Financial Services SpeedRead: 25 May 2021

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

1. FCA consults on use of new powers to support orderly wind down of critical benchmarks

On 20 May 2021, the FCA published a consultation paper (CP21/15) setting out its proposed policy framework for exercising two of its new powers under the Benchmarks Regulation (BMR), which will be introduced by the Financial Services Act 2021 (FS Act). These powers relate to the use of critical benchmarks that are being wound down, such as LIBOR, and they are:

• legacy use power: this enables the FCA to designate a critical benchmark as an 'Article 23A benchmark' where it has become permanently unrepresentative of the market it is intended to measure. Designation as an Article 23A benchmark would result in an automatic prohibition on use of the benchmark by UK supervised entities (under Article 23B(1) of the BMR); and
• new use restriction power: this gives the FCA the ability to prohibit some or all new use of a critical benchmark when the FCA has been notified by its administrator that it will cease to be provided.

The FCA explained that these powers are part of a wider package of amendments to the BMR in the FS Act. This package is intended to ensure that the FCA has the appropriate regulatory powers to help reduce risk in the wind down period before LIBOR ceases permanently. CP21/15 will interest users of critical benchmarks such as LIBOR, whether those users are regulated or unregulated.

The consultation closes on 17 June 2021. Following this consultation, the FCA will publish a Statement of Policy and feedback statement in Q3.

2. ESMA opinion proposes lowering the reporting threshold for net short positions to 0.1% on a permanent basis

On 20 May 2021, ESMA published an opinion to the European Commission proposing to permanently lower the threshold to notify net short positions on shares to national competent authorities (NCA) from 0.2% to 0.1%. ESMA had examined the evidence gathered after its decision, beginning in March 2020, which lowered, for the first time, the notification threshold to 0.1% on a temporary basis. The analysis showed that a substantial amount of additional and essential information became available to NCAs due to the reporting of net short positions at the level of 0.1%. This additional transparency allows NCAs to better conduct market oversight. ESMA therefore considers it appropriate and important to lower the reporting threshold to 0.1% on a permanent basis.

If ESMA's proposal is adopted by the European Commission, this will remove the current divergence in relation to the notification thresholds between the UK and EU short selling regimes. You can read more about the UK's approach to the net short position notification threshold in a previous edition of our Financial Services SpeedRead.

3. FCA publishes guidance for insolvency practitioners on how to approach regulated firms

On 12 May 2021, the FCA published a non-handbook guidance (FG21/4) for insolvency practitioners (IPs) on how to approach insolvencies of regulated firms. This follows its guidance consultation (GC20/5) published in December 2020. Alongside FG21/4, the FCA published a feedback statement (FS21/9), confirming that respondents largely supported the proposed guidance, but some made minor comments which the FCA used to shape FG21/4.

In FG21/4, the FCA stated that minimising the impact of a regulated firm failure is a key priority. If an IP is appointed over a regulated firm, the IP takes control of the firm which continues to have regulatory responsibilities and requirements. As the FCA supervises firms including those in insolvency proceedings, FG21/4 sets out the FCA's view of how an IP should ensure regulated firms meet their ongoing financial services regulatory obligations following appointment. FG21/4 aims to help IPs comply with the FCA's rules and guidance and relevant legislation to achieve better outcomes for consumers and market participants when a regulated firm fails.

As confirmed by the FCA, FG21/4 is aimed at IPs appointed over firms solely authorised or registered by the FCA, but it also stated that FG21/4 may be relevant, from the perspective of conduct regulation, for IPs appointed over firms that are dual regulated by the FCA and PRA.
The FCA confirmed that FG21/4 takes effect from 12 May 2021.

4. PRA Business Plan 2021/22

On 24 May 2021, the PRA published its 2021/22 Business Plan, setting out the workplan for each of the PRA's strategic goals to support the delivery of its strategy, together with an overview of the PRA's budget for the period 1 March 2021 – 28 February 2022. As explained by Sam Woods, Chief Executive of the PRA, the last year has been dominated by managing the impact of Covid-19, but it is hoped that in 2021/22 the PRA will be able to focus more on business-as-usual priorities and on moving forward with key strategic pieces of work.

