Happy New Year to all our clients, subscribers, and readers. We are starting 2021 with our top 12 of areas where we are expecting regulatory focus in 2021.
1. Unused permissions
As a result of the Gloster Report the FCA has committed to conducting a “use it or lose it” exercise. The purpose of the exercise to identify firms that have not earned any regulatory income from their regulatory permissions in the previous 12 months.
The regulatory reporting and returns received by FCA will enable it to carry out a desk based thematic review to identify firms not earning any regulatory income from their permissions.
FCA would investigate whether those firms really need those permitted activities. The primary purpose is uncovering any firms using their permissions to add credibility to unregulated activities as happened in London Capital and Finance.
2. Separating Client’s Assets from House Assets
In 2020 FCA sent 3 Dear CEO letters about protection of customers monies and assets. These covered the balances of uninvested funds and the use of title transfer collateral arrangements. Many of the themes arising from the Charles Schwab fine appear in the third letter around ensuring clients assets receive adequate protection.
We will see more FCA follow up to those letters in 2021. This will be a range of enforcement actions and specialist visits from their CASS Unit, which FCA can conduct remotely.
Key to success in separating client’s assets from house assets is aligning what you agree with clients in your legal agreements with what your operations people actually do in practice. We can help audit your approach or build robust procedures.
3. FCA Supervision
With a new CEO and in the aftermath of the Gloster Report FCA will be reviewing its approach to supervision. As an organisation that continues to struggle to attract and recruit experienced people it will be under pressure to review how it supervises firms. Dedicating teams of people to supervising firms is more costly. We are likely to see a shift towards more thematic reviews which allows FCA to be more nimble, and fleet of foot, in tackling cross cutting issues.
As we have noted in previous blogs, the FCA spent the past decade focussing on the banks and getting the much-needed culture and other post-crisis improvements made. Other sectors have lacked FCA attention resulting in FCA sending a series of Dear CEO letters to wholesale brokers in 2019 and in 2020 to multiple retail firms.
The retail sectors were payment services and e-money firms, wealth management and stockbroking, financial advisers, mortgage intermediaries, debt advisers, credit brokers, and personal and commercial lines insurers.
FCA will be following up with all these sectors and most likely through a combination of thematic work and investigations during 2021.
4. Enforcement activity
2020 saw a slowdown in FCA enforcement activity despite the large numbers of ongoing investigations. This was almost certainly due to the disruption caused by adjusting to remote working on FCA’s part as much as on the part of those under investigation. We saw signs that this is settling down from the series of Final Notices issued just before the end of 2020.
The nature of these ongoing investigations range from misdemeanours in the retail markets through to market abuse and multiple actions against individuals. Notably there has still only been one fine under the SMCR regime which is five years old next month and there are still multiple ongoing investigations under the predecessor regime. Whilst enforcement against individuals takes significantly longer to conclude than cases against firms we should start seeing some conclusions this year including more SMCR fines.
If you are a senior manager be sure to have documented your reasonable steps, and while a large folder of emails might feel reassuring it is unlikely to be enough. You need to document how you discharge your responsibilities and have agreed with colleagues that you are relying upon, what you are relying on them for, when and how.
The UK’s withdrawal from the European Union will continue to be a live issue for many years and particularly during 2021 as we adjust to the end of the transition period.
In financial services many firms had been planning for a hard Brexit since the 2016 referendum. The provisions in the Trade and Co-operation Agreement (TCA) that relate to financial services are high-level and relate to commitments around access, providing new services adhering to international standards, and regulatory cooperation.
The TCA includes agreement to establishing a Memorandum of Understanding (MoU) that establishes the framework for this cooperation. It will include how the UK’s equivalence discussions will proceed with the EU. In the meantime HM Treasury has established a framework to assess equivalence of other countries regimes. We can expect to see decisions from those assessments this year.
An automatic result of the end of transition period is the loss of passporting rights to and from the UK. The PRA and FCA established a Temporary Permissions Regime (TPR) that is a three-year renewal scheme to enable those firms who applied to participate to continue operating in the UK with minimal disruption. Although the PRA and FCA have been clear about which UK rules applies to those firms within the TPR.
As we all settle into these new regimes we are likely to see new rules and policy making from both HM Treasury as well as PRA and FCA. This will mean more consultations dealing with issues of immediate concern. We may also see PRA and FCA revisit policy areas that may have been on the borderline for gold plating.
6. Regulation of Spot FX
In September 2020 ESMA said they feel there are market failures within the EU regime that means ESMA considers regulating FX spot is necessary. Following careful advice and discussions from the Global FX Committee (GFXC) ESMA has agreed to wait for changes to the Global FX Code before pushing on with regulating FX spot.
We will see changes to the Global FX Code this year which will include FX spot.
7. New Prudential Regime for Investment Firms
The EU is implementing a new prudential regime for investment firms, comprising both a regulation (the IFR) and directive (the IFD). This regime applies form 26 June 2021.
The UK is implementing a parallel prudential regime for UK investment firms, the Investment Firms Prudential Regime (the IFPR). This is modelled on the EU regime and will replace the requirements set out in the Capital Requirements Regulation and Directive (CRR and CRD IV).
The IFPR will apply from 1 January 2022 and we will see further consultations and policy statements during 2021 along with a longer transition period (than for EU investment firms) during 2021 to the new regime.
8. Bitcoin / Tokenisation
The EU adopted a legislative proposal for a regulations on markets in cryptoassets (MiCA) which includes amendments to MiFID II for market infrastructures based on distributed ledger technology (DLT).
MiCA is a MiFID style regulation for cryptoassets and is part of the EU’s package of measures to enable and support digital finance. These proposals will not apply directly in the UK and there are currently no proposals for any equivalence regime.
The UK does not currently plan to issue any similar regulatory regime. This will raise issues for UK based cryptoasset issuers and service providers that also operate in the EU. We will likely see the UK develop its own regime as the EU finalises its regulation this year.
9. Diversity and Inclusion
Diversity and inclusion will continue to be a hot topic in 2021. Following the focus on diversity in boards we will see the focus move down into middle management of firms.
From a regulatory perspective we have seen PRA and FCA commenting on diversity in boards in the past. Going forward FCA might consider a lack of effort towards achieving greater diversity and inclusion from a culture perspective.
10. Operational Resilience / Cyber
The final rules and policy to strengthen the resilience of financial institutions and financial market infrastructures will be published during 2021 including more robust controls around third parties. This follows several consultations from the Bank of England, PRA, and FCA, the deadlines for which were extended to October 2020.
11. Environmental, Social and Governance
2021 will see a continued drive from regulators for clearer disclosures in relation to ESG factors (climate change, human rights, executive pay, etc).
You should align your ESG efforts with your implementation of the Stewardship Code that was relaunched this time last year.
The new operating environment continues to raise regulatory expectations as to what firms are doing to protect customers and themselves from fraud and scams. This should be an established part of your risk or financial crime risk mitigation framework.