TOPIC: UK prudential priorities set-out for 2023
The UK’s lead prudential regulator (PRA) was quick off the mark in the new-year to set out its expected and required priorities applicable across its own regulated landscape for the coming year. Collectively, these are aimed at dovetailing with and supporting the delivery of not just its own overall and enduring working objectives, but to also underpin its own specific business plan goals for 2022/23 which were previously set out back in April 2022. In a series of tailored public letters to the various key sectors involved, it has sought to inform regulated firms on how it will seek to achieve its requirement around being an inclusive, efficient and modern regulator which not only supports and advocates markets competition and innovations but looks to champion the necessary reforms and strengths across the UK financial industry whilst proactively acting on new and emerging risks in both a dynamic and internationally focussed environment.
In particular, the PRA has in January 2023 initially set out relevant 2023 priorities concerning insurance, UK-deposit-takers (banks and building-societies) and also international banks (see detailed published PRA letters dated 10/1/23). As might well be expected, there is an important and necessary degree of commonality and linkage in terms of the specific aspects being highlighted and covered for each sector, such as ongoing and structural operational/financial resilience as well as effective risk governance and oversight etc. It is also clear that the quality and timeliness of data to support the PRA’s work will be an ongoing area of supervisory attention, and especially how firms have acted on past thematic review outputs identifying repeated control deficiencies around regulatory reporting. But these letters also go on to usefully outline and highlight other aspects of future supervisory focus too, including how matters of diversity, equity and inclusion are being effectively embedded within organisational systems and cultures.
Those firms and sectors affected need to ensure their internal personnel and mechanisms are appropriately cognisant and informed on these matters, and any internal systems and controls are suitably and adequately aligned to accommodate, reflect, evidence and address these areas on an ongoing basis.
TOPIC: Conduct regulator warns consumers on emerging concern
The tide has remained high around firms and products engaged in both promoting and marketing life cover designed or intended to help accommodate and offset funeral costs from burdening family etc. and this has also spawned the offer of personal pre-paid funeral plans and services to head-off the financial shock of such a circumstance and event. Similarly, the conduct regulator (FCA) has now seen an associated and corresponding rise in pre-paid probate plans covering the handling of a decease’s estate and assets (delivered on a commission fee basis), and has felt it appropriate to take the step to formally highlight and warn UK consumers around the risks such products and services may not actually offer any real value or meet the needs and expectations of users with no current regulatory protections in place around such pre-paid probate products.
In its warning notice issued towards the end-January, the FCA commented on the apparent increased marketing of pre-paid probate plans in recent months, pointing out that such products are not currently protected not only by UK financial authorisation or regulation, but also are not covered by either the Financial Services Compensation Scheme (FSCS) or the existing scope of the Financial Ombudsman Services (FOS) in terms of company failure or dispute resolution within the UK. In the event of cold calling or pressured sales tactics etc. the FCA encourages consumers to carefully assess and determine if these services are suitable for their actual needs and circumstances, and if necessary seek to discuss matters with or use suitably qualified and reputable skilled sources. In particular, it highlights fees may be based on a pre-determined estate ‘value’ judged at the time the contract plan is entered into, which could in fact change markedly before death and result in a worthless or unnecessary plan.
This is another example of the UK’s lead conduct regulator (FCA) taking proactive steps to actively intervene in forewarning UK consumers on emerging risks and threats that can lead to adverse outcomes and experiences, and result from unsuitable decisions and purchases.....even beyond the current regulated environment! But it should also be noted that similar past conduct concerns involving the pre-paid funeral plan market led directly to their formal authorisation and regulation from end-July 2022, with the introduction of high sales standards and the need for providers to deliver fair value products and services.
TOPIC: Effectively preparing for the new Consumer Duty in the UK
The phased roll-out of the new Consumer Duty as a cornerstone of conduct principles and regulation form July 2023 to July 2024 is a key element of the FCA’s own 2023-25 strategy, and requires firms to establish, maintain and test compliance with its detailed rules and guidance built around ensuring delivery of acceptable outcomes crossing all aspects of the firm-consumer relationship. This fundamentally requires firm to ensure their organisations and consumers appropriately understand its arrangements and that these deliver effective and meaningful communications in relation to products and services which offer fair value and meet consume, and that consumers get adequate support when it is needed.
