Pinsent Masons advises Fortescue Metals Group on £164m acquisition of Williams Advanced Engineering Ltd
Out-Law Analysis | 14 Jan 2022 | 3:22 pm | 8 min. read
Climate change, consumer protection and innovation are core themes binding many of the regulatory changes we expect to see in UK financial services in 2022, but more fundamental reform is also on the agenda.
In the year ahead, policy direction indicated in 2021 is likely to be developed further as the UK government seeks to use post-Brexit freedoms and build on the financial service sector’s existing strengths in areas such as fintech. These developments will shape the work of regulators for years to come.
The UK government and regulators are beginning to exercise their rule-making muscles in the post-Brexit world. Thought is being given to the need for the UK to have a robust but reasonable regulatory environment to attract international business.
Evidence of this was provided by the Treasury in November 2021 when it set out proposals for reforming the financial services regulatory framework to ensure that it is fit for the future. This consultation paper reviews the overall approach to financial services built on the existing Financial Services and Markets Act (FSMA) model. The changes brought about as a result of this consultation could include adding ‘new growth’ and ‘international competitiveness’ as secondary objectives that the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) will have to pursue, and also signal a change in the relationship between the Treasury and the regulators.
In addition, UK chancellor Rishi Sunak announced the introduction of a new chapter for financial services in the UK with a vision for an open, green and technologically advanced sector. We anticipate that this vision will shape new policy and regulation in the UK, whether in response to the Covid-19 pandemic, developments in fintech or in relation to Brexit.
As financial services firms plan ahead for the new rules coming into force over the next year, thought should be given to some overarching themes.
The immediate and long-term impact of measures to address climate change should not be underestimated. All investment firms must take on the challenge thrown down by the chancellor at COP 26 that the UK will be the world’s first net zero aligned financial centre. Whilst there is a significant amount of regulation which will need to be taken on board, there is also a change in mindset and culture that is required so that being “green” becomes the ordinary rather than the extraordinary.
Much regulatory and therefore business focus will be on consumer protection. This will be driven by the plans for a new consumer duty , and build on earlier initiatives including around vulnerable customers and the FCA’s changes to speculative illiquid securities brought in last year. The pandemic has also forced firms in a number of ways to re-examine consumer protection matters. This is not only as regards treating customers fairly but also how to operate in a pandemic and the digital world. The tendrils of consumer protection are present in many FCA initiatives.
Often innovation is seen as how firms utilise technology. The pandemic has accelerated plans around interacting with customers digitally, but innovation covers so much more and one area that we expect to see developing are products that address diversity and inclusion issues, as highlighted in an FCA discussion paper. The FCA is also actively encouraging innovation through the second green fintech challenge as well as the current digital sandbox and Innovation Hub more generally. The FCA, PRA and Bank of England also recognise that they need to be innovative themselves as can be seen by the current proposals to transform data collection and digital regulatory reporting proposals.
Underlying all the changes will be the temporary permissions regime (TPR), with numerous former passporting firms applying for direct authorisation from the FCA. This will take up significant time and resources. It can be expected that, as with previous significant authorisation programmes, the FCA will recruit for or outsource the TPR applications but even so firms would be wise to factor in continuing longer turnaround times for applications and queries.
The UK investment firms prudential regime (IFPR) came into force on 1 January 2022. The IFPR applies to all firms carrying on Markets in Financial Instruments Directive (MiFID) business that are currently subject to any part of the Capital Requirements Directive and the Capital Requirements Regulation, including collective portfolio management investment firms.
This new regime brings a number of changes. This includes dividing firms into the categories of small and non-interconnected firms (SNI) and those that are not, as well as the introduction of new liquidity requirements and initial capital and permanent capital requirements. Further detail on the changes is outlined in this article.
Perhaps one of the most significant changes for impacting attitudes is the FCA’s proposal for a new consumer duty. The FCA has consulted on the plans which would require regulated firms to provide a higher level of consumer protection in financial markets.
Through imposing a higher standard, the FCA aims to improve outcomes for UK consumers across all retail financial services markets by April 2023. The FCA plans to achieve this by introducing a new consumer principle that would require retail financial services firms to consider the likely outcomes consumers will receive throughout the lifecycle of a product. This duty would replace the existing sixth and seventh principle in the FCA Handbook, which concern treating customers fairly and require firms to communicate in a clear, fair and not misleading way with clients. Further detail on the changes are outlined in this article.
Our view is also that close collaboration between the FCA and the Financial Ombudsman will be necessary as the extent of the new consumer duty on UK financial firms evolves, given the role played by the Financial Ombudsman in resolving consumer complaints.
A prominent theme of the changes in the pipeline is a much greater a focus on diversity and inclusion by the FCA. The expectation is that, by adopting diversity and inclusion, firms will achieve diversity of thinking which will result in better outcomes for consumers and firms. Firms also stand to attract better talent by fostering a more inclusive working environment and can also expect to develop more appropriate products for a more diverse customer base.
