Financial institutions general regulatory news, April 2021 # 4

Contents

• Financial Services Act 2021 receives Royal Assent
• Tackling financial exclusion: House of Lords Liaison Committee follow-up report
• Safe harbour provisions to support the wind-down of critical benchmarks: RFRWG letter
• Net zero and the future of green finance: Treasury Committee report
• UK Future Regulatory Framework Review: BoE speech on PRA policymaking
• UK MiFID research and best execution reporting requirements: FCA CP21/9
• Strengthening financial promotion rules for high-risk investments and firms approving financial promotions: FCA DP21/1
• Compliance, culture and evolving regulatory expectations: FCA speech
• Improving effective regulation: FCA speech
• Why black inclusion matters: FCA speech
• Climate change and sustainable finance: FCA webpage
• Digital sandbox pilot: FCA evaluation
• Cyber threats: FCA insights from 2020 Cyber Coordination Groups
• Sustainable finance standards: FMLC concerns about UK-EU divergence
• CMA annual concurrency report 2021
• RAO: High Court considers "carried on by way of business"
• CRR: European Commission consults on extending transition period relating to treatment of exposures to third-country CCPs
• Climate risk: ECB speech banking supervision
• Global Anti-Corruption Sanctions Regulations 2021 and guidance

Financial Services Act 2021 receives Royal Assent

The Financial Services Bill 2019-21 has received Royal Assent. Among other things, the Financial Services Act 2021:

• amends the Financial Services and Markets Act 2000 (FSMA) to establish the legislative framework for the Investment Firms Prudential Regime and for the UK implementation of the final Basel III standards;
• amends FSMA to establish the legislative framework for the Overseas Funds Regime and the Gibraltar Authorisation Regime;
• amends the UK Benchmarks Regulation (UK BMR) to provide the FCA with additional powers to manage an orderly wind-down of a critical benchmark, such as LIBOR, and extend the transitional period for third country benchmarks under the UK BMR;
• amends the Criminal Justice Act 1993 and the Financial Services Act 2012 to increase the maximum sentence for criminal market abuse;
• gives HM Treasury the power to bring interest-free buy-now pay-later products into the scope of FCA regulation; and
• amends the Payment Services Regulations to make it easier for retailers of all sizes to offer cashback without a purchase.

The House of Commons rejected the House of Lords' amendment requiring the Financial Conduct Authority (FCA) to make rules introducing a duty of care by 6 April 2022. Instead, the Act requires the FCA to carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers, and to publish its analysis by 1 January 2022 and any rules as it considers appropriate by 1 August 2022. The FCA intends to consult on the duty of care in May 2021.

The House of Commons debate and record of the proceedings have been published. Details of the rejected clauses and the substituted clause on duty of care are set out in a House of Lords document.

Except for certain provisions detailed in section 49, the commencement dates for the provisions of the Act will be specified by HM Treasury in regulations.

Tackling financial exclusion: House of Lords Liaison Committee follow-up report

The House of Lords Liaison Committee has published a follow-up report on financial exclusion. The report examines the progress made by the government in the implementation of the recommendations made by the Select Committee on Financial Exclusion in its report Tackling Financial Exclusion: A country that works for everyone?, which was published in March 2017, as well as analysing the evidence received and making further recommendations to the government and the FCA.

Safe harbour provisions to support the wind-down of critical benchmarks: RFRWG letter

The Working Group on Sterling Risk-Free Reference Rates has published a letter it has sent to HM Treasury relating to the wind-down of critical benchmarks and the possible safe harbour HM Treasury has consulted on to reduce the risk of contractual uncertainty and disputes that may arise from the transition of tough legacy contracts.

Among other things, the Working Group welcomed HM Treasury's recent consultation on whether there is a case for incorporating a supplementary legal "safe harbour" provision. Written before the Financial Services Bill received Royal Assent, the Working Group explained that it understands that the safe harbour protections outlined in the consultation are unlikely to be included in the Financial Services Bill. While its understanding is that this does not represent a substantive decision on the merits of introducing such protections, the Working Group is keen to receive an update from the government on whether it intends to introduce safe harbour protections and, if so, how and when.

