Regulatory Update: UK Edition – March 2023

On 10 March 2023, the FCA published its findings and expectations of fast-growing firms to identify, assess and manage the risks arising from their activities. The review focusses on CFD providers, wealth managers and payment services firms.

The FCA summarises that for most firms:

• Risk management framework and governance arrangements (including staffing in second and third line of defence) have not kept pace with the growth in their business activities. While risk management practices at these firms may have been proportionate at authorisation, they had not evolved to scale with the business. This can result in an increased risk of poor outcomes for consumers.
• Firms’ assessment of the adequacy of financial resources did not consider the growth in their underlying business resulting in financial resources assessments that were not commensurate with the size, business model and underlying risks. This can affect the financial resilience of firms, increasing the risk of disorderly firm failure.
• Wind-down plans were inadequate following the fast growth of these firms, increasing risk of harm in the event of firm failure.

The FCA recommended actions for some firms to address the concerns identified, which included:

• Updates to risk management and governance arrangements, including resourcing needs in risk, compliance and audit functions. This is to help ensure that firms have adequate resources in place to identify, assess, manage and monitor risks and potential for harms.
• Updating their assessment of adequacy of financial resources and wind-down plans. For some firms, this resulted in an increase in the level of capital/liquid assets held. This helps in reducing the likelihood of disorderly wind down, which can cause harm to consumers and markets.

The FCA expects regulated firms to:

• Have robust plans in place to understand their likely future growth, and to maintain sufficient resources to manage growth or unexpected stress. While firms may have adequate risk management practices at the stage of authorisation, the FCA expects the risk management practices to evolve in line with growth in business.
• Update their risk management framework (including risk appetite and limit framework) and governance arrangements to ensure that they remain proportionate and fit for purpose. This should include consideration of the resourcing needs of risk, compliance and audit functions. For further information related to governance, the FCA directed firms to refer to its work on the importance of culture and governance.
• Ensure that the assessment of adequacy of financial resources continues to be commensurate with the size, complexity and forecast growth of the business. This includes regular stress testing and scenario analysis, that is proportionate in nature. The purpose of adequate financial resources. The FCA directed firms to look at its expectation of all firms set out in more detail in FG20/1.
• Embed a liquidity risk management framework including liquidity risk policies, controls, contingency funding plans and stress testing.
• Ensure that their wind-down plan is robust, and they have considered the Wind-down Planning Guide (WDPG). This includes liquidity management for wind down as outlined in TR22/1.

On 6 March 2023, the Financial Ombudsman Service (FOS) opened a consultation on Temporary changes to outcome reporting in our business-specific complaints data.

The consultation sets out the proposed amendments to the way the FOS reports business-specific complaints data. Between 1 November 2021 and 31 March 2022, the FOS amended the way it recorded the outcomes of certain complaints that were proactively resolved by respondent businesses. This led to around 100 financial businesses making nearly 7,000 offers to resolve complaints – helping complainants get fair answers more quickly. Since then, the service has been considering the results and feedback from that initiative to see if it is something it can and should take forward on a more permanent basis. The decision and plans were published by the FOS on 3 April 2023.

On 9 March 2023, HM Treasury published a policy paper called Terms of reference – Investment Research Review. The Investment Research Review will consider the provision of investment research and its contribution to the competitiveness of the UK’s capital markets, and will focus on two key objectives:

1. To assess the link between levels of research and the attractiveness of the UK as a destination to list, the Investment Research Review is asked to:

• Provide evidence on how investment research provision in the UK compares or is perceived to compare with other international financial services centres, in both public and private markets.
• Consider the amount, quality and type of investment research currently provided on firms listed or quoted, or seeking to be listed or quoted, on UK public markets, and whether that has an effect on the attractiveness of UK markets for issuers. As part of this, consider if there are specific issues for research into the tech and life science sectors.
• Consider the current level of demand investors have for research, factors driving this demand, and evidence of whether the amount, quality and type of investment research is sufficient to meet such demands.

2. To evaluate options to improve the UK market for investment research and provide recommendations to this effect. In particular:

• The Investment Research Review may recommend both legislative and non-legislative measures, including measures that may fall to the Financial Conduct Authority (FCA) to consider.
• As part of this, the Investment Research Review will consider the impact of the MiFID II unbundling rules on the levels and quality of investment research and evaluate the likely impact of any proposed changes on investment and fees.
• Actions that industry should take.

This is not an exhaustive list, and the Investment Research Review may consider other matters that it considers to be relevant to its objectives. The review will run until June 2023.

