Regulatory update February 2023

February was a significant month as the government published updates for some of the Edinburgh reform proposals.

• On 1 February the government consulted on a new regulatory regime for cryptoassets. The proposals set out which cryptoasset activities would initially be brought within the regulatory framework, and what the approach would broadly look like. In this regard the proposals adopt the ‘same risk same approach’ principle – ie the activities would be regulated using existing approaches adjusted as appropriate for risks specific to cryptoassets. The FCA will be the relevant regulator and will in due course need to consult on the details of the regime. The consultation doesn’t cover stablecoins, while some activities will be considered later. This consultation closes 8 April 2023.
• Also, on 1 February the government published its response to its consultation on cryptoasset promotions. The document sets out the feedback received and the government’s response and intended approach to updating the Financial Promotions Order.
• On 7 February the government and Bank of England issued a joint consultation on an approach to a UK central bank digital currency (CBDC) or a ‘digital pound’. Further details can be found in this ICAEW insights article: Treasury and Bank of England release digital pound proposals. The BoE also issued a working paper alongside the consultation, exploring the design parameters (eg privacy, security) of a potential CBDC and setting out an illustrative conceptual model.
• On 14 February the government consulted on legislation to bring ‘Buy Now Pay Later’ (BNPL) products within the FCA regulatory oversight. The proposed legislation is intended to implement the government’s June 2022 response to its earlier consultations on whether and how to deliver a proportionate regulatory regime. The consultation closes 11 April.

• On 3 February a Bank Underground article looked at various reviews of the bankers’ bonus cap. It concluded "There is limited support from the existing literature that the bonus cap rule, as it is currently designed, is effective in curbing excessive risk-taking". But it also found that a cap on total reward might prevent excessive risk taking. One of the empirical reviews found that fixed pay increased so total compensation was unaffected.
• On 8 February the Bank of England published a policy statement providing feedback on three consultations about outsourcing and third-party risk management for Financial Market Infrastructure (FMIs, eg clearing houses). The Bank set out its expectations for compliance with the range of requirements in a Supervisory Statement and Code or Practice. FMIs will be expected to comply with the expectations by 9 February 2024.
• On 8 February the PRA published a consultation dealing with insurers in financial distress. The proposals implement draft clauses in the Financial Services and Markets Bill, currently before Parliament. The clauses include a requirement for the PRA to change the how the FSCS regime approaches write downs of policyholder claims. This is a short consultation with a deadline of 31 March 2023.
• On 27 February the PRA published its latest instalment (CP 4/23) in the evolving strong and simple banking framework. This consultation incudes the liquidity and disclosure requirements for the simpler firms’ regime. Proposals include a new conditional retail deposit ratio instead of the NSFR; that Pillar 2 liquidity guidance will generally not be applied; reduced liquidity reporting; and reduced reporting of Pillar 3 disclosures. The consultation closes on 30 May 2023. Earlier consultations dealt with the definition of simpler firms (CP 5/22), and transitional approaches (CP16/22). The PRA plans to consult on capital requirements in H1 2024.
• Also on 27 February the PRA published a consultation proposing enhancing the proportionality of remuneration requirement for simpler banking firms. The proposals include removing the requirement for smaller firms to apply rules on malus, clawback and buyouts. The consultation closes 30 May 2023.

• On 2 February the FCA published a further consultation on the proposed ban on debt packager firms from receiving referral fees from debt solution providers. The new consultation was to gather further evidence following the initial consultation in November 2021. The consultation closed 2 March 2023.
• The FCA published a report showing the results of its actions in 2022 against authorised firms breaching financial promotion rules and its investigations into unregulated activity. The FCA's key message is that it significantly increased intervening in response to poor financial promotions compliance in authorised firms and its activity involving unauthorised firms and individuals.
• On 3 February the FCA issued a series of letters to firms setting out the timeline for the introduction of the customer duty, its expectations and feedback from a review of implementation plans. There were 19 letters tailored to specific sectors supervised by the FCA.
• On 6 February the FCA issued a statement about how cryptoasset firms will be brought into the new UK financial promotion rules (in place from 1 February 2023). The FCA will publish final rules for cryptoasset firms when the government has finalised the relevant legislation. The legislation will include provisions whereby cryptoassets firms registered with the FCA under the MLRs (without being an authorised person) can promote crytoassets. The expects to take a consistent approach to cryptoassets to that taken for other high-risk investments. This would mean firms being required to use specific risk warnings and positive frictions (such as a 24-hour cooling off period) in their consumer journeys, in addition to the overarching requirement that their promotions are clear, fair and not misleading.
• On 15 February the Strategic Working Group (a non-decision-making consultative forum for industry and stakeholders to input into the vision and strategic roadmap for the future development of open banking) published its report into The Future Development of Open Banking in the UK.
• On 20 February the FCA published a discussion paper (DP 23/2) inviting comment on ways to improve asset management regulation. While the FCA indicates any changes will be consistent with international standards and enable technological development and innovation, it is looking to develop a more modern regime tailored to the needs of UK markets and consumers. The DP covers a range of areas, including how to support firms’ use of technology to improve the customer experience, and how the FCA’s rules could be streamlined and improved. The deadline for comment is 22 May 2023
• On 21 February, alongside it latest scamsmart campaign, the FCA "found that a quarter of investors who avoided a scam are taking inspiration from Sherlock Holmes to stop scammers in their tracks". The FCA announcement highlights warnings signs such as: unexpected contact; time pressure to invest before a set date; exclusivity or secrecy; social proof such as fake reviews; unrealistic returns; false authority such as using convincing literature and websites or claiming to be regulated; flattery; and remote access.

• On 30 January the FRC published an update to its Statement of intent in ESG. This sets out areas where the FRC believes there are still challenges in ESG reporting and the actions the FRC is taking. The statement highlights the areas of focus for the next year, including data, materiality to ensure disclosures are relevant and provide decision useful information, changes to the strategic report, a thematic review of metrics and targets, new requirements will be added to Technical Actuarial Standards, audit quality inspections will look at the audit work on climate risks.
• On 2 February the FRC announced a research project to consider the gender imbalance among UK qualified actuaries. The research objectives are: i) Gather and assess primary evidence on the reasons for gender imbalances among senior actuaries; ii) Assess the barriers/disincentives for women to progress towards senior actuarial positions; and iii) Identify cases where good practice has supported women’s progression to senior positions in the actuarial profession. The announcement includes details how to take part in the project.
• On 24 February the FRC published the results of a thematic review of IFRS 9 audits by the Big Four audit firms. The review considered a number of matters including the classification and measurement of financial instruments; ECL modelling; model assumptions; measuring Significant Increase in Credit Risk; modelling multiple economic scenarios; post model adjustments; the completeness and accuracy of data inputs. The review found that the audit firms have made significant investment in audit methodologies, it identified areas of good practice, but also found matters for improvement, relating to both the audit firms’ methodologies and their implementation.