Recent regulatory developments of interest to all financial institutions. Updates include the latest publications relating to Brexit, COVID-19, the UK FCA banning sale of investment products referencing cryptoassets to retail clients, and more.

Contents

• Brexit: HM Treasury responds to questions on post-Brexit future relationship in financial services
• FPC September 2020 meeting summary and record
• COVID-19: FCA finalised guidance on cancellations and refunds
• Investment products referencing cryptoassets: FCA PS20/10 bans sale to retail clients
• Sandboxes: FCA opens Cohort 7 of Regulatory Sandbox and launches Digital Sandbox pilot
• FCA policy development update
• Operational resilience in time of uncertainty: BoE speech

Brexit: HM Treasury responds to questions on post-Brexit future relationship in financial services

The House of Lords EU Services Sub-Committee has published a letter it has received from John Glen, Economic Secretary and City Minister, in response to its own letter seeking clarity on UK-EU equivalence decisions, future UK-EU regulatory cooperation and the future regulatory framework for UK financial services after Brexit. The Sub-Committee had sought clarification from Mr Glen following his appearance before the Sub-Committee on 2 July 2020.

In relation to UK-EU equivalence decisions, Mr Glen notes that the EU has decided to make, at most, limited equivalence decisions with respect to the UK. The government is considering next steps. The UK is committed to an outcomes-based approach to the UK's equivalence framework applicable to third countries, including the EU. The government's forthcoming guidance document will contain more detail on the process and principles underpinning the UK's equivalence framework.

Mr Glen explains that the government proposed to have an annex within the free trade agreement (FTA) with the EU that would cover regulatory cooperation in financial services. However, the EU has been clear that it would prefer to agree to regulatory cooperation outside the FTA. Mr Glen states that this difference of structure, while significant, does not inherently introduce any limitations on future UK-EU engagement.

The government will shortly publish a consultation paper on the second phase of the Financial Services Future Regulatory Framework. Mr Glen states that the model the government will consult on aims to ensure an agile and responsive framework by allowing the UK financial services regulators to use their expertise and experience to lead on developing regulatory requirements for firms. As this involves delegating day-to-day regulatory responsibilities to the regulators, the government must carefully review the framework arrangements for accountability and scrutiny. Engagement with parliament will need to be a key part of this and Mr Glen emphasises that he is keen to hear the Sub-Committee's views on this. The important and complex nature of these questions makes an in-depth review necessary, and the government will seek views from a wide range of stakeholders. As such, it will use the responses to its first consultation to inform a second, more detailed consultation in 2021. This will set out specific proposals for delivering the framework and will require further in-depth engagement with parliament. When developing this model, the government has looked to other countries and regulatory systems to determine best practice, but ultimately, the main concern is that the right approach is taken for the UK.

FPC September 2020 meeting summary and record

The Bank of England (BoE) has published the financial policy summary and record of the meeting of its Financial Policy Committee (FPC) on 30 September 2020.

Topics discussed by the FPC include the resilience of the UK banking system, providing financial services at the end of the transition period with the EU and global efforts to address issues in non-bank financial intermediation. The FPC also noted that the COVID-19 pandemic continues to pose challenges for households and businesses.

Additionally, the BoE has published tables setting out a checklist of actions to avoid disruption to end-users of financial services at the end of the transition period and other risks of disruption to financial services.

COVID-19: FCA finalised guidance on cancellations and refunds

Following its earlier consultation, the FCA has published finalised guidance on cancellations and refunds aimed outlining its expectations for insurance and card providers when helping customers who are trying to claim money back following a cancelled trip or event due to the COVID-19 pandemic.

The guidance is designed to ensure that such firms handle enquiries and claims from consumers in a reasonable timescale, fairly and in a way that minimises inconvenience to the consumer.

Following the feedback, it received in response to its consultation, the FCA has made some additions to the final guidance. These include amendments to:

• provide example questions to provide clarification where customers have no prospect of making a claim under section 75 of the Consumer Credit Act 1974;
• clarify the FCA's expectations for debit and credit card providers;
• confirm that the guidance does not provide a set route for consumers to get a refund; and
• provide more detail on when it might be "unreasonable" for insurers to not pay out when the consumer has attempted to seek a refund from other sources.

The guidance comes into immediate force and will be effective until 2 April 2021.

