In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation which are expected for April 2021.
At the end of 2020, we identified the following key issues to have in mind as we entered the LIBOR “endgame”:
- Readiness, meeting the milestones set by relevant industry groups
- Right time, the need to communicate with customers in a timely way
- Right information, communicating in a way that’s clear, fair and not misleading
- Right rate, using a fair replacement rate
- Remaining contracts, managing “tough legacy”
- Record keeping, the importance, not least for senior managers, of having a record of decisions and their rationale
The PRA and FCA have reinforced all these points in a Dear CEO letter published on 26 March 2021, which is considered in further detail below.
The issues raised in this Dear CEO letter are not unexpected. But that does not mean they are straightforward to manage. Continue reading
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation which are expected for March 2021.
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation which are expected for February 2021. Continue reading
As the end of the Brexit transition period approaches, the PRA has published a letter from Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, to CEOs of all PRA-regulated firms preparing for the end of the transition period and for entering the Temporary Permissions Regime (TPR). The letter stresses the need for firms to be operationally prepared to enter the TPR and to ensure that they are able to meet the PRA’s regulatory requirements once they are in the TPR. The transition period is due to end at 11pm on Thursday 31 December 2020 at which point the TPR will take effect.
The FCA and PRA have now both published their Consultation Papers on the implementation of the remuneration provisions of the revised Capital Requirements Directive (referred to as CRD5), which will apply in the UK and the EU from 29 December 2020. Continue reading
[This post was last updated on 11 May 2020 to reflect the latest FCA publication on SMCR for solo-regulated firms]
The PRA and FCA have published two statements setting out their expectations on UK-regulated firms under the Senior Managers and Certification Regime (SMCR).
A joint statement from the PRA and FCA has been published for dual-regulated firms (the Joint Statement), while the FCA have separately published a statement for solo-regulated firms (the FCA Statement).
There are also some differences in expectations as between solo and dual-regulated firms to be aware of, which we highlight below in Key expectations.
In line with the expectations set out in the statements, firms should:
- Ensure responsibility for the response to COVID-19 disruption is clearly allocated to an appropriate Senior Manager(s) (SM).
- Document internally all decisions relating to interim re-allocation of Senior Management Functions (SMFs) and Prescribed Responsibilities (PRs) as a result of temporary absences during this period. Firms should be prepared to share these internal documents with the regulators on request.
- Communicate material temporary changes to the appropriate regulator promptly (this may not need to be by way of usual SMCR notification forms).
- Keep contingency plans under review to ensure they remain up-to-date.
- Take reasonable steps to complete any annual certifications that are due to expire while restrictions are in place.
Allocating responsibility for COVID-19 response
- Firms are not required to allocate a single SM to be responsible for response to the disruption caused by COVID-19. No “one size fits all” approach is being mandated (with the exception of requiring the responsibility of identifying key workers to be allocated to SMF1 (Chief Executive Officer) – see the FCA and PRA statements for more information).
- In the Joint Statement, the PRA also recommends that dual-regulated firms consider how they respond to unexpected changes to contingency plans, given the possibility of SMs becoming temporarily absent. Solo-regulated firms should consider doing the same.
Temporary arrangements for SMFs and PRs
- Where an SM is unexpectedly absent due to illness (or other COVID-19 related circumstances) firms may choose to allocate SMFs to existing SMs. In addition, under the existing ‘12-week rule’, firms may permit an unapproved individual to perform an SMF role where such arrangements are temporary.
- For solo-regulated firms, the FCA has issued a Modification by Consent to the 12-week rule to support firms using temporary arrangements for up to up to 36 weeks. This extended period is not currently available for dual-regulated firms (although this position remains under review).
- The FCA and PRA expect PRs (for both solo and dual-regulated firms) to be allocated to existing approved SMs wherever possible. Where this is not possible (for example due to other SM absences), the PR can be allocated to an unapproved individual performing an SMF’s role on an interim basis.
- All temporary changes to SMFs or PRs throughout this period should be clearly documented on internal records, including in Statements of Responsibilities (SoRs) and Responsibilities Maps (where appropriate). These records will need to be available to the FCA and/or PRA on request.
- Both statements confirm that furloughed SMs will retain their approved status during their temporary absence and will not need to seek re-approval.
- Certain ‘required’ functions (such as Compliance Oversight and MLRO) and/or ‘mandatory’ functions (such as the CEO, CFO and Chair of the Governing Body for CRR and SII firms) should only be furloughed “as a last resort”. Firms must arrange cover for those SMFs during the individual’s absence.
