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Charlotte Hill

Charlotte Hill

Partner

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Daniel Hirschfield

Daniel Hirschfield

Senior Professional Support Lawyer

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Autoren
Charlotte Hill

Charlotte Hill

Partner

Read More
Daniel Hirschfield

Daniel Hirschfield

Senior Professional Support Lawyer

Read More

2. Dezember 2021

Financial services update – 12 von 35 Insights

Financial services regulatory update - December 2021

Featured in our final newsletter of 2021:

  • HMT's Future Regulatory Framework review.
  • Fourth edition of the regulatory initiatives grid.
  • Next steps on central bank digital currency.
  • FCA's strategy for ESG priorities.
  • Changes to UK MiFID's research rules.
  • HMT's report on AML and CTF.
     

 

General financial services regulation (UK)

FCA: Changes to decision-making process announced

In policy statement PS21/16, published on 26 November 2021, the FCA confirmed that certain statutory notice decisions would move from the Regulatory Decisions Committee (RDC) to the Executive.  The FCA consulted on these changes to its decision-making process in CP21/25 (see our September 2021 update).  

Senior managers within the FCA will now be able to make decisions in relation to the following:

  • Authorisation of a firm or approval of an individual.
  • Cancellation of a firm's permissions in straightforward cases where the cancellation is contested.
  • Commencement of civil and/or criminal proceedings.
  • Varying or limiting a firm's permissions or imposing requirements on a firm.

The RDC will focus on contentious enforcement cases, which tend to involve proposals to impose sanctions on individuals or firms and will often relate to historical misconduct. 

The changes to the relevant sourcebooks (DEPP and EG) came into force on 26 November 2021.  The FCA will undertake a review of the effectiveness of the changes in six months' time.

HMT: Future Regulatory Framework review

On 9 November 2021, HM Treasury opened a consultation on the Future Regulatory Framework (FRF) review, setting out the government's proposals for adapting the UK regulatory framework for financial services, reflecting the position after Brexit, and ensuring the framework remains relevant in the future. The review is a key element of achieving the goals set out in the Chancellor's speech at Mansion House in July 2021, which described the government's vision for an open, green, and globally competitive financial services sector. 

The review makes a series of proposals to deliver HMT's outcomes, for example moving to a comprehensive model of the Financial Services and Markets Act in areas currently covered by retained EU law. In order to achieve this, the government plans to ensure that financial services regulators can determine the direct regulatory requirements which are currently within the retained EU law. As discussed in our November 2020 update, HMT have previously undertaken phase 1 of the review, which examined co-ordination arrangements between the UK authorities who are responsible for regulation of, and policy for, the financial services sector. Phase I concluded in March 2020, and was followed by phase II of the FRF review, which remained open between 19 October 2020 and 19 January 2021. The current consultation period will close on 9 February 2022.

FCA: data-led regulator

On 2 November 2021, the FCA published a speech given by Jessica Rusu (its Chief Data, Information and Intelligence Officer) discussing the drivers of change in the financial services industry and how the FCA is responding. The speech focuses on the FCA's plans to use its resources to become a data-led regulator, for example:

  • The FCA will publish an updated Data Strategy soon.
  • The FCA will define and codify the behaviours and events likely to result in consumer harm or market function failures.
  • The FCA is collaborating with industry experts to determine the issues associated with increases in artificial intelligence and machine learning.

FCA: statement on digital regulatory co-operation forum

On 2 November 2021, the FCA released a statement on the Digital Regulatory Co-operation Forum inquiry on Digital Regulation. The regulatory bodies, including the FCA, focused on how co-operation between regulators is necessary to make it easier for people to engage with digital regulation, and to increase clarity and transparency. Looking to the future, the statement discusses how the regulators intend to develop joint guidance on digital issues where regulatory regimes overlap, as well as how regulators plan to ensure coherent supervision of the world's largest technology companies. Specifically, the FCA confirmed that one of its key priorities, as discussed in its 2021/22 Business Plan, is international co-operation. You can read more about the FCA's 2021/22 Business Plan in our August 2021 update.

Regulatory Initiatives Grid fourth edition

On 1 November 2021, the Financial Services Regulatory Initiatives Forum issued the fourth edition of the Regulatory Initiatives Grid, which provides a clear outline of upcoming regulatory work. The key upcoming initiatives in the regulatory landscape include, among others, the implementation of strong customer authentication for e-commerce on 14 March 2022, the deadline for implementation of new requirements, and expectations to strengthen operational resilience on 31 March 2022. 

