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.

• Cross Sector
• Banking
• Capital Markets and Asset Management
• Insurance
• Retail Conduct
• Pensions
• ESG and Sustainable Finance
• Operational Resilience
• Digital finance

Financial Stability Report: The December Financial Stability Report from the Bank of England (BoE) Financial Policy Committee reported that conditions remain challenging in the UK financial system, given increased geopolitical tensions and uncertainties over growth and inflation. UK households and businesses continue to face higher borrowing costs as interest rates are expected to remain higher for longer, but the UK banking system remains sufficiently resilient to support households & businesses even if the economic conditions are worse than expected.

PRA Approach to Policy: The PRA is consulting on its proposed approach to policy under the regulatory framework as amended by the Financial Services and Markets Act (FSMA) 2023. The consultation follows DP4/22 and reflects the PRA's evolving approach as it takes on wider rule-making responsibilities and enhanced accountability requirements. 

Remuneration: The FCA and PRA published a joint policy statement amending remuneration rules for smaller, less complex dual-regulated firms to be proportionate to the risks posed to consumers and markets in the UK. The amendments include changes to proportionality thresholds and exemptions for firms to meet the updated proportionality thresholds under the requirements relating to malus and clawback. The amendments came into force on 8 December 2023.

The FCA has also written to Chairs of the Remuneration Committee to outline regulatory themes that should be considered in a firm's remuneration approach. The letter is intended to inform firms' remuneration strategy for the next two years. It highlights recent changes to the remuneration regime regarding variable remuneration, as well as the importance of the Consumer Duty, culture and accountability, diversity and inclusion and broader sustainability issues.

The `Strong and Simple' framework: As part of its programme to develop a proportionate prudential regime for non-systemic banks and building societies, the PRA has issued a Policy Statement (PS15/23) providing feedback to its consultations on liquidity and disclosure requirements (CP4/23), Pillar 3 remuneration disclosures for smaller firms (CP14/23) and the scope criteria proposed in CP5/22 and modified in CP16/22. A key change since the consultations is the decision to rename Simpler-regime firms to Small Domestic Deposit Takers (SDDTs) and Simpler-regime consolidation entities to SDDT consolidation entities. The new rules relating to the definition of an SDDT, the ability for firms to become SDDTs and SDDT consolidation entities, and disclosures will apply from 1 January 2024. All other rules in the PS will apply from 1 July 2024. The PRA will consult further on simplifications to Pillar 2 and on buffer requirements for SDDTs and SDDT consolidation entities in Q2 2024. 

Step-in risk, shadow banking entities and groups of connected clients: The PRA is consulting until March 2024 on new rules, based on the BCBS guidelines on the identification and management of step-in risk. The proposed rules would require firms that are not SDDTs or SDDT consolidation entities (i.e. are not eligible for the Simpler regime) to perform regular assessments of their step-in risk — `the risk that a bank provides financial support to an unconsolidated entity that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support'. In-scope firms would be expected to develop their own policies and procedures for step-in risk and submit their assessments to supervisors using templates included in the consultation, alongside their ICAAP assessment. To make the UK rulebook more coherent, the PRA also proposes to transfer the EBA's guidelines on limits on exposures to shadow banking entities and on connected clients into PRA Rules through new supervisory statements with some amendments, and by amending the Large Exposures (CRR) Part of the PRA Rulebook to include definitions of `shadow banking entities', `excluded undertakings', `group of connected clients' and `control'.

Aggregation of shares and voting rights: The PRA and FCA are consulting on proposals to replace EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (3L3 Guidelines) with a new PRA supervisory statement (Prudential assessment of acquisitions and increases in control) and new FCA guidance. The PRA proposes to move the existing text from SS3/15 (Aggregation of holdings for the purpose of prudential assessment of controllers) with minor amendments to clarify the information and then delete SS3/15. The consultation runs until 23 February 2024.

Final report on IFPR implementation observations: The FCA has issued a final report on its multi-firm review of the implementation of the Investment Firms Prudential Regime (IFPR), including implementation of the Internal Capital Adequacy and Risk Assessment (ICARA) process and requirements. The report should be read together with the FCA's February 2023 initial observations. While most firms engaged well, the FCA notes areas of improvement around group ICARA processes, internal intervention points and various key assessments such as wind-down, liquidity, operational capital risk and regulatory data submissions.

Overseas funds regime: The FCA is consulting on rules and guidance to implement the Overseas Funds Regime (OFR). The OFR is intended to replace the post-Brexit temporary marketing permissions regime (TMPR) and provide streamlined access for overseas funds to UK retail customers where their jurisdiction has been deemed equivalent by the UK government. The consultation covers the information that overseas funds would need to submit to the FCA to become recognised, ongoing notification requirements and measures to ensure that investors understand whether they are protected under the FSCS or FOS. The FCA emphasises that any equivalence decisions are a matter for the government and notes that, as part of an equivalence decision, the government may impose additional requirements.

