Financial Services SpeedRead - 26 October edition

No updates for this fortnight's edition of the FSS.

1. FCA: Final rules for first two IFPR policy statements

On 22 October 2021, the FCA published its final rules and related material regarding the first two Policy Statements on the Investment Firms Prudential Regime ("IFPR"). The FCA issued Policy Statements in respect of IFPR in June 2021 and July 2021 (PS21/6 and PS21/9) containing near final materials and rules materials.

The materials published by the PRA include the following:

• Investment Firms Prudential Regime Instrument 2021 (FCA 2021/38): This contains the text of the new Prudential sourcebook for MiFID Investment Firms (MIFIDPRU) and the MIFIDPRU Remuneration Code;
• Investment Firms Prudential Regime (Consequential Amendments to other Prudential Sourcebooks) Instrument 2021 (FCA 2021/39): This sets out consequential changes to parts of the FCA Handbook; and
• Finalised Guidance: this contains guidance on the application of ex-post risk adjustment to variable remuneration (FG21/5) as well as outlining the FCA’s expectations on compliance with the requirements in SYSC 19D and SYSC 19G on ex-post risk adjustment, including malus and clawback.

The FCA has also made available a Remuneration Policy Statement template and a template for recording material risk takers.

The FCA confirms that it will publish a third Policy Statement before the end of 2021.

2. FCA policy statement on LIBOR transition and derivatives trading obligation

On 15 October 2021, the FCA released a Policy Statement on the UK derivatives trading obligation ("DTO") in connection with the LIBOR transition. The policy statement outlines the FCA's finalised amendments to the UK RTS on the DTO (onshored Commission Delegated Regulation (EU) 2017/2417) following: (a) the Bank of England's changes to the scope of the derivatives clearing obligation, (b) the FCA's updated liquidity analysis; and (c) the responses to the FCA consultation on amendments to the list of derivatives subject to the DTO in July 2021.

On 20 December 2021, the FCA will remove GBP LIBOR derivatives from the scope of the DTO and replace them with SONIA overnight index swaps ("OIS"). This is to reflect the modifications made to the UK EMIR clearing obligation.

EURIBOR-based swaps and USD LIBOR derivatives will remain subject to the DTO at present.

There is insufficient liquidity for €STR OIS and SOFR OIS to be brought within scope of the DTO but the FCA will carry on monitoring market developments.

The finalised amendments are set out in full here.

3. PRA: Policy statement on the Implementation of Basel standards: Final Rules (PS 22/21)

On 14 October 2021, the PRA issued a Policy Statement on the implementation of Basel standards (PS22/21).

In PS22/21, the PRA sets out its final rules and supervisory material concerning the implementation of the CRR II Basel standards following the publication in September 2021 of the Capital Requirements Regulation (Amendment) Regulations 2021 (SI 2021/1078). The PRA states that relevant parts of the Capital Requirements Regulation have been revoked and replaced with PRA rules as set out in the Policy Statement (Appendices 1 and 2). The PRA has made minor amendments and corrections to the rules published as near-final to:

• remove and delete specific cross-references and rules following HM Treasury's decision to revoke certain onshored CRR articles;
• remove the definition of "Capital Requirement Regulation (consolidation entity)", as the PRA published the final definition and associated rules in PS20/21 "Financial holding companies: Further implementation" in September 2021; and
• make minor typographical amendments and factual corrections.

The final rules and changes to supervisory materials will come into force on 1 January 2022.

4. FCA finalises plans for LTAF

On 25 October, the FCA published its Policy Statement on a new authorised fund regime for investing in long term assets (PS21/14).

The Long Term Asset Fund ("LTAF") regime creates a category of authorised open-ended fund design to facilitate investment in long-term, illiquid assets such as venture capital, private equity, private debt, real estate, and infrastructure.

The rules and guidance in PS21/14 aim to address two barriers to investment in long-term illiquid assets, which are: (a) that there is no UK authorised open-ended fund structure that enables investments in such assets while offering appropriate structural safeguards, and (b) the permitted links rules for unit-linked insurance hinder investments in such assets.

The new rules therefore "embed longer redemption periods, high levels of disclosure, and strong liquidity management and governance features" in order to "provide sufficient investor protection and enable defined contribution pension scheme investment into the LTAF."

The rules will come into force on 15 November 2021 and the FCA intend to consider expanding the rules to enable certain retail investors to invest in LTAFs in 2022.

