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
• Insurance prudential
• Retail Conduct
• Payments
• Digital Finance

BoE Climate transition plans: The Bank of England (BoE) has published its own Climate Transition Plan — the first of its kind from any central bank — with COO Ben Stimson noting that: “As the authority responsible for enhancing the resilience of the financial system it is only right that we hold up a mirror to ourselves to ensure we meet the standards we expect of others." The BoE plan shows that most of its physical emissions are Scope 3. To achieve its net zero target of 'no later than 2050', the BoE has set interim milestones for emission reductions: 40% by 2025, 62% by 2030, 84% by 2035 and 90% by 2040. For the remaining 10%, the BoE will focus on neutralising rather than reducing emissions. Firms may find the BoE's plan helpful in highlighting challenges and approaches as they prepare their own plans. In the autumn, the UK Transition Plan Taskforce is expected to publish its final disclosure framework and implementation guidance and begin consulting on sector guidance. Regulatory expectations for firms are likely to be formalised further thereafter.

Sustainability-linked loans: The FCA has written to heads of ESG and Sustainable Finance outlining its concerns around the sustainability-linked loans (SLL) market. SLLs fall outside the FCA's regulatory remit. However, the FCA is concerned that the operation of the SLL market may impact the integrity of the overall sustainable finance market. Some of the deficiencies identified in the FCA's review are addressed by the recently published Sustainability-Linked Loan Principles — the FCA notes that voluntary adoption of these principles would drive positive growth in the market.

FCA's Sustainability Disclosure Requirements (SDR): The FCA has provided a further update (PDF 976KB) regarding the timing of its policy statement and final rules, which had been due to be published in Q3 2023 (see our latest article here). As the FCA continues to consider feedback to its consultation, it will now publish the policy statement in Q4 2023.

BoE Financial Stability Report: The BoE Financial Policy Committee's (FPC) July Financial Stability Report, found that:

• The global economic outlook is highly uncertain.

• UK household and business finances are under pressure from higher borrowing costs.

• UK banks are well capitalised and maintain large liquidity buffers. Overall asset quality remains relatively strong. However, the wider risk environment is challenging. Banks remain strong enough to support lending and support households and businesses through a period of higher interest rates even if economic conditions were to be substantially worse than expected. The UK Countercyclical Buffer (CCyB) will be maintained at 2%.

• Non-bank financial institutions (NBFIs) continue to require greater resilience and vulnerabilities in certain parts of Market Based Finance (MBF) remain. These could crystallise in the context of current interest rate volatility, amplifying and tightening financial conditions.

• The recently launched System Wide Exploratory Scenario (SWES) aims to improve understanding of the behaviours of banks and NBFIs in stressed financial market conditions.

Bank stress test results: The results of the BoE's 2022/23 annual cyclical scenario (ACS) 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. The BoE points out that, although the 6% base rate scenario no longer looks unrealistic, other elements of the scenario remain severe based on current macro projections. The banks came into the test with improved asset quality and higher deposit balances compared to the last ACS in 2019. For the first time, where relevant, they were required to run the ACS at both group and ring-fenced bank (RFB) level. All were safely above the hurdle rates for CET1 and leverage ratio. No capital inadequacies were revealed and none of the banks were required to submit a revised capital plan, at either level. However, there was a clear warning to investors that, in the event of a severe stress, banks would reign in distributions (including dividends, variable remuneration and AT1 discretionary coupons). 

Solvent Exit Planning: The PRA has published a Consultation Paper (CP10/23) and accompanying draft Supervisory Statement (PDF 976KB) setting out expectations for non-systemic UK banks and buildings societies to prepare for, and be able to execute, an orderly 'solvent exit' from PRA-regulated activities. Read more in our article above.

Depositor Protection: The PRA has published a policy statement (PS7/23) on Depositor Protection, finalising rules that were consulted on in 2022 (CP9/22). The PS implements the original proposals faithfully, with only a few minor amendments to improve clarity and readability. The rules came into force immediately on 1 July 2023.

Vote Reporting: The FCA-convened Vote Reporting Group has published a consultation to build industry consensus on a voluntary vote reporting template for asset managers in the UK. The consultation closes on 21 September 2023. The FCA convened the group to help develop a comprehensive vote reporting framework for asset managers — the goal being to increase transparency and better meet the needs of asset owners and the wider market.

Consolidated tape: The FCA is consulting on the framework for a consolidated tape (CT) of bond prices & volumes. Trading venues will be required to send the bond data for free to an FCA authorised and supervised CT provider. The FCA's aim is that the CT will provide a single, authoritative, complete and affordable source of market data on bonds. Final rules/policy statement are due in December 2023. Tender process to commence in 2024. The authorisation process and time to onboard clients and data providers means that it will be unlikely to operate before summer 2025. Concurrently, the FCA will consult on changes to the bond transparency regime in late 2023 — with the aim to be in force before the CT starts operating. The paper also requests initial feedback on the design of an equities CT. It will not necessarily follow the same model as the bonds CT due to the very different economics around equities and bond market data. Points of discussion include the scope of instruments to be covered, revenue sharing model, and inclusion of pre-trade data.

