Financial Services SpeedRead 16 November 2022 edition

1. FCA: Press Release: Court of Appeal Decision – R (Sutton) v Financial Conduct Authority

On 2 November 2022, the FCA published a press release welcoming the Court of Appeal's decision to deny permission for a judicial review of its decision to assist the United States Commodity Futures Trading Commission (CFTC) regarding an ongoing investigation.

The FCA had issued notices which required UK residents to produce information in order to help the CFTC with an investigation into particular crude oil trading on a US derivatives exchange. The UK residents in question had applied for a judicial review of the FCA's decision.

The Court of Appeal denied permission for judicial review because FSMA permits the FCA to use its powers of investigation in order to assist overseas regulators. Moreover, the FCA and CFTC are parties to a multilateral memorandum of understanding under which they have a commitment to assist one another.

2. European Council: Implementation of Basel III International Agreements into EU Law

On 8 November 2022, the European Council issued a press release, announcing its plans to finalise the implementation of Basel III international agreements into EU law.

Basel III is part of a continuing effort to enhance the international banking regulatory framework in areas such as risk management, solutions for tackling financial stress or economic uncertainty and the promotion of transparency within the European banking sector. The European Commission aims to strengthen the European banks' resilience to potential future economic shocks by implementing global, prudential Basel III standards

The European Commission's proposals to implement Basel III into EU law are as follows:

• Capital Requirements Directive: the proposed directive aims at strengthening the regulatory and supervisory landscape for banks operating in the EU. The proposal intends to close loopholes for third country branches, by enhancing and harmonising supervision and risk management of banks across the EU and strengthening banks' resilience towards environmental, social and governance (ESG) risks.
• Capital Requirements Regulation: the proposed regulation aims at re-enforcing and facilitating the allocation of capital and liquidity within banking groups in Europe without imposing a significant increase in their capital requirements. The framework for credit risk and operational risk will be further improved and supported by a so called "output floor" which aims at reducing unjustified variances in banks' risk metrics. The regulation also notes that competent authorities and the EBA should understand the impact that International Financial Reporting Standards (IFRS), particularly IFRS 9, have on the range of values for risk-weighted assets.

3. EBA: Opinion on set-up and operationalisation of intermediate EU parent undertakings under CRD IV

On 7 November 2022, the EBA issued an Opinion, addressed to competent and resolution authorities, clarifying the framework in relation to the set-up and operationalisation of intermediate EU parent undertakings (IPU) by third country groups in the EU.

Article 21b of CRD requires two or more institutions in the EU belonging to the same third country group to have one single IPU where the total value of assets of that third country group in the EU is equal to or greater than EUR 40 billion. In some circumstances, the competent authority may approve the establishment of two IPUs where a single IPU would:

• be incompatible with a mandatory requirement for separation of activities imposed by the rules or supervisory authorities of the third country where the ultimate parent undertaking of the third-country group has its head office
• render resolvability less efficient than in the case of two intermediate EU parent undertakings according to an assessment carried out by the competent resolution authority of the intermediate EU parent undertaking

The Opinion outlines the process, the information requirements and the assessment criteria for the approval of the two IPU structure by a competent authority. It states that so as to ensure the approval of two IPUs is subject to an appropriate assessment, the application should be jointly submitted by all credit institutions and investment firms in the EU belonging to the third country group, with the support of the parent undertaking in the third country.

Where the application is the result of the mandatory requirement of separation of activities which the third country group is subject to in the third country, the Opinion provides that the application should contain a detailed description of the applicable third country regime, the operational structure and the envisaged allocation of the activities to each IPU in line with the third country regime.

The Opinion stresses the importance of adequate and effective arrangements to ensure the safety and soundness of the IPU and its subsidiaries in the EU and looks at internal governance, outsourcing, risk management, liquidity and funding arrangements. In particular, the EBA argues for a uniform approach and refers to previous guidance issued in light of Brexit, stressing that the EU framework must be applied effectively to EU institutions belonging to third country groups and that arrangements should not lead to so-called "shell banks" inconsistent with EU law. It states that functions can only be outsourced to the extent that this still allows the institution in question to meet authorisation requirements.

The adoption of the Opinion follows the publication in July 2021 of guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate EU parent undertakings.

4. PRA: Discussion Paper (DP4/22): PRA Future Approach to Policy

On 8 September 2022, the PRA released a Discussion Paper entitled "The Prudential Regulation Authority's Approach To Policy" (the DP). The DP applies to all PRA regulated firms.

The DP sets out the PRA's proposed framework and objectives under the Financial Services and Markets Bill (the FSM Bill) which will broaden the PRA's responsibilities in areas currently regulated by retained EU law and set to be repealed by the FSM Bill.

The DP sets out key updates to the framework of objectives and regulatory principles under which the PRA operates, including:

• the PRA's approach to its objectives, including the new secondary objective introduced by the FSM Bill of facilitating the international competitiveness of the UK economy and its growth in the medium to long-term;
• the PRA's plans for engagement with international standards and integration with the global financial system;
• the PRA's commitment to taking on wider responsibility, with appropriate accountability to Parliament, transparency and communication with HM Treasury;
• the PRA's approach, when making policy or amending the PRA Rulebook, to responding to changes in the characteristics of regulated firms and the UK financial system (for example by seeking stakeholder feedback); and
• the PRA's proposals to adapt its policy-making approach, including as part of the process for the repeal and replacement of retained EU law, so that the PRA Rulebook and its policies are more streamlined, accessible and clear.

The PRA aims to implement the processes set out in the DP following HM Treasury's decision-making process to repeal and retain any relevant EU law.

The PRA intends to publish a consultation paper informed by responses to the DP, followed by a final publication on the PRA's policy approach. Responses to the DP can be made until Thursday 8 December 2022.

5. FCA: Change in Control Decision: Conditions on takeover of Link Group

On 12 September 2022, the FCA published a decision notice imposing conditions on the proposed acquisition of the Link Group, including a 100% shareholding and voting rights in Link Fund Solutions (LFS) by Link Acquisition Australia Pty Ltd, Link Acquisitions Holdings Australia Pty Ltd, Dye and Durham Corporation and Dye and Durham Limited (D&D).

Link Fund Solutions managed the LF Woodford Equity Income Fund (WEIF). The FCA has investigated the circumstances leading to the suspension of the WEIF and is likely to seek to require LFS to pay a financial penalty and/or consumer redress. The FCA’s current view is that the redress payment LFS could be required to pay may be up to £306 million, although this is not a final decision. The redress proposal reflects the FCA's current view of LFS's failings in managing the liquidity of the WEIF. The FCA decided to approve the acquisition and allow D&D to take control of the seven UK-authorised firms, subject to a condition to commit to make funds available to meet any shortfall within LFS to cover any redress payments LFS may be required to make.

6. FCA: New webpage: Side pockets

On 8 September 2022, the FCA set up a new webpage for investors discussing side pockets. Side pockets have the potential to impact anyone who invests in funds with exposure to Russian, Ukrainian or Belarusian assets. They are measures which can be used in emergencies, which allow fund managers to temporarily separate affected assets from the rest of a fund. Investors will receive a written notification of the creation of a side pocket, explaining the reasoning behind the decision. The notification will cover practical information about the changes, benefits and costs, implications for the investor's rights, and the risks associated.

This follows on from the FCA's Policy Statement issued in July 2022 on the use of side pockets to mitigate possible harm resulting from exposure to Russia, Belarus and Ukraine. "Sanctioned investment" has been widely defined and relates to any investment or asset under a sanctions regime, which is held in a retail authorised fund. The FCA has added guidance relating to a number of issues, for instance on the ways in which voting rights regarding side pocket units may be exercised, how fund managers should assess the value of a fund with side pockets, and redeeming and transferring side pocket units.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

7. FCA: Financial Promotions Q3 2022 data

On 4 November 2022, the FCA published a press release and webpage in relation to quarterly data for Q3 2022 financial promotions. Key points include the following:

• 4,151 promotions were amended or withdrawn between July 2022 and September 2022;
• the FCA has seen a number of cases involving unauthorised firms and individuals seeking to take advantage of the rising cost of living and work that the FCA is carrying out to address this issue includes tackling false claims in adverts, issuing warning to consumers and engaging with tech and social media platforms to protect consumers from online harm;
• the FCA issued 303 alerts concerning unauthorised firms and individuals, with just over 20 per cent of these relating to clone scams (the FCA comments that many of these involved breaches of the financial promotion restriction online); and
• retail lending, investments and banking are the sectors with the highest rate of amends to or withdrawal of adverts and amount to 95 per cent of the FCA's interventions with authorised firms.

