Financial Services SpeedRead: 27 April 2021

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

1. European Commission adopts sustainable finance package

On 21 April 2021, the European Commission adopted a comprehensive package of measures to help improve the flow of money towards sustainable activities across the EU. The Commission stated that the measures will be instrumental in making Europe climate neutral by 2050.

The package of measures is comprised of the following.

• Political agreement being reached on the text of the EU Taxonomy Climate Delegated Act, which introduces a set of technical screening criteria to define which activities substantially contribute to two of the environmental objectives under the Taxonomy Regulation i.e. climate change adaptation and climate change mitigation. It currently includes sectors such as energy, forestry, manufacturing, transport and buildings but it will continue to evolve over time. The Delegated Act will be formally adopted at the end of May once translations are available in all EU languages and it will apply from 1 January 2022.

• A proposal for a Corporate Sustainability Reporting Directive (CSRD), which aims to make sustainability reporting by companies introduced by the Non-Financial Reporting Directive more consistent. It will also extend the EU's sustainability reporting requirements to all large companies and all listed companies. The Commission also proposed the development of one set of standards for large companies and separate proportionate standards for SMEs, which non-listed SMEs can use voluntarily.
• six amending Delegated Acts on fiduciary duties, investment and insurance advice which will ensure that financial firms including advisers, asset managers or insurers include sustainability in their procedures and their investment advice to clients.

2. Rishi Sunak, the Chancellor of the Exchequer, written statement on UK Listings Review

On 19 April 2021, the House of Commons published a written statement by Rishi Sunak, the Chancellor of the Exchequer. The statement set out how the Government intends to take forward each of the recommendations made by Lord Hill CBE in his UK Listing Review.

Of particular relevance is the Chancellor's support of recommendations 7 to 9 with respect to the prospectus regime (summarised below):

• recommendation 7 to rethink the whole prospectus regime and introduce new primary legislation which more closely resembles the regime which existed prior to the introduction of the EU Prospectus Directive and Regulation;
• recommendation 8 to consider whether prospectuses drawn up under third country jurisdictions' rules can be recognised in the UK to facilitate secondary listings; and
• recommendation 9 to consider whether issuers can provide forward-looking financial information, both at the time of listing and afterwards, which is of particular relevance for venture capital / high growth companies.

The Government will bring forward a public consultation on the UK's prospectus regime later this year.

3. FCA speech on regulating the UK as a global financial centre

On 13 April 2021, the FCA published a speech given by Nausicaa Delfas, FCA Executive Director of International and Interim Chief Operating Officer, on regulating the UK as a global financial centre. The speech focused, in particular, on (i) regulating the UK market as a global financial centre; (ii) looking to the longer term; and (iii) the FCA's approach to international firms in the UK. The key points of the speech are summarised below.

• In the wholesale market the FCA is already taking steps to better tailor its rules and practices. Post-Brexit, the FCA can now focus on what works for UK markets in a nimble, flexible and proportionate way, without compromising market and consumer protection. For example, the FCA has decided to not automatically apply the double volume cap to all equities, as there is little evidence that dark trading is harming the ability of market participants to make well-informed decisions.
• All firms operating in the UK can expect to be held to the same high standards. This approach applies to all international firms, and is particularly timely for those EEA firms currently in the Temporary Permissions Regime (TPR). The FCA has reached out to these firms to ensure they are able and willing to be authorised over the next few years and has set out the FCA's expectations of them whilst they are in TPR.
• Over the longer term, several important areas must be addressed, including sustainable finance. For the first time, alongside other regulators, such as the Bank of England, the FCA has been asked to formally integrate into the way it regulates the goal of moving to a net zero economy in the UK by 2050.
• The FCA will continue to work with international colleagues to shape global standards, to work towards regulatory convergence and co-operation on cross border issues.
• The FCA is closely involved in the negotiations for a Mutual Recognition Agreement with Switzerland, and other bilateral work. It has also been working closely with US counterparts to ensure UK firms' access to US markets continues and is strengthened, where possible.

4. PRA publishes consultation paper on the definition of "higher paid material risk taker"

In our previous FSS update, we covered PRA's clarificatory statement on the definition of "higher paid material risk taker".