In the later part of 2022, the FCA undertook a supervisory review exercise scrutinising the actual implementation plans of a number of larger regulated firms, providing some very useful observations and benchmarking opportunities for all firms to objectively assess and evaluate the quality and status of their own arrangements and delivery goals. It is clear that firm’s approaches to embedding the new Duty across their businesses is requiring considerable effort and prioritisation, as well as also engagement and co-operation from all levels and functions of an organisation. But importantly, the new Duty will hold firms and Boards and senior-management accountable for delivering good outcomes for consumers. This all means that real and visible senior-management awareness, leadership and ownership is key, not just in terms of driving the relevant systems and cultural changes etc. but also in the appointment of a Consumer Duty champion at Board or equivalent level to help champion and ensure relevant business areas/functions are being actively and adequately engaged and to challenge the firms’ management on its planning, implementation and ultimate delivery and testing against the required standards.
The FCA’s review findings, published towards the end-January 2023 cover a number of key areas for action and even improvement. In particular, it has drawn attention on effective prioritisation to identify and address reducing the risks of poor consumer outcomes and determining specific gaps in meeting the requirements of the new Duty. But the current implementation-planning phase also needs to see measures being suitably embedded into actual processes and policies/procedures, and firms need to ensure it engagements and involvements focus on and incorporate all firms in its product and service distribution and delivery chains. The FCA is now looking to widen its surveying to include smaller firms affected as it seeks to inform and communicate on the key risks and consumer harms it will be concerned about across various sectors. Firms affected should be taking full and due account of the key findings of this important preparatory analysis, to ensure their own plans and targets remain clear, on-track and realistically deliverable in light of the new Duty coming fully into force.
TOPIC: Concerns and attentions continue to circle around digital assets and platform services
The volatility and risks perceived and associated with crypto-assets such as bitcoin, as well as other types of opaque and intangible transaction mediums like non-fungible tokens (NFT’s), continues to attract alarm and nervousness from the world’s financial systems bodies and watchdogs. The Financial Stability Board (FSB) had previously called for a clampdown on both these types of assets and the platforms and providers used to trade them. With the value of crypto-assets believed to have been close to two trillion (in GBP£) back in 2021, the growing concerns over the scale and implications for global financial stability have refused to dissipate alongside the calls for both clearer and ever more regulatory oversight and scrutiny. Indeed recent events involving the collapse of some notable crypto exchanges and/or currency firms has only served to further underline a persistent lack of confidence and transparency towards the assets, platforms and other services and activities connected to the digital market. Indeed it seems the evolution of crypto-assets into ever-more intangible products as well as extensions into wider transaction services such as lending, has highlighted how its pricing and stability can just as easily be undermined by the very and increasingly integrated nature of the market itself and the liquidity demands and expectations from customers and creditors alike.
TOPIC: Consumer harms using trading applications comes under the spotlight
The UK’s conduct regulator has recently (see FCA Press Release 21/11/12) indicated concern over the operation of some stock-trading applications (apps) after finding some operators risk using features and designs which might inherently encourage or prompt consumers to act or exhibit behaviours or decisions against their own interests and potentially lead to poor outcomes or investments in products beyond their risk-appetite. Its initial research has highlighted that where consumers are exposed through such apps to high risk investments or certain ‘gamification’ techniques and features to engage them, they can often have the detrimental effect of encouraging them to instead exhibit behaviours more similarly associated with problem-gambling. It has warned app-operators to be alert to the need to avoid misleading consumers or to lead them towards poor outcomes and problem behaviours, as it seeks to further analyse the scope and potential use and design of such apps in adversely impacting consumer vulnerabilities and losses. With the FCA’s new Consumer Duty to come into full force during 2023 this represents an important and timely reminder that firms should always be ensuring they treat customers fairly at all times and do not seek or do anything to mislead consumers or deliver poor outcomes. And perhaps most importantly here, this obligation and expectation definitely extends to ensuring any products or services provided for consumers remain fit-for-purpose on an ongoing basis, and is ultimately designed to facilitate and achieve the delivery of effective, timely and properly informed consumer choices, decisions and outcomes.
