Financial Services SpeedRead: 1 March 2023 edition

1. FCA/BoE: Policy Statement: Changes to reporting requirements, procedures for data quality and registration of Trade Repositories under UK EMIR

On 24 February 2023, the FCA and the Bank of England published a joint Policy Statement on changes to trade reporting requirements under UK EMIR.

The Policy Statement summarises feedback to an earlier consultation paper (CP 21/31) and sets out the final policy and rules on the reporting of certain data fields. The new rules include:

• amendments to the table of reportable fields, to align them with international CPMI-IOSCO guidance;
• amendments to the registration process for Trade Repositories (TRs); and
• requirements for TRs to establish procedures and policies to ensure the effective reconciliation of data between TRs and other verification processes (to be introduced by the implementation of a new sourcebook in the FCA Handbook (the European Market Infrastructure Regulation Rules)).

The final rules are set out in the Technical Standards (EMIR Reporting and Data Quality and Miscellaneous Amendments) Instrument 2023, the Technical Standards (EMIR Registration of Trade Repositories and Miscellaneous Amendments) Instrument 2023, and the EMIR Rules (Procedures for Ensuring Data Quality) Instrument 2023.

The regulators have also published draft UK EMIR Validation Rules (applicable from 24 September 2024) and XML schemas relating to incoming and outgoing messages to provide clarity on how to implement the amended table of reportable fields. Comments on these are invited by 24 March 2023. The regulators will also issue a supporting guidance document to provide further clarity on how the rules are to be implemented in due course.

2. ESAs: Final Reports: EU EMIR intragroup clearing and margining exemptions extended by three years

On 13 February 2023, the EU officially extended the temporary intragroup exemptions from clearing and margining available under EU EMIR until 30 June 2025.

The amending regulations (EU Regulation 2023/314 and EU Regulation 2023/315) entered into force on 14 February 2023, and defer the date from which the EU EMIR clearing and margining obligations will apply to in-scope intragroup transactions from 30 June 2022 to 30 June 2025.

The extensions were originally proposed in early June 2022, before the previous 30 June 2022 expiry date, but have only recently been implemented. To bridge the regulatory gap, on 10 June 2022 the ESAs recommended that national competent authorities exercise regulatory forbearance for the period between 30 June 2022 and implementation of the extensions (see our briefing).

UK EMIR provides for temporary exemptions for intragroup transactions between a UK entity and a non-UK entity established in a jurisdiction which has not been found equivalent by HM Treasury. The exemptions last until 31 December 2023 unless equivalence is granted in the meantime, in which case they expire either two months (for clearing exemptions) or four months (for margin exemptions) thereafter, and permanent exemptions can be sought instead.

3. BoE (PRA): Press release: The Bank of England’s policy on outsourcing and third party risk management for Financial Market Infrastructures (FMIs)

On 8 February 2023, the Bank of England published a Policy Statement on outsourcing and third party risk management for Financial Market Infrastructures (FMI) providing feedback to responses to three consultation papers it published in April 2022. The Bank has also published three supervisory statements for outsourcing and third party risk management for categories of FMI; and an outsourcing and third party risk management part to add to the Code of Practice applicable to relevant Recognised Payment System Operators (RPSOs) and Specified Service Providers (SSPs). These are contained in the annex to the Policy Statement.

The Bank's 2022 consultation set out proposals to update its expectations and requirements regarding outsourcing and third party risk management in response to increasing reliance placed by FMIs on services and technologies provided by third parties. In developing its policy, the Bank took account of global standards such as the IOSCO's Principles on Outsourcing. The Bank’s outsourcing and third party risk management policy for FMIs aims to promote greater resilience and adoption of the cloud and other new technologies as set out in the Bank's response to the Future of Finance report; prescribe the Bank’s requirements and expectations in relation to outsourcing and third party risk management in FMIs, and complement the Bank’s Supervisory Statements on FMI operational resilience.