Following on from this, on 26 April 2021, the PRA published a consultation paper (CP9/21), setting out its proposal to correct an error in the definition of "higher paid material risk taker" in Rule 1.3 in the Remuneration Part of the PRA Rulebook. The purpose of the proposal, as confirmed by the PRA, is to align the definition with the PRA's intention of continuing the approach outlined in Supervisory Statement (SS2/17) on remuneration. The erroneous definition states an individual would be treated as a "higher paid material risk taker" when:

a) their annual variable remuneration exceeds 33% of their total remuneration; and

b) their total remuneration exceeds £500,000.

The definition implies that an individual would need to meet both conditions in order to be considered a higher paid material risk taker. However, the PRA intended that the definition captures individuals who meet either of these conditions. Therefore, CP9/21 is proposing to change the "and" in the definition to "or". It also proposes to make a consequential amendment to Table G in SS2/17, to reflect the updated definition in the table heading.

The PRA stated that the changes resulting from CP9/21 would take effect upon publication of the final policy. To avoid retroactivity, the PRA proposes that firms would not be required to apply the corrected definition to remuneration that has been paid, vested, or is subject to an obligation to pay or vest created before that date in respect of the first performance year beginning or after Tuesday 29 December 2020.

The consultation closes on 26 May 2021 and the PRA intends to publish its final policy in Q2 2021.

5. FCA publishes consultation paper on new prudential regime for UK investment firms

In our previous FSS update, we covered the first of a series of consultations papers (CP20/24) on a new prudential regime for UK investment firms.
Following on from this, on 19 April 2021, the FCA published its second consultation paper (CP21/7), seeking views on the second tranche of their proposed rules to introduce the Investment Firm Prudential Regime. The main areas covered by CP21/7 include:

• remaining aspects on own funds requirements (such as the Fixed Overheads Requirement);
• the basic liquid assets requirement;
• remuneration requirements;
• risk management, Internal Capital and Risk Assessment and Supervisory Review and Evaluation Process; and
• regulatory reporting requirements

The deadline for responses to this consultation is 28 May 2021.

For more information, please see our briefing here.

6. PRA policy statement on approach to new and growing banks

On 15 April 2021, the PRA published a policy statement (PS8/21) setting out its approach to non-systemic UK banks. PS8/21 follows the PRA's July 2020 consultation (CP9/20).

The PRA has made some changes to the draft policy as a result of the responses to CP9/20 including clarifications on:

• the scope of firms covered by the policy;
• expectations of new and growing banks;
• capital expectations of new and growing banks;
• existing resolvability expectations that banks need to demonstrate on an on-going basis;
• expectations around a firm's path to achieve profitability; and
• expectations around board independence and what is good practice.

The policy statement also contains the PRA's final policy, as follows:

• Appendix 1 - final supervisory statement on the PRA's approach to new and growing banks (SS3/21);
• Appendix 2 - updated supervisory statement on the internal capital adequacy assessment process (ICAAP) and the supervisory review and evaluation process (SREP) (SS31/15); and
• Appendix 3 – PRA's updated statement of policy on its methodologies for setting Pillar 2 capital.

7. Joint PRA and FCA Dear CEO letter on obtaining deposits through deposit aggregators

On 14 April 2021, the PRA and FCA published a joint Dear CEO letter highlighting the risks associated with the increasing volumes of deposits that are placed with banks and building societies (firms) via deposit aggregators. Deposit aggregators are providers of intermediary services who sit between savings account providers and retail customers.

The risks identified by the regulators include that customers who place their deposits via a deposit aggregator may not fully understand how the relationship work or how they can differ from a direct-depositor relationship with firms. For example, in some cases, Financial Services Compensation Scheme (FSCS) payments can take longer.

The regulators also reminded firms that the deposit aggregator model presents challenges relating to firms' preparation for resolution. Therefore, firms may need to plan ahead with deposit aggregators to ensure eligible claimant criteria are met and client specific information is available to ensure a swift pay out. Further, the regulators stated that there is a risk for deposit-takers, notably for small and medium-sized firms, that deposits from a deposit aggregator may represent a significant portion of their balance sheet and present concentrated liquidity risk. The regulators warned firms that in future, they may wish to discuss depositor aggregator relationships with them.

8. Financial Stability Board publishes peer review report on UK implementation of remuneration standards

On 14 April 2021, the Financial Stability Board (FSB) published a report setting out the findings of a peer review of how the UK has implemented the FSB Principles and Implementation Standards (P&S) of Sound Compensation Practices.

The FSB found that the PRA and FCA have implemented financial sector compensation reforms in the UK that are consistent with the P&S. The FSB also found that there is strong cooperation and information-sharing between the PRA and FCA and clear communication with the industry about their remuneration expectations. The FSB further recognised that in combination with other initiatives such as the Senior Managers and Certification Regime (SM&CR) and research published on conduct and culture, the remuneration regime has helped firms to map responsibilities, which has resulted in more consistent and effective implementation of remuneration practices.

Although the FSB considered the implementation of P&S to be well-advanced, it has made four targeted recommendations to further strengthen the UK's remuneration framework. These include:

• reviewing the interaction between the UK's remuneration regime and the SM&CR;
• improving the efficiency of data collection;
• considering other supervisory approaches for assessing the effectiveness of the regime; and
• providing additional guidance to the insurance sector on the UK Solvency II remuneration requirements.

On the same date the report was published, the PRA and FCA published a joint statement, welcoming the findings of the peer review report. The regulators confirmed that they will work together to take the above recommendations forward when delivering on their regulatory objectives.

9. PRA publishes webpage on holding company approval

On 9 April 2021, the PRA published a new webpage on holding company approvals. Part 12B of the Financial Services and Markets Act 2000 requires certain parent financial holding companies and parent mixed financial holding companies established in the UK to apply to the PRA for approval or exemption from the new requirement to be approved. The new webpage is aimed at these holding companies and includes information on submitting an approval or exemption application.

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.

10. EU Commission publishes "A Retail Investment Strategy for the EU"

On 20 April 2021, the EU Commission published a roadmap entitled "A Retail Investment Strategy for the EU". The roadmap follows the publication in September 2020 of the EU's second Action Plan on the Capital Markets Union. The roadmap highlights a number of problems with the existing regime including: a dispersed approach to investor protection whereby rules are set out over a number of EU Regulations; the potential for arranging and advising services provided by intermediaries to be biased by inducements; and the complex nature of some retail investment products, as well as access to effective individual redress.

The strategy aims to review the journey of the retail investor, with a view to the retail investor benefitting from:

• adequate protection;
• bias-free advice and fair treatment;
• open markets with a variety of competitive and cost-efficient financial services and products; and
• transparent, comparable and understandable product information.

The deadline for comments is 18 May 2021, with a public consultation expected in Q2 2021.

For more information, please refer to our briefing here.

11. HM Treasury publishes consultation on regulation of non-transferable debt securities

On 19 April 2021, HM Treasury published a consultation on regulation of non-transferable debt securities (NTDS). The Government is consulting on proposals to bring the issuance of NTDS, commonly referred to as 'mini-bonds', within the scope of financial services regulation. NTDS are unlisted bonds typically issued by companies to retail investors in order to raise finance. As non-transferable securities, investors cannot sell their investment, which normally must be held until maturity.

The background to the consultation is that London Capital & Finance (LCF), which issued NTDS, entered administration in January 2019, impacting 11,000 investors who had invested more than £230m. Following the failure of LCF, HM Treasury announced it would review the regulatory arrangements in place for the issuance of NTDS to retail investors.

HM Treasury has proposed two options for regulatory reform: (i) making the direct-to-market issuance of certain NTDS where the proceeds of the issue are used to on-invest or on-lend a regulated activity; and (ii) extending the scope of the Prospectus Regulation to cover NTDS, so that public offers of NTDS would require an FCA approved prospectus.

The consultation closes at midday on 21 July 2021.

12. FCA First Supervisory Notice 2021: Finteractive Limited – FCA stops Finteractive Limited from offering CFDs to UK investors

On 16 April 2021, the FCA published a first supervisory notice issued to Finteractive Limited (trading as FXVC), a Cypriot based investment firm, stopping it from continuing to offer high risk contracts for difference (CFDs) to UK investors. FXVC operates in the UK under the Temporary Permissions Regime. Since February 2019, the FCA has received 47 complaints or expressions of concern about FXVC's activities. These complaints have increased in frequency in 2021. The complaints disclose serious misconduct by FXVC in the provision of its services to UK investors.

The FCA found that FXVC used a variety of inappropriate techniques, including misleading financial promotions which appeared to offer investors the opportunity to purchase shares in a well-known company and failed to mention that they were actually promoting CFDs. Many of the firm's customers were unclear about the risks involved in trading CFDs and nature of the investments that they were being persuaded to make. The FCA also found that FXVC used pressure tactics to encourage consumers to invest additional funds and some customers were encouraged to declare they were professional investors despite not meeting the necessary criteria for such categorisation.

The FCA considered that FXVC had breached its MiFID obligations and was in breach of Principles 6 and 7 of the Principles for Businesses and rules in Chapters 3 and 22.5 of COBS. It has stopped FXVC conducting any regulated activities in the UK and required the firm to close all trading positions and return the money to investors.

13. FCA publishes webpage on changes for consumer credit firms post-Brexit

On 13 April 2021, the FCA published a new webpage regarding changes certain consumer credit firms will have to make to pre-contract consumer credit information forms. As explained by the FCA, from 1 June 2021:

• firms subject to regulation 8 of the Disclosure Regulations must only use the new (post-Brexit) pre-contract credit information form; and
• firms subject to regulations 10 and 11 of the Disclosure Regulations and CONC 2.7.2R(4)(a) of the FCA Handbook must only use the new pre-contract consumer credit information (overdrafts) form.

The FCA reminded firms 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.

14. HM Treasury publishes response to consultation on insolvency changes for payment and electronic money institutions and draft Statutory Instrument: The Payment and Electronic Money Institution Insolvency Regulations 2021

On 20 April 2021, HM Treasury published a response to consultation on insolvency changes for payment and electronic money institutions ("P&EMIs"). This follows HM Treasury's December 2020 consultation. On 26 April 2021, HM Treasury published a draft statutory instrument: The Payment and Electronic Money Institution Insolvency Regulation 2021. This legislation will provide for a new special administration regime for P&EMIs ("pSAR"). The pSAR will give insolvency practitioners administering the insolvencies of P&EMIs an expanded toolkits, allowing the practitioners to keep an insolvent institution operational with the aim of ensuring continuity for customers and prioritising the return of their funds. It will also extend the full suite of Financial Services and Markets Act 2000 Part 24 (which makes provision for insolvency) to all P&EMIs entering the standard insolvency process. This will provide the FCA with specific powers to participate and protect customers in the event of an insolvency of a P&EMI.

15. FCA CEO Nikhil Rathi delivers speech on levelling the playing field – innovation in the service of consumers and the market

On 20 April 2021, the FCA published a speech entitled "Levelling the playing field – innovation in the service of consumers and market", delivered by Nikhil Rathi, FCA CEO, at FinTech Week. The key points of the speech are as follows:

• success in financial innovation has been enabled by regulatory open-mindedness;
• support for innovation has been matched by action to protect consumers and markets;
• the FCA will be taking forward the Kalifa Review's recommendation for a Scalebox, including the creation of a regulatory nursery;

• online search and social media firms need to take greater responsibility for their role in connecting consumers with investment offers; and

• the FCA need to make sure that its internal processes allow for quick action, which is why it is currently reviewing how its Regulatory Decisions Committee functions.

In his speech, Mr Rathi recognised that in supporting innovation to deliver more competitive markets, consumer protection is held in balance. He stated that innovation comes with risk; new products and new firms fail. They can take consumers' money with them so as regulator, the FCA needs to understand new ideas and stay close to innovative firms. Mr Rathi mentioned the FCA plans to create a regulatory 'nursery' by autumn. Currently, firms gain regulatory status and are treated in the same way as a firm with a long track record. The regulatory nursery will keep the FCA in close contact with firms immediately post-authorisation so it can provide support and, where necessary, intervene earlier to steer firms in the right direction.

With respect to the transformation of the FCA, Mr Rushi stated that he wants the FCA to be a more efficient and effective regulator. He recognised that the FCA must keep pace with innovation and changes in consumer behaviour. For example, previously, online platforms were exempt from the financial promotions regime but this exemption was removed post-Brexit as the FCA sees no reason why different standards should apply to a search engine or social media compared to a newspaper. If these platforms choose to display and profit from adverts for risky investments, they should also comply with financial promotion rules.

16. Bank of England statement on Central Bank Digital Currency

On 19 April 2021, the Bank of England (BoE) and HM Treasury announced the joint creation of a Central Bank Digital Currency Taskforce. On the same day, the BoE published a statement on Central Bank Digital Currency (CBDC). The statement confirmed that the Taskforce was created to coordinate the exploration of a potential UK CBDC.

