Authors
Charlotte Hill

Charlotte Hill

Partner

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Daniel Hirschfield

Daniel Hirschfield

Senior Knowledge Lawyer

Read More
Authors
Charlotte Hill

Charlotte Hill

Partner

Read More
Daniel Hirschfield

Daniel Hirschfield

Senior Knowledge Lawyer

Read More

2 November 2022

Financial services update – 1 of 35 Insights

Financial services regulatory update - November 2022

In this month's update:

  • FCA's new webpage on the Consumer Duty.
  • FCA launches discussion on BigTech.
  • FSB's proposed framework for the regulation of cryptoassets activities.
  • FCA's consultation paper on sustainability disclosure requirements.
  • PSR consults on mandatory reimbursement and cost allocation for APP fraud.
  • Energy markets financing scheme.
 
General FS regulation

FCA update on consumer investments strategy: October 2022

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:

  • Consulting on a more proportionate advice regime for investing money in stocks and shares ISAs.
  • Carrying out a review of the advice/guidance framework.
  • Investigating changes to prudential requirements for non-MiFID adviser firms to allow them to meet their redress liabilities. The FCA will publish more details of this in 2023.
  • Publishing a feedback statement on the review of the compensation regime.
  • Reviewing its consumer investment strategy against the cost-of-living crisis.

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. 

European Commission 2023 work programme: financial services aspects

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:

  • Proposal for a Regulation amending the Central Securities Depositories Regulation (909/2014).
  • Proposal for a Directive on corporate sustainability due diligence.
  • Proposal for a Regulation amending the Markets in Financial Instruments Regulation (600/2014) as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders. 
  • Proposal for a Directive amending the MiFID II Directive (2014/65/EU). 
  • Proposals for a: Regulation to establish a European single access point (ESAP) providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability, a Regulation amending certain Regulations as regards the establishment and functioning of the ESAP, a Directive amending certain Directives as regards the establishment and functioning of the ESAP.
  • Proposal for a Regulation amending the Regulation on European long-term investment funds ((EU) 2015/760) as regards the scope of eligible assets and investments, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules and as regards requirements pertaining to the authorisation, investment policies and operating conditions of European long-term investment funds. 
  • Proposal for a Directive amending the Alternative Investment Fund Managers Directive (2011/61/EU) and UCITS Directive (2009/65/EC) as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by alternative investment fund. 
  • Proposal for a Regulation amending the Capital Requirements Regulation (575/2013) as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor. 
  • Proposal for an Insurance Recovery and Resolution Directive.
  • Proposal for a Directive amending the Solvency II Directive (2009/138/EC). 
  • Proposals to strengthen the EU's anti-money laundering and counter-terrorist financing legislation.
  • Proposal for a Regulation amending the SRM Regulation (806/2014) to establish a European Deposit Insurance Scheme.
  • Proposal for a Directive on consumer credits. 

FCA CEO and interim chair outline regulatory strategy at annual public meeting

On 12 October 2022, the FCA held its 2022 annual public meetingIn his opening remarks, Richard Lloyd, interim chair, discussed:

  • The FCA's focus on the cost-of-living crisis and maintaining market integrity.
  • The urgent need for Parliament to pass legislation that brings Buy-Now Pay-Later products into regulation. 
  • Combating the rise of scams such as loan fee fraud.
  • The new Consumer Duty, which will increase the level of protection UK consumers receive.

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.

FCA authorisations update: October 2022

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:

  • Shortcomings to meeting timelines. For example, the update refers to a range of factors that meant it did not meet some of its timelines in 2021/22, related to increased scrutiny at the authorisations gateway, incomplete or poor-quality applications and an increased volume of applications in key areas like approved person status because of the expansion of the Senior Managers and Certification Regime.
  • Service metrics near target. The FCA refers to service levels for change in control applications being near to the statutory target whilst noting that the complexity of some cases means that it will not always meet the deadline.
  • Other service metrics. The FCA is reviewing its voluntary service metrics in relation to processing approved person and appointed representative applications, to determine whether they remain appropriate. 
  • Transforming the application experience. The FCA continues to progress work on digitising its application forms, including data enrichment and validation to improve the application process in order to automate more of its processes, such as the senior management functions application form.
  • Systems improvements. A programme of work to upgrade and improve the FCA's case management systems is underway. In 2023, authorisations will transition to a newer version of the current system, with the aim of it providing a better user experience. The FCA is also exploring how it can improve its engagement with industry about expectations at the authorisations gateway.