Net zero and the future of green finance: Treasury Committee report

The House of Commons Treasury Committee has published its Thirteenth Report of Session 2019-21 on net zero and the future of green finance. In the report, the committee makes a series of recommendations for how the government can achieve net zero by 2050, including:

• financial products should be clearly labelled to allow consumers to assess their relative climate impacts and to make choices accordingly. HM Treasury and the FCA should consult on making green labels mandatory, including how they could encourage innovation and be widely understood by retail consumers;
• greenwashing may be an issue, with the potential to mislead consumers. HM Treasury must ensure the FCA has the appropriate remit, powers and priorities to prevent the greenwashing of financial products available to consumers;
• the FCA should consider undertaking further FinTech challenges to encourage innovation and set out how it will tackle remaining regulatory barriers that discourage innovative green financial products from coming to market;
• the overall cost of achieving net zero is uncertain. The government should set out the principles on which the UK will fund its transition to net zero. It should also set out its own cost assessments of achieving net-zero by 2050, its methodology, and highlight where the uncertainties lie;
• with the first issuance of a UK green sovereign bond expected in summer 2021, the UK is lagging behind other countries. The government should set out its tolerance for them to be more expensive than other forms of government debt; and
• many pension savers in defined contribution (DC) pension schemes are invested in their pension's default fund. HM Treasury will not require default funds to move to greener alternatives but maintains consumers should not have to switch out to invest sustainably. The government should resolve this apparent contradiction. It should also report on the proportion of pension holders in DC pension schemes who remain in the default fund and the extent to which those default funds are aligned with a path to net zero.

UK Future Regulatory Framework Review: BoE speech on PRA policymaking

The Bank of England (BoE) has published a speech by Victoria Saporta, BoE Executive Director of Prudential Policy, in which she discusses the Prudential Regulation Authority's (PRA's) changing approach to policymaking and its "strong and simple" prudential framework for small, non-systemic banks and building societies, the discussion paper for which was published on the same day (see Banking and finance regulatory news in our Related materials links).

Dr Saporta explains that, under the government's proposals for the new financial services regulatory framework, the PRA is expected to move from rule taker to rule maker for most areas of prudential policy within its remit. To guide its overall approach, it has a vision to be an accountable, responsive and accessible policymaker. Ms Saporta then elaborates on what this means. Dr Saporta observes that realising this vision will take years of coordinated work, including new legislation setting out the regulatory framework and the transfer of rules from the statute book to the Rulebook.

UK MiFID research and best execution reporting requirements: FCA CP21/9

The FCA has published a consultation paper, CP21/9, on changes to conduct and organisational requirements laid down in UK laws and regulations implementing the EU Markets in Financial Instruments Directive (MiFID). The FCA states that the proposals are the first output of the FCA and HM Treasury work on capital markets reform to ensure the UK regime it is adapted to the structures of UK markets and maintain the highest regulatory standards.

The proposals relate to:

• the inducements rules relating to research to broaden the list of what are considered minor non-monetary benefits. The FCA proposes to include research on SMEs with a market cap below £200m, fixed income, currencies and commodities (FICC) research, openly available research and research provided by independent research providers; and
• the removal of best execution reporting obligations (RTS 27 and RTS 28 reports) on execution venues and investment firms.

The consultation closes on 23 June 2021.

Strengthening financial promotion rules for high-risk investments and firms approving financial promotions: FCA DP21/1

The FCA has published a discussion paper, DP21/1, on strengthening its financial promotion rules for high-risk investments and firms approving financial promotions. In its discussion paper, the FCA seeks views on three areas where changes could be made to protect consumers from harm:

• the classification of high-risk investments;
• the segmentation of the high-risk investment market; and
• the responsibilities of firms which approve financial promotions.