Investment products referencing cryptoassets: FCA PS20/10 bans sale to retail clients

Following its consultation in CP19/22, the FCA has published feedback and a policy statement, PS20/10, prohibiting the sale of derivatives and exchange traded notes referencing certain types of cryptoassets to retail clients. If a firm carries out marketing, distribution or selling activities in, or from, the UK of these products to retail clients, they must cease these activities by 6 January 2021.

Retail clients with existing holdings can remain invested following the prohibition, until they choose to disinvest. There is no time limit on this and the FCA does not require or expect firms to close out retail clients' positions unless consumers ask for this.

The FCA's supervision in this area will focus on attempts to avoid the effect of the new Handbook rules by inappropriately "opting up" retail clients to become elective professional clients or moving retail clients to associated non-UK entities. It will also consider the conduct of inward passporting firms operating under the temporary permissions regime.

The FCA will keep the prohibition under review in line with Article 42(6) of the Market in Financial Instruments Regulation. It will consider whether there is a need to review the prohibition if it sees robust evidence indicating that the cryptoasset market has changed in ways that materially tackle the drivers of the harms it has identified.

The FCA has also published a technical annex providing a description of the supporting data and analysis for CP19/22 and PS20/10.

Sandboxes: FCA opens Cohort 7 of Regulatory Sandbox and launches Digital Sandbox pilot

The FCA has launched the pilot of a digital sandbox to support innovative firms tackling challenges caused COVID-19, and opened Cohort 7 of its Regulatory Sandbox. The FCA has also updated its webpage on the digital sandbox pilot.

The Digital Sandbox pilot aims to support earlier stage innovation where products and solutions are still in development and not yet at the stage where they are ready to be tested with consumers or in a live production environment.

Preventing fraud and scams, supporting the financial resilience of vulnerable consumers, and improving access to finance for small and medium-sized enterprises have been identified as three key areas of importance for the FCA.

The FCA is piloting the following features as the foundations of a digital sandbox:

• access to synthetic data assets to enable testing, training and validation of prototype technology solutions, for example transactional banking data sets, small and medium-sized enterprise lending data and customer accounts;
• an application programming interface (API) marketplace where digital service providers list and provide access to services via APIs;
• integrated development environment in which applicants can develop and test their solution;
• a collaboration platform to facilitate an ecosystem of key organisations that will provide support and input to digital sandbox participants, such as incumbents, academia, government bodies, venture capital, and charities; and
• an observation deck to enable regulators and other interested parties to observe in-flight testing at a technical level, in order to inform policy thinking in a safeguarded environment.

The FCA is accepting applications for the Digital Sandbox until 30 October 2020. It will confirm successful applicants and give access to the digital sandbox in early November 2020. Firms or individuals without a proposition to test in the digital sandbox, but who want to observe or potentially be involved with a team, can register an account on the digital sandbox website to stay up to date.

The lessons learned from the pilot will inform efforts to establish an ongoing digital sandbox.

Applications to Cohort 7 of the FCA's Regulatory Sandbox are open until 31 December 2020.

FCA policy development update

The FCA has updated its policy development update webpage for October 2020, setting out information on recent and future FCA publications.

Operational resilience in time of uncertainty: BoE speech

The Bank of England (BoE) has published a speech given by Nick Strange, BoE Senior Technical Adviser for Operational Risk and Resilience, on operational resilience in a time of uncertainty.

Points of interest in the speech include:

• the Prudential Regulation Authority (PRA) expects to publish its final policy on operational resilience in Q1 2021;
• firms need to remain prepared for threats that are fast, short lived and asymmetric, such as cyber threats, idiosyncratic operational failures and key third-party failures;
• COVID-19 has led to a changed operating environment which has consequently heightened some risks for firms. High levels of remote working requires focus on end point and network security, with emphasis on robust user authentication protocols. Remote working increases fraud and insider trading risks, which necessitates execution of detailed risk assessments of new solutions and real time security monitoring and patch management. Cyber risk has also been increasing, meaning user awareness campaigns are even more critical to maintaining cyber security;
• perfect alignment of UK and international regulatory rules on operational resilience is unlikely, but there is alignment on core principles. Firms are expected to "work their way around" local differences in implementation; and
• the PRA expects firms to have a coherent narrative between what is "critical" or would support a firm's viability for operational continuity in resolution, and what is "important" for important business services.

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