3 February 2022
Financial services update – 10 of 35 Insights
Featured in this month's update:
On 25 January, the FCA published a guidance consultation (GC22/1) on its approach to firms that are proposing compromises in relation to liabilities. Compromises are arrangements that enable a firm to settle its liabilities with creditors and/or shareholders.
The FCA has made clear that compromises that unfairly benefit a firm and its other stakeholders at the expenses of consumers are unacceptable. It will not hesitate to use its regulatory tools in respect of the firm/senior management if it is appropriate to do so.
The consultation includes a number of illustrative examples of how the FCA would consider compromises proposed by firms.
The consultation is open until 1 March 2022.
On 19 January 2022, the FCA published a consultation paper (CP22/2) on strengthening its financial promotion rules relating to high-risk investments and firms approving financial promotions. The proposals in the consultation paper mainly relate to financial promotions for high-risk investments, which include investment-based crowdfunding and peer-to-peer agreements. The rules will also include cryptoassets when they are brought within the financial promotion regime – see the Cryptoassets section below.
The proposals focus on the following key areas:
The consultation closes on 23 March 2022. The FCA intends to publish its final rules in the summer of 2022. It proposes to give firms 3 months from when it publishes its final rules to comply with the new requirements for the consumer journey and the new requirements for firms approving the financial promotions of unauthorised firms.
On 18 January, the FCA published a new webpage outlining its approach to firms in the temporary permissions regime (TPR) that do not meet its expectations. The FCA aims to ensure that, where relevant, firms cannot extend their UK business whilst operating in the TPR. Further, if firms do not voluntarily leave the TPR, the FCA may take action to remove them, potentially resulting in the FCA contacting a firm's home state regulator and issuing a final notice in the UK. Firms may avoid these actions if they voluntarily apply to cancel their temporary permission entirely and, where eligible, enter the supervised run-off mechanism within the financial services contracts regime.
On 12 January 2022, the Financial Services Compensation Scheme (FSCS) published its 2022/23 budget update, including its anticipated running costs. The proposed FSCS budget for 2022/23 is £95.5 million, a £5 million increase on the budget announced in January 2021. Among others, reasons for the increase include the increasing numbers of time-consuming and complex claims requiring expertise to process. The FSCS announced its expectation to end the 2021/22 financial year below its previously announced budget by £5.2 million.
On 12 January 2022, the FCA and PRA published a joint consultation paper on the 2022/23 management expenses levy limit (MELL) for the Financial Services Compensation Scheme (FSCS). Under the Financial Services and Markets Act 2000, the PRA and FCA set a limit for the total management expenses the FSCS can levy on firms, with the MELL being the maximum amount the FSCS can levy for operating costs in a year without further consultation.
For 2022/23, the proposed MELL is £110.5 million, consisting of a £95.5 million management expenses budget and an unlevied contingency reserve of £15 million. The proposed MELL will apply from 1 April 2022 until 31 March 2023. The deadline for responses to the consultation paper is 14 February 2022, ahead of the final rules being in place by 1 April 2022.
On 10 January 2022, the FCA released a policy statement (PS22/1) containing the new structure for authorisation application fees. The new structure went live on 24 January 2022, but further work needs to be completed by the FCA before it can introduce the new £250 charge for stand-alone Form A applications under the senior managers regime and controlled functions for appointed representatives. Key elements of the new structure include:
On 18 January, HMT confirmed that the promotion of certain "qualifying assets" will be brought within the scope of the UK financial promotion regime. For further detail, please read our special alert.
On 11 January 2022, the International Monetary Fund (IMF) published a blog post examining how cryptoassets have developed from an obscure asset class into an integral element of the digital asset landscape, resulting in financial stability concerns. The IMF's research illustrates that the correlation of cryptoassets with traditional holdings, such as stocks, has significantly increased. This leads to a limitation of perceived risk diversification benefits, as well as raising the risk of contagion between financial markets.
On 17 December 2021, the Futures Industry Association (FIA) released an article discussing the growing number of regulated markets for crypto derivatives in the US. The article noted that the CME Group has maintained its leadership position since 2018 in its offering of a fully regulated marketplace for bitcoin futures. However, its position is now being challenged by two market operators moving into the space through acquisitions. This has resulted in an increased choice of marketplace for US fund managers, and other institutional investors wanting exposure in a regulated crypto environment.