Comments can be made on DP21/1 until 1 July 2021. The FCA will also be testing ideas informed by behavioural research to get better insight on how effective they might be and this, together with feedback to DP21/1, will help shape the changes the FCA intends to consult on later in 2021.

Compliance, culture and evolving regulatory expectations: FCA speech

The FCA has published a speech by Mark Steward, FCA Executive Director of Enforcement and Market Oversight, on compliance, culture and evolving regulatory expectations. In his speech, Mr Steward's talks about:

• raising senior manager standards through the senior managers and certification regime;
• the five conduct questions "journey". Mr Steward notes that the FCA is currently considering a sixth conduct question in its future work which will interrogate firms on diversity and inclusion;
• two examples of enforcement cases, both relating to insider dealing; and
• embedding behavioural change.

Improving effective regulation: FCA speech

The FCA has published a speech given by Charles Randell, FCA chair, in which he highlights five things that the FCA needs to do differently for it to be as effective as possible in the new ways of living and working with COVID-19 and increased digitisation:

• making sure that firms with FCA authorised status are "good enough" and using their authorisations or they should lose them;

• with 60,000 authorised firms to monitor, the FCA must focus on the basics. It will continue to focus on its four priorities for basic consumer protection: safe and accessible payments; sustainable credit; clear and safe investment choices; and fair product terms;
• focus on outcomes and ensure that firms do the same;
• reshape regulation. Financial services legislation and financial regulation are full of complex detail, which can produce loopholes and opportunities for regulatory arbitrage. The FCA must be more agile and confident in using its Principles for Businesses, in particular the Principle that firms should treat their customers fairly, to take action against firms that are not doing the right thing. Mr Randell also notes that the FCA has been considering a "New Consumer Duty" (or duty of care) and states that the FCA will make further announcements about this shortly; and
• reshape the FCA, for example, with recent new appointments.

Why black inclusion matters: FCA speech

The FCA has published a speech by Sheldon Mills, FCA Executive Director, Consumers and Competition, on why black inclusion matters. Mr Mills was speaking at a New Financial event at which its research report on accelerating black inclusion was launched. The report's qualitative analysis focuses on the progression of black colleagues into leadership positions across the UK financial services industry. Highlights from Mr Mills' speech include:

• there is a lack of black people across senior roles in financial services, and there is a strong business case for improving diversity and inclusion at senior levels, with black inclusion being an important part of that;
• the racism that many black people face in the workplace is not overt, but subtle and insidious, and it adds obstacles for black people to succeed;
• black inclusion is important to the FCA as a regulator. The FCA wants firms to consider how they can accelerate black inclusion at all levels as part of their diversity and inclusion agendas. Data plays an important role in driving transparency and action; and
• The FCA has recognised its own challenges as an employer and it is taking action as an employer to improve black, Asian and minority ethnic representation and inclusion.

Climate change and sustainable finance: FCA webpage

The FCA has published a new webpage detailing its work relating to climate change and sustainable finance. The FCA explains it is working to broaden and deepen its sustainable finance strategy, which is based on the themes of transparency, trust, and tools, as set out in an October 218 feedback statement, FS19/9.

Digital sandbox pilot: FCA evaluation

The FCA has published an evaluation report of its digital sandbox pilot. The report sets out the findings of the pilot, including how it accelerated the development of innovative products and solutions within financial services, as well as key lessons learned from the pilot phase. Although it is too early to assess the long-term outcomes for participating firms, the FCA's on-going evaluation and feedback from participants has indicated a range of benefits. These include accelerated product development, validating and improving artificial intelligence and machine learning models, refining business plans, and networking within the pilot ecosystem.

Key lessons learnt from the pilot include significant industry demand, particularly from early-stage firms and start-ups, for a digital testing environment, future cohorts should have a narrower focus and participants would benefit from a more structured journey through the cohort, rather than the digital sandbox being a "self-service" platform.

