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Quarterly update on regulatory publications

Author: Simon Gibbs, Financial Services Faculty

Published: 21 Nov 2022

Amid the rapid twists and turns in UK political life and the UK economy. The following is a list of some regulatory publications or announcements affecting financial services in the last quarter.

The summary includes consultation/policy papers and speeches published by the regulators and other bodies, as well as articles that may be of interest. It is not intended to be an exhaustive list of all matters relevant to financial services.

Please refer to the relevant organisations’ website for a complete record of their publications and news releases.

HM Government

The Financial Services and Markets Bill (FSMB) received its second reading on 7 September and has been subject to line-by-line scrutiny by a Public Bill Committee. It is now at the Report stage (date to be announced) which gives MPs an opportunity, on the floor of the House, to consider further amendments.

The FSMB sets out proposed changes to the future of financial regulation, including reform of the Solvency II framework for insurance firms. See the following ICAEW article (22 August) for a summary of the Bill when it was introduced in July 2022. The Government has since stated an intention to include an intervention power to give HM Treasury the ability to direct a regulator to make, amend or revoke rules where there are matters of significant public interest - but has not yet introduced the power.

Bank of England / Prudential Regulation Authority (PRA)

The PRA published its Regulatory Digest for October 2022 and September 2022 on 1 November and 3 October respectively. The Regulatory Digest is a monthly roundup of the PRA’s key regulatory news and publications.

October 2022 highlights included a speech by Sam Woods on growth and competitiveness; a description of a stress testing scenario for banks and building societies not part of the concurrent stress testing exercise; a letter providing thematic feedback on the PRA's supervision of climate related risks; a discussion paper on artificial intelligence and machine learning; an explanation that the PRA has created a new centralised process of liquidity and funding reporting Q&As, and feedback on Written Auditor Reporting.

September 2022 highlights include: a discussion paper and speech on the PRA’s future approach to policy; a consultation paper on changes to the Credit Unions Regulatory Regime; feedback on some changes to the definition of capital; and a consultation paper on Depositor Protection.

The PRA published CP14/22 - Review of Solvency II: Reporting phase 2. The CP sets out proposals to streamline the current Solvency II reporting and disclosure requirements for insurers, and to improve the collection of data in a small number of areas. The deadline for responses is 8 May (6 months). It is a longish consultation period, as there may be further related consultations in the new year which may be relevant to these proposals.
7 November 2022

Sam Woods gave a speech setting out how prudential regulation can support the UK as a competitive global financial centre. In simple terms, an independent, well designed and robust regulatory regime that at the same time is agile, proportionate and innovative. He also noted some areas of ongoing regulatory reform: SII, 'strong and Simple’ for smaller banks, Basel 3.1, remuneration, reporting requirements, a regulatory framework for stable coins, and making PRA rules more accessible. 
27 October 2022

The PRA wrote to CEOs about climate risks. The letter provided a summary of the PRA's expectations for firms, its feedback on levels of embeddedness and examples of good practice (see annex A: Observations on firms’ progress in responding to SS3/19), and updates on the Bank of England's work (including its climate biennial exploratory scenario the results of which were published in May). Overall, the PRA observed that firms have taken positive steps to implement its expectations. That said, the level of embedding varies, and further progress is needed by all. The letter provided a list of areas where firms are expected to demonstrate capabilities: board oversight; risk management frameworks, tolerances, modelling, counterparty engagement; capital implications in ICAAPs and ORSAs; scenario analysis; and approaches to data gaps. The letter also stated an expectation for financial reporting priorities to include similar matters (see annex B: Climate and accounting) and indicated it would continue to make use of the external auditor. The PRA will assess firms against its expectations through regular supervisory engagement and reviews.
21 October 2022

The Bank of England published a staff working paper that considered the effects of ring-fencing. The paper reported compelling evidence that banking groups subject to ring-fencing are perceived to be safer (repo investors lend to ring-fenced groups at lower rates), and that ring-fenced groups charge more to supply liquidity. The paper also notes that banking groups reduced their risk-taking after the imposition of the fence and suggests that structural reforms can have a significant beneficial impact on risk in the banking system.
21 October 2022

The PRA wrote to chief actuaries to share insights from its recent review of the effect of claims inflation on general insurance claims. The PRA's feedback was organised around five areas of 'good practice': Consider how inflation is manifesting in your firm’s claims, and how this may change over time; assess the appropriateness of existing reserving techniques in the current inflationary environment; Maintain feedback loops between claims, reserving, capital modelling and underwriting/pricing functions; Consider whether the uncertainty around claims inflation has been adequately allowed for in the capital requirement; and Ensure that risk management systems continue to be effective (agile and responsive).
20 October 2022