On 3 March 2023, the FCA published Consultation Paper 23/6 Quarterly Consultation No 39, which relates to changes to guidance and numbering in the Annual Claims Management Report form.

On 16 March 2023, the FCA published a ‘Dear CEO’ letter titled: “FCA priorities for payments firms”.

The letter is directed to firms authorised or registered under the Payment Services Regulations 2017 (“PSRs”) and the Electronic Money Regulations 2011 (“EMRs”) such as Payment Institutions (“PIs”), Electronic Money Institutions (“EMIs”) and Registered Account Information Service Providers (“RAISPs)”.

In the letter, the FCA expresses its concern that many payments firms do not have sufficiently robust controls and that, as a result, some firms present an unacceptable risk of harm to their customers and to financial system integrity. To tackle these concerns, the FCA sets the following outcomes and priorities for firms and outlines in the letter what firms should be doing to achieve these:

• Outcome 1: Ensure that customers’ money is safe
  • Priority 1: Safeguarding
  • Priority 2: Prudential Risk management
  • Priority 3: Wind-down planning
• Outcome 2: Firms do not compromise financial system integrity
• Outcome 3: Ensuring that customers’ needs are met through high quality products and services (Implementation of the Consumer Duty)
• Cross-cutting priority 1: Governance and Leadership, including oversight of agents and distributors
• Cross-cutting priority 2: Operational Resilience
• Cross-Cutting Priority 3: Regulatory reporting
• Changes in Control

In its letter, the FCA highlights the current cost-of-living crisis and reminds payments firms of the Dear CEO letter on implementing the Consumer Duty sent to the sector on 21 February 2023, and its expectations for a robust implementation of the new rules. To understand how we can support you in the implementation of the new Consumer Duty, please contact us.

On 17 March 2023, the FCA  launched a call for input on whether the thresholds for SMEs to be able to refer complaints to the Financial Ombudsman Service (FOS) remain appropriate.

This is a post-implementation review of the FCA rules which extended access to the FOS to over 4,700 SMEs starting 1 April 2019. Before that date, the FOS was only able to consider complaints from micro-enterprises (i.e., firms with fewer than 10 employees and a turnover or annual balance sheet of less than €2 million). As of 1 April 2019, the FOS can consider complaints made by small businesses (i.e., firms with a turnover of less than £6.5 million and fewer than 50 employees or a balance sheet total of less than £5 million).

The FCA’s policy objective is to provide access to the FOS to SMEs who are likely to have insufficient resources to resolve disputes with financial services firms through the legal system. The FCA’s call for input closes on 28 April 2023.

On 20 March 2023, the Financial Ombudsman Service (FOS) announced that the FCA has confirmed the increase to the maximum amount the FOS can require a financial business to pay when it upholds a complaint. The FCA has confirmed that from 1 April 2023, the award limits will go up to:

• £415,000 for complaints referred to the FOS on or after 1 April 2023 about acts or omissions by firms on or after 1 April 2019.
• £190,000 for complaints referred to the FOS on or after 1 April 2023 about acts or omission by firms before 1 April 2019.

On 20 March 2023, the FCA published its newsletter for primary market participants, Bulletin 44. This covers topics on:

• diversity and inclusion on company boards and executive management
• when a prospectus is required where securities are issued pursuant to Schemes of Arrangement
• regulatory news and announcements with multimedia content.

On 21 March 2023, the FCA published a speech delivered by Therese Chambers, Director of Consumer Investments, at the TISA Financial Advice and Guidance Conference in London. The speech covered the following topics:

• The FCA wants to ensure it has a healthy and successful consumer investment sector in which firms can thrive and consumers can make informed choices about financial products and services.
• The FCA is committed to a regulatory approach that supports streamlined advice models. Following the closure of its consultation on its core investment advice regime (CP22/24), it is considering the best way to take forward any simplified advice regime as well as the timeline for doing so.
• The FCA, alongside the Treasury, are keen to ensure that the advice guidance boundary review is genuinely holistic. They expect that this will inevitably take time.

The speech also covers the Consumer Duty and the Regulatory Sandbox, which allows firms to test innovative propositions on Personalised Guidance.

On 30 March 2023, HM Treasury published a Call for Evidence on the Senior Managers and Certification Regime, which closes on 1 June 2023. They are inviting stakeholders to provide responses to the questions posed and share their views on how the SM&CR is currently operating in the financial services sector, and the nature of any potential reforms required. Firms have also reported that the regime has led to greater clarity for their own internal structures and responsibilities, improving management as well as outcomes for firms and their customers. However, some stakeholders have raised concerns about their experiences of specific aspects of the regime.

