Financial Services SpeedRead 12 May 2022 edition

1. ESMA objects to European Commission’s proposed amendments on its draft RTS on insider lists

On 2 May, ESMA published an Opinion regarding the amendments proposed by the European Commission (EC) to the Regulatory Technical Standards (RTS) on liquidity contracts for SME Growth Market issuers and the Implementing Technical Standards (ITS) on insider lists initially adopted by ESMA in October 2020.

ESMA agreed with the EC's proposed amendments to the RTS, explaining that the amendments would clarify the obligations which derive from the RTS.

ESMA stated that the proposed amendments to the content of the insider list to only those with regular access to inside information and the removal of personal information required by insider lists for SME Growth Market issuers would provide only limited relief to SME Growth Market issuers. They were also of the view that the proposed amendments would significantly reduce the usefulness of such lists for National Competent Agencies.

2. EBA releases discussion paper on the role of environmental risk in the prudential framework

On 2 May 2022 the EBA published its discussion paper on the role of environmental risk in the prudential framework.

The discussion paper starts the discussion of how appropriate the current EU prudential framework is to address environmental risks, and highlights the potential for a dedicated prudential treatment of exposures to environmental and social impacts. It focuses on exploring the prudential framework for investment firms and credit institutions, and whether and how environmental risks can be incorporated into the Pillar 1 framework, including stressing the importance of collecting relevant and reliable information regarding environmental risks and their impact on institutions' financial losses.

The discussion paper invites interested parties to register for the virtual public hearing which will be held on the 17 June 2022 by the 15 June 2022, and to submit comments, by the 2 August 2022.

3. PRA Consultation Paper: The Strong and Simple Framework: a definition of a simpler-regime firm (CP 5/22)

On 29 April 2022, the PRA issued a consultation on the prudential framework for non-systemic domestic banks and building societies. This follows a discussion paper (see entry 15 in FSS 11 May 2021 edition). In the consultation paper, the PRA outlines its proposals for introducing a definition of a "simpler-regime firm".

Key aspects of the consultation:

• in order to be considered for the simpler-regime, the PRA is proposing that a firm must have an on-and-off balance sheet trading book business equal to, or less than, both of the following thresholds: 5% of the firm’s total assets; and £44 million;
• firms providing certain clearing, settlement, custody and correspondent banking services will be excluded from the regime;
• only firms whose activity is primarily based in the UK, and focused on UK-based customers or counterparties are to be considered for the regime;
• the firm's broader consolidation group would be taken into account when determining whether a firm meets the definition i.e. the regime is intended to apply to small banks and building societies, not small units of large groups.

The deadline for comments is 22 July 2022. The PRA expects to publish a Policy Statement on the definition of a simpler-regime late 2022 or early 2023. The PRA also plans to consult on other aspects of the regime in early 2023, with the second set of proposals to follow in 2024.

4. PRA publishes speech concerning operational resilience and the next steps on the PRA's Supervisory Roadmap

On 28 April 2022, the PRA published a speech concerning operational resilience given by David Bailey, PRA Executive Director, UK Deposit Takers Supervision. In the speech, Mr Bailey notes progress made by firms in developing their operational resilience capabilities ahead of the first deadline in March 2022 and notes how the COVID-19 pandemic and current events underscore the importance of operational resilience. Mr Bailey comments that firms have been resilient in spite of challenges but that further development is still needed in order to ensure that all firms have reached the level of operational resilience that the PRA expects to see.

Key points

• Important business services identification (IBS): The PRA is of the view that firms have made positive progress against expectations in identifying these services.
• Guidelines for the identification of important business services: The regime allows firms to identify IBS in a way best suited to their business models and so the divergence the PRA has observed in approach adopted by firms is to be expected (although the PRA expects this to decrease over time). The PRA will be asking firms to clarify how they have incorporated key points of the policy concerning the identification of important business services.
• Impact tolerances: Firms have found setting impact tolerances more challenging than identifying IBS, with some firms submitting IBS with an impact tolerance for customer harm or market integrity that did not include one for safety and soundness or financial stability. The PRA also observed that the granularity with which firms defined their IBS impacted the tolerances that were then defined. As a result of some of these findings, Mr Bailey confirms that the PRA will encouraging firms to justify their judgements and will be carrying out detailed comparisons across peer groups.
• Mapping and testing: The PRA does not expect mapping and testing frameworks to be fully developed and significant further work is needed in the next three years for firms to fully embed coherent mapping and testing frameworks.
• Implications from other relevant upcoming policies: The PRA is currently involved in other areas of work that have implications for operational resilience (the BoE's Cyber Stress Test and work with other UK regulators on risks posed by Critical Third Parties). The PRA will publish a discussion paper with other regulators on Critical Third Parties in 2022.

5. FCA issues consultation paper on protecting investors in authorised funds following the Russian invasion of Ukraine

On 4 May 2022 the FCA issued its consultation paper on protecting investors in authorised funds following the Russian invasion of Ukraine. The paper focuses on the issue of illiquid and untradeable assets following the Russian invasion of Ukraine, and the fact that Authorised Fund Managers (AFMs), may be unable to produce accurate unit prices for funds holding these investors.

The FCA highlights issues with treating investors fairly in this regard, and propose allowing AFMs to use separate new classes of units, 'side pockets', to hold affected investments.

The FCA invites interesting parties to submit responses via its related webpage by 16 May 2022.

6. FCA charging a fee for Long Form As from 27 May 2022

On 5 May 2022 the FCA updated its webpage for applications to approve an individual to carry out senior management functions.

The update reflects the fact that from 27 May 2022 the FCA will be introducing a category 1 charge when solo regulated firms appoint senior managers in certain scenarios, including lateral hires, internal promotions into Senior Management Functions, expansions into new business areas etc and changes in firm status (e.g. from a core firm to an enhanced firm under the Senior Managers Certification Regime).

The new charges will not apply to Form As submitted with respect to new firm authorisations or variations of permission.

No updates for this edition of the FSS.

7. European Commission publishes proposal amending distance marketing rules

On 11 May 2022, the European Commission adopted a proposal to reform current EU rules on the distance marketing of consumer financial services.

Following a review of the Distance Marketing Directive (Directive 2002/65/EC) (DMD), it was found that the Directive's relevance and value had decreased due to the introduction of other legislative acts (such as the Consumer Credit Directive and the GDPR). However, the ongoing usefulness and consumer protection elements of the DMD was acknowledged (particularly for areas were not product-specific legislation exists, such as crypto-assets).

Accordingly, under the proposal, the current Distance Marketing Directive (Directive 2002/65/EC) is to be repealed and the Consumer Rights Directive (Directive 2011/83/EU) will be modernised and extended to consumer financial services concluded at a distance. The modernisation changes include:

introduction of an 'easier to access' 14-day withdrawal right for distance contracts for financial services;

• updated rules on what, how and when pre-contractual disclosure is to be provided;
• special rules to protect consumers when concluding contracts for financial services by electronic means, including the requirement to ensure information tools (including chatbots) are fair and clear and a prohibition on designing online interfaces in a way which can distort or impair the consumers’ decision-making ability;
• greater enforcement powers for national competent authorities with a maximum penalty of 4% of annual turnover for systemic infringements; and
• full harmonisation of the rules across Member States;

8. The FCA publishes Dear CEO letter to credit brokers and firms providing high-cost lending products in relation to financial promotions

On 6 May 2022, the FCA published a Dear CEO letter addressed to credit brokers and firms providing high-cost lending products about ensuring financial promotions are clear, fair and not misleading. As a result of the increased cost of living, the FCA expects to see greater demand for credit, including short-term credit. The FCA expects firms not to exploit the cost of living crisis to promote their services.

Key points

• the FCA has identified some financial promotions whereby firms include phrases such as "no credit check loans" "loan guaranteed", "pre-approved" or "no credit checks". Even if a credit broker does not carry out a creditworthiness assessment itself, the FCA has worries that consumers could be led to believe the lender will make no checks on credit status, whether with a credit reference agency or by other means;
• firms should ensure that they comply with requirements under CONC 5 (Responsible lending) and CONC 3 (e.g. a firm must not in a financial promotion or a communication to a customer state or imply that credit is available regardless of the customer's financial circumstances or status (CONC 3.3.3Rs)) ;
• the FCA has identified promotions by credit brokers failing to state that they are brokers and not lenders as required by CONC 3.7.7R. The FCA reminds credit brokers to make clear in their advertising that they are brokers and not lenders; where the firm is both a broker and a lender and the advertising is solely promoting credit broking services, the advertising will need to make clear that it is promoting the firm's broking services, not its lending services.
• some advertising media may make compliance with FCA rules difficult but FCA rules are in general media neutral, and it is possible to comply, despite character limitations;
• firms are also reminded of the need to comply with the Advertising Standards Authority's UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (CAP Code);
• the FCA will continue to monitor online credit advertising to check that firms are complying. Firms are advised carry out a review of processes and systems and controls for financial promotions across all media platforms (and to keep a record of such a review), to ensure compliance with CONC 3. The FCA states that this should include oversight of appointed representatives/introducer appointed representatives; and
• the FCA expects the Board at firms to read the letter and to have considered the issues raised and to have approved the action taken in response and retain evidence that this action has taken place, including the outcomes of any subsequent actions.

9. FCA Market Study: Findings from investment platforms costs and charges review – good and poor practice

On 4 May 2022, the FCA published its findings on its investment platforms costs and charges review as part of its 'Investment Platforms Market Study.' The FCA found that consumers could generally identify the main platform charges and that fund charges were signposted. However, it found that activity-based charges were harder to locate – e.g. telephone trade costs and foreign exchange – and where they could not be located, it was hard for consumers to find whether charges applied at all.

The FCA also identified good and bad market practice. Good market practices included: single comprehensive lists of all fees and charges and simple and clear explanations of charges. Bad market practices included: a lack of a succinct and comprehensive list of charges and information being spread across multiple webpages.

The FCA concluded that platforms need to provide both existing and future clients with:

• all charges and costs -clearly explained;
• total prices/aggregate costs - expressed both as a cash amount and as a percentage - with a breakdown available; and
• illustrations showing effect of costs on returns.

10. ESMA: Final report on the European Commission mandate on certain aspects relating to retail investor protection

On 29 April 2022, ESMA issued its final report, advising the European Commission on certain aspects relating to retail investor protection.

It put forward a number of proposals which are intended to make it easier for investors to obtain the key information that they need to make well-informed decisions, and protect them from aggressive marketing techniques and detrimental practices.

As set out in the press release, the recommendations relate to a number of issues, including:

• requiring machine readability of disclosure documents to facilitate the development of publicly available searchable databases;
• addressing information overload by proposing to define what is vital information and by using digital techniques such as layering of information;
• development of a standard EU format of information on costs and charges and aligning the disclosures under MiFID and the PRIIPs KID;
• possibility for NCAs and ESMA to impose on firms the use of risk warnings for specific financial instruments;
• addressing aggressive marketing communications; and
• addressing issues related to misleading marketing campaigns on social media and the use of online engagement practices, such as the use of gamification techniques by firms or third parties.

For more information, ask us for a copy of our recent newsflash.

No updates for this edition of the FSS.

11. DORA: EU co-legislators reach a provisional agreement

On 11 May 2022, it was announced that a provisional agreement had been reached between EU co-legislators in respect of the Digital Operational Resilience Act (DORA). DORA was introduced by the European Commission in September 2020 as part of the larger EU digital finance package.

The Council of the EU adopted its negotiating mandate on DORA on 24 November 2021, with trilogues between the co-legislators beginning in January 2022.

The provisional agreement must still go through the formal adoption procedure, before it can be published in the Official Journal.

12. CMA/FCA/ICO/Ofcom: Digital Regulation Cooperation Forum: Annual report 2021 to 2022

On 28 April 2022, the Digital Regulation Cooperation Forum (DRCF) published its first annual report (2021 to 2022). The DRCF is made up of the four major UK regulators tasked with regulating digital services: the CMA, the FCA, the ICO and the Ofcom. The report sets out the progress made in the last year, structured around the three priorities the regulators identified in their workplan for 2021 to 2022.

Key priorities and progress

1. Responding strategically to industry and technical developments: The regulators created a single cross-regulatory teams to share knowledge and develop collective views on complex digital issues. They prioritised 4 digital trends and technologies: algorithmic processing, design frameworks, digital advertising and technologies and end-to-end encryption.
2. Joined-up regulatory approaches: The regulators are ensuring that each of their regulatory regimes work well together in practice. They focussed on: the interaction between data protection and competition (particularly advertising) and the wider digital regulation landscape.
3. Building skills and capabilities: part of the DRCF's output includes developing detailed workplans setting out their approach to: recruitment, graduates, early careers and outreach, building digital regulation skills and attracting talent in 2022 to 2023.

In the report, the regulators also indicated that they have appointed a Chief Executive, expanded the core team, formalised governance of the DRCF and its projects and established key structures.

13. AIMA Publishes Guidance on Digital Asset Custody

On 27 April 2022, the Alternative Investment Management Association ("AIMA") published guidance (the "Guide") on digital asset custody for institutional investors. The guidance advises on key considerations for institutional investors conducting due diligence in determining how to custody their digital assets.

The Guide is connected to the initiative of AIMA's Digital Assets Working Group which is tasked with driving AIMA’s regulatory engagement, thought-leadership initiatives, and operational guidance in the area of digital assets.

14. ESAs issue joint Consultation Paper on draft regulatory technical standards (RTS) on STS securitisations-related sustainability disclosures

On 2 May 2022 the European Supervisory Authorities (ESAs) issued a joint consultation paper inviting responses in relation to the draft RTS for STS securitisations and related sustainability disclosures.
The draft RTS facilitate disclosure by the originators of the principal adverse impacts of assets financed by STS securitisations on ESG factors, as well as supplementing the rulebook under the Securitisation Regulation, as amended by the Capital Markets Recovery Package (CMRP), supplementing the ESA's work in respect of sustainability-related disclosures under the Sustainable Finance Disclosure Regulation (SFDR).

The closing date for the consultation is 2 July 2022.

15. The FSB publishes Interim Report regarding Supervisory and Regulatory Approaches to Climate-related Risks

On 29 April 2022, the FSB issued an interim report on supervisory and regulatory approaches to climate-related risks. The report, which has been developed as part of the FSB's 2021 Roadmap for Addressing Climate-related Financial Risk, seeks to assist supervisory and regulatory authorities in developing their approaches to risks arising from climate change.

The report is focused on three main areas: current supervisory and regulatory practices on reporting and collection of climate-related data; system-wide supervisory and regulatory approaches to assessing climate-related risks; early consideration of other potential macroprudential policies and tools to address systemic risks.

The report concludes that micro-prudential tools alone do not sufficiently address cross-sectoral, global and systemic dimensions of climate-related risks and the potential or the financial system to amplify its effects. It calls for authorities and standard-setting bodies to carry out research, analysis and supervisory and regulatory actions.

16. FCA Speech: Supporting Customers in challenging times

On 5 May 2022, Sheldon Mills, Executive Director, Consumers and Competition at the FCA delivered a speech which highlighted the impact of the cost of living crisis on consumers and their personal finances.

Mr Mills discussed the FCA's three year strategy, which introduces the concept of the Consumer Duty. Mr Mills highlighted the extension of their Product Design and Fair Value rules as being particularly relevant for building societies and urged monitoring and testing throughout the consumer lifecycle.

Other highlights include:

• Mr Mills noted many consumers are feeling the impact of the cost of living crisis and the financial services industry has a role to play in helping consumers manage their personal finances;
• firms that are diverse and inclusive will deliver better outcomes for consumers and markets – we expect to see greater diversity in terms of gender and ethnicity in the building societies sector;
• open Banking will bring opportunities for building societies and their members, for example by enhancing members’ experience or improving greater data access – firms should unlock these benefits to consumers through innovation; and
• later life lending is growing – to serve older borrowers well, suitable advice and responsible lending are key."

17. HM Treasury publishes Consultation in relation to Solvency II Review

On 28 April 2022, HM Treasury issued a consultation on the review of Solvency II. The Government states feedback from the consultation will help to inform the decision concerning which reforms are best tackled with legislation and which with PRA rules. Areas covered in the consultation include: reforms to the risk margin regime (i.e. the difference between an insurer's best estimate of its liabilities and the market value of its liabilities); reforming aspects of the fundamental spread used to calculate matching adjustment; widening the range of assets eligible for the matching adjustment portfolio; extending the range of liabilities eligible for the matching adjustment; reducing reporting burdens; and introducing a mobilisation regime for new insurers (similar to that used for the credit institutions).

On the same day, the PRA issued a statement together with a discussion paper outlining its views on certain aspects of the reforms. The PRA states that it supports the objectives of the review into Solvency II and that any reform would need to ensure long-term safety and soundness of the UK insurance industry and provide an appropriate degree of policy holder protection. The PRA states that any changes to the risk margin need to be considered with decisions on the fundamental spread.

The deadline for comments on the HM Treasury consultation is 21 July 2022.

18. ESAs publish technical advice on the review of the PRIIPs Regulation

On 29 April 2022, European Supervisory Authorities (ESAs) published technical advice to the European Commission on its review of the PRIIPs Regulation.

The ESAs recommended significant changes to the PRIIPs Regulation, including:

• harnessing opportunities of digital disclosure;
• not extending the scope to additional financial products at this stage, but further specifying the existing scope;
• allowing more flexibility on the information provided in the performance section of KIDs including the indication of past performance; and
• introducing a new section in the KID to give prominence to sustainable objectives.

The ESAs also encouraged the European Commission to consider a broad review of the PRIPPs framework and to undertake appropriate consumer testing before formulating proposals for change.