2 November 2022
Financial services update – 5 of 39 Insights
In this month's update:
On 18 October 2022, the FCA published an update summarising the progress it has made in delivering its consumer investments strategy, which it launched in September 2011. The strategy set out four outcomes relating to mainstream investments, high risk investments, scams and fraud and consumer redress. The update reports that three outcome metrics have declined and one is at risk of falling. Given the time it takes to implement and see the impact of its interventions, the FCA does not necessarily expect to see improvements in these long-term outcomes in the first year of the strategy.
In addition to setting out the work that is impacting the market and that will impact the market over the next year, the update outlines future workstreams, which will include:
Alongside the update, the FCA has published its fourth consumer investments data review, which shows its activities to protect consumers from high-risk investment harm for the period 1 April 2021 to 31 March 2022. To date these reviews have been published every six months. The FCA will now publish its consumer investments data review annually; the next review will therefore be published in summer 2023.
On 18 October 2022, the European Commission published a communication (COM(2022) 548 final) outlining its work programme for 2023, which was accompanied by a series of annexes describing its key actions for next year.
Annex I sets out 43 new Commission initiatives, which include an initiative for an open finance framework and an initiative to revise the Payment Services Directive ((EU) 2015/2366) (PSD) to support innovation whilst ensuring safer use of online payment services and better protecting users against abuse and fraud. A legislative proposal is expected in Q2 2023.
Annex III sets out priority pending proposals in 116 areas in relation to which the Commission wants the Parliament and the Council to take swift action. These include the following proposals relating to the financial services sector:
On 12 October 2022, the FCA held its 2022 annual public meeting. In his opening remarks, Richard Lloyd, interim chair, discussed:
Nikhil Rathi, the Chief Executive, used his speech to refer to the FCA's recent work regarding the Ukraine invasion and the energy crisis and the recent repricing of gilts. He also spoke about the FCA's transformation programme and its work to enhance the authorisation process.
On 10 October 2022, the FCA published an update on its operating service metrics for authorisation timelines, setting out the FCA's progress on service standards for authorisations case work, and the FCA's strategy for closing any gaps. The update discussed:
New FCA webpage for firms on Consumer Duty
On 5 October 2022, the FCA published a new webpage on its Consumer Duty. The webpage discusses:
On 3 October 2022, the FCA published a consultation paper (CP22/19) setting out proposals for the creation of a baseline financial resilience regulatory return, which will be referred to as FIN073.
Under its proposals, firms will be required:
The deadline for responses is 2 December 2022. The FCA will publish a policy statement and final rules in spring 2023 and aims to launch FIN073 in the second half of 2023.
On 25 October 2022, the FCA published a discussion paper (DP22/5), in which it seeks views on the potential competition benefits and harms from the entry of BigTech into four essential retail sectors: payments, deposit taking, consumer credit and insurance.
The FCA is not proposing any regulatory or policy changes at this stage. Rather the aim of the discussion paper is to stimulate a discussion among stakeholders that will inform the FCA's regulatory approach to BigTech firms as part of the new UK pro-competitive regime for digital markets.
The discussion period ends on 15 January 2023. The FCA expects to publish a feedback statement in the first half of 2023.
To support the release of the Discussion Paper, the FCA is hosting two events: an expert panel on 28 November and in-person sector-focused roundtables on 6 and 7 December.
On 12 October 2022, the Bank of England (BoE) published the financial policy summary and record (FPSR) of the meeting of its Financial Policy Committee (FPC) on 30 September 2022, which noted with regards to cryptoassets that where crypto technology is performing an equivalent economic function to one performed in the traditional financial sector, this should take place within existing regulatory arrangements and the regulatory perimeter should be adapted as required. In the light of the provisions in the Financial Services and Markets Bill 2022/3 on stablecoins, the BoE will publish a consultation on a regulatory framework for systemic stablecoins.
The FPC's next policy meeting will take place on 28 November 2022. A record of the meeting will be published on 13 December 2022.
On 11 October 2022, the Financial Stability Board (FSB) published a proposed framework for the international regulation of cryptoasset activities, consisting of a consultation on:
The proposed recommendations regarding cryptoassets activities and markets relate to:
Comments can be made until 15 December 2022 and the FSB will finalise the recommendations by mid-2023 and review progress in the implementation of the recommendations by the end of 2025.
On 11 October 2022, the BoE, FCA and PRA published a discussion paper on the use of AI and machine learning in financial services, which discussed the following:
Comments can be made on the discussion paper until 10 February 2023.
On 5 October 2022, the Council of the EU published an information note attaching a letter sent to the Chair of the European Parliament Economic and Monetary Affairs Committee (ECON) relating to the proposed Regulation on markets in cryptoassets (MiCA) (2020/0265(COD)).