- Firms have greater flexibility in furloughing SMs whose function are not mandatory. However, in the Joint Statement, dual regulated firms are cautioned to think carefully about the implications of furloughing non-mandatory SMFs (such as SMFs responsible for business continuity). Solo-regulated firms should also consider the implications of furloughing key senior staff.
Notification requirements during this period
- All firms should update the FCA (and, where relevant, the PRA) by email or by telephone where:
- unapproved individuals are acting as SMFs under the ‘12-week rule’; and/or
- SMs have been furloughed.
Firms are not required to submit Forms C, D or J in connection with these temporary absences.
- Solo-regulated firms will not be required to submit an updated SoR for approved SMs if a temporary change is made to their responsibilities. However, solo-regulated firms will still need to notify the FCA of the detail of any changes (by email or by telephone) that would normally be included in updated SoRs.
- Dual-regulated firms are still required to update and submit SoRs if there are significant changes “as soon as reasonably practical”. It is acknowledged in that this may take longer than usual due to current operational challenges.
No change to the obligation to certify staff as fit and proper
- Dual-regulated firms should take reasonable steps to complete annual certifications due to expire during this period. What might constitute reasonable steps may be altered given the current situation, and certification policies and procedures may need to be adapted.
- While not specifically addressed in the FCA Statement, in the absence of any new regulatory guidance, the FCA’s expectation appears to be that solo-regulated firms should also take reasonable steps to continue with annual certifications during this period.
On 19 March, the UK Government published guidance requesting that schools and other educational institutions provide limited care for children whose parents have roles that are critical to the COVID-19 response. This includes parents working in certain financial services roles that are essential to the functioning of the economy (referred to as “key financial workers” or “KFWs“).
- A KFW is any individual who fulfils a role which is necessary for the firm to continue to provide (i) essential daily financial services to consumers, or (ii) ensure the continued functioning of markets. The guidance provides a list of example KFWs (PRA) (FCA).
- KFWs could work for any categorisation of financial institution (e.g. dual or solo regulated, payment service providers, market infrastructure providers).
- Firms are best placed to identify their KFWs; they should start by identifying the firm’s activities, services or operations which are essential to services in the real economy or financial stability and then identify the individuals essential to support those functions.
- The PRA/FCA expects that most firms will have a limited number of KFWs.
- When considering KFWs, firms should also identify any critical outsource partners that are essential to the continued provision of services, even if these are not financial services firms.
- The PRA/FCA recommends that the Chief Executive Officer Senior Management Function (SMF1) (or, if not applicable, an equivalent senior member of the management team) is accountable for ensuring an adequate process so that only roles meeting the KFW definition are designated.
- Firms should consider issuing letters to all individuals identified as KFWs as evidence of their status.
Our general briefing on COVID-19 – Key Issues for Employers is available here.
The FCA has published information for firms on COVID-19. Communication with the FCA will be key as the situation evolves, and we recommend that firms regularly monitor the FCA’s website for news and developments.
Firms are expected to:
- take reasonable steps to ensure they are prepared to meet the challenges coronavirus could pose to customers and staff, particularly through their business continuity plans;
- be clear and transparent, and provide strong support and service to customers during this period (being flexible to meet retail customers’ needs in unusual times is a core theme); and
- manage their financial resilience and actively manage their liquidity, and report to the FCA immediately if they believe they will be in difficulty.
The FCA is taking this opportunity to provide some high level guidance and to remind firms of their obligations as the consequences of this pandemic unfolds before us. For example, reminding firms to report their concerns to the FCA, notwithstanding existing reporting obligations on regulated firms. The COVID-19 situation is unprecedented and has already caused significant impacts on the financial system globally. It is encouraging that the FCA appears to be taking steps to assist firms, and themselves, to prepare for any future uncertainty arising from this situation.
The information published includes guidance on the following key areas:
- Regulatory change – The FCA is reviewing its own work plan so that it can delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term. Immediate actions include: extending the closing date for responses to open consultation papers and Calls for Input until 1 October 2020; rescheduling most other planned work; and scaling back the programme of routine business interactions. The FCA does not elaborate on other areas of impact, so we will have to wait and see whether this includes, for example: enforcement investigations, processing day-to-day authorisations or change in control approvals, and issuing market studies etc.