The Government and the BoE have not yet made a decision on whether to introduce CBDC in the UK and will engage widely with stakeholders on the benefits, risks and practicalities of doing so. The UK CBDC would be a new form of digital money issued by the BoE and for use by households and businesses. It would exist alongside cash and bank deposits, rather than replacing them.

17. HM Treasury and Department for International Trade announce new plans and measures to boost UK FinTech sector

On 19 April 2021, HM Treasury announced new plans to enhance the UK's competitive advantage in FinTech, from regulatory support and reform to establish a new taskforce to lead the UK's work on central bank digital currency (see above entry). In order to support FinTech firms to scale up, the FCA will take forward a 'scale box', which is a package of measures to enhance its regulatory sandbox. It will also launch the second phase of its Digital Sandbox to enable firms to test concepts that tackle sustainability and climate change-related challenges, helping to deliver a greener financial sector that supports the transition to net zero.

On the same day, the Department for International Trade announced a series of export measures for UK's FinTech sector to boost trade, jobs and economic growth. The support includes a bespoke Fintech Export Academy and FinTech Champions scheme to provide 1-2-1, sector specific advice. The Fintech Export Academy will give businesses free advice on issues such as legal, tax, regulatory, accounting and market entry, making their exporting journey shorter and smoother. As for the FinTech Champions scheme, it will tap into UK's diverse FinTech talent pool and work with industry leaders to elevate the UK's status as a global FinTech hub and promote expansion around the world.

18. Sheldon Mills, Executive Director, Consumers and Competition at FCA, delivers speech on "Why black inclusion matters to us"

On 22 April 2021, New Financial hosted Accelerating Black Inclusion research launch. At the event, Sheldon Mills, Executive Director, Consumers and Competition at the FCA, delivered a speech on "Why black inclusion matters to us". According to Mr Mills:

• there is a lack of black people across senior roles in financial services, and there is a strong business case for improving diversity and inclusion at senior levels, with black inclusion being an important part of that;
• the racism that many black people face in the workplace is not overt, but subtle and insidious, and it adds obstacles for black people to succeed;
• black inclusion is important to the FCA as a regulator. Data plays an important role in driving transparency and action but it is also important to listen to the voices behind the numbers; and
• the FCA has recognised their own challenges as an employer and are taking action as an employer to improve black, Asian and minority ethnic representation and inclusion.

With respect to the importance of black inclusion, Mr Mills stated that to have diversity at junior level is important, but it is even more important that these employees thrive, prosper and are able to progress to becoming decision makers. The FCA wants to see improvements within firms and it is considering how to best use its powers. This includes looking into its supervisory toolbox and whether the diversity of management teams could be part of consideration for senior manage applications.

19. Bank of England launches Meeting Varied People initiative

On 21 April 2021, the Bank of England (BoE) launched its Meeting Varied People initiative. The aim of the initiative is to enable the BoE to hear from a more diverse range of people who work in financial markets. It will use this insight to inform the decisions it makes on, for example, setting interest rates and designing market operations. In his speech delivered at the launch event, Andrew Bailey, the BoE Governor, stated that it is important the BoE engages with a more diverse range of people and institutions within the financial sector.

Mr Bailey further stated that for a public institution, it is vital the BoE reflect the whole society it serves. This includes both identity and cognitive diversity, which are equally important. He wants the BoE to have an inclusive and open culture where people speak up, ensuring it makes better decisions by mitigating the risks of groupthink and myopia.

In his speech, Mr Bailey also stressed that diversity in who BoE speaks to in financial markets has direct benefits, for example it improves its understanding of what is driving markets, what people expect from future policy and the potential impacts of different decisions. It also allows BoE to act more quickly and decisively in a crisis too.

The BoE has also updated the UK Money Markets Code to include an expectation to promote and develop a diverse team and the Market Intelligence Charter to reflect diversity objectives.

20. Treasury Committee launches inquiry into lessons from Greensill Capital

On 20 April 2021, the House of Commons Treasury Committee announced the inquiry into the lessons learned from Greensill Capital. The inquiry will focus on the regulatory lessons for the financial system from the failure of Greensill Capital and the appropriateness of HM Treasury's response to lobbying in relation to Greensill Capital.

The inquiry is currently accepting evidence from anyone with answers to the questions in the call for evidence. The deadline to submit evidence is Monday 10 May 2021.