The Kalifa Review of UK FinTech recommended that a permanent digital sandbox be created to encourage further collaboration within UK financial services. To support this recommendation, the FCA will:

• run a second cohort of the digital sandbox in late 2021;
• further iterate and improve the digital sandbox testing environment by incorporating the lessons learned from the initial pilot and making the suggested improvements to the platform;
• expand on the use of the digital sandbox testing environment to highlight the opportunities and value it contributes to the financial services ecosystem;
• focus the efforts of the second cohort around the theme of sustainability and climate change to support the UK's green finance ambitions; and
• explore, with industry and other stakeholders throughout the summer, viable sustainable operating models for a future, permanent version of the digital sandbox.

Cyber threats: FCA insights from 2020 Cyber Coordination Groups

The FCA has published its third annual insights publication giving a broad overview and insight into the discussions held at its quarterly Cyber Coordination Group (CCG) meetings, with the aim of sharing key insights from those meetings with the wider financial sector. Insights include:

• some of the major cyber threats and risks that CCG member firms have faced include: ransomware attacks, denial of service attacks, cloud security, insider threats and inadequate supply chain oversight and security;
• CCG firms have identified Zero Trust Security models and artificial intelligence as some of the emerging fields within cyber-security;
• the change to remote working has put additional strain on cyber-security teams and systems, requiring the need to re-evaluate existing cyber risks and controls. The changed ways of working have also exacerbated the challenges caused by ransomware, supply chain security and insider threats; and
• there are several common good practices that can be used to mitigate supply chain risks. CCG members identified fourth-party supply chain and Cloud Service Provider risks as unique challenges in this space and shared potential mitigation strategies. CCG members also identified shared assurance models as potentially promising improvements to the way firms assess supply chain risk.

FCA complaints data for second half of 2020

The FCA has published complaints data relating to the second half of 2020 (H2 2020). The FCA explains that it publishes two different types of data every six months: firm specific data for individual firms; and aggregate (or total) figures for the industry. The webpage summarises the FCA's latest findings and contains links to:

• a new webpage providing firm specific complaints data for H2 2020; and
• a new webpage providing aggregate complaints data for H2 2020 and including all the complaints that financial services firms reported to the FCA during this period. The data is contained in a sortable table. Additional new webpages related to this webpage focus on opened complaints, closed complaints, complaints upheld and redress paid.

The FCA has also published new webpages on redress paid, complaints upheld, closed complaints, opened complaints, firm specific complaints data and updated its webpage on previous complaints data.

Sustainable finance standards: FMLC concerns about UK-EU divergence

The Financial Markets Law Committee (FMLC) has published a letter sent to HM Treasury on the International Platform on Sustainable Finance (IPSF). Among other things, in its letter, the FMLC draws attention to the risk of uncertainty due to divergence, which may arise between sustainable finance standards adopted in the UK and EU, particularly in relation to the Sustainable Finance Disclosure Regulation, the Non-Financial Reporting Directive and the Taxonomy Regulation.

CMA annual concurrency report 2021

The Competition and Markets Authority (CMA) has published its 2021 annual concurrency report. This is the seventh such report. It reviews how the concurrency arrangements between the CMA and the sectoral regulators – which include the FCA and the Payments Systems Regulator – have worked over the year from 1 April 2020 to 31 March 2021 and assesses progress since the last annual report. The report has sections on competition enforcement, market studies and market investigations, general and multilateral cooperation, and the impact of the UK's withdrawal from the EU and COVID-19.

RAO: High Court considers "carried on by way of business"

In Jackson v Ayles and another [2021] EWHC 995 (Ch), the High Court held that a loan was unenforceable under section 26(1) of the Financial Services and Markets Act 2000 (FSMA) as the lender was not authorised. Among other things, the court considered whether entering into a loan was an activity "carried on by way of business" within section 22(1) of FSMA. It held that it was. Chief ICC Judge stated:

"34. I find, on the balance of probabilities that Mr Pumphrey's lending was carried on by way of business for the following reasons:
34.1. The relationship between Mr and Mrs Ayles and Mr Pumphrey arose out of commercial dealings and not a prior friendship…;
34.2. On his evidence he had sought advice from a lecturer of law at Kingston University about "private lending";
34.3. He had obtained a charge template for the purpose of securing his lending to "ensure I got my money back";
34.4. The lending to Mr and Mrs Ayles was "not built on trust";
34.5. The Weymouth Loan did not constitute an isolated lending occasion. Mr Pumphrey made several loans to Mr and Mrs Ayles over many years;
34.6. Since 2005 he has lent more than £3.5m (albeit not at the same time) to 14 different individuals and companies. None of the loans were soft;
34.7. He accepted that he wanted a return on his money; and
34.8. All loans made entitled him to the receipt of interest in excess of market rates.
35. For the sake of completeness I do not find that lending money was his only business. It formed a part, likely to be a small part, of his overall enterprise…"

CRR: European Commission consults on extending transition period relating to treatment of exposures to third-country CCPs

The European Commission has published for consultation a draft Implementing Regulation extending the transitional period during which EU institutions can treat exposures to a third-country central counterparty (CCP) that has not been recognised in accordance with the European Market Infrastructure Regulation (EMIR) as if they were exposures to a recognised (or qualifying) CCP.

Article 497(1) of the Capital Requirements Regulation (CRR) (as amended by CRR II) established a transitional period during which institutions may treat exposures to those third-country CCPs as exposures to qualifying CCPs. However, for third-country CCPs that submitted their application for recognition under Article 25(6) of EMIR before 27 June 2019, and are still awaiting recognition by the European Securities and Markets Authority (ESMA), this transitional period will expire on 28 June 2021.

The Commission will not be able to adopt by 28 June 2021 decisions in accordance with Article 25(6) of EMIR for some of the jurisdictions in which those third-country CCPs are established (which is a prerequisite for ESMA to recognise third-country CCPs), and so ESMA will not be able to complete by that date the recognition procedures for the third-country CCPs awaiting recognition. This means that EU institutions that have exposures to those third-country CCPs would be required to significantly increase their own funds for those exposures.

The extension of the transitional period would give the Commission time to finalise its equivalence assessments under Article 25(6) of EMIR and to adopt the relevant equivalence decisions where the required conditions are met. It would also give ESMA time to recognise the third-country CCPs concerned.

The draft Implementing Regulation extends the transitional period by 12 months until 28 June 2022.

The consultation closes on 26 May 2021.

Climate risk: ECB speech banking supervision

The European Central Bank (ECB) has published a speech by Frank Elderson, ECB Supervisory Board Vice-Chair and Executive Board Member, which includes discussion on how the ECB banking supervision is tackling climate risk. This includes, for example, the publication of the ECB Guide on climate-related and environmental risks, incorporating climate-related risks into ongoing supervision and stress testing, and promoting international cooperation on joint solutions for climate change.

Global Anti-Corruption Sanctions Regulations 2021 and guidance

The Global Anti-Corruption Sanctions Regulations 2021 (SI 2021/488) entered into force at noon on 26 April 2021. The Regulations were made under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) to establish a sanctions regime with the purpose of preventing and combatting serious corruption. Among other things, the Regulations give a power to the Secretary of State to designate persons who are, or have been, involved in serious corruption. Such designated persons may be excluded from the UK and may also be made subject to financial sanctions, including having their funds or economic resources frozen.

Alongside the Regulations, the Secretary of State for Foreign, Commonwealth and Development Affairs (FCDO) has provided guidance to assist in the implementation of, and compliance with, the Regulations. This guidance also provides best practice for compliance. The current guidance should be read together with the more detailed sanctions guidance published by the Office of Financial Sanctions Implementation (OFSI). The Secretary of State has also published related guidance for non-government organisations with the aim of supporting the understanding of the regime for those who may wish to submit information to the FCDO concerning specific designations.