EU Parliament approves crypto rules

On 20 April 2023, the EU Parliament voted to adopt the text of the EU Markets in Crypto-Assets Regulation. Please see our article.

Speech on innovation in payments and money by Sir John Cunliffe published

On 17 April 2023, the Bank of England published a speech on innovation in payments and money given by Sir John Cunliffe, the Deputy Governor, Financial Stability at the Bank.

In his speech, the Deputy Governor looked at:

• Stablecoins used for payments.
• Tokenisation of commercial bank deposits.
• The next stage of the Bank of England's work on issuing a Digital Pound.
• The Bank's work to ensure new forms of money are robust and uniform.

FCA publishes speech on innovation, artificial intelligence and the future of financial regulation

On 17 April 2023, the FCA published a speech given by the FCA's Chief Data, Information and Intelligence Officer on innovation, artificial intelligence and the future of financial regulation.

Highlights of the speech include:

• That the FCA has created a permanent Digital Sandbox service to support innovative businesses and start-ups in developing new proofs of concept for products and services.
• The FCA is making it easier for firms to engage with their Innovation Services by providing a single point of entry.
• The continuation of the FCA's successful TechSprint programme looking at Financial Services Register data, and a global TechSprint looking at greenwashing to help tackle a global challenge.

Joint Regulatory Oversight Committee publishes recommendations for the next phase of open banking in the UK

On 17 April 2023, the Joint Regulatory Oversight Committee (being the FCA, the Payment Systems Regulator, the Competition and Markets Authority and HM Treasury) published a report setting out its recommendations for the next phase of open banking in the UK.

The report identifies that for open banking to successfully move to a new phase, the ecosystem needs to scale and become more economically sustainable while remaining reliable, resilient and efficient. The report sets out the committee's vision and priorities and a roadmap of 29 actions. Another of the committee's priorities is to establish the future open banking entity that will replace the Open Banking Implementation Entity. 

The report identifies five themes that the committee will be progressing over the next two years:

• Levelling up availability and performance.
• Mitigating the risks of financial crime.
• Ensuring effective consumer protection if something goes wrong.
• Improving information flows to third-party providers and end users.
• Promoting additional services, using non-sweeping variable recurring payments as a pilot.

These themes build on the findings of the Strategic Working Group's February 2023 report on the future of open banking (please see our March 2023 update).

European Central Bank publishes blog post on the oversight of crypto asset activities

On 5 April 2023, the European Central Bank (ECB) published a blog post on the oversight of crypto asset activities, in which lessons learned from recent events are considered.

One line of commentary in the blog post relates to gaps in the regulatory framework. The post mentions that in the crypto asset world, unlike the banking sector and securities sector, there is no framework under which there is a central point of entry, and this creates challenges for regulatory and supervisory approaches. The post also raises the issue of how businesses without physical borders, as is the case with many crypto asset businesses, can be supervised.

The blog also highlights that the nature and scale of crypto asset markets are rapidly evolving and could reach a point where they represent a threat to global financial stability. 

New Chief Executive of Digital Regulation Cooperation Forum appointed

On 4 April 2023, the Digital Regulation Cooperation Forum (DRCF) announced the appointment of Kate Jones as its Chief Executive (effective 2 May 2023).

The DRCF was formed in July 2020 and functions to harness the collective expertise of its members to support strong regulation of online services and drive a coherent approach to digital regulation. The DRCF members are the:

• Information Commissioner's Office.
• Competition Markets Authority.
• Office of Communications.
• FCA.

AI white paper: a pro-innovation approach to AI regulation published alongside evidence supporting the analysis of impacts for AI governance

On 29 March 2023, the Department for Science, Innovation and Technology (DSIT) published a long-awaited white paper providing a framework to guide the UK's approach to regulating AI. The paper provides a cross-sectoral, principles-based framework to increase public trust in AI and develop capabilities in AI technology.

The white paper follows on from the consultation undertaken by the government during 2022. A single regulatory function to govern AI will not be created, and instead the government will support existing regulators to develop a bespoke approach for AI development and use within their sectors.

The white paper sets out five principles which regulators must consider to build trust and provide clarity for innovation:

• Safety, security and robustness.
• Transparency and explainability.
• Fairness.
• Accountability and governance.
• Contestability and redress.