Following informal negotiations between the Council, the Parliament and the European Commission, a draft overall compromise package has been agreed by the Council's Permanent Representative Committee. On 10 October 2022, ECON approved the provisional deal. The text of the draft Regulation will now be subject to a plenary vote of the Parliament, which is scheduled for later this month. Once the text has been translated into the official EU languages, it will be published in the Official Journal.
On 25 October 2022, the FCA published a consultation paper (CP22/20) on sustainability disclosure requirements (SDR) and investment labels.
The consultation paper takes into account the feedback the FCA received to its November 2021 discussion paper (see our December 2021 FSR update), the recommendations of the Disclosures and Labels Advisory Group and consumer behavioural research.
CP22/20 focuses on funds and portfolio management in the UK. The FCA intends to consult separately in due course on how its proposals may be applied to overseas funds.
The key policy proposals in the consultation paper are:
Annex 1 of the consultation paper considers the relationship between the UK's proposed regime and the provisions of the EU SFDR, and the US SEC's proposals. The FCA notes that the starting point for its regime is different from both SFDR and the SEC's proposals in that the UK regime is designed as a labelling regime.
Comments on the consultation paper should be made by 25 January 2023. The FCA aims to finalise its rules and publish a policy statement by the end the first half of 2023. It intends to build on the proposals over time to respond to domestic, international and market developments.
On 19 October 2022, the ASA banned two adverts for HSBC for breaching the CAP Code rules on misleading advertising and environmental claims, stating that:
The ASA ruled that consumers would be misled by these greenwashing statements as consumers would not understand the complexity of transitioning to net zero nor expect HSBC to simultaneously be financing businesses which significantly contribute to greenhouse gas emissions. Therefore, the adverts breached Section 3 (Misleading Advertising) of the CAP Code and Section 11 (Environmental Claims).
This ruling highlights the ASA's strict approach to environmental claims.
On 13 October 2022, the Task Force on Climate-related Financial Disclosures (TCFD) published its fifth TCFD status report. It found that:
However, the report highlights that more progress is needed. The TCFD will prepare another status report in October 2023, as requested by the FSB.
On 7 October 2022, the Green Technical Advisory Group (GTAG) published a report containing its advice on the development of a UK green taxonomy. In summary:
On 11 October 2022, the Payment Systems Regulator (PSR) published a policy statement (CP22/3) on extending the requirements for participation in the Confirmation of Payee (CoP) service to around a further 400 PSPs. The aim of the extension is to help reduce APP fraud and accidentally misdirected payments.
The PSR has identified two groups of PSPs that need to implement the system:
The PSR has prioritised Group 1 because of the capabilities size of the financial firms and because adopting CoP quickly in these firms is likely to have an immediate impact on preventing APP scams overall and increase the likelihood of CoP coverage from 92% of Faster Payments transactions to 99%.
The FSB published a note on 10 October 2022, setting out the priorities for its next phase of work under the G20 roadmap for enhancing cross-border payments (roadmap).
The FSB, together with the Committee on Payments and Market Infrastructures (CPMI) will prioritise future work on the roadmap based on three themes that will focus on:
The FSB will incorporate the actions into an updated roadmap, which it will provide to the first G20 Finance Ministers and Central Bank Governors meeting in 2023.
On 6 October 2022, the PSR published a policy statement (PS22/2) setting out its final decision on remedies for the card-acquiring market review.
In November 2021, there was a market review which found that the market did not work well for merchants with annual card turnover below £50 million. The PSR consulted on initial remedies in January 2022 and consulted on its provisional decision on remedies to address its concerns in June 2022.
The PSR is mandating the following remedies:
On 29 September 2022, the PSR published a consultation paper (CP22/4) on mandatory reimbursement and cost allocation for authorised push payment (APP) scams. Its proposals relate to measures to require reimbursement for APP scams, improve the level of protection for APP scam victims and to incentivise payment service providers (PSPs) to prevent such scams.
The PSR proposes requiring all PSPs sending payments over Faster Payments to fully reimburse APP scam victims, with the only exceptions being when the consumer is involved in the fraud themselves, or where they have acted with gross negligence.
The sending PSP will have to reimburse the victim no more than 48 hours from the fraud being reported.
PSPs would be allowed to set a minimum threshold for a reimbursement claim (of no more than £100), to apply an excess (of no more than £35) and to set a time limit for claims (of no less than 13 months).
In regard to allocating the costs of reimbursement, the current position is that sending PSPs pick up over 95% of the costs of reimbursement under the Contingent Reimbursement Model Code. This gives receiving PSPs little incentive to prevent fraud. The PSR therefore proposes to allocate the costs of reimbursement equally between sending and receiving PSPs. However, PSPs may use a dispute management process to adjust the allocation, to better reflect the steps each PSP took to prevent the scam.