4. FCA: Discussion Paper: Updating and improving the UK regime for asset management

On 20 February 2023, the FCA published its Discussion Paper on the UK regime for the regulation of asset managers and funds. The Discussion Paper sets out ideas, at a high level, on ways in which the asset management regulation regime can be modernised and tailored to better meet the needs of UK consumers and markets. In making any changes to the relevant regimes, the FCA is keen to prioritise innovation and technical development, as well as ensuring alignment with international standards.

The FCA has in particular considered the following topics:

• simplifying and standardising rules for asset managers (both retail and wholesale);
• updating areas where the rules could work better, including in the depositary space; and
• how technology (including tokenisation) could drive better outcomes including in disclosure.

The Discussion Paper is open for comments until 22 May 2023.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

5. FCA: Updated press release: FCA supports firms through the transition to implementing the Consumer Duty

On 21 February 2023, the FCA updated its Press Release on supporting firms with the transition to the Consumer Duty by publishing portfolio letters for various sectors. Eleven portfolio letters were published in total, with examples including Retail banks and Building Societies, Asset Management, Custody & Fund Services and Alternatives and Mainstream Consumer Credit Lenders.

Each of the portfolio letters provides detail on:

• the timeline for introducing the Duty;
• how the Duty applies to each of the sectors;
• the requirements of the Duty;
• the FCA's expectations for how the firms should embed the Duty in each of the sectors;
• feedback from the FCA's review of Consumer Duty Implementation Plans; and
• the FCA's supervisory approach and next steps.

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

On 14 February 2023, HM Treasury published a Consultation Paper on the regulation of buy-now-pay later (BNPL) products, as well as a draft version of its implementing legislation as part of the in the Financial Services and Markets Act 2000 (Regulated Activities etc.) (Amendment) Order 2023.
BNPL products are currently unregulated, meaning firms offering them do not need to be authorised and regulated by the FCA, or comply with the Consumer Credit Act 1974 (CCA). The Consultation contains the Government's response to feedback from a consultation paper published in June 2022 which sets out the Government's initial proposals on bringing BNPL products within the scope of FCA regulation.

Proposals include the following:

• the new regime will largely capture third party lending, as merchants would be exempt from regulated lending in connection with agreements financing the goods and services they supply;
• merchants would be exempt from regulated credit broking where they offer newly regulated agreements provided by third party lenders as a payment option, but advertising and promotions of such agreements would fall within the financial promotions regime;
• certain existing regulatory exemptions will continue to be available (including business-to-business lending and transactions that do not involve a third-party lender);
• existing requirements of the CCA will be disapplied in respect of pre-contract disclosures (and replaced with FCA rules), but will continue to apply in respect of the contents of BNPL credit agreements;
• the jurisdiction of the Financial Ombudsman Service would be expanded to cover newly regulated agreements; and
• the FCA will operate a temporary permissions regime for firms to transfer into the new regime before obtaining permission under Part 4A of the Financial Services and Markets Act 2000.

Feedback on the Consultation can be provided by 11 April 2023. For more detail on the Consultation, please see the our briefing here.

7. FCA: Press Release: FCA censures Amigo for failing to conduct adequate affordability checks

On 14 February 2023, the FCA issued a Final Notice to Amigo Loans Ltd (Amigo) for failing to conduct adequate affordability checks on borrowers and guarantors. The FCA found that between 1 November 2018 and 31 March 2020, Amigo did not have appropriate processes in place to ensure it adequately assessed borrower and guarantor circumstances before approving loans, in particular with respect to vulnerable customers.

The FCA found that this created a high risk of consumer harm as it resulted in lending that was unaffordable for some, with guarantors having to step in. This also had the effect of prioritising the firm's commercial interests over the obligation to comply with regulatory requirements, and to safeguard customers.

The FCA was set to impose a fine of £72,900,000 for these failures. However, Amigo demonstrated that this would cause serious financial hardship.

Therefore, the FCA approved a scheme of arrangement which aims to ensure an amount of redress is paid to affected customers.

