European Banking Authority
Sustainable finance - EBA publishes roadmap - 13 December 2022
The European Banking Authority (EBA) has published a roadmap outlining a number of objectives and a timeline relating to its work on sustainable finance. The roadmap explains the EBA’s approach over the next three years to the integration of ESG risk considerations into the banking framework. Among other things, the EBA has initiated an assessment of whether amendments to the existing prudential treatment of exposures to incorporate environmental and social considerations are justified. The EBA will also continue its efforts to ensure that ESG factors and risks are integrated in firms’ risk management framework and in their supervision, including through climate stress tests.
EBA roadmap on sustainable finance
Press release
UK Parliament
Financial Services and Markets Bill - First reading in House of Lords and revised text published - 8 December 2022
The Financial Services and Markets Bill 2022-23 (FSMB) has completed its first reading in the House of Lords. A revised version of the FSMB, together with revised explanatory notes, has been published on the UK Parliament website, reflecting amendments that were made at the report stage of the Bill in the House of Commons. New clauses in the FSMB include: (i) “reporting requirements” in clause 37; (ii) “composition of panels” in clause 44; (iii) “consultation on rules” in clause 50; and (iv) “unauthorised co-ownership alternative investment funds” in clause 60.
A second reading in the House of Lords is scheduled to take place on 10 January 2023.
Hansard for 8 December 2022: Financial Services and Markets Bill
Minutes from the First Reading in the House of Lords
UK Government
UK Financial Services - Edinburgh Reforms unveiled - 9 December 2022
The Chancellor of the Exchequer, Jeremy Hunt MP, has announced a package of measures referred to as the “Edinburgh Reforms” of financial services, building on the reform agenda being taken forward through the Financial Services and Markets Bill 2022-23 (FSM Bill). The measures are categorised under four main headings: a competitive marketplace promoting effective use of capital; sustainable finance; technology and innovation; and consumers and businesses.
Press release
Webpage
Written statement from Chancellor
HM Treasury
Building a smarter financial services framework for the UK - HM Treasury publishes Policy Statement - 9 December 2022 - As part of its Edinburgh Reforms, HM Treasury has published a Policy Statement, “Building a smarter financial services framework for the UK” detailing the government’s approach to repealing and replacing retained EU law on financial services using powers in the Financial Services and Markets Bill (FSMB). The Policy Statement provides an overview of the implementation of the Future Regulatory Framework (FRF) Review and refers to the government’s intention to create a framework for the regulation of financial services based on the Financial Services and Markets Act 2000 (FSMA).
Among other things, the FSMB will, over time, repeal retained EU law, enabling the government to replace it with legislation designed specifically for UK markets. The Policy Statement notes that HM Treasury has identified 43 core files of financial services retained EU law, which are set out in Annex I. The repeal of this law will be split it into tranches, using a number of guiding principles for prioritisation that are explained further in the Policy Statement. The first tranche of the repeals process will consist of:
- the Wholesale Markets Review (WMR), which makes substantial amendments to various parts of the framework under the UK Markets in Financial Instruments Regulation (600/2014) (UK MiFIR);
- the Listing Review. HM Treasury intends to commence the repeal of the UK Prospectus Regulation ((EU) 2017/1129) and implement a new regime for admission to trading and public offers;
- the Securitisation Review, which identified several areas for revision in the UK Securitisation Regulation ((EU) 2017/2402); and
- the Solvency II Review of UK legislation and regulation implementing the Solvency II Directive (2009/138/EC).
The second tranche of retained EU law is focused on areas that are considered to have the biggest potential benefits to deliver improvements to UK economic growth. It consists of:
- the implementation of the remaining aspects of the WMR;
- implementation of the remaining aspects of the Solvency II Review;
- the UK PRIIPS Regulation (1286/2014) (see further below for a separate item on this);
- the UK Short Selling Regulation (236/2012) (UK SSR);
- the UK Taxonomy Regulation ((EU) 2020/852);
- the UK Money Market Funds Regulation ((EU) 2017/1131) (UK MMF Regulation);
- the revised Payment Services Directive ((EU) 2015/2366) (PSD2) and the Electronic Money Directive (2009/110/EC);
- the Insurance Mediation Directive (2002/92/EC) (IMD) and the Insurance Distribution Directive ((EU) 2016/97) (IDD);
- the UK Capital Requirements Regulation (575/2013) (UK CRR) and the CRD IV Directive (2013/36/EU);
- the UK Long-term Investment Funds Regulation ((EU) 2015/760); and
- the consumer information rules in the Payment Accounts Regulations 2015 (SI 2015/2038).
HM Treasury has also published three draft statutory instruments to illustrate its approach to the use of its powers under the FSMB:
- The Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023 (with an accompanying policy note).
- The Securitisation Regulations 2023 (with an accompanying policy note). This instrument repeals and restates some elements of the UK Securitisation Regulation with a view to the replacement of most firm-facing requirements by rules made by the FCA and the PRA. The aim is to demonstrate how regulatory responsibility could look in regimes which involve more than one regulator; and
- The Electronic Money and Payment Services (Amendment) Regulations 2023 (with an accompanying policy note). This instrument gives the FCA rule-making powers concerning payments regulation, which is intended to demonstrate how powers under the FSMB might be used to ensure that the FCA has the necessary powers to make rules to replace retained EU law.