The FCA reiterates that it expects authorised firms issuing and/or approving financial promotions to take responsibility in making sure all communications of financial promotions are clear, fair and not misleading and compliant with FCA relevant rules.

8. FCA publishes report on borrowers in financial difficulty following the coronavirus pandemic – key findings

On 3 November 2022, the FCA issued a report on borrowers in financial difficulty following the coronavirus pandemic. The report draws on the workstreams of the FCA's Borrowers in Financial Difficulty project, which aims to ensure firms are providing tailored support to customers in financial difficulty in light of the Covid-19 pandemic. The report contains examples of good and poor practice, along with supporting case studies.

The FCA comments that although it found examples of firms delivering good outcomes for customers, it also found areas where significant improvement was needed in terms of supporting borrowers in financial difficulty. In the accompanying press release, the FCA confirms that just 30 per cent of firms it reviewed sufficiently explored customers' specific circumstances, which meant repayment agreements were often unaffordable and unsustainable. 32 firms have already been informed by the FCA to make changes to improve the way they treat customers, with seven of these firms voluntarily agreeing to pay £12 million in compensation to nearly 60,000 customers.

The FCA states that lenders need to focus on:

• engaging with customers; 
• effectiveness of conversations with customers; 
• helping customers to consider and access money advice and not for profit debt advice; and 
• fees and charges.

Firms are advised to:

• encourage consumers to engage earlier when facing financial difficulties;
• offer tailored support, particularly for those with vulnerable characteristics;
• let customers in difficulties know about the availability of free, independent debt advice when appropriate;
• make sure their fees and charges are fair and only reflect the reasonable costs that firms incur; and
• consider, when engaging with consumers, whether it would be appropriate to reduce, waive or cancel fees and charges.

The FCA also confirms plans for a consultation on the future of its tailored support guidance in relation to mortgages, consumer credit and overdrafts, which may include proposals to make changes to the FCA Handbook.

9. FCA: Webpage on cost of living consumer credit data collection

On 1 November 2022, the FCA published a webpage on cost of living consumer credit data collection and a set of related FAQs. The FCA is seeking to monitor and assess the impact of the rising cost of living on consumers and is therefore requesting data from certain consumer credit firms on their credit activities. Approximately 600 firms have been selected to provide data based on the amount of regulated consumer credit activity they undertake. It states that current regulatory returns do not provide information in a way that allows it to effectively assess, monitor and identify key harms emerging from the rising cost of living.

The FCA confirms that this is not a one-off exercise but will be a regular request, adding that the frequency will be detailed in the initial request it sends to firms. The FCA states it will use the data firms provide, alongside existing data, to support its ongoing work.

The FCA is not seeking this information under its formal information gathering powers, but it expects firms to supply the data accurately and within the specified timeframe. The FCA refers to Principle 11 of the FCA's Principles for Businesses, which requires firms to deal with regulators in an open and co-operative way. Where firms do not provide the requested information, FCA Supervision may contact them.

10. Administrative Court Decision - Assurant General Insurance Ltd v Financial Ombudsman Service

On 2 November 2022, the Administrative Court dismissed a judicial review claim brought by Assurant General Insurance Ltd (Assurance) against the Financial Ombudsman Service. The claim arose due to complaints to the FOS that Assurant missold payment protection insurance policies (PPI) used to cover customers' credit arrangements with home-shopping catalogue retailers. The FOS accepted the complaints and further found that there was an agency relationship between Assurant and the retailers. Assurant brought the judicial review proceedings on the basis that the FOS had no jurisdiction to make its decision on the agency point and the FOS had erred in its findings. The Administrative Court dismissed this, and found in favour of the FOS, such that it was entitled to make this conclusion.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

11. TPT: Consultation Paper: The Transition Plan Taskforce Disclosure Framework

On 8 November 2022, the UK Transition Plan Taskforce (TPT) (introduced at COP26 by the UK Chancellor to develop a 'gold standard' for private sector climate transition plans), published a Consultation Paper setting out:

