA the power to ensure the reasonable provision of cash access services. As required under the Act, HMT has published a Policy Statement on cash access, setting out its position to inform the FCA's approach. Alongside, an FCA statement confirmed its intention to develop rules to ensure that as cash access services evolve, they continue to be provided on a reasonable basis. The FCA expects new rules to be in place by Summer 2024.

Oversight of wholesale cash distribution: The BoE has published a statement of policy on the supervisory approach to market oversight for wholesale cash distribution (WCD), confirming its three supervisory principles which recognised firms must have regard to when performing relevant functions in relation to WCD activities — efficiency, effectiveness, and sustainability. The BoE intends to issue three areas where it will develop for consultation binding codes of practice — (1) information gathering (2) third-party arrangements and (3) cash centre closure and market exit.

Defined benefit (DB) pension consolidation: DWP has published a response to the consultation on the consolidation of DB pension schemes and started to build out the scope, characteristics, design, and governance of the Superfund. The Government supports the proposals for Superfunds, which are large pension schemes that would be able to merge smaller schemes. Superfunds would provide employers with a new, affordable way to manage their legacy pension liabilities. They would also be able to invest in assets that support the UK economy as a whole. The Government is committed to having a permanent regulated regime for Superfunds as soon as parliamentary time allows. 

Pension Dashboard Connection deadline: The FCA has confirmed the revision to the pensions dashboard connection deadline. The connection deadline will now be 31 October 2026. This change has been made in line with the Government's Pensions Dashboards (Amendment) Regulations 2023 which set a new statutory connection deadline for occupational scheme trustees. The staging timeline will be set out separately in guidance rather than enshrined in legislation. 

Defined contribution (DC) scheme guidance updates: The Pensions Regulator (TPR) has updated its DC Code of practice, investment governance and communicating and reporting guidance. Updates have been made to help DC schemes comply with new regulations to ensure all investment opportunities available are considered to achieve the best value for savers.

FCA expectations for cryptoasset firms under Travel Rule: To bring greater transparency to cryptoasset transfers, from 1 September, the UK version of the `Travel Rule' will come into force and all relevant firms will be required to collect, verify, and share information about cryptoasset transfers. The FCA statement clarifies its expectations of UK firms given the currently inconsistent application of the `Travel Rule' globally.

Regulators' joint complaints scheme: The FCA, PRA, and the BoE have finalised revisions to the joint Complaints Scheme which applies to complaints against the regulators. With these revisions the regulators aim to enhance user-friendliness and increase 'ex-gratia' compensatory payments. In response to feedback, the proposal capping compensatory payment for financial loss at £10,000 has been dropped, and the levels of discretionary compensatory payments for non-financial loss increased. Aside from these changes the regulators are proceeding with the proposals as consulted upon, subject to a few minor clarifications.

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: