Regulatory update - January 2023

On 13 January HMT published a review and call for evidence in relation to the Payment Services Regulations. The review found that the payment services regulations have supported a strong, innovative, and competitive UK payment sector. It also found that there are several areas where the regulations could work better. The call for evidence is seeking views on how UK payments regulation should evolve to meet the Government's aims and challenges identified by the review. Views are also sought on connected areas such as E-money Regulations, and the Cross-border Payment Regulation. The call for evidence closes 7 April 2023.

On 26 January the Government issued a consultation proposing a dedicated insurer resolution regime in the UK. The aims are to preserve UK financial stability in the event of insurer failure and remain a world leader in designing an insurance regulatory framework. In this latter regard, the government intends aligning with international standards in insurer resolution. The proposals include that the Bank of England would be the Resolution Authority (as with the banking resolution regime), the objectives for and processes to enter into resolution, the stabilisation options (eg bail-in, temporary public ownership), and new powers that may be needed by the Resolution Authority. Separately, changes to the insurance solvency regime are being debated as part of the Financial Services and Markets Bill. The consultation closes 20 April 2023.

On 10 January 2023, the three supervisory departments of the PRA wrote to chief executives setting out their 2023 priorities:

Deposit-takers 2023 priorities:

• Credit risk and the effects of the current environment on traditionally higher risk areas such as retail credit card portfolios, unsecured personal loans, leveraged lending, commercial real estate, buy-to-let, and lending to SMEs.
• Credit risk and the effects of the current environment on traditionally higher risk areas such as retail credit card portfolios, unsecured personal loans, leveraged lending, commercial real estate, buy-to-let, and lending to SMEs.
• The associated risks to financial resilience and whether firms have adequate capital and liquidity positions.
• Risk management and governance as firms continue to unintentionally accrue large and concentrated exposures to single counterparties, without fully understanding the risks that could arise. The PRA indicates it wants firms in 2023 to ensure that the lessons from past crises are learned in full and are thoroughly embedded across the first and second lines of defence.
• Operational risk and resilience with continued roll out of the PRA’s impact tolerance framework. The PRA highlighted some specific areas where firms will need to manage risks: large / complex IT change programmes; material increase in outsourcing; growth in crypto products.
• Model risk as firms are expected to implement the principles in the PRA’s model risk management consultation that was published in June 2022.
• Data as in recent skilled persons reviews of regulatory returns have repeatedly identified deficiencies in the controls over data, governance, systems, and controls. The PRA expects firms to improve their reporting, including by considering the thematic findings. The PRA indicates it will continue to use skilled persons reviews in this area in 2023.
• Financial risks from climate change where the PRA notes that level of embeddedness varies from firm to firm and that all firms need to make more progress. It expects firms to take a proactive approach to addressing risks. The letter provides some specific examples of areas where firms are expected to be able to demonstrate capabilities in meeting supervisory expectations.
• Other areas include diversity (where the PRA will issue a consultation paper in 2023), and resolution.

International banks 2023 priorities: financial resilience; operational risk and resilience; data; financial risks from climate change and diversity – as described above.

Insurance 2023 priorities

• Risks to financial resilience arising from (for life insurers) growing concentrations in assets (notably those that are internally rated and valued) that may result in a greater exposure to credit and concentration risk; and (for general insurers), the continuing pressures on claims inflation.
• Adequacy of risk management and controls due to multiple external uncertainties. The PRA will focus on how well insurers’ capital models are operating in conditions that differ substantially from those that prevailed when much of current modelling was developed. There will be a thematic review of bulk purchase annuities.
• Implementing financial reform following the Government’s announcements in November 2022 to make changes to Solvency II.
• Reinsurance risk and whether the continued high level of longevity reinsurance and the emergence of the more complex ‘funded reinsurance’ in the UK life market could reduce the protection of UK policyholders.
• Operational resilience with continued roll out of the PRA’s impact tolerance framework.
• The ease of exit for insurers. The PRA will consult during 2023 on requirements for insurers to prepare exit plans. In the meantime, the PRA expects firms to begin considering how they might exit the market if the need arose.
• Non-natural catastrophe risk (including cyber), as exposure management capability remains immature. During 2023, the PRA intends to work with industry to enhance practice,
• Other areas include financial risk from climate change, and diversity.

On 23 January the PRA wrote to CEOs giving feedback on the 2022 insurance stress test. 54 insurers took part, with life insurers subject to an adverse economic scenario and an increase in longevity, and general insurers subject to a range of natural catastrophe scenarios. Overall, the PRA found the UK insurance sector to be resilient to the specified scenarios, but some matters needed further consideration. These include the suitability and certainty of reinsurance contracts, the potential for concurrent management actions across the sector and therefore their effectiveness, how to quantify catastrophe losses, and governance arrangements. The PRA plans to engage with life and general insurers in Q2 and Q3 2023 respectively on the timing and approach for the next stress testing exercise.

The Bank of England and Bank Underground published several interesting research articles, working papers and blogs, including:

• How does household financial resilience compare to the early 1990s recession
• The demand for long term mortgage contracts and the role of collateral
• The cyclicality of bank credit losses and capital ratios under expected loss model
• How are the rising cost of living and interest rates affecting households

On 11 January the FCA consulted on guidance (CP 23/1) for firms that provide non-investment insurance products to provide support for customers that are in financial difficulty regardless of the reason why. It proposed the guidance replace the guidance introduced in November 2020, that firms should support customers in financial difficulty due to Covid. The FCA indicates that the proposed guidance sets out its views on what to consider to comply with the Consumer Duty rule. The guidance covers its purpose, when firms should act, what actions to take, and how to communicate with customers. The aims include enabling customers to maintain appropriate and affordable insurance. The consultation closes 11 March 2023. The FCA will consult later on the premium finance aspects of the Covid guidance.

On 19 January the FCA announced it will undertake a thematic review of retirement income advice. The review is a response to the Government's pension freedom reforms, the wider range of retirement options, and the need for customers to get food advice. The FCA will contact firms to be included in the review in early 2023, and the FCA aims to publish its findings in Q4 2023.

On 25 January the FCA highlighted areas that firms should focus on in the run up to the Consumer Duty going live on 31 July 2023. These are: prioritising areas that will have the biggest impact on customer outcomes, making changes needed to ensure customers understand products and services, and working with other firms to make sure all are delivering good customer outcomes. The FCA also published the results of a survey of the implementation plans for the largest firms. Many firms were found to understand the new requirements, but some firms were found to be behind in their planning. The FCA also announced it will undertake a survey of over 600 small to medium sized firms to understand their progress.

On 3 January the FRC launched a survey into the use of Artificial Intelligence and Machine Learning in UK actuarial modelling practices across pensions, life and general insurance. The aim is to understand new risks created by the technology. The survey will consider: i) How AI is used and by which actuarial departments; ii) What approaches and techniques are used; iii) Governance; iv) and how matters i) to iii) affect how outputs are used internally and affect uncertainty viz traditional approaches.