The Regulatory Initiatives Grid also includes key dates for the publication of the finalon climate-related disclosure in Q4 2021 and UK green taxonomy Technical Screening Criteria by the end of 2022, and the consultation paper on sustainability disclosure requirements and investment product labels in Q2 2022.

General financial services regulation (international)

FSB reports on November plenary

On 18 November 2021, the Financial Stability Board (FSB) published a press release after its November plenary meeting.  Among the items discussed were the following:

  • A key challenge for emerging markets and developing economies is navigating the exit from COVID-19 support measures and managing financial stability in the light of increased digital innovation.
  • The FSB's 2022 work programme, which includes priorities such as balancing the benefits and risks of crypto technology, addressing climate change risks, and enhancing co-operation between international financial authorities. The finalised work programme will be published in January 2022.
  • The outlook for financial stability and the actions required to manage vulnerabilities in the global financial system, such as increased indebtedness in households after COVID-19. In February 2022, the FSB will provide the G20 with an updated evaluation of the financial stability implications of cryptoassets.
  • The financial stability implications, such as debt overhang and scarring effects, on the financial system following COVID-19.

Financial service aspects from the October 2021 G20 summit

On 31 October 2021, the G20 published the leaders' declaration which was adopted after the summit on held in Rome 30-31 October 2021. The declaration included discussions on financial regulation and sustainable finance, among other topics. In relation to financial regulation, the G20 stated they are committed to addressing the gaps in the regulatory framework by, for example, completing the outstanding elements of the regulatory reforms agreed after the financial crisis in 2008. The G20 also endorsed the Financial Stability Board's final report on policy proposals to enhance money market fund (MMF) resilience and to address MMF vulnerabilities within the G20 jurisdictions. In relation to sustainable finance, the G20 confirmed the establishment of its sustainable finance working group and recognised the importance of expanding its sustainable finance roadmap. 

Additionally, the G20 stated that no global stablecoins should commence operation until all legal, regulatory, and oversight requirements are sufficiently in place. Furthermore, the G20 encouraged organisations such as the World Bank to further analyse how cross-border payments are increased through central bank digital currencies.

Cryptoassets

SBAI: operational due diligence of cryptoassets toolbox

On 16 November 2021, the Standards Board for Alternative Investments (SBAI) published a toolbox memo, providing guidance on undertaking operational due diligence on cryptoassets. The memo highlights key areas of consideration, including:

  • Operational due diligence questions for investors to ask.
  • Key operational due diligence areas, such as asset valuation and custody.
  • Additional operational due diligence areas, such as responsible investments.
  • A glossary of common cryptoasset terms.

BCBS: update on climate-related financial risks, cryptoassets, and G-SIB methodology

On 9 November 2021, the Basel Committee on Banking Supervision (BCBS) shared a press release following earlier meetings, which covered several key issues, including cryptoassets. Regarding cryptoassets, the BCBS confirmed the importance of developing a risk-centric global minimum standard to reduce potential risks to the banking system from cryptoassets. The BCBS plans to propose a specific prudential treatment, and undertake further consultation, by mid-2022.

FATF guidance on virtual/crypto assets updated

On 28 October 2021, the Financial Action Task Force (FATF) published an updated version of its guidance on virtual assets (known as cryptoassets) and virtual asset providers. The guidance addresses how the FATF's anti-money laundering and counter-terrorist financing standards apply in the case of virtual assets and their providers, as well as providing examples and solutions to obstacles that may arise.

The guidance updates follow a FATF report in July 2021, which identified issues within its standards on virtual assets and their providers, as well as its March 2021 consultation on updating the guidance. The principal changes include clarification on the definitions of virtual assets and their providers, how the FATF standards apply to stablecoins, and guidance on the licensing and registration of virtual asset providers. The FATF will undertake ongoing monitoring of the sector to determine any material changes which may require it to provide further changes or clarifications.

ESG

NGFS: climate-related litigation awareness

On 9 November 2021, the Network for Greening the Financial System (NGFS) shared a document on climate-related litigation, aiming to increase awareness around the growing risk of climate-related litigation, which is important for micro-prudential supervision and monitoring financial stability. The document highlights the trends in climate-related litigation as well as ways of addressing the risks and a consideration of how exposed financial institutions are to this type of risk.

The NGFS states that climate-related litigation risk will remain an important topic for it in the future, particularly following the case of ClientEarth v Banque Nationale de Belgique – the first case of climate-related litigation proceedings brought against a central bank as a defendant. 