• the TPT Disclosure Framework, which makes draft recommendations for companies and financial institutions on developing their climate transition plans. The Framework emphasises the need for short-term action by companies and financial firms and a consideration of how to prepare for the economy-wide transition to net-zero;
• the TPT Implementation Guidance, which sets out the steps to be taken on developing a Transition Plan, as well as when, where, and how to disclose their plan. Entities should publish standalone transition plans at least every three years, or sooner where significant changes are made to the plan. Progress on or amendments to the Transition Plans should be reported annually as part of existing Task Force on Climate-Related Financial Disclosures or International Sustainability Standards Board aligned disclosures in general purpose financial reporting. Transition Plans must be clearly separate from other existing disclosure obligations or reports (i.e. as an appendix or separate document); and
• a Sandbox, which seeks to test the Framework and Guidance to help users create their own transition plans and gather feedback from the market.

In summary, good Transition Plans should address:

• an entity's ambitions to mitigate, manage and respond to the changing climate and to leverage opportunities of the transition to a low GHG and climate resilient economy, including GHG reduction targets;
• short, medium and long-term actions the entity plans to take to achieve its strategic ambition, alongside details on how those steps will be financed;
• governance and accountability mechanisms that support delivery of the plan and robust periodic reporting; and
• measures to address material risks to, and leverage opportunities for the natural environment and stakeholders such as the workforce, supply-chains, communities or customers which arise as part of these actions.

The Framework and Guidance are open for public consultation until 28 February 2023. Feedback from the Paper and Sandbox will then be used to finalise the Framework and Guidance which the FCA intends to draw on to strengthen its transition plan disclosure expectations for listed companies, asset managers, and regulated asset owners.

12. ECB: Results of the 2022 thematic review on climate-related and environmental risks

On 2 November 2022, the ECB published the results of its thematic review on whether banks adequately identify and manage climate risks (as well as environmental risks such as biodiversity loss), as set out in the ECB's guide on climate-related and environmental risks. The review also examined banks’ risk strategies and their governance and risk management processes. The ECB has also published a compendium of good practices in climate-related and environmental risks observed in some banks.

The report found that over 85 per cent of banks have at least basic practices in place for most of the areas addressed by the ECB's expectations. The ECB, however, notes that approaches lack methodological sophistication and granular information on climate and environmental risks, adding that banks continue to significantly underestimate the breadth and magnitude of these risks.

The ECB has set institution-specific deadlines for achieving full alignment with its expectations by the end of 2024. The ECB expects banks to adequately categorise climate and environmental risks and to conduct a full assessment of their impact on activities by March 2023 at the latest, and to include climate and environmental risks in their governance, strategy and risk management at the latest by the end of 2023.

The ECB comments that deadlines will be closely monitored and enforcement action will be taken where necessary, adding that supervisors are already including bank-specific climate and environmental findings in the Supervisory Review and Evaluation Process (SREP).

13. GFANZ: Guidance on financial institution net zero transition plans

On 1 November 2022, the Glasgow Financial Alliance for Net Zero (GFANZ) published a report containing a framework on net zero transition plans of financial institutions. The focus of the framework is on developing and implementing transition plans, rather than specific guidance on disclosing transition plan, and the report is intended to be complementary to, rather than supersede, industry-specific resources already in use.

The framework focuses on enabling four aspects of transition finance and introduces ten components, arranged under five themes (foundations; implementation strategy; engagement strategy; metrics and targets; and governance) of credible net-zero transition plans, with each component consisting of a recommendation, guidance, case studies, and examples.

The report also identifies possible areas for further work that financial market participants should consider in relation to transition planning efforts.

GFANZ has also published a report on measuring portfolio alignment to promote transparency of portfolio alignment metrics.

No updates for this edition of the FSS.

14. FCA: Updated webpage: Principals of Appointed Representatives

On 7 November 2022, the FCA updated its website by including additional wording under the sub-heading "Information and notification requirements for principal firms".

In summary, the additional wording notes that:

• Principal firms will need to provide information about new and current Appointed Representatives as part of the FCA's enhanced reporting requirements under the regime;
• in December 2022, the FCA intends to issue a section 165 data request, requiring information about their appointed representatives. Principal firms should expect to receive this between 8 December and 10 December 2022;
• the section 165 data request will go to the Principal firm on Connect. Principal firms should therefore ensure their Connect information is up to date and correct; and
• Principal firms will have until 28 February 2023 to respond.