The PRA wrote a letter to directors of credit unions (CUs) as part of its annual assessment of the credit union sector. The letter highlighted the current cost of living crisis, and asked CUs to review their financial projections by the end of December 2022 to ensure they are realistic. Larger CUs should additionally include stress/scenario testing in their financial planning. The PRA indicated it will also shortly approach (relative to 14 October) some smaller CUs (those with a capital to asset ratio below 5%, that have failed to submit returns, of where there are issues with directors) for a remedial plan. The appendix sets out a number of further matters for credit unions to be aware of. 
14 October 2022

The Bank of England published a Quarterly Bulletin article on the future role of cash. This article reviews recent data trends and survey evidence to consider where cash usage might head next. The bulletin describes how there has been a fall in transactional cash use over the last decade, but that there has been a rise in the value of notes in circulation, and that for a sizable share of the population cash remains important. It also highlights the Bank of England’s work to understand the trends.
14 October 2022

The PRA published a consultation paper on contingent leverage. The consultation proposes new guidance for a firm to assess the risks of contingent leverage within its ICAAP, and additional reporting of those trades most affected by the risk. The consultation closes 23 February 2023.
12 October 2022

The PRA published a letter to CFOs, setting out thematic feedback from the 2021/22 round of Written Auditor Reporting, and providing further guidance as to its expectations. Overall, the PRA found there had been progress in key areas, but that the findings were like last year and further progress was needed to embed high quality practices. The main IFRS9 ECL thematic findings were that: model performance continues to be impaired, in part due to firms' approaches; that there are limitations in firms' ability to adjust economic scenarios for events shortly before year end, or to explore vulnerabilities in specific sectors; and that there has been less progress in adopting high quality practices that challenge recovery assumptions. The findings on climate related financial risks were that: firms were at different stages of preparation in capturing the risk on the balance sheet and in considering future requirements for data, modelling, and how to adapt economic scenarios to include climate risks; and firms’ control environments around the quality of new data sources were immature.
11 October 2022 

The Bank of England published the key elements of its annual cyclical scenario stress test for the UK banking system. The exercise subjects major UK banks to a hypothetical deep recession, large falls in asset prices, and higher interest rates. The results of the exercise will be published in the summer of 2023 and will inform banks' capital buffers.
26 September 2022

The PRA published a Discussion Paper (DP4/22) describing how it intends to approach policy making under the Financial Services and Markets Bill for banks, building societies, insurers and PRA investment firms. Much of what is described is a continuation of the PRA's current approach. But the PRA does indicate it will aim to be even more responsive to risks and opportunities when using policy to pursue its primary objectives; that its approach will be tailored to UK specific risks (eg the current approach being taken to simplify the regime for small UK domestic banks); it will take a proactive approach to the new secondary objectives (facilitate international competitiveness of the UK) - including looking for specific opportunities to pursue it; and it will aim to increase the frequency and the breadth of its engagement with a wider array of stakeholders, and consider different ways to engage. The consultation period ends on 8 December 2022.
8 September 2022 

Bank Underground has published some interesting articles in the last few months, including discussions about: capitalising climate risk within risk weighted assets; why operational risk matters for financial stability; the familiarity of risks with crypto assets and the crypto ecosystem, and the challenges for financial stability policy in the next decade.

Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR)

FCA announced that it had ramped up intervention on rogue financial promotions and had asked for 4,151 promotions between July and September to be withdrawn or amended - the highest number since it started publishing data. Retail lending, investments and banking accounted for 95% of interventions for authorised firms. The FCA also issued 303 alerts about unauthorised firms and individuals.
4 November  2022

The FCA published its findings from a review of firms' treatment of borrowers in financial difficulty after the pandemic. The FCA's press release indicates it found examples of good outcomes for consumers - but others must do a lot better. Just 30% of firms sufficiently explored a customer's specific circumstances. 32 firms have been told to make changes to how they treat customers, and so far £12m has been agreed in compensation affecting 60,000 customers. These figures may rise further. The FCA expects lenders to learn the lessons from the Covid pandemic to help borrowers during the cost-of-living squeeze.
3 November 2022

Nikhil Rathi, Chief Executive of the FCA gave a speech about the changing role of the FCA. He indicated a greater willingness by the FCA to take more legal risk, to intervene earlier and to test its powers to the limit - and highlighted a first criminal case against a bank for money laundering. The authorisation gateway has become more robust and 1 in 5 firms were initially rejected for authorisation, up from 1 in 14 last year. The FCA has investing in more technological solutions around big data. There is also focused engagement with lenders to ensure customers are treated fairly during the current cost of living crisis.
27 October 2022

The FCA published a consultation paper proposing new product sustainability labels, restrictions on the use of green terms in marketing material, and more disclosures. The proposed rules aim to tackle greenwashing and build trust in products that claim to be sustainable. The deadline for comment is 25 February 2023, and the aim is to finalise the rules and publish a policy statement by the end of H1 2023.
25 October 2022