The below sets out PRA's strategic goals over the coming year:

• Robust prudential standards and supervision – have in place robust prudential standards, and hold regulated firms, and those who run them, accountable for meeting these standards.
• Adapt to market changes and horizon scanning – continue to adapt to changes in the market, and pre-empt and mitigate risks.
• Financial resilience – ensure that firms are adequately capitalised, and have sufficient liquidity, for the risks they are running or planning to take.
• Operational resilience – develop supervision of operational resilience in order to mitigate the risk of disruption to the provision of important business services.
• Recovery and resolution – ensure that banks and insurers have credible plans in place to enable them to recover from stress events, and that firms work to remove barriers to their resolvability to support the management of failure – proportionate to the firm's size and systematic importance – in an orderly manner.
• Competition – facilitate effective competition by actively considering the proportionality of PRA's approach as it contributes to the safety and soundness of the UK financial system.
• EU withdrawal – maintain a sustainable and resilient UK financial regulatory framework following the UK's exit from the European Union.
• Efficiency and effectiveness - operate effectively and efficiently by ensuring that resources are allocated to work that best advances PRA strategy and reduces the greatest risks to the delivery of PRA statutory objectives, and by providing an inclusive working environment in which all staff can perform to their potential.

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

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

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

5. FCA publishes consultation paper on a new Consumer Duty

On 14 May 2021, the FCA published a consultation paper on a new Consumer Duty (CP21/13), which will set a higher level of consumer protection in retail financial markets for firms to adhere to. The FCA explained that this new Duty will drive a shift in culture and behaviour for firms, meaning that consumers always get products and services that are fit for purpose, that represent fair value and are clearly communicated and understandable.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA said: "we want firms to be putting themselves in the shoes of consumers and asking 'would I be happy to be treated in the way I treat my customers?'".

The Consumer Duty will have three key elements:

• The Consumer Principle, to be added as a new Principles of Business, which will reflect the overall standards of behaviour the FCA expects from firms. The FCA is consulting on the following to formulations for the Consumer Principle: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients'.
• Cross-cutting rules which would require three key behaviours from firms, including taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives and to act in good faith.
• The Consumer Duty will also be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes – communications, products and services, customer service and price and value.

In addition to the three elements, tucked away in the back of the consultation paper there is a discussion around a private right of action which, if introduced, would allow private persons to bring action for breaches of the FCA's Principles, including the Consumer Principle. Individuals currently have a right of action for damages under section 138D of FSMA for loss caused by a rule breach, but not for a Principles breach.

The consultation closes on 31 July 2021 and the FCA is holding a webinar on the proposals on 10 June 2021. The FCA expects to consult again on proposed rule changes by the end of 2021 and make any new rules by the end of July 2022. For more information see, our briefing here.

6. Various regulator statements relating to access to access to cash

On 13 May 2021, the FCA and the Payment Systems Regulator (PSR) published a joint statement providing an update on their approach on access to cash. The regulators expect firms to ensure that there are alternatives available to meet the needs of customers when a firm closes a branch or ATM. In order to meet their responsibilities, the regulators expect that firms will rely over the short term on the current alternatives to branches, such as Post Office and LINK services. The regulators also confirmed that they will supervise upcoming legislation on access to cash.

Alongside the joint statement, the FCA published a speech by Sheldon Mills, Executive Director, Consumers and Competition at the FCA. In his speech, Mr Mills stated that:

• cash use and bank branch visits are declining and data from the FCA's Financial Lives survey showed a decrease in the number of adults with a day-to-day account carrying out banking activities face to face;
• consumers are increasingly making use of innovative payment methods and there is a preferred use of cards to cash
• a large number of consumers still, however, rely on cash and cannot easily move to digital alternatives; and
• data from the FCA's Financial Lives survey indicated that 3 in 10 adults with health-related characteristics of vulnerability have problems dealing with customer services over the telephone.

On the same date, HM Treasury published a speech by John Glen, Economic Secretary to HM Treasury, on access to cash. Mr Glen set out action points in relation to two aspects that the Government will focus on in relation to protecting access to cash and maintaining a sustainable UK's cash infrastructure. He stated that the Government will continue to work closely with the Bank of England on the review of the design of the wholesale cash framework.

The Government will also launch a consultation on access to cash in Summer 2021, setting out requirements that ensure people and businesses can continue to access cash withdrawal and depositing facilities.

7. FCA reminds some consumer credit firms of Post-Brexit changes from 1 June 2021

In a previous edition of our Financial Services SpeedRead, we covered the publishing by the FCA of a new webpage regarding changes certain consumer credit firms will have to make to pre-contract consumer credit information forms.

Following on from this, in its Regulation round-up for May 2021, the FCA has published a reminder to consumer firms subject to regulations 8, 10 and 11 of the Consumer Credit (Disclosure of Information) Regulations 2010 and CONC 2.7.2R(4)(a) of the changes that will take effect from 1 June 2021. The FCA confirmed that if these changes are not complied with, the credit agreement is only enforceable against the debtor on an order of the court under the Consumer Credit Act 1974.

8. EU Commission consultation on a Retail Investment Strategy for Europe

In our previous briefing, we covered the publishing by the EU Commission of a roadmap on the topic of "A Retail Investment Strategy for the EU".