Examples of the issues that stakeholders have raised informally with government include:

• the compliance requirements for authorising the appointments of new Senior Managers, and time taken to authorise Senior Managers
• the breadth of coverage of the Certification Regime
• the different levels of scrutiny applied to firms regulated under the regime
• the interaction of the SM&CR with other regulatory regimes
• aspects of the regime which may appear removed from its core purpose of managing risk
• the frequency with which certification must be reviewed.

Alongside the HM Treasury review, the FCA and PRA published a joint Discussion Paper on the review of the SMCR on 30 March. Responses are due by 1 June 2023.

The feedback regulators have received on the regime from firms and other stakeholders over the years has been predominantly positive. Many see great value in the regime in improving conduct, governance, and individual responsibility, which helps them run their businesses more efficiently. In particular, firms have emphasised the importance of the regime during the operational disruption from the Covid-19 pandemic and have highlighted how the SM&CR has helped them manage the disruption and ensure continuity of business.

At the same time, questions have been raised by some stakeholders about aspects of the regime. These include:

• challenges in completing regulatory references and the criteria for making conduct notifications
• the growth in new expectations on Senior Managers in respect of new and emerging risks
• the frequency of submitting SM&CR-related information
• delays in SMF approvals.

On 31 March 2023, the FCA published Handbook Notice No. 108. The changes to the FCA Handbook are set out in the following instruments:

• Consumer Duty (Amendments) Instrument 2023
• Handbook Administration (No 64) Instrument 2023
• Product Governance for Overseas Non-Investment Insurance Products Instrument 2023
• Investment Firms Prudential Regime and Interim Prudential sourcebook for Investment Businesses (IPRU-INV) (Amendment) Instrument 2023
• Technical Standards (Markets in Financial Instruments Regulations) (Derivatives Trading Obligation) Instrument 2023
• Application and periodic fees (2023/24) Instrument 2023
• Financial Services Compensation Scheme (Management Expenses Levy Limit 2023/2024) Instrument 2023.

On 1 March 2023, the PRA published its Regulatory Digest covering February. It includes the following:

• CP16/22 – Implementation of the Basel 3.1 standards
• CP3/23 – Dealing with insurers in financial difficulties
• CP4/23 – The Strong and Simple Framework: Liquidity and disclosure requirements for Simpler-regime Firms
• CP5/23 – Remuneration: Enhancing proportionality for small firms
• Sixth edition of the Regulatory Initiatives Grid
• Bank Overground: Mind the (smaller) gap? Implications of the narrowing gap between modelled and standardised residential mortgage risk weights.

On 7 March 2023, the EBA published a report on the benchmarking of diversity practices and the gender pay gap. The executive summary makes the following points:

More diverse management bodies can help to improve their decision-making regarding strategies and risk-taking by incorporating a broader range of views, opinions, experiences, perceptions, values and backgrounds. A more diverse management body reduces the phenomena of ‘group think’ and ‘herd behaviour’. The issue of diversity is not limited to gender; it also concerns other factors, including the age, professional and educational background, and geographical provenance of the members of the management body.

Despite the legal requirements, a significant proportion of 27.05% of institutions have still not adopted a diversity policy. Only 76.78% of institutions that have a diversity policy promote gender diversity by setting a target for the underrepresented gender.

More than half of the institutions (56%) in the sample and nearly a half of the larger credit institutions have no female executive director.

On average, female executive directors, receive 9.43% less remuneration than their male colleagues, for non-executive directors the average gender pay-gap is at 5.90%.

The EBA analysed the correlation between the profitability of a credit institution expressed as return on equity (RoE) and gender diversity of executive directors. Credit institutions with a gender-diverse management function have on average a RoE of 7.88%, while credit institutions with executive directors of only one gender have on average a lower RoE of 5.27%.

On 10 March 2023, ESMA updated Q&As to include the following:

• EuSEF and EuVECA Regulations – Investment in another qualifying venture capital fund/qualifying social entrepreneurship fund
• Application of AIFMD – Exemptions
• European crowdfunding service providers for business Regulation – Question 3.14 relating to payment service providers.

On 1 March, the feedback stage opened for the call for evidence in the review of the scope and regime for non-EU benchmarks. This initiative will check whether the scope of the EU rules for financial benchmarks as well as the rules for the use of non-EU financial benchmarks are still fit for purpose. The review deadline is 15 June 2023.

The Commission will propose amending the rules, to ensure that EU banks and investment funds retain access to a broad array of global benchmarks.

On 10 March 2023, ESMA wrote a letter to the EU Parliament and EU Council to raise its concerns over the proposed changes to the insider list regime in the Market Abuse Regime.

