Welcome to the first of our financial services updates of 2023.
Featured in this month's update:
On 9 December 2022, the Chancellor of the Exchequer, Jeremy Hunt, announced a package of measures designed to "turbocharge growth" in financial services across the UK. Please see our special feature article for further details.
The Financial Services and Markets Bill 2022/23 (Bill) contains amendments to s21 of the Financial Services and Markets Act 2000 that will impose a new financial promotion requirement on all existing and newly authorised firms, restricting them from approving financial promotions.
An authorised firm that wants to approve financial promotions for unauthorised firms (s21 approver) will need to apply to the FCA for permission to do so through a new regulatory gateway.
On 6 December 2022, the FCA published a consultation paper (CP22/27) on the new regulatory gateway.
The main areas that the FCA is seeking views on are:
HMT's response to its consultation on the regulatory gateway includes a commitment to introduce a transitional regime for this regulatory change. The FCA's consultation paper set outs how a transition period may work in practice alongside its application process.
The FCA notes that it does not expect its proposals to generally be relevant to authorised persons approving the financial promotions of their appointment representatives or of unauthorised persons in their corporate group.
Responses to CP22/27 must be submitted by 7 February 2023. The FCA expects to publish a policy statement in the first half of this year although the timing of its final rules will depend on when the Bill receives royal assent.
On 14 December 2022, the FCA published a feedback statement (FS22/5) on the compensation framework, following its discussion paper on the compensation framework (DP21/5), which was published in December 2021 and which we covered in our January 2022 update.
DP21/5 was published against a background of a pattern of increasing compensation costs in recent years and focused on the purpose of the Financial Services Compensation Scheme (FSCS), the scope of protection, the eligibility of complaints, compensation limits and how it is funded.
In FS22/5, the FCA notes that it has identified three main themes from the responses to DP21/5:
Although the FCA has concluded that "material changes" are not currently required to the compensation framework, it has set out a number of actions, which it aims to largely complete over the next financial year (2023/2024). These are:
The FCA expects to consult on any proposed changes to the compensation framework during 2023/2024 and aims to finalise any changes by the end of that financial year.
It has also confirmed the wording of the four principles for the compensation framework taking into account the feedback it received on its proposed principles in DP21/5. The final principles, which will guide the FCA's work on the framework, can be found in Chapter 5 of FS22/5.
On 21 December 2022, the FCA published highlights of some of the work it has carried out in 2022 to deliver on the three-year strategy it announced in April 2022 (see our May 2022 update), which revolves around three areas of focus: reducing and preventing serious harm, setting and testing higher standards, and promoting competition and positive change.
The key points to note are:
Reducing and preventing serious harm
Setting and testing higher standards
Promoting competition and positive change
The Upper Tribunal (Tax and Chancery Chamber) (Upper Tribunal) has published its decision in Moneybrain Ltd v Financial Conduct Authority, evaluating the FCA's exercise of its registration powers under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017).
The Upper Tribunal:
Statement from the Joint Regulatory Oversight Committee on the future of open banking
On 16 December 2022, the Joint Regulatory Oversight Committee (consisting of the FCA, the Payment Systems Regulator, the Competition and Markets Authority and HM Treasury) (Committee), provided an update on the future of open banking. The Committee is committed to ensuring the benefits of Open Banking are "fully realised and momentum is satisfied." It has identified three priorities:
Extensive analysis is being provided by the Strategic Working Group. Its final report on current gaps in the Open Banking project, potential solutions and a future roadmap, was due to be submitted to the Committee by January 2023. The Committee expects to publish another statement in Q1 2023, in which it sets out its views and recommendations.
Following the Committee's statement, it was reported in the City A.M. that a number of UK FinTechs had written an open letter to the FCA criticising the Committee and calling for it to "…publish clear directions and timelines for the continued enforcement of Open Banking in 2023 and beyond as a matter of urgency."
On 4 January 2023, the EBA published the text of a provisional request for advice it had received from the European Commission on certain delegated acts that the Commission intends to adopt under MiCA. The request for advice is attached to a letter dated 21 December 2022 and relates to criteria for classifying asset reference tokens (ARTs) and e-money tokens (EMTs) as significant by the EBA and the types of fees the EBA can impose on the issuers of significant ARTs and EMTs under MiCA.
The request for advice is provisional as MiCA has not yet entered into force. The formal adoption of MiCA by the European Parliament and the Council and publication in the EU Official Journal is planned for spring 2023.
The EBA is asked to deliver its technical advice by September 2023, which is ahead of when the relevant parts of MiCA are due to apply.