TOPIC: Collective and personal culpability for AML failings remain front and centre
A recent fine of some GBP£3.25m on a UK headquartered banking firm and the public censure of an individual with responsibility for the ongoing effectiveness of the firms’ AML arrangements highlights the importance and continued focus of this area by the UK conduct regulator (FCA). The firm had failed to remediate previous concerns raised by the regulator, and the individual censured (with responsibility for not just establishing but also equally maintaining the AML systems and controls of the firm) held the CEO (senior-management) position. It was deemed there had been a clear failure to take the required steps to reasonably assess and mitigate the AML risks of the firm resulting in numerous consequent areas of systemic failure. This included allowing a culture of non-compliance to prevail and persist amongst staff, and a failure to properly or adequately resource the firms’ specific Money Laundering Reporting Officer (MLRO) function. It should also be noted that an intended personal financial penalty of over GBP£76k on the individual CEO concerned was also considered appropriate, but was only avoided due to the exceptional circumstances that existed for the particular case to be finally resolved by agreement. This case underlines the imperative for all staff within firms to suitably, properly and accurately appreciate the need to comply with UK AML legal and regulatory requirements, and to be directly engaged and adequately aware of their own responsibilities and accountabilities as part of the firms’ own internal arrangements to achieve and deliver this. But without a clear and effective MLRO function and oversight, then its resulting AML monitoring and compliance is unlikely to hold-up as sufficient, and ultimately this will adversely undermine and reflect on the resulting overall adequacy and effectiveness of systems and controls through-out the firm and its business, as well as broader senior-management. Furthermore in this specific case, a second individual who actually held the specific compliance and MLRO oversight and reporting roles at the time was themselves fined GBP£17.9k and banned from performing the roles again in the UK.
TOPIC: Shifting the mindset around consumer protection
Seeking to further clarify and drive higher standards of protection for retail consumers the UK conduct regulator’s new Consumer Duty (FCA PS22/9) embodies many former ‘fair treatment’ elements but creates a new core principle for firms to follow and demonstrate in their decisions and actions. By evidently putting customers needs ‘front and centre’ in both thinking and deeds, firms will have to be able to show how they are actually delivering good and acceptable outcomes and business relationships, by acting in good faith, avoiding foreseeable harms and in enabling customers to pursue their financial objectives. This is further embodied and emphasised by a deliberate focus on four specific outcomes involving key behavioural elements, including price and value, customer understanding and support in a firms delivery of its products and services, and will demand and throw an increased light on robust governance systems, internal awareness and responsiveness as well as overall accountability for the practices and outcomes experienced by consumers.
TOPIC: Sharpening the boundaries of accountability for representatives
The observed and persistent lack of consistent and effective oversight on the activities of appointed representatives has prompted the UK conduct regulator to commit to making principal firms ever more objectively responsible and accountable for appointed representatives. This has been driven by cases of misconduct by such representatives that can result not just in mis-selling or misleading consumers, but can more broadly undermine confidence and the fair and safe operation of both markets and business. As such, the proposed strengthening of rules (FCA PS22/11) will not alter the direct accountability of principals for the activities of its representatives, but also require firms to directly apply appropriately enhanced oversight and apply adequate systems and controls and the resources to do so. This extends to broader expectations on senior-management themselves to periodically review/assess relevant information on any appointed representative activities and standards and to act on failures and shortfalls. Also, firms will be required from the end 2022 onwards to submit new regulatory reporting and information covering related business and activity, and to essentially be applying the same aspects of oversight as to their own operations.
TOPIC: Increased targeting of financial promotions involving higher risk investments
As the UK conduct regulator pursues a strategy to tackle and reduce consumers investing in products that fail to appropriately reflect their needs and appetite, it has introduced further strengthened rules (FCA PS22/10) focussed on misleading adverts that encourage investing in high risk products. From the end 2022 onwards firms engaged in issuing or simply approving related sale and marketing material and promotions will need to not just show an exercise of the appropriate subject and content expertise but now also conduct and evidence enhanced checks to ensure any related targeted and affected investments and consumers are being adequately matched. AS well as introducing bans on certain related incentive focussed practices, associated risk warnings and disclosures will need to be evidently clear and prominent. This echoes the regulators increasingly assertive and interventionist approach, aimed at reducing the potential for unexpected consumer losses, and in future this approach is expected to be similarly extended to cover crypto-assert related products and promotions too, once the full regulatory framework and powers are put into place.
TOPIC: Focus on higher-risk investments
As global regulators seek to establish control systems to extend protections to consumers of higher risk investments the UK conduct regulator is driving ahead with proposals to increase and amend financial promotion rules and obligations concerning emerging and specific high-risk investments like crypto-assets. Other regulators e.g. in Hong Kong and Spain, have equally issued recent material seeking to implement or propose the regulation of virtual currency service-providers, with increased registration and regulatory obligations including the applied expansion of existing AML laws, directives and standards. Whilst uncertainty, inconsistency and even jurisdictional arbitrage still prevail there remains a growing movement and recognition that such market and technologically innovative products needs a more transparent and effective absorption into the regulatory environment.