- Impact on consumers – The FCA welcomes the flexibility some firms have introduced to support customers. Firms should notify the FCA when going beyond usual practices to support their customers so the FCA can consider the impacts and offer support as appropriate. The FCA also reminds firms of their obligations to deal with customer complaints promptly.
- Mortgages – The FCA is encouraged by the actions of some lenders in granting flexibility on mortgage repayments to protect customers, and will be discussing with the industry and updating the approaches which mortgage providers may take for assisting customers in the coming days.
- Unsecured debt products – Firms are encouraged to show greater flexibility to customers in persistent credit card debit. In light of the challenges customers are currently facing, until 1 October 2020 these customers should be given longer to respond to communications from their providers, which means their card will not automatically be suspended if escalation measures are offered by their provider (and not responded to) after 36 months of persistent debt.
- Access to cash – Firms should ensure vulnerable customers are protected when accessing their banking services online or over the phone, particularly for the first time, and should remind customers to be aware of fraud and protect their personal data.
- Insurance products – The FCA supports firms offering travel insurance in making consumers aware of the scope of their cover and any exemptions which may apply. This information should be made available online in a clear and concise way and consumers should have access to call centres. For health insurance, the FCA expects firms to make clear any time period restrictions when consumers take out a new policy.
- Operational resilience – The FCA expects all firms to have contingency plans in place to deal with major events and that the plans have been tested. Firms should consider whether their contingency plans are appropriate to the conditions which are currently unfolding and that these have been tested appropriately. Firms should also take all reasonable steps to meet the regulatory obligations which are in place to protect their consumers and maintain market integrity. For example, if a firm has to close a call centre, requiring staff to work from other locations (including their homes), the firm should establish appropriate systems and controls to ensure it maintains appropriate records.
- Market trading and reporting – As firms are moving to alternative sites and working from home arrangements, the FCA wants them to consider the broader control environment in these new circumstances. Three particular areas are highlighted:
- Call recording: Firms should make the FCA aware if they are not able to meet call recording requirements; and take mitigating steps (eg enhanced monitoring, or retrospective review).
- Submission of regulatory data: If firms experience difficulties with submitting their regulatory data, the FCA expects them to maintain appropriate records during this period and submit the data as soon as possible. Where firms have concerns, they should contact the FCA as soon as possible.
- Market abuse: Firms should also continue to take all steps to prevent market abuse risks (including enhanced monitoring or retrospective reviews). The FCA will continue to monitor for market abuse and, if necessary, take action.
On 17 March 2020, the FCA also temporarily prohibited short-selling of 129 financial instruments under Articles 23 (1) and 26 (4) of the Short-selling Regulation (SSR), following a decision made by another EU national competent authority (NCA). This prohibition lasted until the end of yesterday’s trading day and followed a similar prohibition which took effect during the trading day of 13 March 2020.
The FCA has also confirmed that it will lower the thresholds for the notification of short selling positions under the SSR. This follows the decision of the European Securities and Markets Authority (ESMA) on 16 March 2020 to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant NCA if the position reaches or exceeds 0.1% of the issued share capital. The amendment will require changes to be implemented to the FCA’s technology so firms should continue to report according to the previous thresholds until further notice.
Senior managers / conduct
In light of the unprecedented nature of the current situation, the senior management of firms may find themselves having to make immediate and difficult decisions. Therefore, senior managers will want to pay close attention to being able to show that “reasonable steps” were taken and ensuring that appropriate records are maintained which document decisions and the rationale.
The FCA this week published two template ‘Dear CEO’ letters, one to asset managers and one to alternative investment firms, highlighting the FCA’s views on the key risks posed to customers and markets, and setting out its supervision strategy for the coming months.
The FCA’s asset management portfolio comprises firms that predominantly directly manage mainstream investment vehicles, or advise on mainstream investments (excluding wealth managers and financial advisers), whilst its alternatives portfolio is comprised of firms that predominantly manage alternative investment vehicles (such as hedge funds or private equity funds) or alternative assets directly, or advise on those types of investments of investment vehicles.
The FCA’s key concern is that standards of governance in both sets of firms are below what it expects, and progress is needed in both sectors to protect the best interests of customers.
The ‘Dear CEO’ letters make it clear that the FCA will be very active in the asset management and alternatives sectors in the coming months, and firms should expect increasing scrutiny. It will be important for firms to look at the areas identified by the FCA and consider any changes they need to make.
