Access to FOS for SMEs & the impact of green finance: This week in regulation


The speed read

  • SMEs to get greater access to the Financial Ombudsman Service (FOS)
  • The industry impact of climate change and green finance
  • FCA and TPR publish joint pensions strategy
  • Speech: A regulatory perspective on trust and ethics
  • Proposed fees for the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) published
  • Feedback statement on FCA’s digital regulatory reporting call for input
  • Increasing the FOS award limit

SMEs to get greater access to the Financial Ombudsman Service (FOS)

The FCA has confirmed its plans to widen access to FOS for small and medium-sized enterprises (SMEs). In its Policy Statement (PS18/21) it confirmed near-final rules which will see an additional 210,000 UK companies eligible to access FOS’s services.

Following feedback to its initial consultation, the FCA has relaxed its proposed eligibility criteria for SMEs. In order to use the Ombudsman’s services SMEs would have to have a turnover below £6.5m and either fewer than 50 employees or a balance sheet total of >£5m.

Around a fifth of consultation respondents expressed concerns about FOSs ability to handle the volume and complexity of likely complaints. To address this, the FCA published an outline of how the FOS’s specialised, ring-fenced SME unit will operate. Key features of the unit include:

  • A team of 20 SME investigators with specialist knowledge and skills
  • Specialist SME ombudsmen and team leaders
  • Dedicated legal resource and access to additional expertise and advice
  • A external panel and SME advisory group to provide sector expertise and insight
  • A dedicated phone line and microsite for SME complaints.


The industry impact of climate change and green finance

The FCA has published a discussion paper on how the impact of climate change and the move towards greater carbon neutrality are relevant to the regulator’s statutory objectives.

Climate change is likely to have a fundamental impact on the economy, with the physical consequences, political action and the response from firms and individuals shaping the financial services industry.

This discussion paper outlines:

  • How the potential effects of climate change could impact the FCA’s long and short term objectives
  • The opportunities and threats for the UK financial services market of moving towards a low carbon economy
  • The specific, near-term actions the regulator will take to ensure markets continue to function well.

Potential impact on FCA objectives

The risks arising from climate change will impact the risks to, and value of, certain kinds of investments and it’s important that the industry responds appropriately and supports the transition to greater carbon neutrality, including adequate disclosure of the risks and opportunities.

Through the lens of competition, the FCA has considered a wide range of factors, including access to the market for new entrants, consumer needs and innovation. It is the regulator’s view that beneficial innovation within ‘green finance’ will help support the successful transition to this new economy and help ensure the UK remains an attractive prospect for international business and financial services.

Opportunities and threats

No common, universally agreed standards exist for measuring the impact and performance of green finance products. These can be helpful for increasing market trust and helping investors choose appropriate products for their needs.

Adequate risk disclosure around the effects of climate change can have a positive effect on long-term investment decisions, particularly in the pensions and insurance industries. Firms may also wish to consider this as part of their broader considerations around sustainability.

FCA actions

The regulator acknowledges there are many things it could be doing in this area. In the short term it has chosen to focus on four key areas, which it believes require the greatest regulatory focus:

  • Address the recommendations outlined in the Law Commission’s report on Pension Funds and Social Investment
  • Take steps to increase innovation in specialist green products, ensure the market functions well and customers receive positive outcomes
  • Explore whether more work is required to encourage issuers to provide appropriate information to investors and whether greater clarity around the regulatory expectations is required
  • Seek industry views on the value of introducing a new requirement for firms to publicly report on how they manage climate risks.


FCA and TPR publish joint pension strategy

 ‘Regulating the pensions and retirement income sector’, the newly published joint strategy from the FCA and TPR is designed to improve pensions and retirement income products and increase consumers’ financial provision in later life.

The overarching risk of consumer harm in this sector is the prospect of consumers not having adequate income, or the income levels they expected, in retirement. The regulators have identified the key issues that lead to this risk materialising. These are:

  • Consumers finding it hard to maximise their pension savings (access and participation)
  • Pensions not being managed in line with savers’ needs (funding and investment)
  • Poor pension scheme governance and administration (governance and administration)
  • Consumers not being empowered to make effective decisions (consumer understanding and decision-making).

These issues are explored in greater detail within the strategy, with the harms and risks to consumers and regulatory objectives highlighted.

Key initiatives in each area include:

Access and participation

  • Enforcement activity against employer non-compliance
  • Greater support and communication for employers, scheme providers and intermediaries
  • Public policy development on access and participation, including a focus on intergenerational issues.

Funding and investments

  • Beginning one-to-one TPR supervision of an initial group of DB schemes
  • Parallel supervision of the governance and oversight of DC default funds
  • Implementing proposed interventions from the Retirement Outcomes Review (ROR) and asset management market study
  • Increased regulatory focus on ESG factors in investment decisions

Governance and administration

  • Use of a broader range of regulatory interventions to address poor governance and administration
  • Ongoing work on operational resilience and cyber risk
  • The development of common value for money (VFM) principles and standards, beyond existing guidance
  • Review of non-workplace pensions
  • New rules on costs and charges disclosure for contract-based workplace pension schemes to align them to DWP rules for occupational pensions.

Consumer understanding and decision making

  • A joint review of the consumer pensions journey
  • Continued support of innovative solutions through the FCA’s Advice Units, Project Innovate and TechSprints
  • Post-implementation review of the Retail Distribution Review (RDR) and the Financial Advice Markets Review (FAMR)
  • A joint protocol for regulatory oversight during significant DB events
  • Continued support for Project Bloom, the multi-agency group working focussed on combatting pension scams.


A regulatory perspective on trust and ethics

To celebrate the launch of St Mary’s University School of Business and Society, Andrew Bailey delivered a speech on trust and ethics. It’s an issue that lies at the heart of society and the regulator has a significant role to play, much like businesses do. We bring you his thoughts on this subject.

In an attempt to define trust, Mr Bailey outlined how a number of disciplines defined it, highlighting that a common thread in all viewpoints was that it involved commitment and had an ethical and moral element to it. We, as regulators, companies and individuals, must meet our commitments to others.

Prior to the financial crisis, Andrew Bailey believes, there was generally a permissive, ‘anything goes’ attitude towards public interest and ethical custom, as seen by the light-touch approach to regulation.

In the wake of the crisis, it was no surprise that the effectiveness of the regulatory regime was questioned. In order to rebuild trust the regulator is focussing on accountability and responsibility through its Senior Managers & Certification Regime (SM&CR). It is not enough for the FCA alone to focus on this, these principles must become an integral part of the fabric of the firm. Combined with the ongoing focus on firms’ culture, Andrew Bailey believes this is the right approach to restore trust.


Proposed fees for the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) published  

The FCA is currently consulting on the 2018/19 fee rate for recovering the costs of establishing and running the OPBAS, along with the proposed timetable for data reporting and minimum fee structure.

The consultation outlines revised costs for OPBAS, with running costs reduced from £2m to £1.4m and the annual funding requirement (AFR) to be recovered in 2018/19 reduced to £1.65m.

The minimum fee structure has been confirmed as a fee of up to £5,000, up to a threshold of 6,000 supervised individuals, as initially outlined in CP17/35. Those with more than 5,000 individuals under supervision will pay the minimum fee plus a variable rate per individual above this threshold.

In the FCA’s 2017 consultation, the regulator quoted a periodic fee of £10-£20 per individual, but warned that this may rise to £40 or above if there was substantial overreporting. This has been the case and this, combined with slightly lower recovery rate, has led the FCA to increase the rate to £45.49 per individual.

Supervised bodies are required to report on the number of individuals they supervise annually. Taking into account that supervised bodies survey their membership at different times of the year, the FCA has chosen not to prescribe a date on which to count members, instead the report should include the latest membership figures during the 12 month period ending 5th April.


Feedback statement on FCA’s digital regulatory reporting call for input

In February 2018 the FCA published a call for input requesting industry perspectives on how the regulator could make its regulatory reporting smarter through digital technologies. The publication also outlined a proof of concept, developed during a TechSprint event, which could improve the regulatory reporting and the quality of data received. It has published a feedback statement, outlining the responses received, the regulator’s response and the proposed next steps.

The regulator received 58 responses, with the majority of respondents agreeing with the FCA’s view that introducing digital regulatory reporting (DRR) could have significant benefits, particularly around driving efficiencies.

Respondents were also asked whether they could foresee any risks or unintended consequences as a result of implementing DRR. Some felt that there could be complications arising from using a third party technology provider, while others were concerned that this would result in a ‘crowd-sourced’ interpretation of the regulatory requirements.

The FCA highlights that this project is still in the initial investigative stage and that it is not its intention to fundamentally change the relationship it has with the firms it regulates.

Specific feedback relating to the proof of concept highlighted the industry’s belief that more efficient ways of implementing DRR existed. These suggestions and responses have been fed into the pilot working group and will help shape the future development of the project.

Two test cases are currently underway, one focussed on retail reporting and the other on wholesale. Through the creation of a minimum viable product, the FCA will use these cases to evaluate the benefits and implications of DRR. The pilot participants will then publish a technical paper, expected in Q1 2019, assessing the technologies used.


Increasing the FOS award limit

The FCA is proposing to increase the FOS award limit from 1st April 2019. The current limit is set at £150,000 and the FCA is consulting on amending this to:

  • £350,000 for complaints about acts or omissions that took place on or after 1st April 2019
  • £160,000 for complaints about firms’ acts or omissions from before 1st April 2019 that have been referred to the Ombudsman after this date.

The regulator is also proposing to automatically adjust the value of each award on 1st April each year, from 1st April 2020, to ensure they keep pace with inflation as measured by the Consumer Price Index (CPI).

This is to ensure that all complainants receive fair compensation, including those with high-value complaints with a value above the current award limit.

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