Money Market Funds Regulation (MMFR): HM Treasury (HMT) and the FCA have published documents to reform the framework for UK-domiciled Money Market Funds (MMFs). This follows the FCA and the BoE's May 2022 discussion paper that sought views on enacting the Financial Stability Board's 2021 policy proposals. As part of the package, HMT published a draft Statutory Instrument (SI) to set out a replacement framework for UK MMFs. Most of the legislative framework under the new framework will remain the same as under the UK MMFR, which will be repealed separately. In parallel, the FCA published a consultation to enhance the resilience of UK MMFs. The most notable proposals are to significantly increase the minimum proportion of highly liquid assets that all MMFs need to hold, and for certain MMFs to remove thresholds that link liquidity levels with the need to activate liquidity management tools. In the EU (where many GBP-denominated MMFs are domiciled) the European Commission decided in July 2023 not to propose revisions to the EU MMFR but will continue to monitor the sector. 

Revisions to the UK asset management regulatory framework: As part of its review of the UK's regulatory regime (see the FCA's discussion paper here), the FCA has proposed minor adjustments to the COLL handbook in its most recent quarterly consultation paper. The amendments include additional options that the FCA plans to allow firms to take advantage of, and clarifications of, or corrections to, existing rules. Examples of the rules being consulted on range from enabling virtual or hybrid unitholder meetings, enabling Shariah compliant funds and broadening the range of investments available under the Qualified Investor Scheme (QIS) regime.

Commodity Derivatives: The FCA is consulting on reforms, as part of the Wholesale Markets Review, to the commodity derivatives regime under UK MiFID II. The aims of the reforms are to apply more stringent requirements to a narrower set of critical contracts. The proposed changes are:

• The transfer of responsibility in setting position limits from the FCA to trading venues;
• Applying position limits to only certain `critical' commodity derivatives contracts;
• Enhancing position management controls and reporting; 
• New exemptions for position limits; and 
• New guidance on what constitutes an ancillary activity.

Risk Margin and Matching Adjustment: Statutory Instruments (SIs) on Risk margin and Matching adjustment have been laid by HMT as expected, with the Risk Margin change — a key feature of the UK reform of Solvency II — coming into force at the end of 2023.

Recalculation of the TMTP as at year-end 2023: Firms may apply to the PRA for permission to undertake a recalculation of the deduction applied pursuant to the transitional measure on technical provisions (TMTP) every 24 months or less. In line with expectations set out in Supervisory Statement (SS) 6/16 — Maintenance of the transitional measure on technical provisions under Solvency II (para 4.1), the PRA invites such firms to request permission to undertake the above recalculation. To streamline this process as far as possible, the PRA will not require submission of an application form. 

Solvency II review considerations for year end: The PRA has published a pragmatic document bringing forward certain improvements before formal policy is place. This includes removing the need to submit the Regulatory Supervisory Report (RSR) and certain reporting templates earmarked for deletion, as well as carrying out the FRR test when recalculating the TMTP in most cases. The PRA has also helpfully confirmed that the risk tapering factor of 0.9 for life insurers within the Risk Margin extends to Periodic Payment Orders (PPOs). Insurers can apply the 0.9 taper to a proportion of future claims, estimating the conversion to PPOs on a probabilistic basis.

2023 Thematic review of expected underwriting profit in GI firms' internal models: The PRA has published a Dear CRO letter for general insurance (GI) firms on expected underwriting profit allowed for in internal models (IM). The letter follows a thematic review and private letter sent to GI firms earlier in the year. The PRA is concerned with how expected underwriting profit is reflected in IMs and the consequent lowering of required capital. It emphasises that expected underwriting profit is different from business planning projections or targets, and that firms should be prepared to discuss their approach to addressing the PRA's thematic findings as part of their supervisory conversations.

Consultation on funded reinsurance: The PRA has issued a consultation paper (CP24/23) setting out its proposed expectations in respect of life insurance firms entering into, or holding, funded reinsurance arrangements as cedants. The PRA considers that, by setting out its expectations for life insurers' use of funded reinsurance, the proposals will advance its primary objectives for safety and soundness and policyholder protection while allowing the life insurance sector to continue to play an important role in productive investment in the UK economy. The CP is relevant to UK Solvency II firms and insurance and reinsurance undertakings that have a UK branch (third-country branch undertakings) when they hold, or are intending to enter into, funded reinsurance arrangements and is open until Friday 16 February 2024.