BCBS: update on climate-related financial risks, cryptoassets, and G-SIB methodology

On 9 November 2021, following its earlier meetings, the Basel Committee on Banking Supervision (BCBS) shared a press release which covered several key issues, including climate-related financial risks (CRFR). Regarding climate-related financial risks, the BCBS will, in November 2021, consult on a set of principles for management and supervision of CRFR at international banks. Furthermore, the BCBS is considering use of the Pillar 3 framework to promote a disclosure baseline for CRFR, alongside exploring the merits of utilising regulatory measures.

FCA: Strategy for ESG priorities

On 3 November 2021, the FCA published its strategy for ESG priorities, including how it plans to deliver on its ESG-related targets set out in its Business Plan for 2021/22. The FCA outlined five themes central to its ESG strategy:

  • Trust – building trust and integrity in ESG instruments, products, and the wider ecosystem. ESG-labelled financial instruments and products should not be 'greenwashed', and consumers must be able to trust green financial instruments.
  • Transition – supporting the delivery of a market-led transition to a more sustainable economy through finance. This includes listed companies and regulated firms having transition plans which meet the government's net zero targets.
  • Team – developing tools, resources, strategies, and structures to integrate ESG into the FCA's activities.
  • Transparency – high quality, comparable, and consistent information on the impact and opportunities of climate- and ESG- related risks is needed to transition to a more stable, less carbon-intensive economy. 
  • Tools – the FCA should utilise its relationships, powers, and tools to achieve ESG outcomes and enhance industry capability.

The FCA strategy also includes key actions for addressing each of the above themes, for example:

  • Trust – developing a policy approach to governance, training, incentives, and remuneration relating to ESG in regulated firms. The FCA plans to begin stakeholder engagement in this in Q2 2022.
  • Transition – determining regulatory intervention which encourages a market-led transition to a sustainable future. The FCA plans to engage with stakeholders in the first half of 2022 and consult on prudential ESG disclosures for investment firms in the second half of 2022.
  • Team – acting, and communicating, as a role model. In summer 2022, the FCA will publish its inaugural disclosure report from the Task Force on Climate-Related Financial Disclosures.
  • Transparency – implementing oversight, enforcement, and supervision mechanisms to enhance the quality of disclosures.
  • Tools – delivering a work programme to develop innovative solutions that support regulators, consumers, and the wider market. The FCA plans to launch a Green Fintech Challenge and a Digital Sandbox in Q1 2022.

The FCA will provide updates on the ESG strategy progress in its 2022 business plan and annual report, as well as more detailed analysis on its progress in 2023.

HMT: mandatory climate transition plans proposal

On 3 November 2021, HMT published a fact sheet, providing guidance on its climate transition plans, and confirming that it would establish mandatory requirements for certain companies to publish net zero transition plans. The government's guidance includes that the transition plans should include:

  • interim milestones
  • high-level targets to mitigate climate risk by the company
  • actionable steps for the company to take to reach their targets.

Although the government is not requiring firms to adopt mandatory net zero targets, they will expect firms to begin publishing their transition plans in 2023.

FCA: positive sustainable change strategy

On 3 November 2021, Nikhil Rathi, CEO of the FCA, gave a speech at COP26 outlining the FCA's strategy for positive sustainable change (see above). He discussed how the International Sustainability Standards Board, launched on 3 November 2021, is a "game-changer" in its use of transparency to create trust, as it will set the first global baseline of complete sustainability reporting standards. 

Additionally, the FCA is announcing a programme of work to assist a market-led transition to a more sustainable economy, and further embed climate consideration into all work it undertakes, alongside wider ESG considerations. The speech confirmed that the FCA will play a central role in delivering the government's green finance ambitions, and will determine its policy amendments following feedback from its Discussion Paper on Sustainable Disclosure Requirements and investment labels (see section on 'Funds and asset management' below). 

Payment services and systems

FCA: Changes to SCA-RTS, Approach Document and Perimeter Guidance Manual

On 29 November 2021, the FCA published PS21/19 in which it set out final rules for regulatory technical standards on strong customer authentication and secure communication (SCA-RTS) and amendments to its "Payment Services and Electronic Money – Our Approach" document (Approach Document) and the Perimeter Guidance Manual.  The FCA consulted on the changes in CP21/3 – see our February 2021 update.   The changes to the SCA-RTS are designed to remove obstacles to continued growth, innovation and competition in the payments and e-money sector (including open banking); the amendments to the Approach Document and Perimeter Guidance Manual are intended to strengthen the resilience of the sector and protect customers if firms fail and to consolidate the FCA's expectations for firms.  The updated Approach Document can be found here.  The amendments to Perimeter Guidance came into force at the end of November.  The commencement dates of the various SCA-RTS changes are set out in the relevant FCA instrument.