Trading venue perimeter: The FCA has updated guidance (PDF 873KB) on the definition of a multilateral system — operation of which requires authorisation as a trading venue. The guidance distinguishes between general purpose communications systems and multilateral systems. It sets out a range of factors that the FCA would consider on whether a service has the characteristics of a trading system or facility. It also has specific guidance on areas such as bulletin boards and voice broking. Firms may need to assess their arrangements against the updated guidance to determine whether they operate a multilateral system and hold the appropriate regulatory permissions.

Review of Solvency II for Insurers:

• HM Treasury (HMT) has launched a consultation on draft regulations to implement Solvency II review in the UK, and make certain modifications to EU retained law. HMT is looking to introduce the statutory instruments, once finalised, under the powers of what is now the Financial Services & Markets Act 2023.

• The PRA has launched a consultation CP12/23 — “Review of Solvency II: Adapting to the UK insurance market”, setting out the bulk of its proposals implementing HMT's proposals. This consultation provides a first substantial and concrete glimpse into the PRA's approach to Solvency II rulemaking, and marks a return to a UK-style of more principles-based regulation. This represents a significant milestone towards tailoring the Solvency II framework to the UK insurance market, while maintaining robust standards for capital resources and a '1-in-200' 1-year value at risk measure for capital requirements. The PRA notes it is in line with developing international capital standards for insurers.

General insurance reserving and capital modelling: The PRA has published (PDF 414KB) a 'Dear Chief Actuary' letter, providing feedback from its recent thematic review on how general insurance firms have been responding to claims inflation. The PRA warns general insurers against under-reserving for future rises in claims inflation, and over-optimistically releasing previous years' reserves. The PRA expects all firms to be impacted by claims inflation, although to varying degrees. Failure to respond appropriately may result in a material deterioration of solvency coverage. Additionally, the PRA notes that technical provisions must be calculated based on up-to-date, credible information, and realistic assumptions. Further claims inflation must be appropriately allowed for in internal model (IM) Solvency Capital Requirement (SCR) calculations and where the standard formula (SF) is used to calculate the firm's SCR, that it remains appropriate.

Funded reinsurance: The PRA has released a 'Dear CRO' letter (PDF 220KB) on funded reinsurance agreements, expressing concern that counterparty risk is potentially being underestimated. Reinsurers' business models are rapidly changing, with more of a focus on credit rather than longevity risk. This collective shift makes them more vulnerable to credit cycle shocks. Furthermore, weaknesses in insurers' collateral arrangements increase the risk of recapture if their reinsurance counterparties fail. Insurers therefore must take remedial action.

Consumer Duty implementation: There has been more activity relating to the Consumer Duty as the open products implementation deadline fast approaches. The FCA has released a podcast on customer outcomes monitoring, and published key questions for firms to assess their preparedness and the findings of its small firms survey. The FOS has also issued a statement on its preparations for the Duty.

• Inside the FCA — Customer Outcomes Monitoring: In this podcast Ed Smith, FCA Head of Competition Policy, explains FCA expectations for outcomes monitoring under the Consumer Duty. Whilst much of the content restates previous communications, it is instructive of the FCA's thinking and expectations.

• 10 Key questions for firms: The FCA has published key questions firms should consider when assessing the progress / success of their implementation of the Consumer Duty. The statement includes some of the FCA's expectations and provides a glimpse into their initial approach to supervision. The way the FCA has drafted these 10 key questions indicates its expectation that firms will need to be able to provide evidence to illustrate the tangibility (and materiality) of the changes that have been made. The FCA wants firms to use these questions as a guide to make sure they are on track and making the most of the time before the rules come into force. The questions should aid firms' Consumer Duty implementation check and challenge process.

• Firm survey findings: The FCA has published the results of its Consumer Duty firm survey looking at their preparedness and support needs for 31 July 2023 implementation deadline. The survey focused on sectors and sub-sectors where firms may have been less prepared. Responses indicated high levels of engagement and understanding of the Duty, with the majority of firms (87%) reporting that they are on course to implement the Duty by the 31 July deadline, and a significant proportion (63%) expecting to achieve full compliance at that point. Of the sectors questioned, retail finance providers and debt advice firms scored consistently lower than others on engagement, understanding, and implementation progress.

• FOS preparations for the Duty: In a brief statement, the FOS has outlined its preparations for the Duty, emphasising it will be an important consideration when deciding whether a financial business acted fairly and reasonably. Nonetheless, the FOS seeks to reassure firms, highlighting that the Duty will apply to events/issues that happen post 31 July 2023, and asserting that the standards of fairness and reasonableness it already employs to assess complaints are closely aligned with those which underpin the Consumer Duty.

