Financial Services SpeedRead: 26 April 2024 edition

Welcome to the latest edition of the Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.

Financial Markets 

1. FCA: Consultation Paper: Payment Optionality for Investment Research (CP 24/7) 

On 10 April 2024, the FCA published a consultation paper (CP 24/7) on its proposed new rules to provide firms with greater flexibility in how they can pay for investment research. This was a key recommendation of the Investment Research Review.

The FCA is proposing to introduce a new option for firms to pay for investment research. This will allow "bundling" of payments for third-party research and execution services, subject to a number of operational guardrails. The new payment option will sit alongside the two existing options for payment for investment research i.e. from a firm's own resources or from a research payment account. 

The FCA is proposing certain additional requirements for firms wishing to use the new payment option. These requirements aim to mitigate potential harms emerging from the re-bundling of payments for research with trade execution charges. These include (amongst others): 

• a formal policy describing the firm's approach to bundled payments;
• agreements with research providers on the methodology for calculating and separately identifying the cost of research;
• a budget for the purchase of third-party research;
• an approach for allocating the costs of research purchased through bundled payments between clients;
• periodic assessment of the value and quality of the research purchased; and
• disclosure to clients on the firm's use of bundled payments. 

The consultation closes on 5 June 2024. 

2. FCA: Market Watch 78: Market Conduct and Transaction Reporting Issues

On 9 April 2024, the FCA published its Market Watch 78 newsletter detailing its observations and best practice guidance on the completeness and accuracy of the instrument reference data (IRD) it receives under RTS 23. 

The FCA covered the following key areas in relation to which firms should consider the guidance and, if necessary, take action to ensure appropriate processes are in place when submitting IRD:

• data quality processes;
• invalid issuer LEI;
• invalid instrument classification;
• cancelled instrument reference data;
• use of dummy values; and
• breach notifications.

The FCA's notes that providing IRD is key to its ability to conduct effective market oversight, with the data being used to validate and supplement the trade and transaction reporting data it receives.

Banking and Prudential

3. HM Treasury: Memorandum: Updated Memorandum of Understanding between the FCA and BoE

On 18 April 2024, HM Treasury published an updated Memorandum of Understanding (MoU) between the FCA and BoE (in its capacity as the PRA, exercising its prudential regulation functions). 

The MoU sets out a high-level framework that the FCA and BoE will use to co-ordinate and co-operate in carrying out their respective responsibilities. It notes that while the FCA and the BoE have separate and independent statutory mandates, it is essential that the regulators co-operate and co-ordinate their activities. 

The updates to the MoU are primarily to: (i) reflect changes arising from the Financial Services and Markets Act 2023, (ii) facilitate the optimisation of certain processes, and (iii) update terminology.

This updated version replaces the previous MoU, adopted on 2 July 2019.

4. EBA: Final Guidelines: Application of the group capital test for investment firm groups

On 11 April 2024, the EBA published its final guidelines on the application of the group capital test for investment firm groups (the Guidelines).

The Guidelines set out objective thresholds and criteria for competent authorities to consider for the purpose of assessing whether the conditions of the group capital test, as set out in Article 8 of Regulation (EU) 2019/2033 (IFD), have been met. The Guidelines aim to ensure the group capital test is applied consistently across the EU.

The Guidelines include (i) quantitative thresholds, such as the number of undertakings and levels within a group, and (ii) qualitative thresholds, including the need for simple capital ties and a clear ownership structure. The Guidelines also set out a methodology for NCAs to assess the adequacy of the own funds requirement of third-country undertakings of EU groups. 

The Guidelines will apply from 1 January 2025. 

Funds Management

5. FCA: New webpage: Asset management: common errors when applying for authorisation

On 15 April 2024, the FCA published a new webpage highlighting the common errors made by firms when applying for authorisation to operate in the UK asset management sector.