On 4 January 2023, the FSB published the 49 responses it has received to the proposed framework for the international regulation of cryptoassets activities, which it released in October 2022 (see our November 2022 update). The FSB is aiming to publish the final reports in July 2023.
On 14 December, the government announced that, having received advice from the Green Technical Advisory Group and taking into account stakeholder engagement, it considers it would be beneficial to review its approach to the development of a taxonomy to maximise the effectiveness of its sustainable finance agenda. To this end, it confirmed that it will not be making secondary legislation under the existing Taxonomy regulations but will rather await the repeal of these regulations as part of the repeal of retained EU law relating to financial services provided for in the Financial Services and Markets Bill 2022/23.
The government will provide a further update when it publishes the updated Green Finance Strategy (a measure referred to in the government's Edinburgh Reforms – see above).
On 13 December 2022, the Climate Financial Risk Forum (CFRF) published its third round of guides to help the financial sector develop its approach to addressing climate-related financial risks and opportunities.
The guides focus on the transition to net zero, scenario analysis, and climate disclosure, data and metrics:
We are a member of two of the CFRF working groups (data, disclosure and metrics and the transition to net zero) and assisted with the legal risks guide above.
On 12 December 2022, the FCA published a webpage with the results of a review of how 12 firms approach are designing and embedding diversity and inclusion (D&I) strategies. The FCS observed that:
The FCA has written feedback letters to the firms that were part of its review and it will use its normal supervisory process to follow up with the. All firms are encouraged to consider the FCA's findings and use them to evaluate their current D&I strategies and practices.
The regulators’ consultation paper on D&I is expected later in 2023.
On 9 December 2022, HM Treasury published a consultation paper on information requirements in the Payment Accounts Regulations 2015 (PARs), which transposed the Payment Accounts Directive (2014/92/EU) into UK law. This is a part of its Edinburgh Reforms.
HM Treasury expects that many of the requirements in Part 2, Schedules 1 and 2 of the PARs, which are intended to improve the comparability of fees connected with payment accounts, are either too prescriptive or less necessary in a UK context.
The consultation closes on 17 February 2023.
On 8 December 2022, the Payment Systems Regulator (PSR) published a consultation paper on measures to improve transparency on authorised push payment (APP) scam data across banks and building societies, following the responses to its November 2021 consultation (CP21/10) (which we covered in our December 2021 update).
In the consultation paper the PSR proposes that:
Responses to this consultation must be made by 17 January 2023. The PSR will consider issuing guidance to receiving PSPs on the Metric C process in spring 2023.
On 9 December 2022, HM Treasury published a consultation paper on reforming the Consumer Credit Act 1974. Please see the "Delivering for consumers and businesses" section of our special feature article on the Edinburgh Reforms for further details.
On 7 December 2022, the FCA published a consultation on draft guidance setting out the following options that mortgage firms have to support customers in relation to their mortgage payments in light of the cost of living crisis:
The FCA explains that the draft guidance should be read together with the Handbook provisions in the conduct of business sourcebook for mortgages and home finance (MCOB), the tailored support guidance and its June 2022 Dear CEO letter. Comments were required by 21 December 2022.
HM Treasury also published a press release on 7 December 2022, in which reported that Jeremy Hunt, Chancellor of the Exchequer, had met with leaders of the UK's major mortgage lenders and Richard Lloyd, FCA Interim Chair. Lenders committed to assist their customers by:
On 19 December 2022, PRA and FCA published a consultation paper, in which they set out proposed changes to the current requirements of the "bonus cap". The regulators propose the removal of limits on the ratio between fixed and variable pay and related provisions on shareholder approvals and discount rates.
The consultation closes on 31 March 2023. The proposed changes would take effect on the calendar day after the publication of the final policy, which is anticipated for Q2 2023.
On 30 November 2022, HM Treasury published a consultation paper on the implementation of the Basel 3.1 standards, in which it sets out the provisions in the UK Capital Requirements Regulation (CRR) that it intends to revoke or amend. It should be read alongside the PRA's Basel 3.1 proposals set out in its consultation paper, which was published on the same day.
The provisions that HMT intends to revoke relate to:
Amendments to the UK CRR include the definitions of probability of default, loss given default and conversion factor.
HMT has decided not to amend or revoke the UK CRR provisions regarding equivalence regimes other than the equivalence mechanism in Article 142(2) of CRR (referred to above).
The consultation paper closes for responses on 31 January 2023.
