European Commission
Reduction of greenhouse gas emissions - ESMA publishes letter from European Commission on assessment of financial system’s resilience to stress and invitation to conduct stress test - 9 March 2023
The European Securities and Markets Authority (ESMA) has published a letter from the European Commission (the Commission) on the Commission’s assessment of the financial system’s resilience to stress in the transition to the EU’s 2030 goals for the reduction of greenhouse gas emissions (a reduction of at least 55% as compared to 1990 levels).
The Commission notes that to ensure financial stability and enable the financial sector to play its role in financing the transition, itself and ESMA need to be aware of any potential vulnerabilities in the financial sector and of how stress in the financial system could affect the transition to the EU’s 2030 goals.
The Commission has invited ESMA to conduct a one-off climate risk scenario analysis to assess, in cooperation with the European Central Bank and the European Systemic Risk Board, the resilience of the EU’s financial system as it seeks to achieve the EU’s 2030 goals. It states that this one-off exercise should go beyond the usual climate stress tests and look at contagion and second-round effects. As part of this work, the Commission requests any insights into the financial system’s capacity to support green investments under stress.
European Commission letter on assessment of financial system’s resilience to stress in the transition to the EU’s 2030 goals for the reduction of greenhouse gas emissions
Request for one-off scenario analysis exercise
Council of the European Union
Financial services contracts concluded at a distance - Council of the European Union publishes general approach - 2 March 2023
The Council of the European Union (the Council) has published the text of its general approach on the proposed Directive on financial services contracts concluded at a distance. The proposed Directive will repeal the Distance Marketing of Financial Services Directive (2002/65/EC) and transfer its contents to the Consumer Rights Directive (2011/83/EU).
The general approach provides the Council presidency with a mandate for negotiations with the European Parliament. This follows the Council’s announcement of its agreed negotiation position with the European Parliament, as previously reported in this Bulletin.
Council of the European Union general approach
UK Parliament
Independence of the Bank of England - House of Lords’ Economic Affairs Committee launches inquiry - 3 March 2023
The House of Lords’ Economic Affairs Committee (the Committee) has launched an inquiry into the independence of the Bank of the England (the Bank). The inquiry will examine, in particular, how operational independence is working and will focus on: (i) the Bank’s role and remit; (ii) whether the governance structures of the Bank are appropriate; and (iii) how the Bank is being held accountable for its actions. The inquiry will not look at individual decisions that the Bank has taken.
The Committee is seeking feedback on a number of questions:
- Is the Bank of England’s statutory framework still defined appropriately? If not, how should it be defined?
- What should be the role of secondary objectives in the remit of the Bank?
- Have revisions to the Bank’s role, statutory objectives and remits since it was made independent affected the Bank’s performance and operations; if so, how?
- How has the relationship between the Bank and the Treasury, as provided in the Bank of England Act 1998, worked in practice; and is that relationship still appropriate?
- Is the Bank of England’s mission to maintain monetary and financial stability affected by its PRA responsibilities; if so, how?
- Do the Bank’s structures provide for a broad range of views in carrying out its functions?
- Is the role of the Court of Directors of the Bank adequately defined and understood? Does the Court function appropriately; if not, how should it change?
- Are the appointment processes to the Bank’s three policy committees, and the Court of Directors of the Bank, providing appropriate degrees of expertise, challenge and range of thought?
- Has the right balance been struck between accountability and independence?
- Is there effective scrutiny and accountability in relation to the delivery of the Bank’s statutory objectives and are its communications sufficiently clear and complete to ensure effective scrutiny?
The deadline for the submission of written evidence is midday on 13 April 2023.
Press release
Financial impact of greenwashing - House of Commons Treasury Sub-Committee publishes letter sent to FCA - 9 March 2023
The House of Commons Treasury Sub-Committee on Financial Services Regulations (the Sub-Committee) has published a letter sent by Harriett Baldwin MP, Chair of the Sub-Committee, to Nikhil Rathi, Chief Executive of the FCA, in relation to the FCA’s proposals on sustainability disclosure requirements and investment labels, published in its Consultation Paper CP22/20 in October 2022 and subsequent evidence session held in February 2023.
The Sub-Committee raises concerns on the cost-benefit analysis (CBA) of the proposed new requirements, particularly that the FCA “has failed to take into account the substantial costs to the consumer of the measures included within [the] consultation.” This specifically relates to the costs associated with consumers transferring out of funds accused of greenwashing and into new ‘sustainable’ funds. In particular, the letter sets out three ways the CBA does not factor in costs to the consumer:
- it does not consider additional costs to the consumer of their time spent reconsidering which products they wish to invest in and divest from;
- it does not evaluate the costs incurred by consumers through the buying and selling of spreads when their investments are reallocated to different funds; and
- it does not put a cost on the potential for the proposed new disclosures to change the fundamental prices of the funds themselves.
The Sub-Committee has requested the FCA to provide a new CBA that estimates the monetary, and other, costs to consumers of its proposals. It also asks what enforcement work the FCA will undertake to ensure that fund managers that have promoted misleading financial products will be pursued with a view to providing redress for consumers, and if no action is to be taken the legal basis for not doing so.
The FCA has been asked to respond by 23 March 2023.
Letter to the FCA
Press release
Financial Conduct Authority
Implementing the Consumer Duty - FCA publishes third series of portfolio letters - 3 March 2023
The FCA has published a third series of portfolio letters to support firms in their implementation of the Consumer Duty (the Duty). The Duty will come into force on 31 July 2023 for new and existing products or services that are open to sale or renewal, and 31 July 2024 for closed products or services. The FCA published the first two series of Consumer Duty portfolio letters in February 2023.