Following on from this, on 11 May 2021, the Commission launched a public consultation on the upcoming retail investment strategy, which is planned for adoption in early 2022. The Commission is seeking views on how to improve the EU's existing retail investor protection framework. The aim is to ensure that retail investors can take full advantage of the EU's capital markets. Whilst the consultation does not provide any additional details on what the retail investment strategy will look like, it sets out a list of consultation questions, touching on the following areas (amongst others):

• financial literacy;
• digital innovation;
• disclosure requirements;
• the PRIIPs regulation;
• suitability and appropriateness assessment;
• reviewing the framework for investor categorisation;
• inducements and quality of advice;
• addressing the complexity of products;
• consumer redress;
• product intervention powers; and
• sustainable investing.

9. PSR publishes call for views on phase two of delivering Confirmation of Payee

On 21 May 2021, the Payment Systems Regulator (PSR) published a consultation paper (CP21/6), calling for views on the second phase of delivering Confirmation of Payee (CoP), which is a name-checking service designed to prevent Authorised Push Payment (APP) scams and misdirected payments.

In phase one of CoP, the PSR issued Specific Direction 10, directing the UK's six largest banking groups to introduce CoP for Faster Payments and CHAPS transactions. By July 2020, CoP was available to consumers of the six directed banking groups. A number of non-directed financial institutions have since implemented the service voluntarily.

In CP21/6, the PSR sets out an analysis of the impact of phase one. It found that there is clear evidence that CoP has had a positive impact, with the PSR observing a reductions in both the value and volume of misdirected payments. With regards to APP fraud, it is likely that CoP has prevented what would otherwise have been a larger increase in scams. The PSR is therefore keen to move on to phase two, which aims to enable further participation in the service by making it possible for all banks and building societies to offer CoP. The latest call for views explores the requirements to make sure the service is technically capable of operating across all bank transfers. The PSR is also seeking views on whether it should direct additional banks, building societies and financial institutions (going further than the six biggest banking groups) to implement the service by the end of 2021.

The deadline for responses is 30 June 2021.

10. FCA statement: deadline extension for Strong Customer Authentication

On 20 May 2021, the FCA published a statement confirming it has extended the deadline for implementing Strong Customer Authentication (SCA) for e-commerce transactions to 14 March 2022. The FCA explained that this further 6-month extension is to ensure minimal disruption to merchants and consumers, and recognises ongoing challenges facing the industry to be ready by the previous 14 September 2021 deadline.

The FCA stressed that the new deadline is the latest it expect full SCA compliance for e-commerce transactions. It also stated that it still expects firms to continue to take robust action to reduce the risk of fraud.

11. FCA publishes Dear CEO Letter: Please act: ensure your customers understand how their money is protected

On 18 May 2021, the FCA published a Dear CEO Letter, asking e-money firms to write to their customers to make it clear how their money is protected. In the letter, the FCA expressed their concern that many e-money firms compare their services to traditional bank accounts or hold themselves out as an alternative in their financial promotions, but do not adequately disclose the differences in protections between e-money accounts and bank accounts. In particular, they do not make it clear that Financial Services Compensation Scheme (FSCS) protection does not apply. The FCA is also concerned that firms are giving a potentially misleading impression to the extent to which products or services are regulated by the FCA.

The FCA has confirmed in the letter that e-money firms need to do the following:

• write to customers within six weeks of the date of the letter to remind them of how their money is protected through safeguarding and that FSCS protection does not apply.
• review financial promotions to ensure (i) promotions give customers enough information; and (ii) where any promotion does name the FCA as regulator and refers to matters it does not regulate, the promotion must make it clear that those matters are not regulated by the FCA.
• draw the Dear CEO Letter to the Board's attention. The FCA expects the Board to have considered the issues raised and to have approved the action taken in response.

The FCA confirmed that they also intend to follow up, with a sample of firms, to assess the action taken.

12. Amex fined for sending four million unlawful emails

On 20 May 2021, the Information Commissioner's Officer (ICO) fined American Express Services Europe Limited (Amex) £90,000 for sending more than four million marketing emails to customers who did not want to receive them. The ICO began investigating when it received complaints from Amex customers who were getting marketing emails despite having opted out from them. Amex had rejected these complaints saying the emails were servicing emails and not marketing. However, the ICO's investigation revealed that these emails were designed to encourage customers to make purchases on their cards which would benefit Amex financially. The ICO stated the actions were a deliberate action for financial gain by the organisation and that AMEX had failed to review is marketing model, despite complaints raised by various individuals.

Andy Curry, ICO Head of Investigations, has encouraged all companies to revisit their procedures and familiarise themselves with the differences between a service email and a marketing email, and ensure their email communications with customers are compliant with the law.