UK Finance recommendations for the future of open banking

On 22 November 2021, UK Finance issued a report setting out its recommendations for the future of open banking, aimed at assisting the development of more products and services for customers. The report sets out the following key recommendations:

  • Multi-lateral industry framework – a voluntary framework for open banking payments should be considered to establish the roles and responsibilities of market participants and to avoid potential market fragmentation.
  • Governance – following the Competition and Markets Authority's decision on open banking governance, further development of open banking payment standards should be considered, supported by industry governance and a technical group.
  • Variable recurring payments (VRP) – the development of VRP has the potential to extend open banking to subscription payments in the future, offering more competition in the market as customers have more choice about their payment methods.

European Commission call for advice on PSD2 review

On 18 November 2021, the European Banking Authority (EBA) published a call for advice from the European Commission relating to the revised Payment Services Directive. The EBA is required to gather evidence, and provide advice, on the application and impact of PSD2, including benefits and challenges in the following areas:

  • Rights and obligations.
  • Licensing of payment institutions and supervision of payment service providers under PSD2.
  • Strong customer authentication.
  • Transparency of conditions and information requirements.
  • Access to, and use of, payment accounts data relating to payment initiation services and account information services.

The EBA is required to deliver its advice to the Commission by 30 June 2022.

PSR: authorised push payment scams

On 18 November 2021, the Payment Systems Regulator (PSR) published a consultation on authorised push payment (APP) scams, setting out proposals to both prevent the scams and protect the people who fall victim to them. The PSR aims to achieve its goal of significantly reducing APP scam losses by:

  • Establishing a joint industry working group aimed at improving intelligence sharing to improve detection and prevention of APP scams. The group will deliver high-level proposals in Q2 2022.
  • Requiring major payment service providers in the 12 largest UK banking groups (and two largest banks in Northern Ireland outside of those banking groups) to share their data on reimbursement levels for victims and the banks' performance relating to APP scams.

The deadline for responses to the consultation paper is 14 January 2022, and the PSR will confirm its final policy in the first half of 2022.

BoE and HMT: next steps on central bank digital currency

On 9 November 2021, the Bank of England (BoE) published a statement outlining the next steps it is taking, alongside HM Treasury, in considering a central bank digital currency. In 2022, the BoE and HMT will launch a consultation setting out the case for a UK central bank digital currency – digital money issued by the BoE used for everyday payment needs by households and businesses, existing in tandem with cash and bank deposits.

The 2022 consultation will inform whether the authorities will move into a development phase, starting with a technical specification outlining the conceptual architecture and an in-depth testing of the design. As the consultation sit within the research and exploration phase, spanning the next few years, the earliest launch date for a UK central bank digital currency would be after 2025.

PSR: final report on supply of card-acquiring services

On 3 November 2021, the Payment Systems Regulator (PSR) published its final report on its market review into the supply of card-acquiring services. Providers of card-acquiring services, who accept and process card payments on behalf of a merchant resulting in a transfer of funds to the merchant, have raised concerns around a lack of transparency regarding the fees merchants pay to accept card payments, among other issues. In response to these concerns, the PSR launched a market review in January 2019 examining, for example, the nature and characteristics of card-acquiring services, and what the market is delivering for both merchants and customers.

After COVID-related delays, the PSR's final report concluded that the supply of card-acquiring services is unsatisfactory for small- and medium-sized merchants, and for large merchants with annual card turnover between £10 million and £50 million. This is due to the PSR discovering features within card-acquiring services which restricted the ability and willingness of these companies to search and switch providers, ultimately resulting in worse outcomes. 

The PSR identified two key remedies to these issues faced by merchants: encouraging them to switch provider or negotiate terms with their existing provider and reducing obstacles to merchants obtaining a better deal. The PSR's next step to implement these remedies is to publish a remedies consultation in early 2022, setting out its views on the most suitable remedies and seeking views from stakeholders. The PSR will then publish its interim decision on remedies for consultation later in 2022.