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:

  • October implementation plans. The FCA's final guidance states that firms' Boards should have agreed their implementation plans by 31 October 2022. The FCA expects that such plans should be sufficiently developed to provide the firm's governing bodies and the FCA with assurance that the expectations set out in the Duty have been considered carefully and will implemented for new and existing products by 31 July 2023.
  • Consumer Duty Board champions. The Board champions' role is to support the chair and CEO in ensuring the Consumer Duty raised in all conversations. They are not responsible for the firm's implementation of the Consumer Duty and is not a prescribed responsibility under the Senior Managers and Certification Regime. The FCA suggests that the champion should be an independent non-executive director and firms should set this up in a way that fits with the existing responsibilities of the Board.
  • Definition of closed products. The Duty will come into effect on 31 July 2024 for closed products and services. Closed products are defined by the FCA as "those that are no longer marketed or distributed to retail customers or open to renewal". It goes on to clarify that where existing customers can continue to make payments under the existing product terms, this would still be considered closed, provided the product or service is not open to new customers. It is up to firms to consider each product and determine whether it is closed.

FCA consults on baseline financial resilience regulatory return

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:

  • To provide the FCA with regular information on their financial resilience in a standard format. 
  • To submit information on issues including the amount of liquid assets that they control, their net profit and loss in the preceding quarter and their revenue in the preceding financial year.
  • To submit a FIN073 every quarter.

FIN073:

  • Will not apply to dual-regulated firms, MIFIDPRU investment firms, or firms in the Temporary Permissions Regime.
  • It will apply to other entities for which the FCA has supervisory responsibility, including electronic money institutions and payment institutions.

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.

Fintech and cryptoassets

FCA discussion paper on the competition impacts of BigTech on retail financial services

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. 

FPC summary and record: October 2022

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.

FSB proposes framework for regulation of cryptoasset activities

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:

  • recommendations that promote the consistency of regulatory, supervisory and oversight approaches to cryptoasset activities and markets and strengthen international co-ordination and information sharing.
  • revised high-level recommendations for the regulation, supervision and oversight of "global stablecoin" arrangements to address associated financial stability risks more effectively. 

The proposed recommendations regarding cryptoassets activities and markets relate to:

  • Regulatory powers and tools to regulate, supervise and oversee cryptoasset activities and markets, including cryptoasset issuers and service providers, as appropriate.
  • Creating a proportionate regulatory framework for the effective regulation, supervision and oversight of cryptoassets activities and markets.
  • Ensuring cross-border co-operation, co-ordination and information sharing.
  • Risk management frameworks for cryptoassets service providers and governance frameworks for cryptoasset issuers and service providers.
  • Data collection, recording and reporting frameworks.
  • Disclosures to users and relevant stakeholders.
  • Financial stability risks arising from interconnections and interdependencies.
  • The regulation of cryptoasset service providers with multiple functions. 

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. 

FCA, BoE and PRA discussion paper on artificial intelligence and machine learning

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: 

  • The supervisory authorities' objectives and remits.
  • The benefits and risks related to the use of AI in financial services.
  • The current legal requirements and guidance that are considered by the supervisory authorities to be most relevant to mitigating the risks associated with AI and its concern with how legal requirements and guidance apply to the use of AI in UK financial services to support consumer protection, competition, the safety and soundness of individual firms, market integrity and financial stability.

Comments can be made on the discussion paper until 10 February 2023.

Proposed Regulation on markets in cryptoassets

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. 

ESG

FCA consultation paper on sustainable disclosure requirements and investment labels

On 25 October 2022, the FCA published a consultation paper (CP22/20) on sustainable 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:

  • The introduction of three sustainable investment product labels: sustainable focus, sustainable improvers and sustainable impact. Each category will be underpinned by objective criteria.
  • Restrictions on the use of certain sustainability related terms such as "ESG", "green" or "sustainable" in product names and marketing of products.
  • A general anti-greenwashing rule applying to all regulated firms that will require that all sustainability-related claims are clear, fair and not-misleading.
  • Consumer-facing product-level disclosures that will help consumers understand the key sustainability-related features of an investment product. This will include disclosing investments that a consumer may not expect to be held in a product.
  • More detailed disclosures at product and entity level that will be targeted a wider range of stakeholders, including institutions investors or those retail investors seeking more information.
  • Requirements for distributors to make sustainable investment label and consumer-facing disclosures available to retail investors. 