The FCA provides a non-exhaustive list of areas of concern and related errors to avoid, that reduce a firm's chances of a successful authorisation application or have caused delays when determining the outcome of applications. These include:

• failing to meet the FCA's expectations in relation to senior management arrangements, including lacking the required experience, qualifications or competencies;
• misunderstanding the 'Location of Offices' threshold condition, noting that the FCA expects the mind and management of the firm to be in the UK;
• not adequately identifying and considering the risks that their business model poses;
• lack of accountability when outsourcing activities;
• failing to adequately identify concerns over conflicts of interest;
• inappropriate assessment of exemption from consumer-protection schemes (such as the Financial Ombudsman Service and the Financial Services Compensation Scheme); and
• firms submitting applications when they are not ready, willing or organised.

Firms should consider the FCA's guidance before submitting an application and, if applicable, may also submit a request to the FCA's pre-application support service.

Senior Managers and Governance

6. FCA: Enforcement: Final notice against Link Fund Solutions

On 11 April 2024, the FCA published a press release and final notice in relation to Link Fund Solutions (LFS), which found that LFS (acting as authorised corporate director) failed to act with due skill, care and diligence in its management of the Woodford Equity Income Fund (WEIF).

The FCA found that between 31 July 2018 and 3 June 2019, LFS failed to properly oversee Woodford Investment Management (WIM) (which acted as the investment manager of the WEIF), appropriately manage the liquidity of the fund and ensure that concerns about liquidity were acted upon.

LFS agreed to settle the case by implementing a scheme of arrangement, pursuant to which LFS, and its ultimate parent entity, will pay restitution of up £230 million under the redress scheme approved by the High Court in February 2024. 

The FCA also published a warning notice statement (issued on 19 February 2024) in relation to its proposed action against both WIM and Mr Neil Woodford (who acted as WIM's Head of Investments and the lead fund manager for the WEIF). 

Financial Crime

No new entries.

Retail Services

7. FCA: Statement: Motor Finance Firms' Financial Resources

On 12 April 2024, the FCA published a statement to motor finance firms, and a related Dear CEO letter, reminding firms that they must maintain adequate financial resources at all times. 

The FCA is reviewing the historical use of motor finance discretionary commission arrangements (DCAs) and has observed firms taking differing approaches to account for the potential impact on their financial resources of historic use of DCAs. 

The Dear CEO letter sets out the FCA's expectation that firms must, with immediate effect:

• assess the adequacy of their financial resources;
• ensure the accuracy of financial statements and regulatory reporting;
• make adequate disclosures to the FCA and, if applicable, to group stakeholders; and
• deal with DCA complaints and subject access requests appropriately.

The FCA also expects firms to plan for any additional operational costs from increased complaints and, where applicable, meeting the costs of resolving those complaints.

The FCA will set out next steps following its review of the historic use of DCAs by 24 September 2024.

8. FCA: Policy Statement: Strengthening protections for borrowers in financial difficulty: Consumer credit and mortgages (PS 24/2)

On 10 April 2024, the FCA published a policy statement (PS 24/2) on strengthening protections for borrowers in financial difficulty and the related Consumer Credit and Mortgages (Tailored Support) Instrument 2024 (FCA 2024/7). The policy statement summarises and provides responses to the feedback received on the consultation in May 2023, and confirms the final rules.

The FCA aims to provide a stronger framework for firms to support borrowers in financial difficulty and build on its Tailored Support Guidance (TSG). Accordingly, the final rules will incorporate aspects of the TSG into the CONC and MCOB sourcebooks of the FCA Handbook, as well as introduce further targeted changes for consumer credit firms and for mortgages. The key changes include:

• broadening the scope of relevant consumer credit and mortgage chapters to clarify to firms the level of support they should be providing;
• enhancing the FCA's expectations around customer engagement and providing information, including on money guidance and debt advice;
• expecting firms to consider a range of forbearance options and take reasonable steps to ensure arrangements remain appropriate; and
• for consumer credit, expecting firms to take into account the customer's individual circumstances when providing forbearance.

The policy statement emphasises the importance of firms providing continued support to customers experiencing payment difficulties, in particular any vulnerable customers who may be at greater risk of harm.