8. FCA: New webpage: Getting to the gamers

On 17 February 2023, the FCA published a webpage titled "Getting to the Gamers", which details its approach to researching and alerting different groups of investors as to the relevant risk considerations for their investments. In particular, the FCA focused on the use of "gamification" techniques to encourage participation in high risk investments. Gamification uses elements of game playing (e.g. score keeping, competition and league tables) to encourage consumers to invest.

The FCA found that at-risk investors tend to be aged 18-40 and are often driven by emotional and social factors such as the "thrill" and feeling of "being an investor". 78% of those investors researched rely on their "gut instincts" when it comes to their investment decisions. However, 45% did not realise that losing money was a potential risk of investing, and over 60% relied on social media when researching their investments.

As part of the FCA's objective to increase awareness surrounding risky investments, it devised the "Don't Get Played" campaign in October 2021 as part of its ongoing InvestSmart programme, inviting potential investors to ask themselves five questions prior to making an investment decision.

9. FCA: Speech on Consumer Duty

On 22 February 2023, the FCA published a speech by Sheldon Mills on the Consumer Duty, which comes into force for open products and services on 31 July 2023. The speech highlights what firms should be doing in the next five months to implement the Duty, including:

• sharing information with commercial partners, including distribution networks and wholesalers as well as retailers and third parties;
• focusing on the areas that will have the greatest impact on outcomes for the firm's customers;
• ensuring that the firm has sufficiently identified and narrowed its target market, as well as being satisfied that the target market understands its communications; and
• considering whether the firm engages in "sludge practices" – for example whether there are commercial incentives for firms to create friction points in the customer journey. Examples include punitive exit fees or unfair charges. The FCA is very clear that any such practices need eradicating.

The FCA now plans to survey around 600 firms to check how prepared they for implementation.

Mr Mills' speech also confirmed that, once the Consumer Duty is in force, the FCA will take a pragmatic and proportionate approach to enforcing the Duty, meaning that it will tackle the biggest risks to consumer harm in the financial services industry first.

10. PSR: Press release: PSR seeks views on papers for card scheme and processing fees market review

On 23 February 2023, the Payment Systems Regulator (PSR) issued a Working Paper outlining its approach to analysing the profitability of Mastercard and Visa’s UK card businesses, as well as a Call for Evidence on initial stakeholder feedback concerning the competitive constraints that Mastercard and Visa face when setting fees. These papers form part of the PSR's card scheme and processing fees market review, the final terms of reference for which were published in October 2022.

In the Call for Evidence, the PSR outlines four themes it is seeking views on:

• the intensity of competition and innovation in the payments ecosystem;
• differences in the competitive dynamics on the issuing and acquiring sides of the market;
• the impact of transparency on competitive pressure at all levels of the value chain; and
• the "must-take status" of Mastercard and Visa-branded cards (in many retail environments).

The Working Paper on profitability sets out the PSR’s proposed approach for UK scheme and processing services. It also sets out some initial analysis of Mastercard and Visa’s recent European operating profits, which include their UK activities. The PSR has also sought further information from Mastercard and Visa to understand drivers of profit. The PSR confirmed it is also considering whether Mastercard and Visa should be required to provide detailed financial information on their UK-specific activities on a regular basis in the future via more formal reporting requirements.

The PSR is expected to publish its interim report in Q4 2023.

11. FCA: Statement: Cryptoasset firms marketing to UK consumers must get ready for financial promotions regime

On 6 February 2023, the FCA published a Statement on the new UK financial promotions regime it plans to introduce for firms that market cryptoassets to UK investors. This follows on from the Consultation Paper on the UK regulatory approach to cryptoassets published on 1 February 2023 by HM Treasury.
Subject to Parliamentary approval, when the new regime comes into force, there will be four routes to communicating cryptoasset promotions to UK investors:

• the promotion is communicated by an FCA authorised person;
• the promotion is made by an unauthorised person but approved by an FCA authorised person. Legislation is currently making its way through Parliament which, if made, would introduce a regulatory gateway that authorised firms will need to pass through in order to approve financial promotions for unauthorised persons;
• the promotion is communicated by a cryptoasset business registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 with the FCA; and
• the promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.
• Promotions that are not made using one of these routes will be in breach of section 21 of FSMA.