FSCS general insurance limit: The FSCS is designed to protect eligible customers when financial services firms fail. When an insurer fails, the FSCS will pay eligible policyholders, with a valid claim under an insurance policy, 90% or 100% of the claim value under that contract of insurance. The PRA has issued a discussion paper (DP2/23) setting out its analysis of those areas of GI where it has identified that additional FSCS coverage could be warranted to secure an appropriate degree of policyholder protection and possible options to remedy this.

UK regime for captive insurance companies: In the Autumn Statement, the government announced it will consult on the design of a new framework for encouraging the establishment and growth of captive insurance companies in the UK. The consultation will launch in Spring 2024.

Pension funds clearing exemption: In the UK, pension funds are currently exempt from the obligation to clear certain derivative contracts. Earlier this year the government extended this exemption to 18 June 2025. An HMT call for evidence requests input from industry stakeholders on the exemption to inform a long-term approach.

Interest on cash balances: The FCA has written to investment platforms and SIPP operators setting out its concerns on the way they deal with interest earned on customers' cash balances. This follows its review of a sample of firms earlier in the year. The FCA found that most firms retained some of the interest earned on cash balances (on average 50% was retained), which may not reasonably reflect the cost to firms of managing the cash. The FCA also has serious concerns that some firms retain interest whilst also applying an account charge or fee on customer cash (“double dipping”). Another area of concern was the variance in the quality of disclosures observed. The FCA is concerned that some firms may not be meeting the Consumer Duty — it expects firms to provide certain confirmations (that they have ceased or will cease double-dipping) and information by 31 January, and to have made corresponding changes by 29 February to ensure that they are providing fair value and are improving disclosures.

Greater support for customer's financial decisions: HMT and the FCA have published a long-awaited package of ambitious reforms designed to improve outcomes for retail customers. DP 23/5 consists of three core proposals: (i) providing additional clarification about when firms can give consumers more support without stepping into giving advice, (ii) a new regulatory regime to provide `targeted support' to customers to help them make informed decisions and (iii) a new form of simplified investment advice that makes it easier for firms to provide affordable advice to customers with straightforward needs and/or smaller sums to invest.  

Implementation of the Consumer Duty: In its recent webinar, the FCA provided a strong view on Consumer Duty implementation and the good and poor practice it had observed through engagement to date. `A good start but room for improvement' was at the core of its messaging. The FCA reasserted that firms should be proactive in taking action where things go wrong rather than waiting for the regulator to intervene. The session also focused on upcoming regulatory challenges on Consumer Duty, fully embedding the Duty, implementing the regime for closed products and developing an appropriate annual board report. For insights into how to address the FCA's expectations, see our articles on the embedding the Duty, closed products and Consumer Duty Board report. 

UK retail investment disclosure: As part of the Autumn Statement, HMT published a consultation on a draft statutory instrument to repeal the onshored PRIIPs Regulation. The consultation sets out the government's approach to establishing a new legislative framework for UK retail disclosure and paves the way for the FCA to consult on new rules to replace existing disclosure requirements. The new regime will widen the current scope of the regulation as it will also apply to all funds marketing to UK retail investors, including UK-authorised funds and recognised overseas funds. 

The FCA also announced temporary measures for UK PRIIPs and UCITS cost disclosures as an interim remedy whilst wider reforms are undertaken. The measures relate to listed closed-ended funds and funds that invest in them and will give fund managers greater flexibility to explain their costs and charges to support consumers to make better informed investment decisions. Relevant firms will be permitted to provide additional factual information to consumers as long as it is presented in line with existing disclosure rules. 

Access to cash: The FCA is consulting on rules to maintain reasonable access to cash for consumers and businesses (strengthening existing voluntary arrangements). The regime would require banks and building societies designated by the government to assess and fill gaps, or potential gaps, in cash access provision that significantly impact consumers and businesses. Proposals include requirements for designated firms to establish a cash access request process, develop a cash assessment process more responsive to a wider range of local needs, publish assessment outcomes, respond to a wider range of trigger events to undertake a cash assessment and meet set timeframes for delivery of additional cash access services identified by cash access assessments.

Enhanced capital requirements for personal investment firms: The FCA is consulting on proposals to require personal investment firms (e.g. advice firms/IFAs) to set aside additional capital to cover compensation costs, thereby creating a 'polluter pays' framework when consumers are harmed. Essentially, firms would estimate the amount potentially due for client redress payments based on client complaints and weight this using a probability factor to generate the capital requirement. This would ultimately reduce the FSCS levy that firms are required to pay as a result of high-profile advice failures (such as British Steel Penson Scheme advice). These are interesting proposals from the FCA, which essentially move the basis of capital requirements from a pure volume metric (i.e. income) to one focused on advice quality/outcomes. As such, the parallels with Consumer Duty are clear.