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.

ASA bans HSBC adverts for misleading green claims

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:

  • "HSBC is aiming to provide up to $1 trillion in financing and investment globally to help our clients transition to net zero".
  • "We're helping to plant 2 million trees which will lock in 1.25 million tonnes of carbon over their lifetime".

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. 

TCFD publishes fifth status report

On 13 October 2022, the Task Force on Climate-related Financial Disclosures (TCFD) published its fifth TCFD status report. It found that:

  • Over 60% of the companies reviewed disclosed their climate-related risks or opportunities in 2021 fiscal year reports, which is up from 50% in 2021.
  • 92 of the world's 100 largest companies either support the TCFD, report in line with the TCFD recommendations, or both, which is up from 83 last year. 

However, the report highlights that more progress is needed. The TCFD will prepare another status report in October 2023, as requested by the FSB.

Green Technical Advisory Group advises on development of UK green taxonomy

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:

  • The GTAG recommends the government should take an "adopt some and revise some" approach to onshoring the EU framework, given the taxonomy's focus on investors and financial market participants and regulators.
  • There are more than 700 do no significant harm (DNSH) criteria included in the EU technical screening criteria. Many reference EU laws, which could create issues about how they are applied within the UK green taxonomy, so the GTAG explored whether a review and revise approach to DNSH requirements within TSC is merited to improve their usability.
  • The GTAG notes a process could be created for updating the UK green taxonomy and that it should be grounded in evidence and science-based criteria.
  • The report contains a summary list of use cases, with the GTAG noting that public and private companies, as well as limited liability partnerships, should be the primary focus. Moreover, encouraging firms to report their level of UK green taxonomy alignment as part of wider climate reporting will help address data gaps and greenwashing concerns.
Payment services and systems

PSR policy statement on extending Confirmation of Payee service to additional PSPs

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:

  • Group 1 which focuses on PSPs that will need to use the CoP system after 31 October 2023. The names of the PSPs are listed in Annex 1 to PS22/3.
  • Group 2 which refers to all other PSPs that use unique sort codes, or are building societies using alternative reference information, which must use the CoP systems after 31 October 2024.

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%.

FSB outlines next steps for enhancing cross-border payments

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 improvement of payment system interoperability, extension of operating hours and access policies of Real-Time Gross Settlement (RTGS).
  • The promotion of an efficient legal, regulatory and supervisory environment for cross-border payments while maintaining their safety, security and integrity.
  • The facilitation of cross-border data exchange and increasing the use of standardised messaging formats for cross-border payments.

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. 

PSR final decision on card-acquiring market remedies

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:

  • Summary boxes containing bespoke key price and non-price information to be sent individually to each merchant and made available in their online account. Merchants will use these with new online quotation tools, which providers will be required to provide to help merchants compare all available offerings (see Specific Direction 14).
  • Trigger messages to prompt merchants to shop around and/or switch must be sent by providers of card-acquiring services to their merchant customers and shown mainly in their online account. The timing of these messages will be linked to minimum contract term expiry dates or, where contracts are indefinite, be provided at least once every 30 calendar days (see Specific Direction 15).
  • A maximum duration of 18 months for point-of-sale terminal lease and rental contracts, and maximum one-month notice after any renewal (see Specific Direction 16).

PSR consults on mandatory reimbursement and cost allocation for APP fraud

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.

Consumer credit and mortgages

FCA statement on Amigo Loans pilot lending scheme

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. 

FPC summary and record: October 2022

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. 

FCA portfolio letter to high-cost consumer credit lenders: October 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:

  • The need for firms to implement the new Consumer Duty, which comes into force for new and existing open products and services on 31 July 2023. 
  • Focusing on responsible lending, particularly how firms promote and describe their products and the information they give customers, firms' approach to affordability including creditworthiness assessments and sustainable borrowing for consumers.
  • Ensuring firms' boards and senior management prioritise embedding a healthy culture that is reflected in their policies. Decision-making should be aligned with consumer interests.
  • Firms are reminded to consider and act on the FCA's guidance for firms on the fair treatment of vulnerable consumers (FG21/1). They should also consider if the findings from the retail bank implementation review are relevant and whether learnings can be taken from it.
Banking and insurance 

Energy markets financing scheme opens for applications

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.