Pay.UK would be charged with making, maintaining and enforcing payment system rules to protect consumers and prevent fraud.
The consultation will close on 25 November 2022 and the PSR will set out its next steps in the first half of 2023.
The FCA published a statement on 14 October 2022, announcing that it had approved a request by Amigo Loans Ltd to start lending again, however this time on a trial basis to enable it to test its updated policies and procedures in a controlled environment and to show that its new systems and controls meet its expectations and deliver good outcomes for consumers. The FCA also published the letter it had sent the firm.
In May 2022, the FCA published a statement relating to a proposed scheme of arrangement concerning Amigo Loans, confirming that the High Court had approved the scheme of arrangement, the purpose of which is to provide redress to customers in respect of mis-sold loans.
As reported above, on 12 October 2022, the BoE published the financial policy summary and record (FPSR) of the meeting of its Financial Policy Committee (FPC) held on 30 September 2022. The FPC referred to the removal of mortgage products following recent market volatility noting that this is likely to be temporary. It stated that the FCA had contacted UK lenders to ensure options were available for borrowers once their fixed rates ended. The FPC considers it too soon to assess the impact of the withdrawal of its affordability test recommendation in August 2022.
The FCA published a portfolio letter on 6 October 2022, setting out its supervisory strategy for the next three years for firms providing high-cost lending products. These include:
On 17 October 2022, HM Treasury and BoE Energy Markets Financing Scheme (EMFS) opened for applications to support energy firms of good credit and Ofgem-licensed in the UK from the volatility triggered by the Ukraine crisis by supplying government-backed guarantees to secure commercial financing and meet large margin calls from energy price volatility, whilst they are suffering from poor liquidity.
The Scheme opened to applications on 17 October 2022 and closes at noon on 27 January 2023. Following the approval process, a 100% guarantee will be issued to commercial banks on additional lending for approved firms. Whilst using the scheme, energy firms will be required to comply with a set of policy conditions, such as restrictions on the use of funds, executive pay, and capital distributions. State-owned firms and energy firms owned by financial institutions and commodity trading houses will not be eligible for the scheme.
On 19 October 2022, the PRA made a statement on the EMFS, with observations on the capital requirements relating to firms’ exposures under the scheme, particularly eligibility for recognition as unfunded credit risk mitigation under the UK Capital Requirements Regulation (UK CRR).
Firms should evaluate exposures against the relevant articles of the UK CRR, and any relevant PRA rules and expectations, including expectations set out in supervisory statement SS17/13, credit risk mitigation, and seek independent advice to confirm that all the applicable requirements and expectations have been satisfied.
On 17 October 2022, the Lending Standards Board (LSB) published a report entitled "Inclusion in Business Banking and Credit: disability and other access needs," in which it set out the findings of its engagement with various disability group representatives and business owners to understand where there could be room for improvement in how products and services are accessed. The report discussed:
On 4 October 2022, the FCA published a new webpage setting out the findings from its multi-firm review of how firms have handled business interruption (BI) insurance claims following the January 2021 Supreme Court judgment on the BI test case (FCA v Arch Insurance (UK) Ltd and others  UKSC 1).
The FCA identified some good practices that include insurers paying out interim payments promptly, reallocating resources quickly and proactively communicating with policyholders to help them with claims following the test case. However, the FCA also found areas where firms did not meet its requirements regarding treating customer fairly in the claims journey. Areas identified included:
Firms not accurately identifying vulnerable customers or taking an inconsistent approach in dealing with the needs of vulnerable customers.
The FCA encourages firms and their senior managers to review their claims processes and procedures and outsourcing arrangements, to ensure they remain effective in mitigating the risk of customer harm.
On 12 October 2022, the International Organization of Securities Commissions (IOSCO) published a final report on retail distribution and digitalisation. IOSCO has analysed developments in online marketing and distribution of financial services and products to retail investors in member jurisdictions, both domestically and on a cross-border basis. It suggests the following measures to assist IOSCO members in adapting their regulatory and enforcement approaches to meet the growing challenges posed by rapidly evolving digitalisation and online activities:
On 10 October 2022, ESMA published its Strategy for 2023-2028, which is structured around the following key areas:
resilience for the financial sector.
On 27 October 2022, ESMA announced an update to it strategy. Its Union strategic supervisory priorities will now include ESG disclosures alongside market data quality.
On 14 October 2022, the International Organization of Securities Commissions (IOSCO) published a survey on index providers for industry participants involved in asset management and in the provision of indices. The survey also included questions in the following areas:
The deadline for responses is 26 November 2022.