The government has also launched a consultation seeking feedback on how best to shape a co-ordinated regulatory approach and to monitor the effectiveness of the AI framework. Responses to the consultation can be given until 21 June 2023. Following completion of the consultation, the government will consider whether legislation should be introduced to support compliance with the regulatory guidance.

On the same date as the white paper was published:

• The DSIT and the Office for Artificial Intelligence published a report setting out evidence to support the analysis of impacts for AI governance.
• A letter from the Secretary of State for DSIT sent to the DRCF was published confirming the role of the DRCF within the AI regulatory framework.
• The Centre for Data Ethics and Innovation published a press release confirming that public engagement and research of public expectations for AI governance conducted in 2022 informed the white paper.

Environmental groups issue proceedings against European Commissions' refusal to remove natural gas from EU sustainable finance taxonomy

On 18 April 2023, ClientEarth published a press release confirming that it and three other environmental NGOs (WWF European Policy Office, Transport & Environment and BUND (Friends of the Earth Germany)) have issued proceedings in the Court of Justice of the European Union against the European Commission's refusal to remove natural gas from the EU's sustainable finance taxonomy.

The Taxonomy Regulation ((EU) 2020/852) introduced an EU-wide taxonomy of environmentally sustainable activities. Under Commission Delegated Regulation ((EU) 2022/1214) nuclear and natural gas energy activities can be included in the list of economic activities considered environmentally sustainable under the EU taxonomy.

NGOs have argued that including natural gas, a fossil fuel, in the EU taxonomy breaches other EU legislation. A hearing at the General Court could be held in H2 2024 and a judgment released in 2025.

Bank of England speech on climate action

On 18 April 2023, the Bank of England published a speech on climate action which was delivered by Sarah Breeden, the Bank's Executive Director, Financial Stability Strategy and Risk, at the Global Association of Risk Professionals.

In the speech, Breeden considers progress observed in four core dimensions:

• Scenario analysis.
• Firm risk management capabilities.
• Disclosure.
• Green finance.

The speech comments on the fact that the creation of stronger linkages between climate change and strategic decision making across the economy has proved harder to deliver than envisaged due to the "headwinds" of the last three years reducing the collective ability to take action.

Four key challenges are outlined in the speech that need to be overcome if aspiration is to be turned into action that advances the transition:

• Filling capability gaps in the transition finance infrastructure – the financial sector needs to be equipped with forward-looking information from the real economy to allocate capital effectively and mobilise finance at scale.
• As the world does not stand still, firms need to be nimble and adaptable in the near term while continuing the make progress in the long term.
• It is difficult but essential for the real economy and firms to make transition-driven business decisions in the absence of complete clarity on the pathway to net zero. Firms should not delay taking action to better understand how transition might impact their businesses.
• Co-ordination throughout the supply chain and an understanding of the needs of firms up and down the supply chain is required as system wide change is complex. Firms should have difficult discussions about steps to reduce emissions.

European Commission adopts new and updated answers to ESAs' questions on SFDR application

On 14 April 2023, the European Commission published an internal Commission Decision (C(2023) 2281 final) adopted on 5 April 2023 on the answers to be provided to questions relating to the application of the Sustainable Finance Disclosure Regulation (SFDR) submitted on 9 September 2022 by the European Supervisory Authorities (ESAs) and amending Commission Decisions of 6 July 2021 and 31 May 2022.

In the decision, the Commission states that the Commission's new and amended answers to questions submitted by the ESAs are necessary to ensure consistency in the interpretation of the SFDR. The answers clarify the interaction between the SFDR and the different pieces of the sustainable finance framework regarding disclosure rules on sustainable investments.

ESMA has also published the covering letter from the Commission to the ESAs. In the covering letter the Commission asks the ESAs to publish the new and updated answers on the website of their Joint Committee and their respective websites. 

ESAs consult on amendments to RTS on content and presentation of PAI and financial product disclosures under SFDR

On 12 April 2023, the ESAs published a consultation paper (JC 2023 09) on proposed amendments to the regulatory technical standards (RTS) on content and presentation of principal adverse impacts (PAIs) and financial product disclosures in Commission Delegated Regulation (EU) 2022/1288 which supplements the Sustainable Finance Disclosure Regulation (SFDR).

The ESAs' proposals broaden the disclosure framework and address the main technical issues that have emerged since the SFDR was originally agreed. The proposals also reflect experiences shared by stakeholders through Q&As and observations from national competent authorities.

The proposals include:

• Extending and enhancing the list of social indicators for PAIs.
• Making amendments regarding decarbonisation targets.
• The potential introduction of more specific disclosure requirements regarding do no significant harm under PAIs for sustainable investments.

Simplifying the language in the financial product templates to help retail investors understand them.

The consultation closes to responses on 4 July 2023. The ESAs will organise a joint public hearing and targeted consumer testing during the consultation period. After considering the comments received, the ESAs will prepare a final report and submit it to the Commission.

FCA and the Global Financial Innovation Network to launch Greenwashing TechSprint

On 11 April 2023, the FCA published a press release announcing that the Global Financial Innovation Network (GFIN) is launching its first Greenwashing TechSprint. The TechSprint will be hosted by the FCA's Digital Sandbox. GFIN also published an information pack for firms interested in participating in the TechSprint.

The TechSprint aims to develop a tool or solution that could help regulators or the market more effectively tackle and mitigate the risks of greenwashing in financial services. GFIN has developed two "problem statements" for the TechSprint to help participants focus on the problem that requires solving.

The TechSprint is open to all UK-based firms. Applications should be made through the FCA's Digital Sandbox from 17 April 2023 until 21 May 2023. For successful firms, the TechSprint will start on 5 June 2023 and will run for three months. It will culminate in a showcase day in September 2023.

European Commission consults on draft Taxonomy Environmental Delegated Act and draft Delegated Act amending Taxonomy Climate Delegated Act 

On 5 April 2023, the European Commission published a consultation on two proposed delegated regulations relating to Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment, known as the Taxonomy Regulation.

The first proposed delegated regulation is the draft Taxonomy Environmental Delegated Act. This sets out additional EU taxonomy criteria for adding economic activities that make a substantial contribution to the taxonomy's environmental objectives of:

• Sustainable use and protection of water and marine resources.
• Transition to a circular economy.
• Pollution preventions.
• Control or protection and restoration of biodiversity and ecosystems.

The criteria determine whether those economic activities cause significant harm to any of the other environmental objectives. The Commission aims to develop technical screening criteria to make them adapted to climate change in the future.

The second proposed delegated regulation is the draft Delegated Act. This amends the Taxonomy Climate Delegated Act ((EU) 2021/2139) which covers the environmental objectives of climate change mitigation and adaptation not yet included in that Act. These include some manufacturing activities for key components of low-carbon transport and electrical equipment and some transitional activities in waterborne transport and aviation where zero-carbon solutions are not yet sufficiently advanced.

The consultation closed on 3 May 2023.

HM Treasury consults on proposed regulatory regime for ESG ratings providers

On 30 March 2023, HM Treasury published a consultation paper on a proposed future regulatory regime for ESG ratings providers under the Financial Services and Markets Act 2000 (FSMA).

The consultation paper sets out the Treasury's policy proposals for the scope of a regulatory regime under which a range of ESG ratings used in financial markets would be regulated. Under the proposals ESG data would not be regulated. The Treasury is considering regulating the direct provision of an ESG rating to a user in the UK where the assessment is used in relation to a specified investment in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), unless an exclusion applies. Further activities may be brought within the scope of regulation. 

The Treasury expects the regulation of ESG ratings providers would involve amending the RAO to add one or more new regulated activities. The amendment would require ESG ratings providers brought within the FSMA perimeter to become FCA authorised firms. 

Comments can be made on the proposals until 30 June 2023.

Government publishes updated Green Finance Strategy

On 30 March 2023, the Department for Energy Security and Net Zero, HM Treasury and the Department for Environment, Food and Rural Affairs published an update to the government's 2019 Green Finance Strategy.

The 2023 update sets out the measures the government is planning to take to achieve its objectives in relation to green finance. The majority of these are not new announcements. Key measures that include some new or important confirmed information are the government's plans for:

• Commissioning a transition finance market review to identify opportunities for the UK to become a leading provider of transition financial services.
• Consulting on the introduction of requirements for the UK's largest companies to disclose net zero transition plans if they have them.
• Setting up a framework to assess the suitability for the UK of the global sustainability disclosure standards.
• Issuing a call for evidence on reporting of scope 3 greenhouse gas emissions. 
• Updating the government's Environmental Reporting Guidelines, which provide voluntary guidance for UK organisations.
• Working to improve climate resilience assessment and disclosure by developing adaptation metrics and guidance.
• Delivering a green taxonomy for the UK which will provide investors with definitions of which economic activities can be labelled as "green".
• Consulting on regulating ESG ratings providers (see our item above).
• Consulting later in 2023 on the interventions needed to support the growth of high integrity voluntary carbon markets.

The update contains a timeline which summarises the commitments and next steps in the period to 2024.

Alongside the update, the government has published several other documents to support the transition to a net zero economy. The update mentions:

• The UK International Climate Finance Strategy.
• The UK 2030 Strategic Framework for international climate and nature action.
• Nature Markets Framework and press release.

Taskforce on Nature-related Financial Disclosures consults on fourth and final draft of disclosure framework

On 28 March 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published the fourth and final beta version of its disclosure framework, alongside a supporting press release. The disclosure framework provides guidance for organisations to report on nature-related risks, to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.

Since the third beta version (see our December 2022 update), the TNFD has made minor changes to the proposed risk and opportunity assessment process and has reduced the proposed recommended disclosures from 15 to 14. Stakeholders can also see a full representation of the framework, including the TNFD approach to disclosure metrics. The disclosure metrics are designed to allow organisations to report on their alignment with global goals.

TNFD is consulting on the fourth beta version from 30 March 2023 to 1 June 2023. It aims to publish the final framework in September 2023.

Payment Systems Regulator speech on innovation

On 18 April 2023, the Payment Systems Regulator (PSR) published a speech given by the PSR Chair, Aidene Walsh, on innovation.

In the speech, Ms Walsh explains that the PSR continues to look at the wider payments horizon to understand developments and their potential impact. Points of interest in the speech include:

• The rise of artificial intelligence and the interlock between data and payments (such as blockchain, QR codes, digital ID, smart contracts and open banking).
• That innovation has varying degrees of success both in terms of adoption and in outcomes for the economy.
• That innovation can be reactive or adaptive.
• In some cases, such as authorised pushed payment fraud, innovation has driven a need for regulatory action.
• The PSR is seeing a morphing between technology, payment providers, banks and commerce to deliver multiple solutions for payment services.
• Regulatory intervention is needed in respect of digital payments where innovation runs the risk of leaving large numbers of people behind.

Pay.UK and UK Finance announce first iteration of technical collateral for Enhanced Fraud Data Standard

On 31 March 2023, Pay.UK and UK Finance published the first iteration of technical collateral for the Enhanced Fraud Data Standard. It is intended that the retail payments industry will review and consider the first iteration and provide input where relevant.

This is the latest stage in helping Pay.UK and UK Finance build an API solution through which standardised customer data will be sent. This will assist economic crime specialists identifying suspicious payments, or authorised push payment scams, prior to a credit transfer occurring.

Pay.UK and UK Finance plan to continue work on standardising additional data over the course of 2023.

Payment Systems Regulator publishes annual plan and budget for 2023/24

On 30 March 2023, the Payment Systems Regulator (PSR) published its annual plan and budget for 2023/24, together with a related factsheet.

The plan sets out a summary of the PSR's key aims and activities for 2023/24 and its expected operating costs. Key projects include:

• Tackling authorised push payment scams.
• Shaping the New Payments Architecture.
• Card fees.
• Digital currencies and crypto assets.

The PSR will boost its effectiveness by creating a new division, Supervision and Compliance Monitoring, to increase focus on reducing PSP's non-compliance with the rules it enforces.

The PSR will hold an event on 9 May 2023 to hear stakeholders' views on the plan. In summer 2023, it will publish its annual report on how it has performed against its plans for 2022/23.

FCA speech on opportunities and risks arising from green mortgages

On 19 April 2023, the FCA published a speech given by FCA Director of Retail Banking, David Geale, on the FCA's view of green mortgages.

In the speech Geale explains that there is no commonly-accepted definition of "green mortgages", but that in this context "green" relates to the property the mortgage is taken out on, as opposed to the mortgage itself. Green mortgages include an incentive for the customer to either purchase an energy-efficient property or improve the energy efficiency of an existing property.

With over nine million regulated mortgages in the UK there are significant opportunities for the mortgage sector to be influential in helping borrowers reduce emissions from their homes. However, there are also several inherent risks such as greenwashing and making it very difficult or very expensive to secure a mortgage for properties with lower energy efficiency. 

The FCA will continue to monitor the green mortgage sector.

EBA consults on draft guidance on assessing adequate knowledge and experience of the management or administrative body of credit servicers under NPL Directive

On 19 April 2023, the EBA published a consultation paper (EBA/CP/2023/07) on draft guidelines on the assessment of adequate knowledge and experience of the management or administrative organ of credit servicers and credit purchasers.

In the consultation paper the EBA explains that to protect the integrity of the market and promote trust, it is critical that the management of a credit servicer has sufficiently good repute and adequate knowledge to conduct business in a competent and responsible manner. The draft guidelines specify the criteria for assessing this.

Comments can be made on the draft guidelines until 19 July 2023. The EBA is aiming to publish the final version of the guidelines by the end of 2023, and it expects they will come into force in early 2024.

FCA publishes evaluation paper on overdrafts and findings from review of overdraft repeat use strategies

On 19 April 2023, the FCA published an evaluation paper (EP23/1), together with a technical annex, setting out the findings following an evaluation of its remedies for consumer harm found in the market for overdrafts. 

The FCA's findings include the following:

• Changes to its pricing rules appear to have delivered benefits from lower charges.
• Regulatory action on pricing practices can result in significant savings for consumers, without strong evidence of negative consequences in terms of access to credit.
• The FCA's policy has made the price of overdrafts simpler.
• Despite the varying size of effects by firm, outcomes for repeat users, in general, appear to be improving.

The FCA invites views on the evaluation paper.

Alongside this, the FCA published the findings of its review of overdraft repeat use strategies. The FCA has found that changes to its overdraft rules in the Consumer Credit sourcebook have reduced high fees for unarranged borrowing, removed complex charging structures and introduced help for those who were repeatedly using their overdraft.

Bank of England publish statement on improving depositor outcomes in bank or building society insolvency

On 18 April 2023, the Bank of England published a statement on improving depositor outcomes in bank or building society insolvency. If successfully implemented, the Bank explains that the changes will reduce risks to depositors and the financial system that could arise due to the failure of a firm. The changes would also minimise disruption and provide efficient access to funds.

The Bank have identified three areas that could support timely pay out of eligible depositors' covered balances and improve continuity of banking services:

• An online portal, enabling depositors to provide alternative account details so the FSCS can electronically transfer the covered balance of their deposit at the failed firm to another bank or building society.
• Improved continuity of banking services, potentially using the infrastructure used to support the sharing of payment information and redirection of payments when a customer moves banks.
• Exploring better operational support and capacity at receiving banks for those depositors who need to open a new bank account to achieve continuity. 

FCA and PRA publish survey on potential critical third-party regime

On 11 April 2023, the FCA and PRA published a voluntary survey on operational resilience relating to critical third parties to the UK financial sector. The PRA has published an accompanying press release.

The survey is intended for service providers in the UK financial sector. Respondents are asked to provide cost estimates for implementing and ensuring ongoing compliance with potential minimum resilience standards along the lines of those set out in the July 2022 discussion paper. It is intended that the information being collected in the survey will help authorities to understand the costs to service providers of implementing a potential critical third-party regime in the UK. The results of the survey will be used to help inform future consultation options.

The deadline for responding to the survey is 17 May 2023. 

PRA policy statement on depositor protection rules

On 31 March 2023, the PRA published a policy statement (PS2/23) on depositor protection.

In the policy statement the PRA provides feedback to part of the responses to its September 2022 consultation paper. The PRA also sets out its final rules concerning the relevant amendments to the Depositor Protection Part of the PRA Rulebook.

The PRA notes that the consultation paper contained a number of other proposals that are not covered by the policy statement. These other proposals have either already been the subject of a previously published policy statement (PS10/22) or will be covered in a separate future policy statement.

Undertaking given to FCA under Consumer Rights Act 2015 concerning terms in insurance broker contract

On 31 March 2023, the FCA published an undertaking given by Policy Express Insure Ltd (trading as Nova Direct) under the Consumer Rights Act 2015. The undertaking related to terms in various insurance policies entered into from 1 October 2015.

The undertaking given relates to the following three terms:

• A continuous payment authority term.
• A cancellation term.
• An automatic renewal term.

Policy Express has agreed to amend the terms in its insurance broker contract and confirmed that it intends to redraft the terms with the assistance of a compliance firm. It has also amended relevant sections of its website.

New FCA webpage on insurer claims data relating to the business interruption test case

On 31 March 2023, the FCA published a webpage on insurer claims data relating to the January 2021 Supreme Court judgment on the business interruption (BI) test case.

The FCA has been closely monitoring affected insurers' handling of BI claims since it began collecting this data in March 2021. The latest claims data shows that 37,978 BI policyholders out of the 43,027 who had had claims accepted had received at least an interim payment. The data also shows that the aggregate value of the payments for the 36,904 claims where final settlements have been agreed and paid is £1,406,662,310. The number of BI claims where the insurer's decision as to whether there is a valid claim is pending is 341.

Draft Insider Dealing (Securities and Regulated Markets) Order 2023 published 

On 17 April 2023, the draft Insider Dealing (Securities and Regulated Markets) Order 2023 was published, alongside an explanatory memorandum. 

The draft instrument aligns the securities and markets on which the criminal offence of insider dealing can be committed under Part 5 of the Criminal Justice Act 1993 with those to which the UK Market Abuse Regulation applies. 

The order will enter into force 21 days after the day on which it is made.

Bank of England grants comparable compliance to the Commodity Futures Trading Commission for incoming central counterparties under UK EMIR

On 14 April 2023, the Bank of England published a joint statement with the Commodity Futures Trading Commission (CTFC) on the supervision of cross-border central counterparties (CCPs).

In the joint statement the Bank announced that it has determined that its relationship with the CFTC meets the expectations of the Bank's level 1 Informed Reliance Assessment. This allows the Bank to place reliance on the CTFC's regulation and supervision in respect of incoming CCPs based in the US under UK EMIR.

The Bank and CFTC also confirmed their commitment to maintaining a robust and effective relationship of co-operation and information sharing, further to the memorandum of understanding they entered into in 2020.

FCA publishes portfolio letter on implementing the Consumer Duty in respect of CFDs

On 6 April 2023, the FCA published a portfolio letter on implementing the Consumer Duty in respect of contracts for difference (CFDs).

The letter is directed at firms whose primary business model is marketing and providing CFDs, spread bets or rolling spot foreign exchange to retail consumers. The FCA explains that the Consumer Duty applies to products and services offered to retail customers and also provides an overview of the Consumer Duty.

The FCA expects CFD firms to understand their obligations under the Duty and to embed it fully. The FCA sets out key considerations for firms when embedding the Duty:

• Governance of products and services - firms must review their governance processes and ensure the target markets for CFDs are appropriate.
• Price and value - firms must be able to demonstrate that their products and services provide fair value, manufacturers must consider the expected total costs paid by consumers and distributers must consider the impact of their distribution arrangements on value.
• Consumer understanding and communications - CFD firms should fully review their customer interactions and communications models, including how they advertise and market products to consumers.
• Consumer support and service - firms should consider if all consumer interactions, from initial onboarding onwards, provide an appropriate level of customer service and should also consider if they are causing foreseeable harm.

HM Treasury call for evidence for Investment Research Review

On 3 April 2023, HM Treasury published a call for evidence for the Investment Research Review.

The call for evidence seeks views on:

• The impact the current UK legislative and regulatory environment has on the provision and quality of research.
• The importance of investment research to the attractiveness of the UK public markets to listed companies and their investors or companies looking to access capital in private markets.
• How investment research provision in the UK compares with other major international financial services centres.
• Steps that could be taken to improve the provision and quality of research on UK listed and quoted companies.