No updates for this fortnight's edition of the FSS.

5. Commencement date for provisions under the Financial Services Act 2021 which extend the maximum sentence for insider dealing offences

On 21 October, the Financial Services Act 2021 (Commencement No 3) Regulation 2021 (SI 2021/1173) was made (the "Regulation").

The Regulation provides the commencement date for section 31 of the Financial Services Act 2021 (the "FSA 2021"). Section 31 of the FSA 2021 extends the maximum sentence for insider dealing offences from seven to ten years by amending section 61 of the Criminal Justice Act 1988 and section 92 of the Financial Services Act 2012.

Under the Regulations the changes brought about by section 31 of the FSA 2021 will come into force on 1 November 2021.

6. HM Treasury: Consultation: Regulation of Buy-Now Pay-Later

On 21 October 2021, HM Treasury issued a consultation paper on unregulated interest-free Buy-Now Pay-Later ("BNPL") products. The consultation paper is in response to concerns raised in "The Woolard Review" about possible consumer detriment arising from BNPL.

The consultation paper focuses on the operation of the exemption set out in article 60F(2) of the RAO in respect of credit agreements and its use in certain BNPL products. The consultation paper explains that these agreements follow a particular model whereby a consumer makes a purchase from a merchant offering BNPL from a third-party provider; the consumer enters into an agreement with the third-party BNPL provider to finance the purchase at the point of sale; and the BNPL provider remits funds to the merchant, minus a percentage of the full value of the credit agreement. The Government is seeking views on whether amendments are needed to the current regulatory framework.

The consultation paper also focussed on the following:

• Financial promotions: The Government is considering amending relevant legislation so that all promotions of BNPL agreements also fall within the financial promotions regime;
• Credit broking: The Government’s current view is that regulation of BNPL should be accompanied by an exemption so that the broking of BNPL credit by a merchant would not lead to a requirement that the merchant to be authorised as a credit broker;
• Precontractual information: The Government’s view is for pre-contractual information regulation of BNPL could rely solely on FCA rules, while the detailed requirements for information disclosure in section 55 of the CCA could be disapplied; and
• Creditworthiness and consumers in financial difficulty: The Government considers that the FCA's rules on creditworthiness can be applied to BNPL agreements and some requirements around how firms treat customers in financial difficulty.

The deadline for responses is 6 January 2022.

7. UK legislation extending UCITS exemption under UK PRIIPs published

On 15 October 2021, the UK government published the Packaged Retail and Insurance-based Investment Products (UCITS Exemption) (Amendment) Regulations 2021 (SI 2021/1149) ("Regulations").

The Regulations were made under a power granted to HM Treasury in the Financial Services Act 2021 and come into force on 31 December 2021.

The Regulations amend the retained EU law version of the PRIIPs Regulation ((EU) 1286/2014) ("UK PRIIPs Regulation") to extend the existing exemption for UCITS management companies and persons advising on, or selling, UCITS funds from the requirements of the UK PRIIPs Regulation by five years to 31 December 2026.

Under the exemption, instead of producing a key information document ("KID"), UCITS funds providers must produce a key investor information document ("KIID"), as per the requirements of the UCITS Directive (as implemented in UK law).

8. The Payment and Electronic Money Institution Insolvency (England and Wales) Rules 2021

On 22 October 2021, the Payment and Electronic Money Institution Insolvency (England and Wales) Rules 2021 (SI 2021/1178) ("Rules") were published.These Rules set out the procedure for the payment institution special administration process/electronic money institution special administration process under the Payment and Electronic Money Institution Insolvency Regulations 2021 (SI 2021/716) ("Regulations").

These Regulations introduced a new special administration regime for payment and electronic money institutions to enable a faster and more efficient return of funds to customers in the event of insolvency. Key features of the process include; a bar date for client claims to be submitted to speed up the distribution process; a mechanism to enable the transfer of customer funds to a solvent institution; rules for treatment of shortfalls in the institutions’ safeguarding accounts; rules for allocation of costs; and an explicit objective on the special administrator for timely engagement with payment systems and authorities.