The Administrative Court has refused a renewal application and an amendment application, made by Charles Street Securities Europe LLP (CSSE), for judicial review of a jurisdictional decision issued by a FOS ombudsman in February 2021.
In the decision, the FOS ombudsman needed to establish whether CSS Partners LLP (CSSP), CSSE's appointed representative, had, in 2006, correctly classified the complainant as an intermediate customer and whether that classification was on the basis of the complainant's experience and understanding. If so, the complainant would be regarded as an elective professional client and therefore ineligible to complain to the FOS. The ombudsman found that CSSP had:
Accordingly, the complainant was not correctly categorised as an intermediate customer by CSSP, thus under a transitional rule did not become an elective professional client and therefore was an eligible complainant, meaning the ombudsman had jurisdiction over the complaint.
CSSE sought to renew its application for permission to judicially review the decision on three grounds. In the amendment application, it submitted that the ombudsman applied the wrong test in deciding whether the complainant was eligible.
Murray J concluded that none of the renewal application grounds were arguable. He stated that they amounted to a challenge to the ombudsman's factual assessment, but that this, as the basis for the decision, was a matter for the ombudsman.
On 20 October 2022, the PRA published a final notice it has issued to MS Amlin Underwriting Ltd (MSAUL), a mixed activity insurance holding company for the purposes of the Solvency II Directive (2009/138/EC), fining it £9,695,000.
Between 1 September 2014 and 31 December 2019, the PRA found that MSAUL breached Fundamental Rule 5 of the PRA Rulebook, which requires firms to have effective risk strategies and risk management systems and Fundamental Rule 6 of the PRA Rulebook, which requires firms to organise and control their affairs responsibly and effectively. The PRA found that MSAUL failed to:
On 14 October 2022, the FCA published the decision notice it has issued to Gatehouse Bank plc, fining it £1,584,100 (after qualifying for a 30% discount) for AML controls failings relating to customers based in countries with a higher risk of money laundering and terrorist financing. Gatehouse offered services that focused on real estate, including offering Shariah-compliant investments in real estate to investors, Shariah-compliant financing for real estate transactions as well as banking and wealth management facilities to its customers. Its customers and investors primarily originated from jurisdictions that posed a higher money laundering risk, some of whom were politically exposed persons.
The FCA found that between June 2014 to July 2017, Gatehouse breached regulations 7(1) to (3), 8(1), 8(3), 14(1), 14(4) and 20(1) of the Money Laundering Regulations 2007 (SI 2007/2157) (MLRs 2007) in respect of the following failings:
The FCA also noted an occasion when Gatehouse had established an account for a Kuwait company to aggregate customer funds without requiring the company to collect information about the source of customers' funds or wealth, leading it to accepting USD 62,000,000 into the account without scrutinising the funds for money laundering risk.
The FCA states that Gatehouse has taken steps to remedy the deficiencies in its AML controls, by:
On 6 October 2022, the FCA published the final notice issued to Sigma Broking Ltd fining it £531,600 for not reporting or not reporting accurately 56,000 contracts for difference (CFD) transactions. Sigma also failed to identify 97 suspicious transactions or orders that it should have reported to the FCA.
In addition, the FCA published the:
In the period from 1 December 2014 to 12 August 2016, the FCA found that Sigma:
It also found that the directors breached FCA Statement of Principle 7, which requires an approved person performing an accountable higher management function to take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system.
The FSB published a consultative document on achieving greater convergence in cyber incident reporting (CIR) on 17 October 2022, which covered the following:
The FSB would like feedback by 31 December 2022.
On 13 October 2022, the Economic Crime and Corporate Transparency Bill (the Bill) had its second reading. The Bill is now at Committee stage.
On 13 October 2022, UK Finance published its half yearly fraud report covering the first half of 2022 (H1 2022). The report notes that more than £609.8 million was stolen by criminals through authorised and unauthorised fraud in H1 2022, down 13% compared to the same period in 2021 due to H1 2021 being unusually affected by a high level of fraud. It observes that during the H1 2022 criminals have focused on "socially engineering" their victims, which is commonly achieved through authorised push payment fraud and involves the fraudster's use of deception and impersonation scams to get the victim to authorise a payment to an account under the control of the fraudster. UK Finance reiterates calls for cross-sector action to target the criminals responsible.
According to the FCA's one year update on its Consumer Investments Strategy, in 2021/22 it opened 2,724 supervisory cases involving high-risk investments or investment scams. What percentage of these cases related to potentially unregistered cryptoasset business?
The answer to last month's trivia: the Financial Services and Markets Bill (2022/2023) will give the FCA and PRA a growth and competitiveness secondary objective.
6 March 2023
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by multiple authors
by Charlotte Hill and Daniel Hirschfield
by multiple authors