The proposal amends Article 18 of MAR, stipulating that an issuer’s insider list would no longer be event-based and would only need to include those persons that have regular access to inside information (so called “permanent insiders”). ESMA believes that this proposal may have two significant detrimental effects:

The first one concerns National Competent Authorities’ (NCAs) ability to enforce against market abuse. Under the proposal:

• The new insider lists will not cover those persons working for the issuer who have irregular access to inside information and thus limiting the ability of NCAs to quickly identify non-permanent insiders.
• NCAs will not be able to use the list to assess which permanent insider accessed each piece of inside information and when. As a result, the identification of insiders will be a lengthy and difficult process that National Competent Authorities will have to carry out from zero when investigating potential insider dealing ex-post.
• While the proposal will not directly impact the insider list drawn up by advisors and consultants, their ability to produce their insider list in a timely manner will be affected as they will no longer be added to the issuer’s list and therefore will not receive the relevant notification.
• NCAs will not be aware of the access of such advisors and consultants to the issuer’s inside information.

The second significant detrimental effect would be on issuers, as they use insider lists to manage inside information, thus protecting both themselves and their staff/third parties. For example, the new regime would diminish awareness by all insiders, as they will no longer be notified that they are in possession of inside information and be informed about the relevant obligations and prohibitions. Not only will this lack of awareness increase the risk of unintended insider dealing, but it will also weaken the issuers’ control of the flow of inside information.

On 6 March 2023, JMLSG published final amendments to the following text in Part II of its Guidance:

• Sector 5 (Wealth management)
• Sector 6 (Financial advisers)
• Sector 11A (Consumer credit providers)
• Sector 13 (Private Equity)
• Sector 22 (Cryptoasset exchange providers and custodian wallet providers)
• Part I Chapter 6 Paragraphs 6.70-6.71, to highlight the ability the Financial Ombudsman has to effectively handle complaints with a money laundering element.

In addition, on 17 March 2023, JMLSG published final amendments to the following text in Part II of its Guidance:

• Sector 8 (Non-life providers of investment fund products)
• Sector 9 (Discretionary and advisory investment management).

All of the revisions have been submitted to HM Treasury for Ministerial approval and copies can be downloaded from the JMLSG website.

On 10 March 2023, the Financial Action Task Force (FATF) published updated guidance on the Beneficial Ownership of Legal Persons. The revised guidance requires countries to:

• Use a multi-pronged approach, i.e., to use a combination of different mechanisms, for collection of beneficial ownership information to ensure that adequate, accurate and up-to-date information on the beneficial ownership of legal persons is available and can be accessed by the competent authorities in a timely manner.
• Follow a risk-based approach and consider the risks of legal persons in their countries, not only those posed by legal persons created in their countries, but also by foreign-created legal persons with sufficient links with their country.
• Allow timely access to information by competent authorities, and that information should be adequate for identifying the beneficial owner, accurate-based on verification, and up-to-date.
• Adopt stronger controls to prevent the misuse of bearer shares and nominee arrangements.

On 14 March 2023, the Financial Action Task Force (FATF) published a report Countering Ransomware Financing. The report analyses the methods that criminals use to carry out their ransomware attacks and how payments are made and laundered, and proposes a number of actions that countries can take to counter this type of criminal activity.

In addition, the report contains a list of potential risk indicators to help public and private entities identify suspicious activities related to ransomware.

On 9 March 2023, the Financial Action Task Force (FATF) published its updated Recommendations as amended by the FATF Plenary of February 2023.

The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction.

The latest updates revise Recommendation 25 (transparency and beneficial ownership of legal arrangements), its Interpretative Note (IN), and the Glossary definitions of “beneficial owner”, “beneficiary” and “legal arrangements”, to strengthen the standards on beneficial ownership of legal arrangements.

On 16 March 2023, the Office of Financial Sanctions Implementation (OFSI) published updates to its Enforcement and Monetary Penalties for Breaches of Financial Sanctions Guidance.

This is Guidance as to the circumstances in which the Treasury may consider it appropriate to impose a monetary penalty under sections 146 or 148 of The Policing and Crime Act 2017, and how it will determine the amount of the penalty.

A section on ‘Ownership and Control’ has been added to the Guidance under chapter 3 Case Assessment. Within the section, amongst other things, it is stated that:

“Where OFSI determines that a breach has occurred, and an incorrect assessment of ownership and control of an entity is relevant to the commission of the breach, OFSI will consider the degree and quality of research and due diligence conducted on the ownership and control of that entity”.

The section also contains examples of areas of enquiry that OFSI may expect to be undertaken by persons seeking to establish whether an entity is owned or controlled by a designated person.

