Regulatory Update July 2023

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. 

On 10 July the chancellor outlined various proposed reforms, including to pensions and capital markets, as part of his mansion house speech. The pension reforms include an agreement with the largest defined contribution pension providers to invest 5% of their default fund assets in unlisted equity, and for Local Government Pension Schemes to double investments in private equity to 10%. Plans to establish an entirely new kind of stock market that allows private companies to access capital markets without floating on a stock exchange and a review onto the future of payments were also announced. 

On 10 July HM Treasury published its response to its consultation proposing to modernise the Consumer Credit Act (CCA), which governs the regulation of retail credit – for example credit card purchases, personal loans and consumer hire agreements. The government reported widespread support to reform the CCA, and reiterated its belief that reform would facilitate innovation, increase accessibility of credit products, promote economic growth, and bolster consumer protection. The government will now develop more detailed proposals (including potential recasting of some of the CCA’s provisions into FCA rules) which it aims to publish in 2024. Given the scale and complexity of the CCA, reform and implementation is expected to take a number of years.  

On 11 July HM Treasury, as part of the reform of UK financial services, published: draft SIs and policy statements for the regulation of securitisations and for a consolidated tape, and a consultation for a digital securities sandbox (DSS). The aim of the DSS is to facilitate the testing and adoption of digital securities across UK financial markets. 

On 20 July HM Treasury published a policy statement and announced new rules for bank account closures. The new rules will require banks to increase the notice period to 90 days from one month, and to explain to the account holder the reason for closure. The new rules will be implemented by secondary legislation.  The FCA will also undertake a review whether the banks are applying the Politically Exposed Persons requirements proportionally.  The policy statement is here. 

On 3 July the PRA's Executive Director for International bank supervision outlined three areas of risk potentially facing international banks. Firstly, that a global economic breakdown (notably US led) could adversely affect the private equity and credit markets, repo matched book activity, and structured equity derivatives. Secondly that commodity markets are complex and susceptible to disruption by climate effects. Thirdly that the current interest rate environment and macro environment may challenge the business model of many (especially small) international investment and wholesale banks.      

On 6 July the PRA published its  Annual Report for 2022/23.  The report includes a summary of how the PRA has delivered its strategic goals for the period 2022/23 – being: retain and build on the strength of the banking and insurance sectors reforms following the financial crisis; be at the forefront of identifying new and emerging risks, and developing international policy; support competitive and dynamic markets in the sectors that we regulate; and run an inclusive, efficient, and modern regulator within the central bank.   

On 10 July the Governor described the work the Bank is doing around Central Bank Digital Currencies and highlighted two foundational concepts it will apply: wherever people hold their money, they can be confident of its value; and that when people use money to pay for something, they can be confident the payment will settle. 

On 12 July the Bank published the record of the 3 July Financial Policy Committee meeting and the biannual Financial Stability Report . The FPC reports that “the global economic outlook is highly uncertain, and the risk environment is challenging” due to inflation, raising interest rates, and geo-political tensions; and that this is putting pressure on UK household and businesses. The FPC, however, finds that “UK banks remain strong enough to support households and businesses” (even if future economic conditions are worse than expected); although non-bank financial institutions need more resilience.

On 17 July the PRA and FCA published an update from the co-chairs of the Regulatory Initiatives Grid. This was mainly to explain the implications of the Financial Services and Markets Act 2023 coming into force. A full update of the Grid is planned for the last quarter of 2023.   

On 19 July the PRA published a consultation paper proposing to reduce the Pillar 3 remuneration requirements for smaller banks and building societies. The proposals follow previous consultations (CP4/23: The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms and CP5/23: Remuneration: Enhancing proportionality for small firms) to provide for a complete disclosure package for smaller firms.  