Consumer credit

FCA: consultation on ban on debt packager firms receiving remuneration from debt solution providers

On 17 November 2021, the FCA published a consultation paper, proposing a ban on debt packager firms (and their appointed representatives) from receiving remuneration from debt solution providers, following the FCA's recent supervision which identified concerns around manipulation of consumer income and use of persuasive promotional language to consumers. The proposals in the consultation paper are aimed at addressing the issue of conflict of interest in the debt packager business models which result in firms not being compliant with the FCA's rules, and creates an unacceptable risk of consumer harm.

The FCA intends for the ban to have a significant impact, including a reduction in applications for authorisation by firms which do not meet its threshold conditions. The consultation closes for comments on 22 December 2021, and the FCA intends for new rules to be in force in April 2022.

Council of EU adopts proposed Directive on credit servicers and credit purchasers

On 9 November 2021, the Council of the EU adopted the proposed Directive on credit servicers and credit purchasers – the Non-Performing Loans Directive. This follows the European Parliament adopting the proposed Directive on 20 October 2021. The Directive will enter into force on the 20th day following its publication in the Official Journal of the European Union.

Banking and insurance

IAIS: statement on diversity, equality, and inclusion

On 16 November 2021, the International Association of Insurance Supervisors published a statement on the importance of diversity, equality, and inclusion (DE&I) in insurance supervision, explaining that advancing DE&I within insurance organisations supports sustainability objectives and sound prudential, and customer outcomes. As DE&I is key to conduct, culture, financial inclusion, sustainable economic development and technological innovation, IAIS intends to implement the following plans:

  • Incorporate DE&I into ongoing IAIS projects.
  • Explore international co-operation opportunities and sharing good practice.
  • Begin exploratory work on the insurance sector's current work in support of DE&I objectives.

PRA: how revoked UK CRR provisions correspond to rules

On 16 November 2021, the Prudential Regulation Authority (PRA) published a webpage, summarising the correlations between revoked UK Capital Requirements Regulation (CRR) provisions and their corresponding PRA rules. The PRA can make rules relating to the revoked CRR provisions and is required to publish information setting out where its rules correspond with the previous, revoked provisions. 

CMA: letter to Danske Bank regarding breach of SME banking undertakings

On 12 November 2021, the CMA shared a letter that was written to Danske Bank regarding its breach of behavioural undertakings given after the Competition Commission's 2002 report on the supply of banking services to SMEs. These behavioural undertakings prevent the signatory banks from, directly or indirectly, requiring customers to open and maintain a business current account as a condition of receiving, maintaining, or servicing a loan.

Danske Bank's breach of the behavioural undertakings arose because the bank's Relationship Managers told prospective loan applicants that a Danske Bank business current account was necessary to apply for a COVID-19 bounce bank loan, resulting in approximately 205 SME customers opening a business current account to apply for a bounce bank loan. The CMA determined that this behaviour amounted to a breach of the prohibition in the undertakings. The bank, in addressing the issue, wrote to the affected customers to offer both refunds of business current account charges and the option to switch to a fee-free loan account. It has also committed to undertaking voluntary actions, such as a staff training programme. The CMA does not consider it appropriate to take formal enforcement action at present but will continue monitoring the issue.

IAIS: paper on culture

On 11 November 2021, the International Association of Insurance Supervisors (IAIS) published a paper on insurer culture, aiming to explore insurer culture at the apex for prudential and conduct risk, including illustrative examples of the broader role of culture. The paper concluded that the culture of an insurer is instrumental in determining effective delivery on critical outcomes relating to general financial soundness, the fair treatment of consumers, and interests of stakeholders. The paper also states that an insurer's clear leadership accountability and communication, business objectives and strategies, and positive incentive structures can be effective methods of promoting a desirable culture, resulting in greater positive outcomes for policyholders and insurers.

The IAIS will now determine the next steps in developing the observations considered in the paper, for example a more specific investigation into specific cultural drivers like remuneration. Additionally, supervisors are placing an increased focus on the role of diversity and inclusion in the insurance sector.

PRA: policy statement to June 2021 occasional consultation paper

On 8 November 2021, the PRA published PS25/21 setting out its final policy on the proposals from its June 2021 occasional paper (the June paper), which proposed minor Rulebook amendments, supervisory statements, and associated guidance, among others. In the June paper, the PRA proposed changes to reporting requirements, aiming to support a better understanding of the risk profiles of schemes, ensure a level playing field for firms, and improve consistency. In its policy statement, the PRA made some minor amendments to these proposed changes, which apply to banks, building societies, and PRA-designated firms, and will enter into force on 1 December 2021.