The FCA’s supervision strategy addresses the key issues in each sector, with specific priority areas set out below. Whilst the areas of focus are split between the two sectors, the FCA recognises that there will be overlap between the two.
The asset management supervision strategy will focus on the following key areas:
- Liquidity management – Authorised Fund Managers (AFMs) are responsible for ensuring effective liquidity management in funds but the FCA warns that there can be a liquidity mismatch in open-ended funds between the terms at which investors can redeem and timescales needed to liquidate assets. The FCA expects firms to take necessary action following recent publications from the FCA and the Financial Policy Committee. This has been a continuing theme in light of the issues experienced by some real estate funds after Brexit and the collapse of the Woodford fund.
- Firm’s governance – Following the extension of SMCR at the end of 2019, the FCA expects firms to have refreshed their approach to governance and taken the steps necessary to improve it in line with SMCR requirements. The FCA intends to carry out work in H1 2020 focussing on the implementation of SMCR across asset managers.
- Asset Management Market Study (AMMS) remedies – The FCA published its AMMS Final Report in June 2017 and the consequential rule changes are now in force, including requirements around governing body structure and value assessment on funds. In H1 2020, the FCA plans to undertake work on how effectively firms have undertaken value assessments, with more work envisaged in the future given the breadth of the AMMS reforms.
- Product governance – Following the introduction of new product governance requirements under MiFID II, the FCA has begun reviewing how effectively these requirements have been implemented by asset managers, and expects to complete this work in early 2020. In parallel, the FCA is also reviewing arrangements whereby funds are managed by ‘host’ Authorised Corporate Directors (ACDs) (AFMs that are not within the group structure of the delegate investment manager), as there are concerns that the ‘host’ ACD may not be undertaking their responsibilities effectively in some cases.
- LIBOR transition – The FCA is currently gathering information from some asset management firms to enhance its understanding of business models, including their specific exposure to LIBOR risk, and intends to provide further communications on its expectations for LIBOR transition in due course.
- Operational resilience – Operational resilience remains an area of focus for the FCA for financial services firms as a whole. In the asset management sector specifically, the FCA is conducting technology reviews and ad-hoc reviews of firms’ arrangements and expects to undertake further proactive work in this area. The FCA reminds firms of their obligations under Principle 11 to notify it of any material technology failures or cyber-attacks. For more information on operational resilience in the asset management sector, please see our blog post here.
- EU withdrawal – With the UK’s exit from the EU approaching, the FCA expects firms to consider how the end of the implementation period will affect both the firm and its customers, and take action to be ready for 1 January 2021.
Alternative Investment Firms:
For alternative investment firms, the FCA’s supervisory priorities are as follows:
- Investor exposure to inappropriate products or levels of investment risk – Significant levels of investment risk are inherent in alternative investments, so the FCA expects firms in this sector to carefully consider the suitability or appropriateness of these investments for their target investors. Where investors are allowed to ‘opt-up’ to elective professional client status, firms should robustly assess the client’s suitability to be opted-up. The FCA plans to review retail investor exposure to alternative investment products offered by alternatives firms, with a particular focus on firms being aware of who their clients are and acting in their clients’ best interests.
- Client money and custody asset controls – As part of the retail investor exposure, the FCA also plans to assess whether firms which have client money or asset custody permissions are exercising them in accordance with the Client Assets Sourcebook (CASS) rules.
- Market abuse – In the FCA’s view, market abuse control across the alternatives sector has “significant scope for improvement”. To that end, the FCA has recently conducted an assessment of the adequacy of market abuse controls in the sector and may invite firms to participate in a similar exercise in future. The FCA reminds firms that it may consider enforcement action for those firms which are found not to comply with Market Abuse Regulation (MAR).
- Market integrity and disruption – With scope to take significant investment risk in managing their products (ie. credit risk and market risk), the FCA expects alternatives firms to operate robust risk management controls to avoid excessive risk-taking and effectively mitigate against potential harm or disruption to markets. The FCA may choose to undertake in-depth assessments of firms’ controls in future.
- Anti-money laundering and anti-bribery and corruption – Alternatives firms face a risk of being used to facilitate fraud, money laundering, terrorist financing and bribery and corruption. The FCA intends to review firms’ systems and controls to mitigate this risk, with particular focus on the risks of money laundering and terrorist financing.
- EU withdrawal – As above, the FCA expects firms to take steps to be prepared for the UK’s exit from the EU at the end of the implementation period on 1 January 2021.