Policy Statement
Webpage
The draft Financial Services and Markets Act 2000 (Public Offers and Admissions to Trading) Regulations 2023
Policy Note
The draft Securitisation Regulations 2023
Policy Note
The draft Electronic Money and Payment Services (Amendment) Regulations 2023
Policy Note
Remit, recommendations and priorities for the FCA and the PRA - Letter sent by HM Treasury - 9 December 2022
HM Treasury has published letters setting out the remit, recommendations and priorities for the FCA and the PRA for the current Parliament. The letter to Andrew Bailey, Bank of England Governor, relates to recommendations for the Prudential Regulation Committee (PRC), which is responsible for exercising the Bank of England’s functions as the PRA.
According to the letter, both regulators should have regard to supporting the government's ambition to encourage economic growth in the interests of consumers and businesses. This includes facilitating investment in productive assets, providing sustainable finance and supplying long-term investment to support UK economic growth, improving competition in the interests of consumers, fostering a well-functioning housing market and delivering regulatory reform.
The letters also state that the regulators should have regard to the government's strategy to promote competitiveness including through, once enacted, the PRA's new secondary objective to facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy and its growth in the medium to long term. As part of this, the PRC should have regard to the government's priorities, including the swift implementation of the Future Regulatory Framework Review.
Recommendations for the Prudential Regulation Committee
Webpage
Recommendations for the FCA
Webpage
UK Green Taxonomy - House of Commons publishes statement - 15 December 2022
The House of Commons has published a statement made by Andrew Griffith MP, Economic Secretary to HM Treasury, on the development of a UK green taxonomy.
Following engagement with both the Green Technical Advisory Group and stakeholders, the government believes that there is benefit in reviewing its approach to taxonomy development to maximise the effectiveness of its sustainable finance agenda. As a result, the government will not make secondary legislation under the UK Taxonomy Regulation ((EU) 2020/852) this year.
Mr Griffith goes onto explain that the Financial Services and Markets Bill (FSMB), which is currently before Parliament, will repeal retained EU law relating to financial services, and this will include the UK Taxonomy Regulation. Using the powers in the FSMB, HM Treasury intends to commence the repeal of the statutory requirement to make technical screening criteria regulations by 1 January 2023, so that the obligation no longer applies. Then it will consider how to use the powers in the FSMB to restate and modify retained EU law, and decide whether to change the UK’s approach.
The government will provide a further update as part of its publication of the Green Finance Strategy in early 2023.
Treasury Update: UK Green Taxonomy
Financial Conduct Authority
Approaches to diversity and inclusion in financial services - FCA publishes multi-firm review - 12 December 2022
The FCA has published the results of its multi-firm review on how firms are designing and embedding diversity and inclusion (D&I) strategies. It follows the publication, in July 2021, of a joint Discussion Paper with the PRA and Bank of England which discussed the current state of diversity and inclusion in the industry and proposed some areas for potential policy intervention. The FCA intends to consult on those proposals in 2023.
Based on a sample of 12 ‘fixed’ (generally larger) firms across multiple sectors, the FCA found a “surprising degree of consistency”. All firms were early in the development of their approach on diversity and inclusion, typically having started serious efforts in 2019 or 2020. Firms had focused most on addressing gender representation, with ethnicity starting to receive more attention. Firms had also made efforts to improve representation at senior leadership level, despite data showing that the biggest drop-off in representation is from junior to middle management grades. The FCA warns that this focus, in isolation, risks creating “a culture where firms attempt to ‘poach’ diverse senior talent rather than develop their own pipelines.” The FCA’s findings also demonstrated a wide variation in data quality, largely the result of differing levels of success with staff declaration rates.
Firms that are part of international groups had generally adopted a group-wide international strategy, without tailoring it to the UK organisation or UK characteristics. These firms typically had less ambitious and well-defined strategies and were often reliant on global, rather than UK-specific, data.
The FCA encourages all regulated firms to consider the findings of the review and use them to assess their current diversity and inclusion strategies and practices.
FCA webpage: Understanding approaches to D&I in financial services
Regulatory initiatives grid - FCA updates timeline - 12 December 2022
The FCA has announced that it will publish a revised version of its regulatory initiatives grid in 2023. The grid was due to be published in November 2022, but the FCA and the Financial Services Regulatory Initiatives Forum are taking additional time to consider any necessary changes following the Edinburgh Reforms.
FCA updated webpage Regulatory initiatives grid
Climate Financial Risk Forum - FCA updates webpage - 12 December 2022 - The FCA has updated its webpage on the Climate Financial Risk Forum (CFRF). The CFRF was established in 2019 to bring together senior financial sector representatives to share their experiences in managing climate-related risks and opportunities. The webpage now includes a third set of guides on addressing climate-related financial risks. A list of CFRF members for Session 3 has also been included. The session 3 guides consist of:
- a scenario analysis guide for banks a guide for financial firms as well as a physical risk underwriting guide;
- transition to net zero guides, dated October 2022, relating to carbon budget primers for financial institutions, disclosures and mobilising investing into climate solutions; and
- a report on industry frameworks and metrics relating to green and transition finance.