The policy statement will affect a variety of consumer credit and mortgage lenders, with the rules coming into force on 4 November 2024.

9. FCA: Finalised Guidance: Guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living

On 10 April 2024, the FCA published updated finalised guidance (FG 24/2) for firms supporting their existing mortgage borrowers impacted by the rising cost of living. 

The purpose of the guidance is to ensure firms are clear about the effect of the FCA's rules and the range of options they have to support their customers who are facing payment difficulties. It details how firms can support their customers through automated processes and digital channels, and outlines the flexibility and scope that firms have when providing forbearance and varying contract terms for other borrowers looking to reduce their monthly payments. 

The updates to the guidance do not impose new expectations or requirements on firms and are to reflect the changes arising from the new rules published by the FCA on strengthening protections for borrowers in financial difficulty in Policy Statement PS 24/2. 

The updated guidance will come into effect from 4 November 2024.

Payments

10. Joint Regulatory Oversight Committee: Policy Paper: Proposals for the design of the Future Entity for UK Open Banking

On 19 April 2024, the Joint Regulatory Oversight Committee (JROC) published its proposals and recommendations for the open banking future entity. 

JROC, led by the FCA and the Payment Systems Regulator, was created in March 2022 to, among other things, oversee the planning and preparation for the future open banking entity and the transition to the future framework, and consider the strategic roadmap for further developing open banking.

In this paper, JROC sets out its recommendations on the design, structure, governance and funding of the future entity for both its interim and longer-term model. This involves the creation of an immediate "interim entity" before the full transition to the future entity occurs. The report also details five workstreams the interim entity will undertake to progress open banking over a two year period, and the long-term regulatory framework for open banking with the ambition to transition to the future entity over the next two years. 

The paper follows JROC's recommendations made in April 2023 for the next phase of open banking in the UK and the recommendations made by the Future Entity Working Group on the capabilities, funding and governance of the future entity.

The consultation period closes on 20 May 2024. Following the close of the consultation period, JROC will publish a response document and progress work on the interim entity and the wider open banking ecosystem. 

11. PSR: Consultation Paper (CP 24/3): FPS APP scams reimbursement requirement: compliance and monitoring

On 17 April 2024, the Payment Services Regulator (PSR) published a consultation paper (CP 24/3) detailing how it will monitor and manage compliance with the Faster Payments Scheme (FPS) authorised push payment (APP) scams reimbursement requirement.

The key proposals set out in the consultation paper include: 

• requiring payment service providers (PSPs) to register with Pay.UK (the operator of FPS) to facilitate their onboarding to Pay.UK's single reimbursement claim management system (RCMS);
• requiring PSPs to comply with the FPS rule on the mandatory use of the RCMS by 1 May 2025;
• the provision of data and information by PSPs to Pay.UK, including draft compliance data reporting standards (at Annex 1 of the consultation paper);
• information and record-keeping provisions;
• the scope of claims to be reported to Pay.UK; and
• contingency arrangements for reporting where the RCMS is unavailable.

The deadline for responses to the consultation paper is 28 May 2024. The reimbursement requirement policy will come into force on 7 October 2024. 

Digital Services and Fintech

12. ESAs: Announcement: Voluntary exercise for the collection of registers of information under DORA

On 11 April 2024, the European Supervisory Authorities (ESAs) announced that they will be launching a voluntary exercise for the collection of registers of information of the contractual arrangements financial entities have in place with ICT third-party service providers. This is a dry run for firms to prepare for the implementation and reporting of registers of information under the Digital Operational Resilience Act (DORA) from 17 January 2025.

The ESAs will provide individual support and feedback to financial entities taking part in the exercise to help them build their register of information, test the reporting process, address data quality issues and improve internal processes. 

The ESAs invite financial entities to an introductory workshop on the voluntary exercise on 30 April 2024. The voluntary exercise is then expected to be launched in May 2024, with financial entities expected to submit their registers of information to the ESAs through their competent authorities between 1 July and 30 August. 

ESG

No new entries.

Other

No new entries.