PRA issues statement on capital requirements and the Energy Markets Financing 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.

LSB report on inclusion in business banking and credit

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: 

  • How firms could improve representation across business banking and credit by recruiting more staff with disabilities or other access needs.
  • How firms should look at who is involved with the design and sign-off process to check that there is a selection of diverse viewpoints being used to assess risks and opportunities.
  • How raising awareness and training staff to understand the various ways that disabilities or other needs can impact customers would be beneficial.
  • How the language used to describe disabilities and other access needs must be clear and inclusive.
  • How providing supporting information is key to improving accessibility for disabled customers and those with other access needs.
  • The fact that some registered firms have specialist teams to help those customers who may require additional support who can receive additional training. 

FCA multi-firm review of business interruption insurance claims handling

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 [2021] 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 producing clear and robust conduct management information. This affected their ability to identify and address delays in the claims process.
  • Firms not having records of all their policy wordings stored in a way that was easily for claims handlers to access. This resulted in delays claims handling.
  • 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.

Securities, investments, and markets

IOSCO final report on retail distribution and digitalisation

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:

  • Firm-level rules for online marketing, distribution and onboarding.
  • Capacity for surveillance and supervision of online marketing and distribution.
  • Staff qualification or licensing requirements for online marketing.
  • Proactive technology-based detection and investigatory techniques.
  • Powers to take prompt action where websites are used to conduct illegal securities and derivatives activity and other powers effective in curbing online misconduct.
  • Promoting enhanced understanding by, and collaboration with, providers of electronic intermediary services with regard to illegal digital activities.

 

ESMA Strategy for 2023-2028

On 10 October 2022, ESMA published its Strategy for 2023-2028, which is structured around the following key areas:

  • Fostering effective financial markets and financial stability, including through effective implementation of the CCP recovery and resolution regime. Among other things, it will consider the impact of decentralised finance and cryptoassets, mainly relating to trading and settlement, on financial stability.
  • Strengthening supervision and supervisory convergence of EU financial markets including deepening co-operation on data collection and data sharing between national competent authorities and ESMA, facilitating information sharing at the EU level and developing common analytics.
  • Enhancing retail investor protection and concentrating its efforts on risks posed by new and innovative products or services (eg cryptoassets or non-fungible tokens) and products with strong retail investor demand, such as ESG. ESMA will also assess risks to retail investors that may stem from distributing complex products, alternative marketing and distribution channels such as social media advertising. Finally, it will work to facilitate comparison across products and sectors such as enabling development of comparison tools for investment funds.
  • Enabling sustainable finance.
  • Facilitating technological innovation and effective use of data, such as the use of algorithms, artificial intelligence, machine learning and distributed ledger technology, with a view to ensure the framework remains fit for purpose, developing detailed regulatory standards on operational resilience, together with the other European Supervisory Authorities, in the context of the implementation of the proposed Regulation on digital operational

    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.

Funds and asset management 

IOSCO survey on interaction between index providers and asset managers

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 role of asset managers in relation to indices and index providers and the role and processes of index providers in the provision of indices.
  • The potential impact of administrative errors on investment funds.
  • The potential conflicts of interest that may exist at the index provider in relation to the fund.

The deadline for responses is 26 November 2022.

Investment manager's renewed application for judicial review of FOS jurisdictional decision refused (Administrative Court)

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:

  • complied with the procedural requirements under the relevant client classification rule in the then FSA Handbook.
  • not taken "reasonable care" to determine the complainant had sufficient experience and understanding to be classified as an intermediate customer, in line with supporting FSA guidance.

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.

PRA and FCA Enforcement action

PRA fines underwriting firm over £9 million

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:

  • Embed an effective risk culture within the business and put in place effective risk mitigation strategies.
  • Emphasise responsibilities between the first and second lines of defence.
  • Establish an effective system of governance underpinned by an adequate and transparent organisational structure that allowed for effective challenge, management and decision making.
  • Ensure management information was adequate, consistently available and appropriate so as to inform the MSAUL board's discussions and form a reliable basis for decisions.
  • Operate an adequate data repository system and consistent data quality controls.
  • Embed sufficiently effective controls over underwriting.