On 9 December 2022, the government published a consultation paper on repealing the PRIIPs Regulation, which should be read alongside the FCA's discussion paper on a future disclosure framework (published on 13 December 2022). For further details, please see the section entitled "A competitive marketplace promoting effective use of capital" in our special article on the Edinburgh reforms.
On 21 December 2022, the Council of the EU published the following documents, all dated 16 December 2022:
On 21 December 2022, the Joint Committee of the European Supervisory Authorities released an updated set of Q&As on the PRIIPs Key Information Document (KID).
The changes to the last version of the Q&As (published on 14 November 2022) reflect recent amendments made by Commission Delegated Regulation (EU) 2021/2268, which apply from 1 January 2023.
Topics that have been revised include:
On 21 December 2022, ESMA published its draft final report, which include draft regulatory technical standards and draft implementing technical standards that are intended to standardise the information provided by UCITS, management companies and AIFMs, when notifying cross-border marketing and management activities relating to UCITS and AIFs.
The draft technical standards have been sent to the Commission for adoption within three months.
On 16 December 2022, ESMA updated its Q&As on AIFMD with a new question relating to whether special purpose acquisition companies meet the definition of an AIF.
On 30 November 2022, the FCA published a statement on liability driven investment, following the issues with the gilt market that led to the FCA working with other regulators across the UK and the EU. The FCA:
The FCA will publish a further statement of good practice in the first quarter of 2023.
On 20 December 2022, the PRA and FCA fined TSB Bank plc a total of £48,650,000 for operational risk management and governance failures, which included management of outsourcing risks, relating to the bank's IT update programme. As a result of technical failures in TSB's IT system, a significant percentage of the bank's 5.2 million customers were unable to access banking services between April and December 2018, in what was a high-profile case at the time.
The fine was split between the regulators: TSB was fined £18,900,000 bv the PRA and £29,750,000 by the FCA. Had a settlement discount not applied, the combined fine would have amounted to £69,500,000.
In recent years, the regulators have implemented significant reforms to improve the operational resilience of the UK financial sector – see our article on the final polices from UK regulators – and last year the government confirmed its intention to legislate for direct regulation of "critical" third parties to the finance sector.
On 9 December 2022, the FCA published the final notice it issued to Santander UK plc (dated 8 December 2022), fining it more than £107.7 million for serious failings in its anti-money laundering (AML) controls between December 2012 and October 2017, which affected its ability to oversee 566,000 business banking customers.
The failings were exemplified by its handling of one particular business banking customer, whose account was originally expecting monthly deposits of £5,000 but instead received millions in deposits within six months, with transfers being made to separate accounts. Santander failed to act on a recommendation by its AML team in March 2014 for the account to be closed until September 2015. At the request of a law enforcement agency, it decided to keep the account open but did not regularly review the need to keep it open. It was not until an intervention by the FCA in December 2016 that Santander closed the account. By the time the account was closed, around £269 million had passed through it.
The FCA found that Santander had breached Principle 3 of its Principles for Businesses (the requirement that a firm must take reasonable care to organise and control its affairs responsible and effectively, with adequate risk management risk systems).
As a result of a settlement discount, the fine was reduced from £153,990,465.
In 2017, Santander implemented a comprehensive restructuring of AML processes and systems, which the FCA acknowledges.
On 5 January 2023, the monetary threshold in s. 339A of the Proceeds of Crime Act 2002 (POCA) was increased from £250 to £1,000. The change was made by the Proceeds of Crime (Money Laundering) (Threshold Amount) Order 2022 (SI 2022/1355), which was made on 15 December 2022.
The monetary threshold is the value of criminal property below which a deposit-taking body (such as a bank), an electronic money or a payment institution can carry out a transaction, in operating a customer account that it maintains, without committing one of the principal money laundering offences in sections 327 to 329 of POCA.
The rationale for this change is to improve the AML Suspicious Activity Report (SAR) regime and free up law enforcement resource. Having consulted with the National Crime Agency, the government believes that the new threshold will reduce the Defence Against Money Laundering volumes and reduce the burden on the reporting sectors without compromising intelligence. The £250 threshold was introduced in 2005 and was set at £250 to be in line with living expenses. As such expenses have now increased significantly, higher values of payments are now made.
On 19 December 2022, HMT published its report on the performance of the UK's AML/CFT supervisors between 6 April 2020 and 5 April 2022.The report notes that:
How many policy measures were announced in the Edinburgh Reforms?
Last month's question related to the significance of the end of April 2023 in the implementation timetable of the FCA's Consumer Duty. This is the date by which manufacturers must have completed their review to meet the outcome rules.