Updated webpage
ESG and the FCA - New ESG Advisory Committee established - 13 December 2022 - The FCA has established a new Advisory Committee to the FCA’s Board to work on ESG issues. Earlier this year the FCA Board agreed to establish a new ESG Advisory Committee to help execute its ESG-related responsibilities, including meeting the government’s expectation that it has regard to the UK’s commitment to achieving a net zero economy by 2050, when considering how to advance and achieve its objectives and functions. The Committee will support the Board in executing oversight of ESG-related issues relevant to the FCA as a corporate entity and as a regulator. In addition, it will provide guidance to the Board on relevant emerging ESG topics or issues and views on how the FCA should develop its ESG strategy in keeping with the organisation’s statutory objectives and regulatory principles.
The following individuals have been appointed as members of the Committee:
- Tom Gosling, Executive Fellow in the Department of Finance at London Business School and Executive Fellow at the European Corporate Governance Institute;
- Catherine Howarth OBE, Chief Executive of ShareAction;
- Tim Mohin, former Chief Sustainability Officer for Persefoni AI and formerly Chief Executive of the Global Reporting Initiative;
- Desiree Fixler, Founder of RYSN Consulting and Chair of VentureESG;
- Sonali Siriwardena, Partner and Global Head of ESG at Simmons and Simmons; and
- Harold Walkate, Senior Fellow at the Center for Sustainable Finance & Private Wealth (CSP) at the University of Zurich.
The Committee will also include the FCA’s Chair, other Non-Executive Directors and the Director of ESG.
Press release
Terms of reference
Compensation framework review - FCA publishes Feedback Statement (FS22/5) - 14 December 2022
The FCA has published a Feedback Statement (FS22/5) on the compensation framework for protection provided through the Financial Services Compensation Scheme (FSCS), following its Discussion Paper (DP21/5) on the same topic published in December 2021. The FCA’s review of the compensation framework was established in the context of increasing concerns about the cost of compensation liabilities falling to the FSCS, which could create a barrier to firms entering or wishing to stay in the market, potentially affecting the availability of some financial services.
The prevailing feedback from stakeholders was that the high cost of compensation liabilities falling to the FSCS is not a feature of the compensation framework itself, but have occurred because of the harms from certain markets that give rise to FSCS liabilities. Stakeholders felt that the most effective way to bring down the cost of claims was for firms to improve their conduct to minimise the liabilities. There was no clear appetite to bring the costs down in other ways such as removing aspects of consumer protection provided by the FSCS.
The FCA does not consider that material changes are needed to the compensation framework. However, the next steps will ensure that the framework remains proportionate and provides an appropriate degree of protection for consumers. For the next phase of the review, the FCA is planning to review the existing compensation limits and funding class thresholds and to carry out research to improve the FCA’s understanding of the impact of FSCS protection on consumer decision making, confidence and behaviour, and on firm behaviour and incentives.
The FCA expects to consult on any proposed changes to the compensation rules during 2023/24 with a view to confirming any changes by the end of the financial year.
FCA Feedback Statement (FS22/5): Compensation framework review: response to feedback and next steps
Webpage
Press release
Financial Policy Committee
Financial stability - FPC publishes Summary and Record of meetings - 13 December 2022
The Bank of England’s (the Bank’s) Financial Policy Committee (FPC) has published a Summary and Record of its meetings on 28 November and 8 December 2022. They refer to a range of market developments, including the sudden failure of FTX. The FPC continues to judge that direct risks to UK financial stability from cryptoassets remain limited, but these events have highlighted how systemic risks could emerge if cryptoasset activity and its interconnectedness with the wider financial system increase.
The Summary and Record of the FPC’s next meeting is expected to be published on 29 March 2023.
Bank of England: Financial Stability Report
Webpage
Bank of England: Financial Policy Summary and Record of the FPC meetings on 28 November and 8 December 2022
Webpage
UK Finance
Regulation of unbacked cryptoassets - UK Finance publishes report - 15 December 2022
UK Finance has published a report on the future regulation of unbacked cryptoassets in the UK. The report addresses regulatory considerations for unbacked cryptoassets from the perspective of consumer protection, market integrity and effective competition, in line with the FCA’s operational objectives. In particular, the report considers how unbacked cryptoassets interact with cross-sectoral financial regulatory requirements such as financial resilience, operational resilience, financial crime and governance. In addition, the report analyses three specific use cases: (i) trading; (ii) custody; and (iii) payments, through which UK Finance questions:
- what risks or harms do regulators typically try to address in relation to this activity?
- what tools are used to address similar risks in traditional finance?
- what challenges and opportunities are encountered when applying these tools to cryptoassets?
- what novel risks are raised by the cryptoasset ecosystem?
The report concludes that, across the use cases for unbacked cryptoassets, existing regulations and tools should form the foundation of the regulatory approach.
UK Finance: The future regulation of unbacked cryptoassets in the UK
Webpage