TOPIC: Expanding on prudential requirements
Solo-regulated MiFID investment firms in the UK are facing adapting and implementing the standards now expected under the new Investment Firms Prudential Regime (IFPR) with effect from January 2022. This includes updates to standards concerning remuneration arrangements and the need for clear and well articulated remuneration policy statements (RPS), providing an opportunity for firms to better demonstrate and articulate a sensible and suitably cautious business attitude and ethos. Firms affected need to not just adjust and update their arrangements, but also to ensure there are clearly owned as well as proportionately articulated and maintained.
TOPIC: Attention on consumer harm
The UK conduct regulators new approach echoes a determination to evolve objectives around innovation, adaption and assertiveness in supporting and increasing integrity across the UK financial system. This work and approach extends to consultative proposals for a new ‘Consumer Duty’ under which firms will be expected to fairly treat and deliver product and service outcomes that remain fit-for-purpose and reflect consumer interests being successfully embedded at the heart of good conduct business. This development will seek to encourage firms to show they understand and adequately reflect consumer risks and harm factors through-out their decision-making, and can adapt to outcomes, exposures and events.
TOPIC: Addressing AML inadequacies & failures
The recent enforcement (including a £64m conduct fine) against a major global firm shows the importance of not simply relying on the working efficiency of risk systems and measures, and the expected ability to evidence an effective oversight and the challenge and testing of actual underlying controls. Coupled with the reputation and commercial impacts of remediation activity, this regulatory action should provide a motivation to suitably and proportionately benchmark, learn and respond on any firm’s own arrangements given the persistent and significant regulatory views and interests expressed within its findings and judgement.
TOPIC: Updated focus & synergy around business resilience
From March 2022 the UK’s lead prudential regulator will apply and expect affected firms to follow its policy and requirements set-out in a former supervisory statement (SS 1/21) and its own recent Dear CEO communication. This looks at how firms place and maintain an adequate and effective grip around material areas of operational resilience and exposure in respect to services and standards, including where they involve third-party reliance. Equally, the conduct regulator has also sought to raise due-attention on this matter having a close synergy of approach with its own interests and expectations (covered in a recent webinar) around the abilities of a firm to properly and proportionately handle operational events and threats. These place an emphasis on dynamically mapping and testing reasonable scenarios, and aligning measures with policy arrangements around risk and impact assessments and tolerances.
TOPIC: Tightening the regulatory grip and focus around digital assets & providers (VASP’s)
The focus and intensity of activities and developments to address the risks and protections surrounding crypto-assets continues to grow and build momentum. These developments all require service providers and other market participants to maintain effective compliance systems, with many jurisdictions now actively producing and establishing working measures, guidelines and control standards, and most recently including the US and Israel. These seek to build visible and ever more unified approaches towards the broadening forms and range of virtual assets and supporting storage and transaction networks, including the evolving risks concerning non-fungible tokens (NFT) etc. Coupled with FAFT’s own recent extension of its ‘Travel Rule’ in respect to applying its global Recommendation 16 to encompass the virtual asset environment, the UK is already consulting on its own implementation provisions expected to be applied from late 2022 and beyond. In the Netherlands too, a number of pivotal convictions for money-laundering involving bitcoin have been upheld on appeal, emphasising the global-wide perspective being thrown around suspicious crypto-transaction activity. This also echoes the recent Basel-based (Financial Stability Board - FSB) watchdog’s own warning that growing use of evolving virtual assets could see a rapid escalation of the risks involved and threaten confidence in broader financial systems.
TOPIC: Effectively taking an onward view on operational risk & resilience
The increasing use and reliance across all areas and sectors of the financial system on outsource arrangements and relationships to support expanding business strategies, customer jurisdictions and even critical services means that effective and informed oversight and decision-making are essential to maintain service quality and to handle event and impact management. In particular, the importance of clear and ongoing control and assessment around realistic threats and consequences needs to be readily visible to those in authority and leadership. With UK and other European regulators reacting to such developments there has been a range of outputs around related policies and supervisory standards concerning outsourcing and other external-party relationships and risk-management measures. Firms engaged in critical outsourcing partnerships and activity can rightly expect to have both their rationales and arrangements put under close scrutiny as to their continued adequacy, effectiveness and proportionality, in regard not only mitigating all reasonable operational risks but also the consequential and real impacts on consumer experiences and outcomes.
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