On 24 July the Bank sent a letter setting out an area of focus for the second Resolvability Assessment Framework assessment starting on 6 October 2023. The Bank has three resolvability outcomes for which it will monitor firms' progress in maintaining and enhancing their ability. These are: i) having adequate financial resources in the context of resolution; ii) being able to continue to do business through resolution and restructuring; and iii) co-ordinating and communicating effectively internally and with the authorities and markets so that resolution and any restructuring are orderly. The letter explains the Bank intends to undertake a more detailed assessment of firms’ preparations for resolution, with a focus in 2023/24 on the adequate financial resources outcome. 

On 31 July the PRA updated its "approach to supervision" documents (last updated in 2018). The latest documents capture changes brought about by the Financial Services and Markets Act 2023, notably the new secondary competition objective. In respect of this the PRA notes that "Robust standards contribute to economic growth by reducing the frequency and severity of financial crises and by creating trust in the UK as a global financial centre, which makes the UK an attractive place to do business."

On 3 July the FCA warned home and motor insurers that they must improve their treatment of vulnerable customers and how they handle claims. The warning came as result of an increase in complaints against insurers, and an FCA review that found breaches of its rules and weakness in processes potentially leading to poor customer treatment. The FCA also published updated insurance guidance for the support of customers in financial difficulty, and that came into effect on 31 July 2023.

On 5 July the FCA announced three measures to reform markets. They are a consultation on a framework for a consolidated tape (in the first instance this would be just for bonds); new guidance on the regulatory perimeter for trading venues (ie regulated markets, multilateral trading facilities and organised trading facilities), a new pre-application support service for overseas wholesale firms wishing to expand into the UK, firms looking to set up in the devolved nations, and those with innovative, complex or high-risk business models.

On 5 July the FCA welcomed the launch of an industry led consultation on a voluntary Code of Conduct for ESG data and ratings providers. And gave its support to this industry-led solution to increase transparency and trust in this growing market. The Code consultation will run for 3 months, until 5 October 2023, with an aim of then finalising by the end of 2023. The creation of the industry group came about in 2022 when the FCA appointed the International Capital Market Association and the International Regulatory Strategy Group to convene a group to develop a voluntary code.

On 6 July the FCA set out an expectation that consumers are offered fair and competitive rates, and that the banks accelerate their efforts to do so. On 31 July the FCA then set out a 14-point action plan to ensure banks and building societies do pass on appropriately interest rate rises to savers, that they communicate more effectively with customers and that they offer better savings rate deals. This followed a review by the FCA during which it found that between January 2022 and May 2023, nine of the biggest savings providers, on average passed 51% of base rate increases through to their notice and fixed term deposits, and only 28% to their easy access deposits. The 14-point action plan includes a number of reviews or assessments that the FCA will undertake (eg firms offering the lowest rates will be required to provide a fair value assessment under the Consumer Duty); and various expectations (eg that firms will take action to prompt customers in lower paying savings accounts to consider alternatives, or they will encourage customers to search for higher rates). The FCA will continue to monitor the market and it indicates it will take further action if it doesn’t see significant progress by the end of 2023. On 18 July the FCA and ICO also wrote to UK Finance and BSA clarifying that savings providers can inform their customers of the best rates available to them, even where they have objected to direct marketing.

On 6 July the FCA published a Dear CEO letter setting out its findings from a review of liquidity management in funds. In overview, The FCA found that firms need to increase their focus on liquidity risk, and that the current gaps in liquidity management could lead to a risk of investor harm. The letter sets out an expectation that firms review their liquidity management arrangements, consider the application of the FCA's findings, and make any necessary enhancements. Specific weaknesses identified included: 1) the building blocks and tools for effective liquidity management lacked coherence when viewed as a full process and were not always embedded into daily activities; 2) many firms attached insufficient weight to liquidity risk management in their governance oversight arrangements; 3) some stress testing methodologies were insufficient to assess the actual liquidity of the portfolio and used assumptions that were not appropriately conservative (eg some firms’ models assumed that they would always sell the most liquid assets); 4) firms typically had governance and organisational arrangements in place to meet large one-off redemptions but did not have sufficient arrangements in place to oversee cumulative or market-wide redemptions that could have a significant impact on a fund; and 5) there were wide variations in the application of anti-dilution tools such as swing pricing, which could affect the price investors receive when redeeming.