The June paper also proposed changes to the reporting requirements to delete a legacy template replicated in the PRA Rulebook and FCA Handbook. These changes entered into force on 10 November 2021. Additionally, further changes were proposed relating to preparing for the discontinuation of LIBOR, applicable to banks, building societies, and PRA-designated firms. These changes will enter into force on 1 January 2022. The June paper also proposed changes to the scope of the definition of Capital Part (applicable to CRR firms) and amendments to the branch return (relevant to PRA-supervised third-country branches), which will enter into force on 1 January 2022 and 31 May 2022, respectively.

Finally, the June paper proposed to correct and update a reference in the Audit Committee Part and correct an error supervisory paper. These proposals are applicable to audit committees of CRR firms, auditors of major UK banks and building societies, UK Solvency II insurance and reinsurance firms, and the Society of Lloyd's and managing agents. These changes will enter into force on 1 January 2022.

Securities, investments, and markets

FCA: Changes to UK's MiFID's conduct and organisational requirements

In policy statement PS21/20, published on 30 November 2021, the FCA announced its final rules on changes to the research rules and the removal of best execution reporting in RTS 27 and RTS 28.  The rule changes to research intend to improve the availability of research on SME firms by creating an exemption to the inducement rules that prohibit the bundling of research and execution fees.  The best execution reporting changes aim to relieve trading venues and brokers from preparing and publishing best execution reports that do not appear to benefit users. 

FCA: IFPR update

Third policy statement on IFPR

On 26 November, the FCA published policy statement PS21/17, the third in a series of policy statements on the UK Investment Firms Prudential Regime (IFPR).  PS21/17 contains three instruments: the Investment Firms Prudential Regime (No. 2) Instrument 2021 (FCA 2021/49), the Investment Firms Prudential Regime (Consequential Amendments) Instrument 2021 (FCA 2021/50), and the Technical Standards (Financial Conglomerates Directive (Amendment) Instrument 2021 (FCA 2021/51).  The IFPR will come into force on 1 January 2022.

Changes made to two IFPR instruments

On 12 November 2021, the FCA published a webpage summarising the changes made to the text of the first two of its IFPR instruments: the Investment Firms Prudential Regime Instrument 2021 (FCA 2021/38), and the Investment Firms Prudential Regime (Consequential Amendments to Other Prudential Sourcebooks) Instrument 2021 (FCA 2021/39). 

The instruments were originally published in October 2021; the near-final version of these instruments was published in the FCA's July 2021 policy statement on the implementation of the IFPR – see our August 2021 update.

FCA: examining the registration of first UK securitisation repositories

On 19 November 2021, the FCA announced that it has assessed completeness and has entered the examination stage in assessing the first applications received under the UK Securitisation Regulation (UKSR). As soon as one Securitisation Repository (SR) is registered, the obligation to report public securitisations within the scope of the UKSR to an SR that is registered and supervised by the FCA will apply. The FCA has 40 working days in which to examine the application for registration before the entity can be registered as an SR.

EBA and ESMA: consultation on draft guidelines on SREP under IFD

On 18 November 2021, the EBA and ESMA published on consultation paper on the joint guidelines on common methodologies and procedure for the supervisory review and evaluation process (SREP) under Article 45(2) of the Investment Firms Directive. The joint guidelines include the process and criteria for assessing the key elements of SREP, for example risks to capital and capital adequacy. It also introduces a scoring system to ensure consistency and comparison between investment firms and specifies common SREP procedures and methodologies which are proportionate to the varying sizes and business models of investment firms and their activities. 

The deadline for responses to the consultation is 18 February 2022, and a public meeting to discuss the draft guidelines will be held on 18 January 2022.

FCA: Market Watch

On 16 November 2021, the FCA published issue 68 of its newsletter on market conduct and transaction reporting issues – Market Watch. The issue highlighted key matters in relation web-based trading platforms:

  • Data challenges – there are issues in obtaining useable data in a format suitable for surveillance.
  • Market abuse surveillance – the FCA is concerned that web-based platform users are unable to monitor their orders to be able to sufficiently detect potential market abuse, particularly given the growing use of dark liquidity via pop-ups and web-based user interface portals.
  • Firm rationales for failings – the FCA is undertaking ongoing observation of the questionable justifications provided by firms to rationalise their potential failure to meet obligations under the UK Market Abuse Regulation, and the FCA will not accept compliance failings.
  • Compliance awareness and onboarding – some compliance teams lack knowledge of the platforms being used by office staff or the quantity of business being performed on the platforms. Firms should, when onboarding new platforms, consider how they will meet their record keeping obligations and market abuse surveillance.