This series of letters is addressed to CEOs and directors of firms in the following portfolios: retail finance providers; motor finance providers; mortgage intermediaries; credit brokers; and credit unions.
In summary, each letter sets out:
- a reminder of the implementation timeline, key elements of the Duty and how it applies to firms in the portfolio;
- the FCA’s expectations for how firms should embed the Duty;
- feedback from the FCA’s review of firms’ implementation plans published in January 2023 (as previously reported in this Bulletin); and
- the FCA’s approach to supervising the Duty in the portfolio and next steps.
More specifically, the letters outline:
- Retail finance providers: the FCA expects retail finance lending products to be designed to meet the needs, characteristics and objectives of the firm’s intended customers. Where firms are developing new products, it is important that they are fit for purpose and designed to meet the needs, characteristics and objectives of the identified target market. Further to this, Annex 2 to the letter highlights relevant issues relating to changes to the regulatory perimeter, such as the significant growth of Buy-Now-Pay-later products, as well as the appointed representatives regime, data-led regulation and ESG issues.
- Motor finance providers: the FCA notes that firms should be recognising where their products are complex and assuring themselves in these circumstances that those products are designed according to customer needs. Firms should ensure that products are designed to consider the effects of potential fluctuation in the value of used cars, including how they set guaranteed (minimum) future values. Annex 2 to the letter includes other priorities for motor finance providers in relation to financial resilience, technology, cyber and resilience, data-led regulation and ESG.
- Mortgage intermediaries and credit brokers: the FCA highlights that its finalised guidance (FG22/5), published in July 2022, provides firms with a full explanation of the requirements of the Duty for mortgage intermediaries and credit brokers.
- Credit unions: the FCA highlights its ‘Dear CEO’ letters and supervisory strategy letters sent to credit unions in March 2022 to assist with implementing the Duty. Credit Unions will need to focus particular attention on the following issues: (i) governance and oversight; (ii) planning for operational and financial resilience; (iii) products and services; (iv) the cost of living crisis; and (v) proportionality.
Press release
Updated webpage: Consumer Duty - information for firms
Updated webpage: Supervisory correspondence
Financial Ombudsman Service
Business specific complaints data - FOS publishes Consultation Paper on temporary changes to outcome reporting - 6 March 2023
The Financial Ombudsman Service (FOS) has published a Consultation Paper on temporary changes to outcome reporting in its business-specific complaints data.
Between 1 November 2021 and 31 March 2022, the FOS amended the way it recorded the outcomes of certain complaints that were proactively resolved by respondent businesses. This led to around 100 financial businesses making nearly 7,000 additional offers to resolve complaints.
Since then, the FOS has been considering the results and feedback from the initiative to see if it something it should take forward on a permanent basis. The FOS proposes to create a separate category in its biannual business-specific complaints data to record any complaint that is resolved by a ‘fair and reasonable offer’ put forward by a business within 14 days of the FOS requesting the respondent businesses’ complaints file. Complaints in this way would be reported as ‘proactively settled’. These outcomes would not contribute to a business’ overall ‘uphold rate’.
The FOS believes that this would incentivise financial businesses to settle complaints proactively and pragmatically at an earlier stage, which in turn would help to provide affected complainants with closure. Feedback on the proposals should be made by 20 March 2023, following which the FOS aims to publish a decision confirming how it will proceed by 3 April 2023.
FOS Consultation Paper: Temporary changes to outcome reporting in business-specific complaints data
Updated webpage
Press release
All-Party Parliamentary Group
Fair business banking - APPG publishes report on framework for compensation and redress - 2 March 2023
The All-Party Parliamentary Group (APPG) on fair business banking has published a report on building a framework for compensation and redress (the Report).
The Report notes that “the existing landscape of institutional mechanisms for redress is fragmented - it includes the Financial Services Compensation Scheme, Financial Ombudsman Service and going to court. It is difficult for both firms and customers to navigate, and often fails to produce fair and reasonable compensation.”
The Report sets out the APPG’s findings from its research into the UK's framework for redress, based on an analysis of ten compensation schemes relating to financial and non-financial issues. The schemes analysed include schemes relating to the Steel Workers Pension Scheme, interest rate hedging products, the Royal Bank of Scotland, Global Restructuring Group and London Capital & Finance plc. Following analysis on a series of case studies, the Report highlights some patterns and key lessons learnt, and sets out a number of recommendations:
1. Key lessons learned:
- the design of many schemes display the same features that led to the wrongdoing in the first place;
- the redress framework is highly complex, sometimes involving multiple schemes and placing a significant burden of proof on victims;
- many schemes suffer from inherent or perceived conflicts of interest;
- most of the schemes considered as part of the Report’s research fail to put victims back in the position they would have been had the adversity not occurred;
- schemes exclude groups of victims with no prospect of independent assessment; and
- several schemes suffer from a lack of transparency of processes, information and outcomes, and a corresponding lack of accountability.
2. Recommendations:
- guidelines for setting up a redress scheme: the report calls on the government to publish a handbook, as a matter of urgency, that establishes compulsory guidelines by which any public agency (such as the FCA) or any private firm (such as a bank) must abide when setting up a redress scheme, based on a number of building blocks;
- an arm’s-length body for redress schemes: this body would be responsible for setting up and overseeing redress schemes and would be activated when a scandal emerges. It would be co-funded by private sector firms responsible for wrongdoing and would be directly accountable to Parliament and regulators; and
- a Financial Services Tribunal (the Tribunal) and extending section 138D FSMA to firms: the Tribunal would adjudicate disputes in the financial sector, with businesses of all sizes and individuals eligible to participate. Repeated and systemic cases referred to the Tribunal would automatically trigger the redress process. The report also calls on private rights of action under section 138D FSMA to be extended to firms.
Building a framework for compensation and redress