On 18 January 2022, Invest Europe announced its plans for develop reporting standards for ESG reporting in private equity and venture capital firms. This standardisation would bring harmonisation and transparency to ESG reporting which is essential to both investors and regulators. The reporting standards will be established by summer 2022.
On 5 January 2022, the International Capital Market Association (ICMA) published its analysis of the amendments to the Regulation on European green bonds as proposed on 2 December 2021. In the ICMA's opinion, by adding new requirements for bonds and proposing it become mandatory for all green bonds between 2025 and 2028, the proposed amendments illustrate a "fundamental shift" from the European Commission's proposal. The ICMA intend to regulate the entire European sustainable bond market through the European green bonds Regulation and introduce mandatory requirements for all sustainable bonds.
On 21 December 2021, the FCA published a Technical Note on disclosures in relation to ESG matters, such as climate change. The note also includes specific requirements and obligations included in retained EU law and how they apply to ESG issues. The FCA also considers that while a wide range of factors can affect the prospects of a company, climate-related risks and opportunities are financially material and, therefore, may need to be disclosed. Furthermore, the FCA notes that disclosure obligations arise under the Listing Rules, Disclosure Guidance and Transparency Rules, and UK MAR in relation to announcements and financial reporting, and on an event-driven basis.
On 17 January 2022, the BoE published an updated webpage on the real-time gross settlement (RTGS) renewal programme. The BoE also announced a revised implementation timetable following a review in late 2021 and incorporating feedback from CHAPS direct participants. The BoE plans to launch a test simulator in February 2022 and will launch a new, end-to-end enhanced ISO 20022-enabled CHAPS pilot platform in summer 2022.
This new timeline upholds the move to enhanced ISO 20022 messaging in spring 2023, now undertaken in a single stage in April 2023 as opposed to a two-stage process. The new RTGS core settlement engine will be introduced in spring 2023, rather than autumn 2023. As part of the wider RTGS renewal programme, the BoE will launch two consultations in spring 2022, seeking views on how RTGS can support the future of payments once the new core settlement engine has been delivered in 2024, and propose the framework for the new RTGS/CHAPS tariff.
On 13 January 2022, the House of Lords Economic Affairs Committee published a report on the potential introduction of a UK retail central bank digital currency (CBDC). The BoE and HMT established a CBDC taskforce in April 2021, followed by an announcement in November 2021 of their intention to consult on their assessment of the case for a UK CBDC in 2022. In the CBDC report, the committee:
On 13 January 2022, the PSR published its strategy for the next five years, setting out its four strategic outcomes and its plans for achieving each one. The strategic outcomes are:
The PSR also outlined four strategic priorities intended to achieve the above outcomes:
Following a consultation in 2021, the PSR made a number of changes to its proposed strategy, including clarifications on how the PSR intends to measure whether it is achieving its strategy.
On 5 January 2022, the FCA updated its webpage on cancelling a temporary permission to provide information for payment services and e-money services firms in both the temporary permissions regime (TPR) or the supervised run-off (SRO) regime. The FCA also published notification forms for TPR/SRO cancellation and TPR to SRO notification.
On 18 January 2022, the FCA published a new webpage on its borrowers in financial difficulty project. The project launched in March 2021, aiming to ensure firms offering a range of retail lending products to support borrowers in financial difficulty. Due to the ongoing impact of COVID-19, the FCA believes that the tailored support guidance continues to provide an adequate framework for lenders to support borrowers in financial difficulty.
The FCA provided its interim findings from the project, focusing on topics such as fees and charges, debt advice, and fair treatment of vulnerable customers. The FCA may further update the webpage after it has analysed all the survey results and plans to publish its findings in the second half of 2022.
On 14 January 2022, the EBA published a letter, dated 20 December 2021, from John Berrigan (European Commission Director General of FISMA) to José Manuel Campa (EBA Chair), alongside a call for advice regarding the Commission's review of the Mortgage Credit Directive. The Commission requires advice from the EBA on a range of issues, including:
The EBA's advice is requested by 30 June 2022.