The FCA will publish its final rules for cryptoasset promotions once the relevant legislation has been made, and expects to take a consistent approach to cryptoassets to that taken in its new rules (which have been in force since 1 February 2023) for other high-risk investments. This would mean firms being required to use specific risk warnings and positive frictions (such as a 24-hour cooling off period) in their consumer journeys, in addition to the overarching requirement that their promotions are clear, fair and not misleading.

12. BoE / HM Treasury: Consultation Paper: The digital pound: a new form of money for households and businesses?

On 7 February 2023, the Bank of England and HM Treasury issued a Consultation and a Working Paper on a digital pound. This follows earlier publications in this area, including a March 2020 Discussion Paper on a central bank digital currency, as well as a June 2021 Discussion Paper on new forms of money.

Notable points include:

• a digital pound would be a retail central bank digital currency (CBDC);
• under the framework, the Bank would provide the digital pound and the central infrastructure, including the "core ledger". Private sector companies would be able to integrate into the central digital pound infrastructure and provide the interface between the Bank and users;
• the decision about whether to introduce a digital pound will be informed by the payments landscape, including developments in relation to privately issued digital money, as well as international CBDCs;
• the Bank and HM Treasury’s priority is to make the necessary preparations to have appropriate infrastructure and technical capability in place should a digital pound be introduced in the future; and
• the next stage of work will involve working with the private sector to explore potential technology solutions and carry out experiments to inform any future implementation.

For more information, please see our briefing.

13. FCA Discussion Paper: Finance for positive sustainable change -Governance, incentives and competence in regulated firms

On 10 February 2023, the FCA published a Discussion Paper "Finance for positive sustainable change - governance, incentives and competence in regulated firms" (DP 23/1). The FCA considers that good governance and a healthy culture are critical to financial services firms’ delivering value to clients and consumers and supporting market integrity. The discussion paper reviews how governance, incentives and competence are considered in climate related reporting frameworks such as the Taskforce on climate related financial disclosures (TCFD), the International Sustainability Standards Board (ISSB) and the Transition Planning Taskforce.

The Discussion Paper considers firms’ sustainability-related objectives and strategies, and how these are supported by their governance and incentive arrangements. The FCA also considers how asset managers and asset owners organise and govern their stewardship activities to influence positive change, as well as firms’ training and competence.

The Discussion Paper also contains commissioned articles from experts with perspectives on firms’ sustainability-related governance, incentives, competence and stewardship arrangements.

The FCA will review feedback received in order to decide if there is a case for further regulatory measures in relation to governance, incentives and competencies, so as to support the role of finance in contributing to positive change. Firms are encouraged to review matters discussed and consider if there is any need to refine current approaches to governance, remuneration, incentives and training.

For more information, please see our briefing.

14. ESAs: SFDR: Delegated regulation amending existing RTS and incorporating nuclear and gas disclosures published in the Official Journal

On 17 February 2023, Commission Delegated Regulation (EU) 2023/363 amending the regulatory technical standards in Delegated Regulation (EU) 2022/1288 was published in the Official Journal.

Delegated Regulation (EU) 2022/1288 sets out the content and presentation of information in relation to disclosures in pre-contractual documents and periodic reports for financial products investing in environmentally sustainable economic activities and Commission Delegated Regulation (EU) 2023/363 makes amendments so as to provide for disclosures in relation fossil gas and nuclear energy activities. These amendments reflect provisions contained in the EU Complementary Delegated Act. Templates for Delegated Regulation (EU) 2022/1288 have also been updated to reflect these changes.

The publication of the Delegated Regulation in the Official Journal follows the publication of a September 2022 Report by the European Supervisory Authorities in relation to disclosure of exposure to investments in fossil gas and nuclear energy activities.

No updates for this edition of the FSS.