The following is a list of some regulatory publications or announcements from October 2023 affecting UK financial services.
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 19 October the first meeting of the Joint EU-UK Financial Regulatory Forum took place, with a joint statement issued on 23 October (see Regulatory Update for June 2023 for a summary of the MoU between the two parties). Discussions included, respective regulatory developments, vulnerabilities in non-bank financial intermediation and the need to finalise international reform, implementation of Basel III, Solvency II reform, and how to progress an orderly transition to net zero. The next meeting will take place in Spring 2024.
On 30 October the government published its response to its May 2022 consultation on managing a failure of a systemic digital settlement asset. The response indicates the proposals were broadly supported and the government now intends to lay the necessary legislations to implement its proposals – notably the use of a modified Financial Market Infrastructure Special Administration Regime in the event of failure – and to provide some additional clarity around the proposals.
On 30 October the government provided an update on plans for the regulation of fiat-backed stablecoins in the UK. The update provides further detail on the government’s proposed approach to regulating UK fiat-backed stable coins and indicates an intention, subject to Parliamentary time, to bring forward secondary legislation by early 2024.
Also on 30 October the government published its response to its February 2023 consultation on a regulatory regime for cryptoassets. The government reports that around 80% of responses were ‘mostly supportive’, with only 4% being ‘mostly critical’. Generally, the government intends to take forward the proposal set out in the consultation and bring cryptoassets within the regulatory perimeter. It may however provide further clarity (eg whether NFTs are within the definition of a cryptoasset) or make minor modifications to certain parts of the proposal.
Bank of England / Prudential Regulation Authority (PRA)
On 3 October the PRA announced it will run a dynamic general insurance stress test in 2025. The objectives for the test include assessing the industry’s solvency and liquidity resilience and insurers’ risk management capabilities. As the test will be significantly different to previous exercises, the PRA will engage with trade bodies ahead of providing further details on the exercise in H1 2024.
On 4 October the PRA published a consultation paper (CP21/23) on the PRA’s approach to third country insurance branches. The proposals are intended to consolidate and formalise existing PRA policy, while also providing more clarity on the PRA’s expectations for third-country branches.
On 6 October the PRA published its annual assessment of the credit union sector. The main points made were the need to be resilient in the face of a challenging economic environment, including the need to manage liquidity as there is an increased likelihood that customers may withdraw funds (eg in a search for better yield). For smaller credit unions, the PRA also highlighted the importance of good governance and the challenge of attracting and retaining new board members.
On 10 October the Financial Policy Committee (FPC) published its latest summary and record of the UK financial system. The FPCs overall assessment is that the overall environment continues to be challenging and prospects for short term global growth are subdued. As a result, some parts of the financial system are vulnerable to stress from increased and higher rates. Nevertheless, the UK banking system is judged to be strong enough to absorb losses and support customers.
ON 10 October the Bank published the FPC’s approach to assessing risks in market-based finance. Since the global financial crisis, market-based finance has grown significantly, and non-bank financial institutions provide around 50% of the financial sector’s assets. The document sets out the importance of market-based finance and the need for resilience; and the FPC’s approach to risk identification, assessment, monitoring, mitigation, and how it is developing its approach further.
On 26 October the PRA published a feedback statement (FS 2/23) summarising responses to its October 2022 discussion paper on Artificial Intelligence and Machine Learning. Some key points made by respondents were, a regulatory definition would not be helpful, any guidance would need to be capable of dealing with rapidly evolving technology, more coordination would be helpful as the regulatory landscape is complex and fragmented, increasing use of third party models and data is a concern and where more guidance might be helpful, a joined up approach across a firm’s functions might be needed to mitigate complex AI systems that cut across multiple functions.
On 31 October the Bank published a Stablecoin ‘Explainer’, with answers to the following questions: what is a stablecoin? how does it work? is Bitcoin a stablecoin? do stablecoins exist today in the UK? is stablecoin the same thing as a central bank digital currency?
There were some interesting speeches:
On 16 October the Deputy Governor for Prudential Regulation discussed four lessons from the bank failures earlier this year. (1) The need to measure risk correctly (so SVB did not reflect the significant interest rate risk that it took and consequently did not have adequate financial resources); (2) That money is not everything – good governance, controls, risk culture etc are also important (CS failed because of a weak business model, damaging misconduct cases); (3) Making a success of failure (ie the need for an effective resolution regime that can provide options); and (4) The right regulation for the right firm (ie that regulation can be sensibly tailored to different business models). Maintaining continuity of access to deposits for a firm in resolution, and the regulatory approach to branches, were highlighted as areas subject to further review by the PRA.
On 18 October an FPC external member discussed the risks with and the Bank’s approach to cyber risks and operational resilience. 80% of firms mentioned cyber risk in response to the Bank’s latest Systemic Risk Survey of what worries financial firms - the most cited risk. Firms are increasingly digitised and interconnected, which increases the risk of disruption to the financial system; and while cloud outsourcing to specialist providers can enhance individual resilience it also introduces concentration risk within the system as there are only a small number of such providers. The bank has a number of work strands to better understand the risks and deal with them (eg CBEST tests, a DP on use of its powers over critical third party providers).
On 26 October the Deputy Governor for Financial Stability talked about recent developments for cross border payments, the digital pound and stablecoins.
Financial Conduct Authority
On 24 October the FCA reported the results of its review of the rules around SME access to the Financial Ombudsman Service (FOS). Since 2019 small and medium sized SMEs have been able to refer complaints to the FOS. Following the review, the FCA proposes no changes to the SME eligibility criteria to access FOS. The FCA notes that the existing criteria mean 99% of private businesses in the UK have access. There is also a separate voluntary Business Banking Resolution Service that caters for larger SMEs.
On 12 October the chair of the FCA highlighted the regulator’s priorities for the UK asset management industry, following a review of responses to its discussion paper (DP 23/2) published in February 2023. The priorities are improving the proportionality of the alternative fund management regime, updating the retail funds regime, and supporting technical innovation.
On 31 October the FCA reported that it had secured changes to potential unfair contract terms of certain unregulated ‘Buy Now Pay Later’ providers. The FCA highlighted that 27% of UK adults used BNPL in the 6 months to January 2023, significantly up from 17% for the 12 months to May 2022; and that BNPL users are more likely to be in financial difficulty. The FCA does not regulate BNPL but is committed to use its powers where it can, to protect consumers.
Financial Reporting Council
On 18 October the FRC published research highlighting the ongoing gender imbalance in the actuarial profession. While some progress has been made recently, the research found that there are still significant obstacles for women entering and advancing in the actuarial field.
On 18 October the FRC launched a consultation with Proposed Revisions to ISA (UK) 250 Section A and ISA (UK) 250 Section B (consideration of laws and regulations in an audit and the auditor’s statutory right / duty to report to regulators). The FRC proposes a more principles-based approach so that information that is of such significance is reported to regulators even where law, regulation or relevant ethical requirements do not require it. It is proposed the revised standards would be effective for periods beginning on or after 15 December 2024. The consultation closes 12 January 2024.
On 26 October the FRC published Research on the use of Artificial Intelligence and Machine Learning in UK actuarial work. The research found General Insurance pricing to be making greatest use of AI and ML, but that actuaries have widespread plans to expand usage. The research highlights the ‘black box’ nature of and a lack of understanding of AI / ML models as leading concerns; along with the potential for bias and discrimination.