13. European Commission fines investment banks € 371 million for participating in a European Governments Bonds trading cartel

On 20 May 2021, the European Commission published a press release announcing that it has found seven banks to have breached EU antitrust rules through the participation of a group of traders in a cartel in the primary and secondary market for European Government Bonds (EGB) (namely, Bank of America, Natixis, Nomura, RBS (now NatWest), UBS, UniCredit and WestLB (now Portigon)). Fines totalling €371 million were imposed on Nomura, UBS and UniCredit. Other banks were not fined for different reasons, for example NatWest was not fined as it revealed the cartel to the Commission; Bank of America and Natixis were not fined because their infringement falls outside the limitation period for imposition of fines.

The Commission found the seven banks participated in a cartel though a group of traders working on their respective EGB desks. These traders were in regular contact with each other mainly in multilateral chatrooms, where they exchanged commercially sensitive information, including in relation to their bidding strategies and prices and volumes offered in the run up to auctions. The conduct partially took place during the financial crisis (between 2007 and 2011) and affected the entire European Economic Area. In the press release the Commission highlighted that it remains determined to deal with anticompetitive practices in all markets, including the financial sector.

14. Treasury Committee publishes responses to Greensill inquiry correspondence

In our previous FSS update, we covered the House of Commons Treasury Committee's announcement of its inquiry into the lessons learned from Greensill Capital.

On 11 May 2021, the Treasury Committee published responses relating to its inquiry into Greensill Capital. Amongst others, the FCA's response confirmed that it is formally investigating matters relating to Greensill Capital UK (GCUK) and Greensill Capital Securities (GCSL) and the oversight of GCSL by its principal, Mirabella Advisers LLP. It is also cooperating with counterparts in other UK enforcement and regulatory agencies, as well as authorities in a number of overseas jurisdictions. Some other points of interest from the FCA's response are set out below.

• GCUK has been a registered entity, an 'Annex 1' firm, under the Money Laundering Regulations (MLRs) since 6 May 2014. This means that the FCA was only responsible for supervising it in relation to its compliance with anti-money laundering rules. This regime is based on registration and is different from the authorisation regime under FSMA.
• The wider activities that GCUK undertook were not regulated by the FCA as most commercial lending falls outside the FCA's remit and the origination of a supply-chain finance instrument is not a regulated activity.
• The FCA agrees with the Bank of England's assessment that the Greensill entities were not systematically important for the purposes of UK financial stability. In line with this assessment, no specific analysis was done for reasons other than direct supervision.
• There are a number of areas that have been under consideration for regulatory or perimeter change and the collapse of Greensill has drawn further attention to these issues. These include, amongst others, the appointed representatives regime, investigation and penalty powers in the event of firm failure or deregistration, criteria for fitness and propriety under the MLRs.
• The failure of Greensill demonstrates again the need for regulators around the world to work closely together to fully assess the risks created by those financial entities that span multiple jurisdictions. The FCA is committed to taking a lead role in this work.

The Treasury Committee further stated in its press release that it is likely to examine the reasons for Greensill's failure, how it was managing risks before the failure, Greensill's business model and funding, and the characterisation of Greensill as a fintech business.

15. FCA reminds firms to prepare for the switch from analogue to digital phone lines

In its Regulation round-up for May 2021, the FCA has reminded firms that the current analogue phone network will be switched off across the UK at the end of 2025 as the country transfers over to a digital phone network, delivered through Voice over IP.

The FCA has stressed that this is a major change to the UK's telecoms networks and will affect anything that currently plugs into existing analogue telephone wall sockets. Firms should be making plans to ensure there is no disruption to their services.

16. Dormant Assets Bill [HL]: publication and first reading

On 13 May 2021, the Dormant Assets Bill [HL] was introduced to the House of Lords and had its first reading. HM Treasury also published two Factsheets: Bill overview and Policy context and background.

The UK Dormant Assets Scheme was established by the Dormant Bank and Building Society Accounts Act 2008 and is administered by Reclaim Fund Ltd. (b). The scheme enables dormant assets to support important social and environmental initiatives across the UK. Dormant assets remain the property of their owners, who can reclaim any money owed to them in full at any time.

In summary, the Bill:

• enables RFL to accept a wider range of dormant assets
• introduces a new power for the Secretary of State to expand the scheme in the future to broaden the pool of eligible dormant assets;
• amends the approach for distributing dormant assets funding in England, aligning it with the model used for Scotland, Wales and Northern Ireland;
• names RFL as the scheme's only authorised reclaim fund and guarantees that, should it or any other authorised reclaim fund face insolvency, the Government can cover its liability for reclaims in the form of a loan; and
• introduces a new power for HM Treasury to establish other reclaim funds in the future as appropriate.