Financial institutions general regulatory news, 8 March 2021

FIG Bulletin

Recent regulatory developments of interest to all financial institutions, including updates from the UK, EU and the FATF. See also our sector specific updates in the Related Materials links.


Future of UK financial services: Treasury Committee inquiry written evidence

The House of Commons Treasury Committee has published written evidence to the committee's inquiry into the future of financial services in the UK after Brexit. The written evidence includes, for example, a response from the Financial Conduct Authority (FCA) which submits evidence under three headings: opportunities for the UK's financial services sector after EU withdrawal; development and scrutiny of financial services policy making after EU withdrawal; and the current challenges facing regulators.

UK FCA temporary permissions regime: landing slots and guidance

The FCA has published a webpage on landing slots for firms in the temporary permissions regime (TPR). The FCA states that it has started to email formal directions to firms in the TPR confirming their "landing slots" – the dates within which the firms must make their applications for FCA authorisation.

Among other things, the FCA webpage includes a Q&A section in which the FCA states that it can change any firm's opening or closing date at its discretion, for example, to align the dates of a group of firms.  In response to a question on whether a firm can change its landing slot, the FCA states that it will be as flexible as it can, but it is not obliged to change a firm's dates and the FCA expects all firms to be organised and prepared. While the FCA will consider requests to change a landing slot, normally such requests must be received within 20 working days of a firm's closing date. However, the FCA is unable to defer a closing date beyond 31 December 2022. It warns that firms that fail to apply for authorisation during their landing slot, may have their temporary permissions cancelled.

The FCA has also published new webpages on how the FCA supervises the TPR and on cancelling a temporary permission.  

MiFID II: FCA product governance review

The FCA has published a report on its review of product governance in a sample of asset management firms. The review examined how eight asset management firms, as product providers (manufacturers), consider the product governance rules in its Product Intervention and Product Governance sourcebook (PROD), originating from the second Markets in Financial Instruments Directive (MiFID II), throughout the product lifecycle.

The FCA found that some asset managers were not complying with the PROD regime, and it believes there is significant scope for asset managers to improve their product governance arrangements.

The FCA also noted that reliance on intermediated services in the UK investment market means manufacturers commonly rely on those who distribute their products to give them relevant information on the end consumer. It found that distributors rarely pass this information on to asset managers, hindering their ability to effectively meet best practice on product governance. The FCA states that asset managers and product distributors need to prioritise effective cooperation and information sharing to address the potential harm to consumers from poor product design and distribution processes.

The FCA report details its key observations under four main areas headings: product design; product testing; distributors; and governance and oversight.

The FCA will continue to focus on product governance and is likely to undertake further work on this subject, including whether it needs to make further changes to PROD, for both asset managers/manufacturers and distributors.

The FCA states that it expects firms to ensure their activities prioritise good customer outcomes and that they comply with the relevant regulatory rules and requirements. Where it identifies potential breaches of its rules, the FCA will consider whether to act, in the form of opening investigations or other appropriate measures.

FCA Handbook Notice 85

The FCA has published Handbook Notice 85, which sets out changes to the FCA Handbook made by the FCA Board on 25 February 2021. The Handbook Notice reflects changes made to the Handbook by the following instruments:

DB pension transfer redress: FCA statement on RPI changes

The FCA has published a statement about its intention to amend, in mid-March 2021, its finalised guidance (FG17/9) for firms on how to calculate redress for unsuitable defined benefit (DB) pension transfers. It is making the amendments to reflect changes to the way that the Retail Prices Index (RPI) inflation measure is calculated, which the government announced in its November 2020 Spending Review. These changes are due to take effect from February 2030.

The FCA explains that the finalised guidance refers to both the RPI and the Consumer Prices Index (CPI), an alternative inflation measure. The RPI change means that, from February 2030, the -1% adjustment to the RPI assumption used in the guidance to calculate the CPI assumption will not reflect the assumed difference between the RPI and the CPI. It will be too large, and some consumers may not receive the correct amount of redress. This will affect consumers who transfer out of DB pensions that are up-rated annually in line with the CPI.

Therefore, the FCA intends to update the CPI adjustment in the guidance to ensure that these consumers continue to receive appropriate redress. It will do this by mid-March 2021. It does not plan to carry out any prior consultation as this would delay the correct amount of redress paid to consumers. It will backdate the change to 25 November 2020, and this will apply to all calculations carried out from that date.

The FCA then sets out the actions that firms should take if they believe that a calculation of a pension transfer redress offer done in accordance with the guidance on or after 25 November 2020 might have unduly disadvantaged a customer.

Regulating of pre-paid funeral plans: FCA CP21/4

The FCA has published a consultation paper, CP21/4, on its approach to regulating pre-paid funeral plans (CP21/4). In January 2021, the government legislated to bring activities involving the provision and distribution of pre-paid funeral plans subject to FCA regulation from 29 July 2022. The FCA is now consulting on its draft rules and guidance for this sector.

The FCA wants to see improved outcomes for consumers and is mindful of the presence of vulnerable customers in this market, with better value products, better sales practices and better controls in place so consumers can be confident they will receive the funerals they have agreed. Its proposed rules will also set a level playing field for all firms that want to carry on business in this sector.

Large parts of CP21/4 are concerned with the application of rules formalising basic standards the FCA expects of all firms. It explains that many of the concepts set out in the proposed rules will be recognisable to businesses in the sector because they reflect good business practice. There is also some overlap with the requirements of the Funeral Planning Authority (FPA), the existing industry regulator. The FCA considers that many well-run businesses will already be meeting these standards or be very close to them. However, for a subset of businesses, meeting the standards will require a significant change in practices. The FCA also proposes some requirements that are specific to the sector and the risks it can pose.