The FCA is expected to consult on matters of diversity and inclusion in the first half of 2022 in a follow up to its discussion paper published last year. A policy statement is then anticipated before the end of the year.
The growing importance being placed on diversity and inclusion is reflected in the wholesale markets where UK listed companies are to be subject to reporting requirements and targets in relation to gender and ethnic diversity. Where these targets are not met, the FCA will expect firms to explain why they have not complied with this target.
Among the changes the FCA could impose later this year are measures to make senior managers directly accountable for diversity and inclusion. These changes and their potential impact are discussed in more detail in this article.
The FCA has proposed changes to the appointed representatives (AR) regime that would require principals to carry out better due diligence when appointing an AR. The principals would have to notify the FCA at least 60 days ahead of the appointment taking effect and would have to report additional information regarding their ARs including on its revenue and on the oversight mechanisms principals have in place. The proposed changes will have significant impact on principal firms, especially those that have numerous ARs. We took a closer look at the FCA’s consultation in this article.
The PRA’s new rules on outsourcing and third party risk management will come fully into effect from 31 March 2022. Although technically this applies only to PRA authorised firms and not solo regulated firms, it seems likely that there will be a trickle-down effect to solo regulated firms when outsourcing or making strategic third-party appointments.
Firms will need to approach such arrangements with an understanding for the potential risk that each arrangement poses for the business and move away from a focus on whether or not something is an outsourcing, and consider it more from an operational risk and resilience perspective.
As of 29 July 2022, the pre-paid funeral plans sector is going be regulated by the FCA. This change will impact both funeral plan providers and intermediaries. They will need to be authorised by the FCA to carry out these activities after 29 July 2022. The reform follows an FCA study into the practices of some of the firms in this market which found various harms that could arise, including poor governance and controls within plan providers, and poor financial management of trusts.
Once authorised, firms will need to comply with the FCA rules on the regulation of funeral plans. These rules will also apply to intermediaries, including funeral directors and will writers. Authorised firms will also be expected to comply with the UK’s senior managers and certification regime and so senior managers will need to be made aware of their responsibilities under the FCA authorisation.
In line with the increase in environment, social and governance (ESG) reporting seen across various regulators in different jurisdictions, the FCA now intends to require asset managers, life insurers, pension providers and standard listed companies to make climate-related disclosures. The intention behind this is to give the market and investors more information about how firms recognise and address climate change to better inform investment decisions.
Specifically, and through the introduction of an ESG Sourcebook into the FCA Handbook, asset managers, life insurers and FCA-regulated pension providers are going to be required to publish an annual report, aligned to the recommendations set out by the Task Force on Climate-Related Financial Disclosures (TCFD), detailing how they consider climate-related risks and opportunities when managing or administering investments on behalf of clients and consumers. We consider the rules to be introduced and their impact in this article.
The FCA is also introducing new rules for standard listed issuers, but not to issuers of standard listed debt and debt-like securities, that include climate-related disclosures and increase business transparency over businesses ‘net zero’ transition plans.
The joint discussion paper on diversity and inclusion in the financial sector, published in July 2021 by the FCA and PRA, sheds light on regulators’ considerations in relation to the existing laws and policies governing ESG and equality, diversity and inclusion (EDI). We examine the impact this discussion paper could have in this article.
As of 15 November 2021, the FCA has been authorising long term asset funds (LTAFs) which invest mainly in long-term, illiquid assets. These investments could provide investors with long-term investment objectives with an alternative investment opportunity where they understand and are able to bear the associated risks. The FCA notes that, where the investment management vehicle is appropriately designed and managed, this type of fund could play a significant role in supporting economic growth and a transition to a low carbon economy.
The LTAF’s will be structured as open-ended non-mainstream pooled investments with enhanced permitted liquidity management tools as well as limits on promotion. There will also be an increased emphasis on governance and disclosure, which includes at least monthly dealing frequency and a minimum 90 days redemption notice period.
By the end of 2022 the new prudential regime will be settling, the consumer duty will be being embedded into processes, funeral plans will be regulated, LIBOR will be a fading memory, and the UK should be firmly on the road to net zero.
The financial services industry of today is in many ways unrecognisable from the financial services industry of five or 10 years ago and there are few sectors that face so much regulatory change on a continuous basis. It is easy to get bogged down in the fine detail, and the regulators will punish those who get the fine detail wrong, but there is a clear direction of travel and interwoven ideas.
The themes of consumer protection and innovation are constant, alongside bolstering the requirements for those in a position of trust over assets – whether the asset is £100, or £1 million or the planet.
Co-written by Farah Al-Amad of Pinsent Masons.
Pinsent Masons advises Fortescue Metals Group on £164m acquisition of Williams Advanced Engineering Ltd