On 20 January 2022, the FCA published a final report and annexes on its review of retail banking business models, after considering developments and trends in retail banking since 2015. The FCA's analysis is based on detailed financial information, data, and documents from deposit-taking institutions, such as the largest banks and building societies. The key findings of the report included:
The FCA has published a webpage to summarise its next steps, which include the fact that the full impact of COVID-19 will take time to fully understand. In the short-term, the FCA will be discussing the report with firms and consumer organisations and is allowing stakeholders to send written submissions by 31 March 2022.
On 12 January, the PRA issued 'Dear CEO' letters on 2022 priorities for its supervision of the following groups:
Each letter focuses on similar themes including resilience, diversity, and climate change. The PRA also considers the increasing importance of data for its regulatory supervision and outlines its expectations for all firms to ensure the integrity of their regulatory returns.
On 12 January 2022, the PRA published a policy statement on its updated approach to insurance business transfers under the Financial Services and Markets Act 2000 and the Friendly Societies Act 1992. After consideration of the responses to its July 2021 consultation paper, the PRA made minor amendments to the statement of policy on its approach to insurance business transfers, including:
On 17 January 2022, HMT published a consultation paper on a revised regulatory framework for central counterparties (CCPs) and central securities depositories (CSDs) as part of its ongoing Future Regulatory Framework (FRF) review. The BoE is responsible for the recognition and supervision of UK CCPs and CSDs and, as part of the FRF review, HMT plans to extend the regulatory responsibilities of the BoE. The consultation focuses on various aspects of the BoE's future role:
The deadline for responses is 28 February 2022.
On 13 January 2022, the FCA published a new webpage on the MIFIDPRU Remuneration Code, which applies to all MIFIDPRU investment firms in performance periods starting on or after 1 January 2022. The FCA also published, in relation to the Code, a remuneration policy statement template and table of material risk takers.
On 13 January 2022, the FCA published a statement explaining that it is implementing temporary measures for reporting the short selling indicator in transition reports while it reviews amendments to the UK transaction reporting regime. Presently, the FCA is in the early stages of considering policy options for the UK MiFIR transaction reporting regime. Until the future of the short selling indicator field is determined, the FCA confirmed that it will not take action against firms who do not yet meet the requirements. It plans to keep its position under review.
On 11 January 2022, the FCA published a feedback statement (FS22/1) on accessing and using financial markets wholesale data and announced its intentions to launch two market studies in response to findings of limited competition in markets for benchmarks, indices, credit ratings, and trading data. The market studies will cover:
The FCA also announced that it will gather data on competition in the market for wholesale trading data supplied by trading venues, and plans to publish its findings later in 2022.
On 20 January 2022, in a press release, ESMA announced the launch of its common supervisory action (CSA) with national competent authorities (NCAs) regarding the value of UCITS and open-ended alternative investment funds across the EU. The CSA will be carried out in 2022 and will determine how compliant the supervised entities are with the relevant valuation-related provisions in the UCITS and AIFMD frameworks. The CSA aims to achieve effective supervision of valuation methodologies, policies, and procedures of supervised entities, which will ensure that assets which are less liquid are valued fairly during both normal and stressed market conditions.
On 4 January 2022, the International Organisation of Securities Commissions (IOSCO) published its Investment Funds Statistics Report, detailing the potential systemic risks the global investment funds industry may pose to the international financial system. The IOSCO report utilises supervisory data from IOSCO members and, in the future, will be undertaken annually to ensure the regular collection and analysis of investment fund data. Key takeaways from the report include:
On 4 January 2022, the European Securities and Markets Authority (ESMA) published a letter, addressed to the director general for financial stability, financial markets, and capital markets union, regarding the Commission's request for support from ESMA in relation to the report on reverse solicitation. In particular, the letter requested ESMA ask NCAs for input on questions concerning the use of reverse solicitation by asset managers and the impact on passporting activities.