Many parts of the Handbook will be amended, and the FCA plans to introduce a new sourcebook, the Funeral Plan: Conduct of Business sourcebook (FPCOB).

All businesses in the sector are advised to start making the necessary preparations for regulation. They will need to apply to the FCA for authorisation as soon as possible after the application gateway opens in September 2021. Applications made after 1 November 2021 may incur a higher application fee.

The consultation period closes to comments on 13 April 2021.

HM Treasury is considering further legislative changes to ensure that the Financial Services Compensation Scheme would be effective for consumers if it covered funeral plans. The FCA will consult later in 2021 on any further changes.


EU money laundering and terrorist financing risks: EBA opinion

The European Banking Authority (EBA) has published an opinion on the risks of money laundering (ML) and terrorist financing (TF) that are affecting the EU's financial sector. The opinion looks at cross-sectoral and sector -specific ML and TF risks. 

The EBA sets out proposed actions addressed to competent authorities, which are based on the detailed analysis and findings set out in the report annexed to the opinion. The opinion, together with the report, also provides information for the European Commission's Supranational Risk Assessment (SNRA) and risk assessments carried out by competent authorities.

The EBA is issuing the opinion as part of its new mandate to lead, coordinate and monitor the fight against ML and TF in the EU financial system. The other European Supervisory Authorities were also closely involved in its preparation.

As a complement to the opinion, the EBA has developed and published an interactive tool that gives European citizens, competent authorities, and credit and financial institutions, a user-friendly way to access all the ML/TF risks covered in the opinion.

MLD4: EBA final report setting out revised AML and CTF risk factors guidelines

The EBA has published its final report setting out revised guidelines on customer due diligence and the factors credit and financial institutions should consider when assessing ML and TF risk associated with business relationships and occasional transactions under Articles 17 and 18(4) of the Fourth Money Laundering Directive (MLD4). The EBA consulted on a draft of the revised guidelines in February 2020 and explains in the report how it has amended the revised guidelines in response to feedback received.

The final revised guidelines (known as the "risk factors guidelines") are addressed to both firms and supervisors. The EBA explains that the update considers changes introduced by the Fifth Money Laundering Directive (MLD5), as well as the identification of new risks and challenges.

The revised guidelines will be translated into the official EU languages and published on the EBA website. Competent authorities will then have two months to report whether they comply. The revised guidelines will apply three months after publication of the official language versions, at which time they will repeal and replace the original June 2017 version.

EU Taxonomy Regulation: EBA final report on KPI disclosure obligations

On 1 March 2021, the EBA published its final report and a related opinion (dated 26 February 2021) setting out advice to the European Commission under Article 8 of the Taxonomy Regulation, specifying the information to be provided by credit institutions and investment firms to comply with their disclosure obligations under the Non-Financial Reporting Directive (NFRD). Annex I and II to the opinion have been published separately.

The EBA launched two surveys while preparing its advice. A summary of the main feedback is set out in Annex IV to the report.

In the report and opinion, the EBA underlines the importance of the green asset ratio (GAR), supported by other key performance indicators (KPIs), as a key means to understand how institutions are financing sustainable activities and meeting the Paris Agreement targets. It elaborates on the KPIs that institutions should disclose, on the scope and methodology for calculating those KPIs, and on the qualitative information they should provide. In addition, the EBA includes some policy recommendations to the Commission on means to facilitate institutions' disclosures and the eventual extension of the KPIs to all relevant assets, including sovereign and central banks' exposures.

The EBA has developed its advice in parallel and consistently with its consultation paper on Pillar 3 disclosures on environmental, social and governance (ESG) risks.

The European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority  (ESMA) have also published their final reports setting out technical advice to the European Commission on KPIs under Article 8 of the Taxonomy Regulation.

EU Taxonomy Regulation: ESMA final report on KPI disclosure obligations

On 1 March 2021, ESMA published its final report (dated 26 February 2021) setting out advice to the European Commission under Article 8 of the Taxonomy Regulation, specifying the information to be provided by non-financial undertakings and asset managers to comply with their disclosure obligations under the NFRD.

ESMA consulted on draft proposals in November 2020. The report provides an overview of responses and explains how ESMA amended the draft advice to reflect some of the comments received.

The Commission is required to adopt, by 1 June 2021, a delegated act specifying the content, presentation and methodology of the KPI information to be disclosed by firms.

EIOPA and the EBA have also published their final reports setting out technical advice to the European Commission on KPIs under Article 8 of the Taxonomy Regulation.

Assessing and mitigating proliferation financing risk: FATF consultation

The Financial Action Task Force (FATF) is consulting on draft guidance on assessing and mitigating proliferation financing risk.

The draft guidance is focused on the new obligations on proliferation financing risk assessment and mitigation, which were introduced in October 2020 by way of amendments to FATF recommendation 1. At that time, the FATF advised that this change was designed to ensure financial institutions are aware of the risks involved in their business, and do not unwittingly support or become part of proliferation financing networks or schemes.

The aim of the new guidance is to help both private and public sectors implement the new FATF requirements to identify, assess, understand and mitigate proliferation financing risk (set out in recommendation 1). The new guidance focuses on conducting risk assessments in the context of proliferation financing, applying corresponding risk mitigation measures, and supervising the risk assessments and mitigation measures.

The consultation closes on 9 April 2021. The FATF will consider responses and revise the text of the draft guidance for discussion, and possibly adoption, at its June 2021 meeting.

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Authored by Yvonne Clapham


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