• High street bank savings rates: In its continuing investigation into high street banks' savings rates, the Treasury Committee (TC) has again written (PDF 132KB) to the top four retail banks raising questions on whether savings rates provide 'fair value' to customers and whether customer inertia is being exploited. Similarly, writing to the FCA, the TC asks if the regulator has observed any change as a result of their intervention, specifically how the Duty will help ensure savings rates offer fair value, how the FCA will assess fair value and what enforcement action can be taken if firms do not comply. The TC also asks how quickly the FCA may be able to achieve change if firms are not meeting their requirements.

Mortgage Charter: HMT has released an agreed mortgage charter in partnership with 32 of the largest banks and building societies. This package contains several measures aimed at providing extra support to customers with residential mortgages. The measures include improved guidance, clearer communication, and more forbearance options. Additionally, the Government has taken action to make it easier to access “Support for Mortgage Interest”. This scheme allows mortgage holders in receipt of qualifying benefits (e.g. Universal Credit) access to a loan to help with mortgage interest payments, while also providing record funding for the Money and Pensions Service to provide debt advice in England. In parallel, the FCA has outlined how lenders can assist borrowers affected by the rising cost of living, and supply them with more information and support should they experience payment difficulties. New guidelines outlining how lenders can assist borrowers who have been affected by the rising cost of living, and supplying borrowers with more information on the support available should they be experiencing payment difficulties.

FOS annual complaints data 22/23: The FOS has published its annual complaints data for the 2022/23 financial year which shows a slight increase in the total number of complaints received. The top 5 most complained about products were current accounts, credit cards, car/motorcycle insurance, hire purchase (motor) and buildings insurance. Of these, only buildings insurance is a new addition, replacing personal loans. Data shows a slight overall increase in complaints volumes and a slight increase in uphold rates from 34% to 35% for 22/23.

FCA publishes guidance for insurers to support struggling customers: As part of its work supporting customers with the rising cost of living, the FCA has published finalised insurance guidance on supporting customers in financial difficulty, and the findings from its review into the treatment of struggling customers in the motor and home insurers sector:

• Finalised guidance: The finalised insurance guidance on supporting customers in financial difficulty is largely unchanged from the consultation (although it did provide clarity that the guidance does not extend to contracts of large risks distributed to commercial customers). The guidance is generally designed to replace the COVID-19 guidance. It gives firms more clarity about meeting their obligations under the “Customer's Best Interests” rule, the Consumer Duty, and putting customers' needs first and acting to deliver good outcomes for customers experiencing financial difficulty. It comes into effect on 31 July 2023.

• Home and motor insurer questionnaire findings: The review focused on how FCA expectations on supporting customers in financial difficulty and claims handling were being met. Although the review found examples of good practice, some firms are failing to demonstrate they are effectively monitoring customer outcomes and identifying vulnerable customers. It also found examples of lengthy complaints handling times and inappropriate settlements. Whilst the focus was on home and motor products and services, firms across the general insurance market should note the FCA's findings and expectations and how they might apply to their business.

Commercial pricing principles for open banking: The Joint Regulatory Oversight Committee (JROC) co-chaired by the FCA and the PSR, has published (PDF 186KB) a paper outlining the characteristics of a safe, sustainable, commercial model for premium Application Programming Interfaces (APIs). APIs facilitate direct communication between software systems, allowing real time communication. Payment APIs can perform a number of functions including providing customers with a means of monitoring payments by integrating multiple payment sources, or facilitating e-commerce transactions (linking customer, with payment type, price and merchant). Payment APIs can provide customers with a means of monitoring payments by integrating multiple payment sources, or facilitating ecommerce transactions.

The paper establishes five high-level principles for banks and registered third parties to follow when agreeing a premium API commercial model — fairness, transparency, costs, investment and innovation, and customer take up. Promoting additional services, including through premium APIs, is key for the next phase of open banking in the UK.

CHAPS migration to global financial messaging standard: The Clearing House Automated Payment System (CHAPS) has successfully migrated to ISO 20022 — marking a significant milestone in the BoE's Real Time Gross Settlement renewal programme. This programme aims to increase resilience, competition, and innovation within the payments landscape - offering advantages to both firms and customers. Pay.UK's New Payments Architecture, (implementation due 2026), which will replace the UK's Faster Payments system, will also use ISO 20022.

Competition impacts of Big Tech: The FCA has published a Feedback Statement (FS23/4) on the potential competition impacts of Big Tech's entry and expansion in retail financial services. This FS summarises the feedback received in response to DP22/5 (PDF 1.06MB). Overall, the key themes that emerged include (i) the differing business models and strategies of Big Tech firms, (ii) the need for the FCA to refine its analytical framework, (iii) further considerations around data access and data sharing, (iv) how to address Big Tech activity beyond the regulatory perimeter and (v) overlaps with other regulatory regimes. The FCA has also identified a number of next steps, namely (1) launch a Call for Input on Big Tech firms as 'gatekeepers'; (2) review its supervisory approach to Big Tech; (3) continue working with the Government and the Digital Markets Unit as the Digital Markets, Competition and Consumers Bill passes through Parliament.