On 20 July the FCA published the results of its and Practitioner Panel’s 2022/23 survey on the FCA’s performance. The FCA reported a majority of firms in the survey had a positive view of its performance. Nevertheless, firms wanted the FCA, to make sure it acted proportionately; to respond efficiently to innovation and new challenges; to improve trust and confidence in the FCA and its supervisors; to look at how the use of data requests is fed back to firms; and to make sure there are ongoing improvements in the authorisations process in the service standards quarterly reporting.

From 1 August the FCA's digital Sandbox will be available permanently, following two pilot exercises. The Sandbox is a testing environment that enables the FCA to support firms at the early stage of product development by enabling experimentation through proof of concepts. Alongside innovators, the permanent Sandbox will now also allow data providers to apply to list their data on the platform to gain traffic and insights on its usage. The FCA indicates participants in the Sandbox will have permanent access to: high-quality datasets and Application Programme Interfaces (APIs); robust data security protection, a collaborative platform (eg to share learnings), and an observation deck to allow observation of in-flight testing at a technical level.

On 26 July the FCA published the results of its third Financial Lives Survey (the results are based on 19,000 respondents to the main May 2022 survey, and a short update survey in January 2023). The FCA reported that "less than half of UK adults, or 21.9m people, had confidence in the UK financial services industry and just 36% agreed that most financial firms are honest and transparent in the way they treat them". The report also revealed the negative effects of the current cost of living crisis as 54% of adults (28.4m people) reported feeling anxiety or stress; 12.9m adults had low financial resilience in May 2022 (a figure that has likely now worsened); 56% of adults had reduced or stopped saving, or used savings to meet their daily needs in the 6 months to Jan 2023; and 13% of adults (6.2m people) had cancelled at least one insurance policy in the 6 months to Jan 2023. In terms of help, not all adults were able to contact their financial services provider or get the support they needed. In the 12 months to May 2022, 14% of adults (7.4m people) who held one or more financial products unsuccessfully attempted to contact one or more of their financial services providers. The survey also found that an increasing number of people are choosing to use digital banking, payments and other online services, with almost nine in ten adults (88% or 42.9 million) having banked online or used a mobile app in 2022, up from 77% in 2017. There are, however, still heavy users of cash (6% or 3.1m people) and that are reliant on face-to-face services.

On 31 July the FCA announced that the new Consumer Duty rules had come into force. The statement set out that customers should expect: i) helpful and accessible customer support; ii) timely and clear information that can be understand, so customers can make good financial decisions; iii) providers to offer products and services that are right for the customer, rather than pushing products and services that are not needed; iv) products and services should provide fair value (ie customers should not be ripped off or pay unexpected costs); and v) firms should consider if customers are in a vulnerable situation.

On 6 July the FRC published the annual summary of its Audit Quality Inspection reviews. The FRC reviewed in total 100 audits in the period 2022/23, and reported an improvement in audit quality at the tier 1 firms (i.e. audits obtaining the top two scores). It notes that all audit firms are investing in developing audit systems, methodologies, guidance and training, but that the extent of improvement is hampered by inconsistencies and weaknesses in the execution of audits.

The FRC did not disclose the number of bank or insurance audits, but we think they may account for around 20% of the total. In the overall report, the FRC identified two areas of common weakness in bank audits: inadequate testing of ECL (in particular around significant increases in credit risk, and post model adjustments), and payment and settlement processes (including a lack of understanding of the processes). Although described as common weaknesses, it appears that the findings relate to four audits. The FRC also found examples of good practice within bank audits, notably in relation to General IT controls, independent rebuild of ECL models, and testing valuation models for financial instruments. There were no reported findings for insurance audits. More detail on bank audits may be found in the individual audit firm specific reports.