The FCA published a discussion paper, considering the competitive effects of Big Tech within financial services. The discussion paper includes the FCA's analysis on the potential competition effects of Big Tech firms but it is also seeking other views on the benefits and harms. The discussion paper will inform the FCA's approach to digital markets.
25 October 2022

The FCA warned that millions of Britons are struggling with bills, as it published a snapshot of its Financial Lives 2022 survey, on vulnerability and financial resilience of UK consumers. It is the third such survey conducted by the FCA, after 2017 and 2020. The headline is that 7.8 million people are finding it a heavy burden to keep up with bills, and one in four UK adults are in financial difficulty or could quickly find themselves in difficulty. FCA press release.
21 October 2022

The FCA announced it had placed restrictions on twice as many firms in the investment market compared to last year, as part of its strategy designed to prevent harm in the consumer investment market. The FCA stopped 17 firms and seven individuals attempting to obtain a new FCA authorisation in the investment market where ‘phoenixing’ or ‘lifeboating’ was suspected. This is where firms or individuals try to avoid the consequences of having provided unsuitable advice by moving to or setting up a new firm. The FCA also stopped the UK operations of 16 Contracts for Difference providers, that had entered the UK’s temporary permissions regime in 2021, where suspected scam activity was detected, or consumers were encouraged to trade excessively to generate revenue. Without FCA action consumers could have lost around £100m a year.
18 October 2022

The FCA held its 2022 Annual Public Meeting. Nikhil Rathi delivered the opening remarks which set out the context in which the FCA has been operating and what they have done in the last twelve months.
12 October 2022

The FCA updated its guidance for branch closures, with additional expectations. When firms are considering closing a branch, and the need for an alternative is identified (eg a banking hub), firms should now make sure that alternative is in place and accessible before a branch closes or an ATM is converted. FCA: Branch and ATM closures or conversions; good practice and areas for improvement.
11 October 2022

The FCA reported that a review of business interruption claims handling found insurers were quickly paying out interim payments, reallocating resources quickly and proactively communicating with policyholders. However, the FCA raised concerns with, how firms handled claims from vulnerable customers, record-keeping of policy wordings, and identifying when customers experienced unnecessary delays. The FCA indicates its findings, and the provided examples of good practice should be relevant to all claims handling - not just business interruption claims. The FCA also updated its business interruption insurance claims data, which shows that £1.5bn has so far been paid to 36,000 small business, because of the Supreme Court test case.
4 October 2022

The FCA expressed concern that the cost of living pressures may cause some consumers to cut back on their insurance needs, leaving them without protection. The FCA wrote to insurance industry CEOs to make sure customers are protected from unnecessary products or add-ons and unfair penalties.
29 September 2022

The FCA gave a speech setting out expectations for firms and consumers from the FCA's consumer duty. Full implementation is by July 2023, but the FCA indicated that firms should be stepping up now to support customers facing current difficulties, and that boards and senior management have a critical role to play. As a reminder, the FCA's firm expectations are products have timely and clear information so that customers understand them; products and services meet customers' needs; customers receive support that meets their diverse needs; and customers should receive fair value.
29 September 2022

The FCA highlighted potential scams involving 'unauthorised' claims management companies. These unauthorised companies might offer debt write offs and compensation from lenders - for a fee; and typically appeal to individuals in financial difficulty. The risk is that the services offered fail to deliver the promised benefits - and may lead to additional losses. These types of scams tend to rise in times of economic hardship. Claims management companies must be authorised by the FCA.
16 September 2022

Taskforce on Disclosures about Expected Credit Losses

The Taskforce on Disclosures about Expected Credit Losses (DECL) published updated guidance on a complete set of high quality IFRS9 ECL disclosures. The guidance is primarily aimed at the largest UK banks and building societies but is likely to be relevant to other preparers of IFRS9 disclosures.
23 September 2022 

The Taskforce's earlier reports described what a complete set of high-quality disclosures might look like. The original guidance largely remains in place. This report includes updates to deal with identified gaps or weaknesses, further guidance on judgemental adjustments (eg post model adjustments), updates to encourage consistency and comparability, and good practice examples. It also includes an assessment of progress - and reports high levels of adoption.

Transition Plan Task force (TPT)

The UK Transition Plan Taskforce (TPT) was announced at COP26 by the UK Chancellor to develop the gold standard for private sector climate transition plans.

The TPT published its first consultation paper setting out a disclosure framework and accompanying implementation guidance for companies. The TPT also launched a 'sandbox' to test the proposals. The closing date for the consultation is 28 February 2023. It is expected that the TPT will produce further sector specific guidance in 2023.
8 November 2022