ESMA surveyed NCAs, inviting them to respond to such questions, and found that almost all NCAs have no readily available information on asset managers' or investor associations' use of reverse solicitation. Interestingly, some NCAs provided information on the extent to which reverse solicitation is used within their jurisdiction which enables ESMA to share anecdotal evidence. For example, the Cyprus Securities and Exchange Commission reported that 30% of the UCITS management companies, and 50% of AIFMs, established in Cyprus use reverse solicitation.
In terms of next steps following these findings, ESMA confirmed that the extension of the notification portal to enable the exchange of notifications of cross-border marketing between NCAs has been proposed for prioritisation in the 2022 ESMA budget.
On 18 January 2022, the PSR announced that it had imposed fines of £3 million against Mastercard, allpay, Advanced Payment Solutions (APS), Prepaid Financial Services (PFS) and Sulion for anti-competitive behaviour by agreeing not to compete or take each other's clients. The PSR's investigations into the parties' behaviour related to the use of pre-paid cards by local authorities to provide welfare payments to vulnerable customers, including the homeless, victims of domestic violence, and asylum seekers.
The PSR found two market cartels operating from 2012 to 2018 and from 2014 to 2016. The PSR also noted that the parties entered into a settlement agreement, with Mastercard, allpay, and PFS receiving a 20% discount for entering the settlement prior to the statement of objections. APS and Sulion received a 10% discount for settling after the statement of objections.
On 10 January 2022, the FCA published a letter from Nikhil Rathi (FCA Chief Executive) to Mel Stride (House of Commons Treasury Committee Chair), giving an update on the FCA's investigation into the LF Woodford Equity Income Fund (WEIF).
The letter contained the following key points:
In a letter of response to Mr Rathi, dated 10 January 2022, Mr Stride emphasised that the investigation is still of 'keen interest' to the committee, and he expects the FCA to use its resources to ensure as swift as possible a conclusion (and keep the committee updated on progress).
On 7 January 2022, the FCA published a press release to announce that it has issued criminal proceedings against two individuals for: fraud by false representation, fraud by abuse of position, and converting criminal property. The FCA alleges that the individuals dishonestly represented to investors that the company of which they were directors was authorised and regulated by the FCA to operate as a peer-to-peer lender. It also alleges that the individuals abused their positions by transferring funds to a separate company and transferring additional funds that they knew, or suspected, were proceeds of crime into a bank account belonging to one of the individuals. The charged individuals appeared before court on 26 January 2022, and the case is expected to continue on 23 February 2022.
On 17 January 2022, the EBA released a discussion paper on its preliminary observations on selected payment fraud data under the revised PSD2. The discussion paper outlines the main findings regarding credit transfers, card-based payments, and cash withdrawals. Additionally, it includes other patterns which appear inconclusive, and require stakeholder comments and views. Some such patterns imply that the regulatory requirements for payment security are working as intended. Furthermore, the analysis shows that fraud is significantly higher for cross-border transactions where the counterparts are located outside the European Economic Area than for those inside it (which is a known pattern of payment fraud). Comments can be made on the discussion paper until 19 April 2022.
On 7 January 2022, the European Commission adopted a Delegated Regulation amending the list of high-risk third countries with strategic anti-money laundering (AML) and counter-terrorist financing (CTF) deficiencies. The amendments are as follows:
The Delegated Regulation outlines the actions being taken by Turkey to address the deficiencies in its AML and CTF regime, but the Commission has decided not to adopt further measures with respect of Turkey presently. The Regulation will be submitted to the Council of the EU and the Parliament to consider for approval and, if neither object, will enter into force 20 days after it is published in the Official Journal of the European Union.
On 5 January 2022, the EBA released a document containing its opinion on de-risking and a report on de-risking and its impact on financial services. De-risking occurs when financial institutions decide not to provide services to categories of customers who are associated with higher money laundering or terrorism financing (ML/TF) risk. In the opinion the EBA outlines proposals for steps to address the issue of de-risking, including:
The EBA intends to follow up with competent authorities on the steps taken to address unwarranted de-risking to inform its next opinion on the issues with ML/TF, due to be released in 2023.
The FCA's new authorisation application fee structure has how many standard pricing categories?
The answer to last month's trivia: the FCA's court action to resolve business interruption insurance claims resulted in over £1.2 billion being paid to businesses.
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