Firms are reminded that HM Treasury can impose a monetary penalty even where an entity makes funds available to a designated person without knowledge that the action would be a breach. Due diligence may be considered as a mitigating factor, however the onus for demonstrating that reasonable and appropriate due diligence into ownership and control has been undertaken rests with the person against whom OFSI is considering taking enforcement action.

On 24 March 2023, HM Treasury and the FCA published a statement on their joint review of the criminal market abuse regime (‘the Criminal Regime Review’), as set out in the Economic Crime Plan 2019-22. The criminal market abuse regime sets out the UK’s criminal sanctions for insider dealing and market manipulation.

In the statement, it is made know that the FCA and HM Treasury have now completed the Criminal Regime Review and that the review has identified a number of areas where the government believes it would be appropriate to update the criminal regime.

As part of the Future Regulatory Framework (FRF) Review, the Government intends to repeal the Market Abuse Regulation, the civil market abuse regime, and replace it with UK legislation. The government will consider changes to the criminal regime alongside any reforms to the Market Abuse Regulation through the FRF Review and will therefore consider how to take forward the recommendations from the Criminal Regime Review at that point.

On 13 February 2023, the FCA imposed restrictions on Independently East Ltd for failing to engage with the Regulator in an open and cooperative way. The Firm’s bank accounts are now frozen and its permissions to carry out regulated activities have been cancelled.

On 9 November 2022, the FCA issued a s165 request of information to the Firm following an outstanding Financial Ombudsman Service award for an upheld complaint by a consumer who paid £70,000 to the Firm believing that these funds would be used to invest in a bond. However, the bond was never purchased, and it appears that some of the consumer’s funds were transferred to a personal account of the Director.

Independently East Ltd has failed to respond to subsequent information requests by the Regulator. For further information, please see the First Supervisory Notice published on the FCA’s website.

On 9 March 2023, the Treasury Sub-Committee on Financial Service Regulations wrote to the FCA raising the following issues in relation to the Greenwashing – Sustainability Disclosure Requirements and investment labels consultation:

• The Cost Benefit Analysis does not consider the costs to the consumer, including the time that consumers spend reconsidering which products to invest in and which to divest from, any related transaction costs, the buy/sell spreads they will be exposed to when their investments are reallocated to different funds, the effect of a large-scale sell-off of funds that are no longer able to market themselves as “sustainable”. The FCA has been asked to provide a new Cost Benefit Analysis.
• Despite stating in its consultation that consumers are being misled, and that it takes its fundamental principles seriously, it appears the FCA is unwilling to take enforcement action because no specific rules were in place when the misleading took place. The FCA has been asked to set out the enforcement action it will take to pursue redress for consumers where fund managers have been promoting misleading financial products.
• The FCA has been asked to comment on the risks to consumers and the funds industry if the FCA requirements are too onerous for US or EU based funds, whether there will be less choice for UK consumers as a result and whether the additional management cost to comply with separate jurisdictional ESG criteria will be passed on to UK consumers.

The FCA responded to the Sub-Committee’s letter on 23 March, promising to consider the issues raised in the correspondence and oral evidence hearing. On 29 March, the regulator updated its consultation.

On 20 March 2023, the FCA published a Dear CEO letter to benchmark administrators on improvements needed in ESG benchmarks. This follows another Dear CEO letter sent to benchmark administrators in September 2022 highlighting the risk of poor disclosures for ESG benchmarks.

In its press release, the FCA states that it has completed a preliminary review on ESG benchmarks. This found that the overall quality of ESG-related disclosures made by benchmark administrators was poor. The issues highlighted by the Regulator include:

• Not enough detail on the ESG factors considered in benchmark methodologies.
• Not ensuring that the underlying methodologies for ESG data and ratings products used in benchmarks are accessible, clearly presented and explained to users.
• Not fully implementing ESG disclosure requirements.
• Failing to implement their ESG benchmarks’ methodologies correctly – for example, using outdated data and ratings or failing to apply ESG exclusion criteria.

The FCA expects all benchmark administrators to have strategies to address the issues identified in this letter.

On 22 March 2023, the FCA updated the Climate Financial Risk Forum (CFRF) page of its website. The CFRF is an industry forum jointly convened by the PRA and FCA to build capacity and share best practice in managing climate-related risks and opportunities.

The FCA has added to its website information on the outputs of Session 3 of the CFRF, which include information materials, webinars and a third round of guides published to help the financial sector develop its approach to addressing climate-related financial risks and opportunities. The published guides focus on the transition to net zero, scenario analysis, and climate disclosure, data and metrics.