Credit Information Market Study: The FCA has published its Credit Information Market Study Final Report, outlining remedies to improve the quality of information collated by credit reference agencies (CRAs). The proposals will require FCA-regulated data contributors to share credit information with CRAs, introduce a common data reporting format and make it easier for consumers to record non-financial vulnerability information. A Credit Reporting Governance Body (CRGB) will also be established to oversee the development and implementation of some of the remedies. By the end of 2024, the FCA expects to consult on new measures, including the introduction of a mandatory reporting requirement.

FOS annual plans and budget 24/45: The FOS is consulting on its plans and budget for 24/25. Most significantly, it is proposing a reduction in the case fee from £750 to £650 per case and a reduction of the compulsory jurisdiction levy from £106m to £70m. These reductions reflect the progress made to date under the transformation programme and benefits to be realised next year. The FOS proposes to use surplus reserves (those in excess of our current reserves policy) to cover the shortfall in funding operational costs in 2024/25. Alongside complaints volume projects, the FOS highlight its expectations that the Consumer Duty will affect demand for the service next year and that legislation should be introduced for BNPL products. In the annual report also published, the FOS highlights performance improvements with a reduction in the number of open cases older than 18 months and waiting times. In 2022/23 the FOS received 165,149 complaints resolving 209,471, upholding 35% of cases.

Pension reform package: The Autumn Statement contained a package of reforms to pensions, the aims of which are summarised in a letter from the Chancellor and Secretary of State for Work and Pensions to the FCA and The Pensions Regulator: 

• Providing better saver outcomes — through a pensions dashboard, one pension pot for life (allowing individuals to move pensions from employer to employer) and emphasis on investing for overall long-term returns.
• A more consolidated market — in both defined contribution and defined benefit sectors.
• Enabling pension schemes to invest in a diverse portfolio — expanding the universe of what funds can invest in e.g. growth fund in British Business Bank, Long-term Investment for Technology and Science (LIFTS) — and increasing the standards of investment expertise and trustee skills.

Sustainability disclosure and labelling regime: The FCA has published its policy statement with final rules and guidance for Sustainability Disclosure Requirements (SDR) and investment labels. The package also includes a consultation on guidance on the anti-greenwashing rule for all FCA-authorised firms (see below) and a webpage for consumers. The volume and complexity of the requirements will have a fundamental impact on UK fund managers and their products, and the resources and time needed for implementation will be significant. For more details on the impacts for fund managers, see the article above.

Guidance on the anti-greenwashing rule: In response to feedback received on its October 2022 consultation on SDR, the FCA is now consulting on separate guidance for FCA-authorised firms on applying the general anti-greenwashing rule. For more details, see the article above. 

Critical third parties to the financial sector: The BoE/PRA and FCA are consulting until 15 March 2024 on proposals to oversee and strengthen the resilience of services provided by critical third parties to UK regulated financial services firms and FMIs. The Financial Services and Markets Act (FSMA) 2023 gave HMT the power to designate certain third party service providers as Critical Third Parties (CTPs), with regulators mandated to make rules for and oversee them. The consultation reflects feedback to the regulators' 2022 joint discussion paper on critical third parties to the UK financial sector. Among the key proposals are:

• Six Fundamental Rules for CTPs — broadly similar to those that apply to regulated firms.
• Eight more granular CTP Operational Risk and Resilience Requirements.
• Requirements for CTPs to provide certain information and assurance to the regulators.
• Requirements for CTPs to notify regulators, firms and FMIs to which they provide services of any disruptions that may adversely impact those services.

For more information, see KPMG's blog here: Critical Third Party Resilience Consultation Paper - KPMG UK.

Competition impacts for Big Tech Firms: The FCA has published a Call for Input to gather focused information and evidence on whether the data asymmetry between Big Tech and financial services firms could lead to Big Tech firms gaining entrenched market power in financial services. This data asymmetry arises because financial services firms are unable to access Big Tech firms' datasets which currently sit outside of data sharing initiatives, whereas financial services data could be accessed by Big Tech firms through initiatives such as Open Banking. The FCA would also like to understand better the potential benefits that could arise from increased use of Big Tech firms' customer data in financial services.

Digital Securities Sandbox: HMT has confirmed its final approach to implementing the Digital Securities Sandbox (DSS), facilitating the use of DLT and tokenisation in the trading and settlement of traditional securities. It will largely proceed as consulted upon in July and legislation implementing the DSS will be laid before Parliament in due course. The BoE and FCA will then consult on the approach to applications, supervision and the use of the powers which have been delegated to them through the DSS arrangements.

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: