Preparing the regulatory regime for Brexit: Further proposals published
The FCA is currently planning for a range of Brexit scenarios to ensure the regulatory framework remains robust, regardless of the outcome. To this end, the regulator has published two further consultation papers, one outlining proposed regulatory technical standards for ensuring strong customer authentication and secure and common open standards of communication in the event of a no-deal Brexit. The second paper outlines how the FCA plans to recover the costs of regulating securitisation repositories, which it will be responsible for after the 29th March 2019.
Regulatory Technical Standards for Strong Customer Authentication and Common and Secure Open Standards of Communication
Under the Payments Services Directive 2015 (PSD2) a number of provisions of the EU Regulatory Technical Standards for strong customer authentication and common and secure open standards of communication (SCA-RTS) will come into force on 14th March 2019, with the remainder being introduced on 14th September 2019. A no-deal Brexit would leave payments potentially open to risk unless similar regulatory technical standards were introduced into the UK from exit day.
To address this, the FCA is proposing to require firms to apply strong customer authentication processes and to communicate securely with customers, in line with the FCA’s regulatory technical standards which will be based upon the SCA-RTS.
Recovering the cost of regulating securitisation repositories
Following the UK’s exit from the EU, the FCA will take over the regulation of securitisation repositories (SR). To ensure the smooth transition, the FCA’s proposals for regulating securitisation repositories will be integrated into the structure developed for credit rating agencies (CRAs) and trade repositories (TRs).
The regulator’s fee proposals are split into three areas: application fees, periodic fees and the cost recovery process.
The FCA is proposing a moderately complex application fee of £5,000, which is in line with fees for CRAs and TRs of a similar level. Because the threshold conditions for SRs don’t match FSMA requirements, no discounts will be available to authorised firms seeking to extend their permissions.
In order to collect periodic fees, the FCA is proposing to create a new fee-block (J.3) for SRs, with a minimum fee of £26,907. This is aligned to ESMA’s proposed minimum fee of €30,000, converted using the Bank of England’s published spot rate for 31st December 2018.
As the oversight of SRs is a new area for the FCA and the regulator has no turnover data to work from, it has presented an estimation of the costs it would look to recover from firms in 2019/20. These costs will be distributed between fee-payers based on turnover.
Notification window open for the temporary permissions regime
EEA-based firms looking to enter the temporary permissions regime have until the 28th March to notify the FCA that they wish to enter the regime via the regulator’s Connect system. Fund managers will also need to identify which of their funds they wish to continue temporarily marketing in the UK.
If the appropriate notifications are not submitted in time, firms and funds will not be able to use the regime. For funds, the only exception to this is for new sub-funds of EEA UCITS that come under the temporary marketing permissions regime on exit day. Subject to certain criteria, firms which do not enter the temporary permissions regime will be subject to the financial services contracts regime.
The FCA has prepared guides on the notification process for firms and investment funds.
FCA publishes updated Sector Views
The FCA has published its updated views on the key issues and developments within the seven sectors it regulates. This publication helps inform the regulator’s priorities and resources for the coming year.
The FCA’s analysis has revealed a number of cross-sector themes, which are driving change across the sectors:
- Technology: consumer engagement and firm accountability, the sustainability of new business models and the disaggregation of the value chain.
- Societal changes: Increased life expectancy, changing financial needs and consumers assuming greater levels of responsibility for complex financial decisions.
- Brexit: Wholesale firms, investment managers and insurance firms are expected to be significantly impacted, but all financial sectors will be impacted in some way.
- The macroeconomic environment: Challenging economic outlook, low interest rates and pressure on household finances.
Retail banking and payments
Overview: For most consumers and small businesses this sector is the gateway to financial services, with 97% of adults having a personal current account and 73,600 payments made in the UK every minute of the day.
How the sector is changing: To take advantage of the opportunities created by PSD2 and Open Banking many providers are developing new offerings, with technology playing an increasing important role, particularly within the payments sector. Recent regulatory developments have been geared towards facilitating greater innovation and competition.
Where there may be evidence of harm: Service disruptions and security breaches are becoming more widespread, potentially causing inconvenience or financial loss for consumers. While beneficial for many, new and emerging technologies can create barriers for certain consumer groups, including the most vulnerable. Often consumers misunderstand the benefits and protections offered by new and different types of payment services and there needs to be a greater awareness of regulation.
Overview: In total, lending is estimated to exceed £1.5 trillion. For many consumers, borrowing is a necessity, leaving them more susceptible to mis-selling or buying poor value products.
How the sector is changing: Much of the change in this sector has been driven by the changing needs of the population, with working patterns, longevity and the rate of earnings growth impacting the generations differently. The regulator is also concerned that pressures on household finances may mean consumers are less able to withstand financial shocks.
Where there may be evidence of harm: Poor borrowing and lending decisions could result in persistent debt, over-indebtedness or financial distress. There is evidence that some firms are not treating customers in financial difficulty fairly. Certain elements of a product’s design may be framed in a way that makes it difficult for consumers to make an informed decision. In the debt management market, consumers do not always receive appropriate advice, with some being sold unsuitable products at a time of financial distress.
General insurance and protection
Overview: Although it is a mature sector, the insurance industry is undergoing significant change thanks to developments in technology and the increased use of Big Data.
How the sector is changing: Consumers now have greater transparency at renewal, boosting the propensity to shop around. Changing consumer demand has resulted in greater product flexibility and a number of providers are beginning to respond to the demand for simpler forms. The continuous developments in technology and Big Data can bring about benefits, such as lower premiums, but also threats and potentially negative outcomes. The FCA’s regulatory focus is to drive increased accountability within the industry. In response to Brexit, several companies have created separate UK and EU subsidiaries or are considering alternative business models to minimise the impact of the UK leaving the EU.
Where there may be evidence of harm: Much of the harm the regulator sees relates to specific products, suppliers or consumer groups. However, there are some broader issues, including differential pricing, claims not being paid fairly and properly, a lack of access for those with specialist needs and a lack of transparency within the wholesale market.
Pensions saving and retirement income
Overview: The risk that consumers may retire without sufficient income to support themselves through retirement is a key challenge for the sector and the FCA. This could be exacerbated pension scams, poor value or unsuitable products.
How the sector is changing: There is growth in the workplace pension market, driven by growth in master trusts, but overall contributions are low. However, firms are regularly updating products to align them more closely with the provisions of the pension freedoms and consumer demand. The aging population and rising cost of long-term care continues to present a challenge for consumers and the industry, particularly in an economic environment of low interest rates. New technologies do offer the prospect of lower cost, more holistic retirement planning but providers are still struggling with legacy system issues meaning these benefits may take time to realise.
Where there may be evidence of harm: Despite the positive impact of auto-enrolment, individuals may still be struggling to maximise their pension savings to ensure they have adequate income in retirement. Consumers are also not being enabled to make good decisions and their pension savings are not being managed in line with their long-term needs.
Overview: Retail investments are available to consumers via a number of different channels and the primary regulatory focus in this area is ensuring that products and services are suitable and meet clearly defined needs.
How the sector is changing: There are four main drivers of change across the retail investment market: the effect of low interest rates on investment returns, increased regulatory scrutiny and policy changes, innovation in product design and the growing disparity between inter-generational wealth.
Where there may be evidence of harm: The regulator’s biggest concerns are around whether consumers receive suitable products and tackling the issues of high charges and low quality service. Confidence in the market could be significantly impacted by incidents of financial crime, cyber crime or technological disruption.
Overview: This sector is a key contributor to the UK economy and will be significantly impacted by Brexit. Assets under management grew to £9.1 trillion in 2017, with 20% managed for retail investors and the remainder for institutional investors.
How the sector is changing: Brexit remains the main source of uncertainty and many are putting plans in place which may affect services to UK investors. Political and social pressure for greater levels of ethical investments is increasing and significant regulatory change is also contributing to high levels of change.
Where there may be evidence of harm: Threats to the stability and resilience of the UK markets, including the cross sector-wide issues identified above, could significantly impact this sector. Other regulatory concerns include the quality and pricing of services available to retail and institutional investors.
Wholesale financial markets
Overview: This sector covers a wide range of services available to corporates, retail investors and investment managers and is large and complex. When the market is working well it delivers significant benefits for market participants and the end customers they act on behalf of.
How the sector is changing: New regulations are set to make the market cleaner, more transparent, more orderly and help improve competition and resilience. Brexit could result in changes to how firms conduct cross-border business and technological advances may lead to new and innovative business models.
Where there may be evidence of harm: Within the wholesale markets the FCA has identified seven areas of potential harm:
- Financial crime
- Market abuse
- Stability and resilience
- Conflicts of interest
- Market effectiveness
- Market power
Window now open for CMCs to register for temporary permissions
The window is now open for claims management companies (CMCs) to register for temporary permissions ahead of the FCA taking over regulation of the sector on 1st April 2019. The registration period is open until the end of March, but firms are being urged not to leave it until the last minute to register, in case of issues or delays.
As part of the process, CMCs will need to demonstrate that they meet minimum standards of conduct. Once registered, they will be invited to submit their application for authorisation in one of two windows between April and the end of July.
Government launches enquiry into charging structures for pension transfer advice
During the Work and Pensions Committee’s enquiry into pension freedom and choice, the committee received evidence that charging structures, particularly contingent charging, may be incentivising advisers to give poor advice.
Although recommended by the committee, the FCA did not introduce a ban on contingent charging following a consultation into the issue, saying there was a lack of evidence linking contingent charging and bad advice, so further investigation would be required. To assist with the FCA’s investigation the government has launched a call for evidence into contingent charging, particularly:
- Whether contingent charging increases the likelihood of unsuitable advice
- Views on the impact of a contingent charging ban and how any negative impact could be minimised
- Any alternative solutions that would remove conflicts of interest while avoiding any possible negative outcomes.
Dear CEO letter on financial promotions issued
The FCA has published a Dear CEO letter to remind all regulated firms of their obligations around the use of financial promotions following evidence that some firms have been publishing financial promotions which imply that all their activities are regulated by the FCA and/or PRA when they are not.
The letter reminds firms of the following points:
- Financial promotions must be clear, fair and not misleading. Those receiving a promotion must understand the extent of the firm’s business that is regulated as part of meeting this standard
- Where a firm references the FCA/PRA as its regulator for specific aspects of its business, it must also make clear those parts that aren’t regulated
- Firms must not indicate or imply that any part of the business is regulated if this is not the case
- The content of all financial promotions must be approved by an authorised person
- The FCA has the power to request firms withdraw a financial promotion or prevent it from being used in the first place.
All firms should read this letter and ensure their own financial promotions meet the FCA’s expectations.