FCA: rules for legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR

On 16 November 2021, the FCA confirmed that it will allow the temporary use of "synthetic" sterling and yen LIBOR rates in legacy LIBOR contracts (except cleared derivatives), which have not been amended at or before the end of 31 December 2021. The FCA will give a final form of the notice on 1 January 2022, which will take immediate effect after it is given to ICE Benchmark Administration Ltd and will be published on the FCA's website.

Additionally, the FCA published a draft notice, prohibiting the use of US dollar LIBOR in most new contracts written after 31 December 2021, a move which is supported by regulators in the US and globally. The FCA also told lenders who are replacing LIBOR in their contracts with an alternative rate to treat their customers fairly and communicate with borrowers in sufficient time to allow them to consider all options before LIBOR becomes unavailable.

European commission statement on clearing and UK CCP equivalence

On 10 November 2021, the European Commission released a statement announcing the Commission's proposed next steps for central clearing, including an intention to extend equivalence for UK-based central counterparties (CCPs). The Commission believes that over-reliance on UK CCPs for some clearing activities will create medium-term financial instability. To address potential short-term financial stability risk, the Commission will propose extending equivalence for UK-based CCPs in early 2022, which will be built on two pillars:

  • Supervision – the risks related to the EU increasing its capacity for central clearing should be appropriately managed, and the Commission must strengthen the EU's supervisory framework for CCPs.
  • Building domestic capacity – measures are needed to incentivise an expansion of central clearing activities in the EU to make it more attractive as a cost-efficient, competitive clearing hub. To achieve this, the Commission will consider ways to increase liquidity in EU CCPs and expand the range of clearing solutions available from EU infrastructures.

The current equivalence decision applies until 30 June 2022.

Funds and asset management

IA: principles of remuneration 2022

On 18 November 2021, the Investment Association (IA) published amendments to its principles of remuneration for 2022. In a letter to the chairs of remuneration committees of FTSE 350 companies, the IA outlines the key changes to the IA principles of remuneration since the November 2020 version, including the following key amendments:

  • The use of ESG-related measures – the IA stated that, as companies are incorporating management of material ESG risks into their long-term strategies and incentive plans, they should use quantifiable ESG metrics.
  • Executive pensions – investors expect new executive directors to be appointed on a pension contribution rate in line with the rate provided to the majority of the workforce of the company (noting that the IA stated that over 90% of FTSE 100 companies have already met its expectations with pension contribution alignment).
  • Value creation plans – value creation plans should only be used where there is a clear rationale suitable to the company's circumstances and must incorporate a limit on the total number of shares and valuable awards.

ECON adopts draft reports on use of KIDs under PRIIPs Regulation and UCITS Directive

On 10 November 2021, the European Parliament's Economic and Monetary Affairs Committee updated the following:

  • A webpage on the draft report on the proposal for a draft Regulation amending the PRIIPs Regulation, relating to the extension of the transitional arrangement for management companies, investment companies, and persons advising on (or selling) units of UCITS and non-UCITS. The draft Regulation was considered by the Parliament during its plenary session from 22 to 25 November 2021.
  • A webpage on the draft report on the proposal for a Directive amending the UCITS Directive, regarding the use of key information documents (KIDs) by UCITS management companies. The draft Regulation was considered by the Parliament during its plenary session from 22 to 25 November 2021. 

FCA: sustainability disclosure requirements and investment labels

On 3 November 2021, the FCA published a discussion paper on sustainability disclosure requirements (SDR) and investments labels, seeking initial views on SDR for asset managers and a new labelling system focused on sustainable investment products. The FCA is considering a three-tiered system to incorporate both labels and disclosures:

  • Product labels – a standardised product classification and labelling system to help consumers determine sustainability characteristics of products.
  • Disclosure layer 1 – consumer-facing product-level disclosures to provide standardised information on the product's main sustainability features.
  • Disclosure layer 2 – detailed disclosures made at entity and product level to provide granular and additional information.

Working alongside HM Treasury, the FCA is also considering how overseas funds marketing into the UK would be treated and is considering introducing requirements for financial advisors. The deadline for responses to the discussion paper is 7 January 2022, and the FCA plans to consult on policy proposals in Q2 2022. The FCA also announced it is establishing a Disclosures and Labels Advisory Group, which will meet regularly and provide the FCA with feedback and technical advice.