 

FCA fines Gatehouse Bank for AML controls failings

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: 

  • Customer due diligence (CDD) to verify the identity of its customers, including persons with a beneficial interest in the customers, to establish and scrutinise the source of wealth and funds.
  • Enhanced due diligence (EDD) of customers that posed a higher risk of money laundering or terrorist financing, such as those who were domiciled in high-risk jurisdictions or were PEPs.
  • Ongoing monitoring of its customers during their relationship with Gatehouse, particularly in respect of ensuring that CDD and EDD information was kept up to date and reflected each customer's current level of financial crime risk.
  • Internal controls that should have allowed Gatehouse to rectify these shortcomings in an orderly and timely manner. The FCA notes that Gatehouse's compliance function was under-resourced.

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:

  • Carrying out a compliance review to remediate customer files.
  • Investing in improving its AML systems and controls.
  • Implementing a new AML and financial crime related policies and procedures that, in the FCA's opinion, addressed the deficiencies.

 

FCA fines brokerage firm and fines and bans former directors for market abuse reporting failures

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:

  • Final notice sent to the former chief executive and director of Sigma, fining them £67,900 and banning them from performing any senior management function and any significant influence function.
  • Final notice sent to a former director of Sigma, fining them £69,600 and banning them from performing any senior management function and any significant influence function.
  • Final notice sent to a current director of Sigma, fining them £83,600 (after qualifying for a 10% discount).

In the period from 1 December 2014 to 12 August 2016, the FCA found that Sigma:

  • breached provisions of Chapter 17 of the Supervision manual (SUP) and Article 16(2) of the EU Market Abuse Regulation (Regulation 596/2014) relating to the detection of market abuse.
  • contravened Principle 3 of the FCA's Principles for Businesses by failing to organise and control its affairs responsibly and effectively with adequate risk management systems in relation to the business activities of the CFD desk, particularly its compliance with the FCA's MiFID transaction reporting requirements.

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.

Economic crime 

FSB consultative document on achieving greater convergence in cyber incident reporting

The FSB published a consultative document on achieving greater convergence in cyber incident reporting (CIR) on 17 October 2022, which covered the following:

  • The challenges to achieving greater harmonisation in CIR faced by financial authorities and financial institutions (FIs), such as: operational challenges, challenges relating to the process of determining the point at which a reporting obligation becomes actionable following a cyber incident and finding an appropriate culture among FIs to report cyber incidents on time, and inconsistent definitions and taxonomy.
  • Setting out 16 recommendations that recognise that a one-size-fits-all approach is not feasible, to address impediments to achieving greater convergence in CIR. FIs and financial authorities can choose to adopt them based on their own situation. The first recommendation is that financial authorities should establish and maintain clearly defined objectives for CIR, the second is that they should continue to explore ways to align their CIR regimes with other relevant authorities, on a cross-border and cross-sectoral basis, and the third is that they should adopt common reporting formats. 
  • Reports on its 2018 review of the cyber lexicon, which resulted in the inclusion of several new terms such as insider threat, phishing and ransomware and the clarification of some existing definitions such as cyber incident and cyber incident response plan.
  • Suggests a common reporting format, the format for incident reporting exchange (FIRE), to standardise the common information requirements for incident reporting. If further developed, FIRE would not require strict global convergence and could be flexible to consider co-existence. Authorities could decide the extent to which they wish to adopt FIRE based on their individual circumstances. 

The FSB would like feedback by 31 December 2022.

Second Reading of Economic Crime Bill

On 13 October 2022, the Economic Crime and Corporate Transparency Bill (the Bill) had its second reading. The Bill is now at Committee stage.

UK Finance calls for urgent action from all sectors as fraud continues to threaten the UK 

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.

FSR trivia

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?

  • 27%
  • 48%
  • 16%
  • 62%

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.

In this series

Financial services regulatory

Financial services update - February 2021

4 February 2021

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - January 2021

14 January 2021

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - December 2020

3 December 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - November 2020

5 November 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - October 2020

1 October 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - September 2020

3 September 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - August 2020

6 August 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - July 2020

2 July 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - June 2020

4 June 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - May 2020

7 May 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - April 2020

2 April 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - March 2020

5 March 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update – February 2020

6 February 2020

by Charlotte Hill, Daniel Hirschfield

Financial services regulatory

Financial services update - January 2020

8 January 2020

by Charlotte Hill, Daniel Hirschfield

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