In particular, the Review requests views on the impact of these issues on different sectors, particularly technology and life sciences. 

The call for evidence is directed at all interested parties and the deadline for responses was 24 April 2023. Before the Review submits its report to HM Treasury, it will hold a series of discussions with interested parties to explore the issues raised further.

FCA publishes guidance and recommendations for liability driven investment asset managers

On 24 April 2023, the FCA published guidance and recommendations for liability driven investment (LDI) asset managers.

The FCA has been collaborating with UK and international regulators to enhance the resilience of the LDI sector following the volatility of gilt markets experienced in September 2022. As part of this work, the FCA has also engaged with asset management firms as they enhance their resilience, review the vulnerabilities they experienced and how they manage the risks and liquidity in their funds.

The recommendations cover:

• Risk management and stress testing.
• Operational arrangements, communications and clients.

Firms are expected to complete and embed all necessary improvements to their operating practices to address the deficiencies identified.

FCA announces plan to deliver redress to Woodford Equity Income Fund investors

On 20 April 2023, the FCA published a press release announcing it has agreed a plan to deliver redress to Woodford Equity Income Fund (WEIF) investors.

Under the plan, Link Fund Solutions Ltd (LFS) will provide a redress payment to investors in the WEIF of up to approximately £235 million. The redress is to cover losses of over 300,000 investors in the WEIF as a result of failures by LFS, as the authorised corporate director of the WEIF, in managing its liquidity.

The agreement reached is subject to completion of the sale of Link Group's Fund Solutions business (including LFS' business) and the approval by the investors and the court of a scheme of arrangement to resolve all of LFS' liabilities in relation to the WEIF.

PRA fines TSB's former Chief Information Officer for Senior Manager Conduct Rule breach

On 13 April 2023, the PRA published a final notice issued to Carlos Abarca, former Chief Information Officer (CIO) at TSB Bank plc, fining him £81,620 for breaching PRA Senior Manager Conduct Rule 2. Abarca agreed to resolve the matter and therefore qualified for a 30% reduction in the penalty, which would have otherwise been £116,600.

The PRA found that Mr Abarca failed to take reasonable steps to ensure that TSB adequately managed and appropriately supervised its outsourcing arrangement relating to its 2018 IT migration programme. The PRA found that Abarca's breach of Senior Manager Conduct Rule 2 undermined TSB's operational resilience and contributed to the significant disruption experienced by TSB branches and customers. The notice sets out further details of Abarca's failures.

In December 2022, the FCA and the PRA published final notices issued to TSB, fining it a total of £48.65 million for operational resilience failings arising from technical failures of a new IT platform (please see our January 2023 update).

FCA brings successful prosecution against individuals relating to binary options investment fraud

On 6 April 2023, the FCA published a press release announcing that three people have been convicted for investment fraud relating to a binary option investment scheme in a prosecution brought by the FCA.

The FCA prohibited the sale, marketing and distribution of binary options to retail customers in 2019. The FCA announced in November 2022 that it was prosecuting the individuals (please see our December 2022 update).

FCA commences criminal proceedings against four individuals for defrauding investors using fake investment schemes

On 5 April 2023, the FCA published a press release announcing that it has commenced criminal proceedings against four individuals.

The FCA alleges, amongst others, that the four individuals defrauded investors out of approximately £1.4 million using investment schemes that were not genuine and that they contravened the general prohibition under section 19 of the Financial Services and Markets Act 2000.

Two of the defendants were remanded in custody and the other two on conditional bail ahead of their first appearance at Southwark Crown Court on 2 May 2023.

PRA censures Wyelands Bank for large exposures failings

On 4 April 2023, the PRA published a final notice censuring Wyelands Bank plc, alongside a press release.

In December 2016, Wyelands became part of the Gupta Family Group alliance (GFG). Between May 2017 and December 2018, Wyelands entered into four sets of structured finance transactions. Each of these had a value representing a significant proportion of its capital and material exposures to counterparties connected to GFG. Wyelands failed to identify that these transactions were significantly in excess of the regulatory limits on large exposures contained in the UK Capital Requirements Regulation, resulting in an unacceptable concentration of risk to GFG and counterparties connected to GFG. The final notice sets out details of additional failings.

This is the first time that the PRA has taken action against a firm for large exposure breaches and found a breach of Fundamental Rule 3. The PRA states that the breaches justify a fine of £8,515,000. However, as Wyelands is in wind down and has limited financial resources, the PRA concluded that a fine would not advance its general objective to promote the safety and soundness of firms.

FCA publishes webpage on cash-based money laundering

On 24 April 2023, the FCA published a new webpage on cash-based money laundering.

The webpage refers to the FCA's work to address an identified weakness in anti-money laundering controls relating to cash deposits. Before starting this work, the FCA identified that banks had limited controls specific to their cash deposit services at the Post Office.

The FCA found that, throughout 2022, banks made significant progress in designing and implementing controls to respond to the identified threat. However, the introduction of deposit limits posed a challenge for some customers, particularly businesses, that have a legitimate requirement to deposit higher amounts than the permitted limits set by their bank. The FCA expects firms to:

• Keep the impact of their controls under review to help ensure they are proportionate to the risk and suitable for the firm's customer base.
• Continue to focus on appropriate communication with their customers.

Wolfsberg Group publishes updated anti-bribery and corruption compliance programme guidance for financial institutions

On 17 April 2023, the Wolfsberg Group published updated guidance for financial institutions on how to develop, implement and maintain an effective anti-bribery and corruption compliance programme.

An accompanying press release explains that the updated guidance incorporates learnings from enforcement actions since 2017. The updated guidance replaces the 2017 Wolfsberg ABC compliance programme guidance, which has been retired.

ECON and LIBE report on proposed AML Regulation and MLD6

On 14 April 2023, the European Parliament published the following reports of the Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE) on two of the European Commission's legislative proposals to strengthen the EU's anti-money laundering and counter-terrorist financing regime:

• Report on the proposed Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
• Report on the proposed Directive on the mechanisms to be put in place by the member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing MLD6.

The next step is for the Parliament to adopt its position during its April 2023 plenary session.

ECON and LIBE report on proposed Regulation establishing Anti-Money Laundering Authority

On 12 April 2023, the European Parliament published the report of the Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE) on the European Commission's legislative proposal for a Regulation establishing the Anti-Money Laundering Authority.

The next step is for the Parliament to adopt its position during a plenary session in April 2023, after which it will be able to start negotiations on the proposal with the Council of the EU. The proposal forms part of a legislative package designed to strengthen the EU's AML and counter-terrorist financing regime.

Home Office announce failure to prevent fraud offence

On 11 April 2023, the Home Office confirmed in a press release that a failure to prevent fraud offence will be introduced in the forthcoming Economic Crime and Corporate Transparency Act.

A factsheet sets out information about how the offence will be applied, including that the offence will only apply to large companies, not-for-profit organisations and incorporated public bodies and that the offence can be committed even if the organisation and the relevant employee are based outside of the UK. If convicted, an organisation can receive an unlimited fine.

The offence will come into force after the Economic Crime and Corporate Transparency Bill receives Royal Assent.  

HM Treasury and Home Office publish Economic Crime Plan 2: 2023-2026

On 30 March 2023, HM Treasury and the Home Office published Economic Crime Plan 2: 2023-2026. The plan sets out measures for the private and public sectors to tackle economic crime. The plan seeks to build on the first Economic Crime plan and is designed to focus more directly on impact and outcomes. 

The plan provides 43 separate actions, including to review the Law Commission recommendations into corporate criminal liability. Significantly, the new plan comes with express financial commitment, including an investment of £400 million over the period comprised of £200 million of government investment and £200 million from the economic crime levy.

The FCA notes in its Business Plan for 2023/24 (see above) that it will play a "key role in driving the financial services sector’s contribution to driving down fraud and delivering the Economic Crime Plan 2."

The answer to last month's question: according to the FCA’s latest Perimeter Report, the top root cause for operational incidents reported to the FCA between 2020 and 2022 was 3rd party failure.

According to the FCA's 2023/24 Business Plan, how much is it investing to make sure the Consumer Duty is effectively delivered? 

• £5.3 million.
• £12.7 million.
• £2.3 million.
• £3.7 million.