Contributors
We recently hosted our quarterly FIN Live event, led by Emma Radmore, Legal Director and Financial Institutions Practice Development Lawyer, who was joined by Paul Armstrong, Managing Associate within our technology team, and Lucy Hadrill, solicitor and Duncan Scott, associate from our financial services regulatory team.
You can listen to again or share with colleagues here.
Several timely topics were addressed at the event, including the Financial Services and Markets Bill, operational resilience and the role of critical third parties, the Consumer Duty and new FCA requirements for firms with appointed representatives.
The speakers gave attendees clear recommendations on what businesses should be doing now to prepare for and comply with upcoming changes.
The Financial Services and Markets Bill
The Financial Services and Markets Bill (the Bill) was introduced into Parliament ahead of the summer recess and represented a key milestone in the post-Brexit implementation of future regulatory framework and to put in place the mechanics required for changing UK laws. The repeal and replacement for previously onshored laws, whilst complex, presents a unique opportunity to make these laws work in UK financial markets and to clarify and update these laws accordingly. While some onshored laws were heavily influenced by the UK in the first place, certain others, notably some of the requirements of the "Solvency II" regime for insurers, have been widely criticised and earmarked for change as soon as possible.
UK Finance described the introduction of the Bill as "a once in a generation opportunity to improve regulation, enhance consumer protection and create a more competitive financial services sector". The scope of the changes are broad and far reaching across the UK financial services sector, as described in our recent article.
A theme we expect to recur is how the UK’s financial framework can ‘reconnect’ in a post-Brexit world and whether the supporting framework goes far enough to future proof the UK’s new standalone economy. Emma Radmore says: “As the UK continues the lengthy process that follows the uncoupling from the EU, the Bill and associated initiatives set the framework for ensuring the UK's financial markets and the institutions that operate in it can continue to function and compete at an international level, with an appropriate regulatory structure".
But the Bill is not just about "getting Brexit done" and adapting the UK regulatory framework for domestic needs. It's also about strengthening regulation in other areas, and future proofing it, as well as harnessing the opportunities for innovative technology in the sector. Examples Emma gave were the proposals to regulate activities relating to "digital settlement assets", and to ensure ongoing access to cash.
The Bill is currently being debated in the Public Bill Committee. The Committee is due to finish its debate by 3 November, and we expect a report soon afterwards accompanied by a revised version of the Bill after which we’ll host another webinar to discuss the changes.
We're keeping track of call the changes to the Bill which you can keep up to date with on FIN and on our dedicated tracker article on our re:connect hub.
Operational resilience: critical third parties
Another focus of the Bill is a process to create new regulatory or supervisory regimes, for example for "critical third parties", which Paul Armstrong covered.
Paul highlighted the continuing concern from regulators about the reliance of regulated firms and financial market infrastructure providers on unregulated entities for provision of critical services. While the regulated firms themselves must already comply with demanding requirements when outsourcing key functions, there is now a proposal that the largest providers of those services should also be subject to some form of supervision.
The Bill proposes this framework, but regulators are already looking at the designation of critical third parties.
HM Treasury will hold the power to make the decision about who is a critical third party. The conditions proposed mean that only a very small number of providers – those that present the greatest systemic risk should they fail - are likely to be designated – ICT framework providers are the obvious targets.
Paul stresses that “In reality, the regulatory scrutiny that will be in place is unlikely to be something that these designated providers will be concerned about as long as they playing by the rules by adhering to the minimum standards that are set”.
What should firms be doing now?
Entities that think they may be designated as critical third parties should start planning how they would meet the proposed requirements. Regulated firms that use critical third parties who are likely to be designated could consider this likely status in operational resilience-related discussions with the providers under existing arrangements or those currently being negotiated.
Consumer Duty update
Lucy Hadrill updated on the Consumer Duty and FCA’s expectation of the process, reminding firms that 31 October is the deadline for having implementation plans in place.
Lucy explained to attendees that: “There’s no one-size-fits-all approach to implementation as how the duty is applied will depend on the business of the firm and how it is structured, and how compliance will be assessed is rooted in principles of reasonableness and proportionality. It’s fundamental that firms hardwire into all relevant areas of the business the understanding of the requirement to deliver good outcomes for retail customers and that this is about more than treating customers fairly (TCF) and communicating clearly with customer.”
For firms who have not started the process, Lucy outlines the next key steps:
- Appoint someone to oversee the implementation plan
- Appoint a project team. While this might be led, for example, by compliance, risk or legal, the ultimate responsibility will fall to the Executive, so one or more senior managers should be given specific responsibility for ensuring delivery
- The project team should comprise the senior managers of each relevant business unit.
Lucy added: “At this stage, the implementation plan should contain enough detail to enable effective challenge and scrutiny by the board but not line by line confirmation of who is doing what as this will change and evolve over time.”
Lucy also gave some useful pointers on how firms should then plan and conduct their implementation process.
What should firms be doing now?
All firms should now have completed, or be at the point of completing, what they need to do before the end of October, and their focus should be moving onto putting their plans into practice.
New FCA requirements for firms with appointed representatives (ARs)
The final discussion point was led by Duncan Scott, who explored the changes to requirements for firms with appointed representatives (ARs) and the changes that firms will need to make to ensure their current AR practices are compliant with FCA expectations.
Duncan said: “The key changes are around the requirement for greater due diligence on ARs, including both at onboarding and ongoing management. There’ll be a greater need to probe the AR's business model and governance alongside changes to annual reporting requirements. All AR appointments need to be reported to the FCA at least 30 calendar days before taking effect and firms that plan to act as network hosting firms must inform FCA of their plans to do so.”
What should firms focus on now?
Duncan advised that: “Firms that act as principals for ARs should focus on performing a gap analysis of their current onboarding activity and monitoring policies and procedures, confirm that AR activities will not result in undue risk of harm to consumers or market integrity, check their own systems and controls are fit for purpose and check AR agreements. The AR agreement needs to give the Principal the right to appropriate MI and suitable rights to terminate.” Principal firms also need to prepare for the increased FCA notification requirements and the need for annual senior management sign off that the firm's systems and controls are appropriate.
The new FCA rules take effect from the 8 December 2022. However, Duncan also noted that HM Treasury had published a separate consultation about the operation of the AR regime, but as yet has not published any feedback or further proposals for change.
Join us for the next FIN. Live, a Focus session, on 13 December 2022.
Our re:connect hub will also be kept up to date with the latest guidance and updates.