FCA: new authorised fund regime for investing in long-term assets

On 25 October 2021, the FCA published policy statement PS21/14 on a new authorised fund regime for investing in long-term assets, designed to enable open-ended funds to invest in long-term illiquid assets such as venture capital and private equity (long-term asset funds). During the FCA's consultation period, some respondents argued that its proposed rules would be ineffective in some areas. Therefore the FCA has made changes to the rules in relation to areas such as investing in loans and second schemes, and the promotion of non-mainstream pooled investments to enable long-term asset funds to be promoted to high-net worth investors.

The FCA considers that its new rules, which embed longer redemption periods and high levels of disclosure and governance features, will provide sufficient investor protection, and allow defined contribution pension schemes to invest in long-term asset funds. The text of the instrument making the Handbook changes came into force on 15 November 2021. The FCA plans to consult in the first half of 2022 to determine whether it should allow a wider range of customers to invest in long-term asset funds in a controlled way.

Investigations and enforcement

FCA: fines second firm for cum-ex trading AML systems and controls failings

On 12 November 2021, the FCA published the final notice as issued to Sunrise Brokers LLP, fining it £642,400 for insufficient anti-money laundering systems and controls between February and November 2015. During the relevant period, Sunrise executed purported OTC equity cum-dividend trades to the value of approximately £25.4 billion in Danish equities and £11.2 billion in Belgian equities, receiving a commission of £466,652. In both instances, Sunrise failed to identify or escalate any potential financial crime suspicions when it should have done . After agreeing to resolve all issues of fact and liability, Sunrise qualified for a 30% discount under the FCA's settlement procedures.

Government launches London Capital & Finance compensation scheme

On 3 November 2021, the government published a webpage announcing it has launched the compensation scheme for investors of London Capital & Finance plc. The Financial Services Compensation Scheme will administer the scheme on HM Treasury's behalf.

Complaints Commissioner recommends FCA clarify complaints process

On 2 November 2021, the Office of the Complaints Commissioner published a final report (dated 11 October 2021) relating to a complaint focused on the FCA's oversight of a regulated firms. Although the Commissioner did not uphold the complaint, he found that the FCA could do more to clarify the position for complainants pursuing their case through either the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS), recommending that:

  • The FCA change their website (which states that it cannot consider complaints against the firms it regulates) and clarify that it can investigate concerns arising from information about individual complains.
  • The FCA's website is updated to clarify that complaints can be simultaneously pursued against the FCA, PRA, FOS and FSCS.
  • When the FOS or FSCS refers complaints to the FCA or FRA, such complaints are not deemed out of time.
Prevention of economic crime

HMT: report on anti-money laundering and counter-terrorist finance

On 19 November 2021, HM Treasury published its ninth annual report on anti-money laundering (AML) and counter-terrorist financing (CTF) supervision. The report provides information about the performance of AML and CTF supervisors between April 2019 and April 2020, including both supervisory and enforcement data on statutory and professional body supervisors. The report concludes that, in the relevant period, actions taken by supervisors remained broadly consistent with the previous reporting period, however there is still more work to be done to achieve greater consistency in this area. HMT plans to continue its work with supervisors to increase the progress made so far, adding to its work alongside supervisors to improve transparency and accountability in supervision. 

Money Laundering and Terrorist Financing (No 3) (High-Risk Countries) Regulations 2021 made

On 1 November 2021, the Money Laundering and Terrorist Financing (No 3) (High-Risk countries) Regulations were made, coming into force on 2 November 2021. The regulations substitute the list of high-risk third countries previously inserted into the Regulations with an updated list, resulting in Botswana and Mauritius no longer being classed as high-risk countries for the purposes of enhanced customer due diligence requirements. Jordan, Mali, and Turkey are no w classed as high-risk countries for enhanced customer due diligence purposes.

HMT: advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions

On 28 October 2021, HM Treasury updated its advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions, replacing all previous noticed issued by it on the subject. The notice follows two statements from the Financial Action Task Force on 21 October 2021, which identified jurisdictions with strategic deficiencies in their anti-money laundering and counter-terrorist finance regimes. The advisory notice identifies countries such as Panama, the Cayman Islands, and Barbados as countries for which appropriate actions should be taken to minimise the risks, potentially including enhanced due diligence in high-risk situations.

FSR trivia

As at 12 November 2021, what is the amount of total fines issued by the FCA for the calendar year ending 2021?

  • £189,028,382
  • £239,045,800
  • £721,050,020
  • £642,400,789

The answer to last month's trivia question: the approximate value of the cryptoassets market as at October 2021 was $2.3 trillion.

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