The Government issued a consultation on the new Rules in December 2020 and this was followed by a response in which it confirmed that it would amend the rules to:

• require insolvency practitioners to provide a reasonable notice period before a bar date comes into effect (so as to allow time for IPs to communicate bar dates to customers and for customers to make claims);
• clarify the full hierarchy of expenses;
• require notice of a bar date to be given to all persons whom the administrator believes to have a right to assert a security interest or other entitlement over the relevant funds; and
• require the special administrator to engage closely with payment systems operators during the special administration.

9. FSB progress report on roadmap for improving cross-border payments

On 13 October 2021, the Financial Stability Board ("FSB") published a progress report reviewing the first year of the "G20 Roadmap for Enhancing Cross-Border Payments". Following a public consultation in May 2021, the report set out FSB's global quantitative targets to address the challenges of the cost (e.g. the global average cost of payment to be no more than 1%), speed (e.g. 75% of cross-border retail payments to provide availability of funds to the recipient within one hour), transparency (e.g. all PSPs to provide certain cross border payment information to account holders) and access e.g. all end-users to have access to at least one provider for cross-border payments in and out by the end of 2027) faced by cross-border payments. The FSB intend to measure the progress of these targets by establishing an implementation plan in 2022 and providing the G20 and the public with a report on their approach by October 2022.

10. Jon Cunliffe (Bank of England) on whether 'crypto' poses a financial stability risk

On 13 October 2021, the Bank of England's deputy governor for financial stability Sir Jon Cunliffe gave a speech on the effect of 'crypto' on the stability of the UK's financial system.

In his speech, Mr Cunliffe outlined the key financial stability risks, including the fast growth of cryptoassets. Most cryptoassets have no intrinsic value and are subject to large price corrections. As the crypto world begins to align with the traditional financial system, leveraged players are emerging within a principally unregulated sector. Although the risks are currently limited, these could increase quickly and will depend on the nature of the asset and the speed at which the regulatory and supervisory authorities react.

Mr Cunliffe advises taking a consistent approach to ensuring the activity the crypto technology is performing is regulated rather than targeting the technology itself. Indeed, bringing the crypto world effectively within the regulatory perimeter will help ensure that the potentially very large benefits of the application of this technology to finance can flourish in a sustainable way. The speech ends by quoting the chairman of the SEC that "financial innovations throughout history do not flourish outside public policy frameworks".

11. FCA publishes its Perimeter Report 2020/21

On 21 October, the FCA published its annual 2020/21 Perimeter Report which is used to form the basis of a discussion due to take place between Nikhil Rathi and the Economic Secretary to the Treasury on the current regulatory regime.

The report broadly focuses on the FCA's consumer priorities (in line with the 2021/22 business plan). It highlighted the following areas where the FCA wishes to provide greater clarity relating to perimeter issues:

• Financial promotions: The FCA have once again expressed concerns and have called for amendments to the Financial Promotions Order as they are concerned that there has been greater reliance by unauthorised persons on the exemptions in the order. The FCA are therefore calling for change to protect ordinary investors from high-risk, non-compliant products.
• Business models: The FCA have expressed concern about unregulated lead generators as well as the set-up of crypto companies. The FCA are continuing to develop their views on the change that is needed in these areas.
• SMCR: The FCA have suggested that the SMCR should be extended to include payment and e-money firms.

12. HM Treasury: Policy paper on Green Finance: A Roadmap to Sustainable Investing

On 18 October 2021, HM Treasury issued a Policy Paper, "Greening Finance: A Roadmap to Sustainable Investing". The paper outlines the Government's ambition to green the financial system and align it with the UK's net zero commitment. The roadmap sets out details in relation to the Sustainability Disclosure Requirements. These build on the implementation of the Taskforce on Climate-Related Financial Disclosures in the UK and will cover three types of disclosure: sustainability disclosures to be made by companies; sustainability disclosures to be made by asset managers and asset owners; and sustainability disclosures by creators of investment products in respect of a product’s sustainability impact and relevant financial risks and opportunities.

The roadmap also sets out more information in relation to UK Green Taxonomy, as well as further detail in relation to investor stewardship. The Government states that the pensions and investment sectors should seek to integrate ESG considerations into: investment decision-making: monitoring and engagement strategies: escalation and collaboration; and voting practices.

For more information, please see our briefing here.

13. FCA and PSR Chair Charles Randell to step down in Spring 2022

On 15 October 2021, the FCA issued a press release stating that Charles Randell CBE will step down as FCA and PSR Chair in spring 2022. Mr Randell was appointed Chair of the FCA and PSR on 1 April 2018.