Financial institutions general regulatory news, December 2020

Hogan Lovells

Hogan Lovells

Recent regulatory developments of interest to all financial institutions. See also sector specific updates in the Related Materials links.


  • UK Future Regulatory Framework Review: consultation deadline extended
  • End of Brexit transition period: UK government and FCA remind firms to be ready
  • Work of FCA: further evidence for House of Commons Treasury Committee
  • SIPP operators: FCA Dear CEO letter on supervisory strategy
  • Seizing the opportunities from digital finance: BoE speech
  • Loyalty price discrimination: CMA publishes update and economic research
  • FCA Handbook Notice 82
  • RDR and FAMR impact: FCA evaluation report
  • UK sanctions framework after Brexit transition period: OFSI blog
  • UK regime for overseas firms: IRSG interim report
  • Advanced analytics and AI in financial services: UK Finance report on ethical principles
  • Tackling algorithmic bias: Centre for Data Ethics and Innovation report
  • IFD and IFR: corrigenda

UK Future Regulatory Framework Review: consultation deadline extended

HM Treasury has extended the deadline for responding to its Phase II consultation relating to the Future Regulatory Framework Review by one month to 19 February 2021.

End of Brexit transition period: UK government and FCA remind firms to be ready

The UK Financial Conduct Authority (FCA) has published a press release reminding firms to be ready for the end of the Brexit transition period, in particular, for the end of passporting and for the 31 December 2020 deadline for incoming EEA firms to notify the FCA of their intention to enter the temporary permissions regime (TPR).

The FCA advises firms that it will continue to provide regular updates on its dedicated Brexit webpages, and firms can also call the FCA Brexit information line (on 0800 048 4255) if they have any further questions.

Separately, UK Finance has published a blog post, written by the government, on key actions for firms in the banking and finance industry to take to prepare for the end of the Brexit transition period, including:

  • to practise or service clients in the EU from 1 January 2021, it is important that firms make sure their staff's UK qualifications are recognised by EU regulators. Without this, an individual might not be able to practice their profession;
  • firms with staff who travel to the EU for work purposes need to check if a visa or work permit is required. If the answer is yes, applications should be made now to avoid potential delays or refusal at the border from 1 January 2021; and
  • firms need to make sure their business is prepared on data protection and data transfers. From 1 January 2021, a firm may not be able to legally receive personal data from the EEA if it has not put alternative safeguards in place to cover EU to UK personal data flows.

The government directs firms to its webpages on recognition of qualifications, using personal data and work permits and visas for more information. It also recommends that firms use its transition checker tool for a tailored summary of actions they need to take.

Work of FCA: further evidence for House of Commons Treasury Committee

The House of Commons Treasury Committee has published a letter from Nikhil Rathi, FCA Chief Executive, responding to questions raised by Mel Stride, Committee Chair following an evidence session held by the committee on 4 November 2020 on the work of the FCA. In his letter, Mr Rathi also provides further information on a range of topics.

The House of Commons Treasury Committee has also published a separate letter from Charles Randell, FCA Chair, responding to the questions raised by the committee regarding the FCA, Prudential Regulation Authority (PRA) and Bank of England (BoE) joint consultation paper on complaints against the regulators.

SIPP operators: FCA Dear CEO letter on supervisory strategy

The FCA has published a Dear CEO letter setting out its key concerns and expectations for firms in its self-invested pension plan (SIPP) operators' supervisory portfolio. The issues identified in the letter relate to the following headings:

  • financial resources;
  • complaints handling;
  • pension scams;
  • product governance;
  • international SIPPs; and
  • issues affecting all firms, including COVID-19 and Brexit.

The FCA notes that CEOs are responsible for ensuring their firm meets FCA requirements and expectations, including those set out in the letter. It will use the senior managers and certification regime to engage directly with accountable individuals on areas of concern, and it will maintain a focus on the key issues identified.

Seizing the opportunities from digital finance: BoE speech

The BoE has published a speech given by Andy Haldane on seizing the opportunities from digital finance. In his speech, Mr Haldane discusses the pace of innovation and shifts in behaviour resulting from COVID-19 which presents "a real opportunity to refashion the payments and lending landscape, for good, in ways which benefit households, companies and the economy".

Among other things, Mr Haldane discusses the evolving payments and lending landscapes with a focus on payments by individuals and lending to small and medium-sized enterprises (SME), and digital identity.

Loyalty price discrimination: CMA publishes update and economic research

The Competition and Markets Authority (CMA) has published its fourth update on its loyalty penalty investigation in five key markets (mobile, broadband, household insurance, cash savings and mortgage markets). The CMA notes that COVID-19 continues to affect the work of the sectoral regulators and brings financial pressures on consumers which make tackling the loyalty penalty even more important. However, the CMA is encouraged by the regulators' progress to date, including the FCA's work in relation to mortgage payment deferrals in response to COVID-19 and its proposed package of remedies to tackle price walking (gradual annual price increases) in the insurance sector.

The CMA also published a report, prepared by E.CA Economics and commissioned by the CMA, on economic research on loyalty price discrimination. The research report contains a review of the academic literature on loyalty price discrimination, considers the main theories and concepts that contribute to the understanding of the loyalty penalty and identifies possible causes of loyalty penalties. It also examines certain business practices that can lead to consumer inertia. The report concludes by examining the policy implications and the various policy responses that might be used to try to address the harms resulting from loyalty penalties (including measures to activate consumers, to improve transparency and information, to regulate prices, to regulate business practices and to encourage the use of intermediaries).

FCA Handbook Notice 82

The FCA has published Handbook Notice 82, which sets out changes to the FCA Handbook made by the FCA board on 22 October, 12 November and 26 November 2020.

The Handbook Notice reflects changes made to the Handbook by the following instruments:

RDR and FAMR impact: FCA evaluation report

The FCA has published a report of its evaluation of the impact of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). Alongside the report, the FCA has published a consumer research report, which informed the evaluation.

The FCA conducted its research through 2019 and 2020. This included qualitative and quantitative research with consumers, data collection from a representative sample of firms operating in the market, and looking at international markets to see what lessons can be learned.

Overall, the FCA found that the financial advice market is improving, albeit slowly. However, many consumers are still holding money in cash rather than investing it to provide potentially higher returns. Many do not seek, or receive, help with their finances that would enable them to make better investment decisions. Although there has been some innovation in the market (particularly around the development of automated advice), there is scope for further development and innovation of models and services that could serve more consumers at different stages of their lives.

The FCA considers that more can be done to support mass market consumers to help them engage with their finances and make better investment decisions. This could include more tailored guidance services and simpler advice services.

Some firms have raised concerns about understanding the point at which more general forms of support become advice, suggesting this limits their ability to innovate. The FCA understands that the current regulatory framework may pose challenges to further market development in sufficiently meeting consumer needs.

The FCA will use the evidence from the evaluation and the feedback to its Call for Input on Consumer Investments to inform its work addressing some of the regulatory challenges. It expects to carry out this work during the first half of 2021 and will provide a further update at that point. The FCA's research was completed before March 2020. As a result, long-term changes resulting from COVID-19 will need to be considered as part of its future work.

UK sanctions framework after Brexit transition period: OFSI blog

The Office of Financial Sanctions Implementation (OFSI) has published blog entitled "Get ready for the end of the transition period". The blog covers changes to the UK sanctions framework after 31 December 2020.

UK regime for overseas firms: IRSG interim report

The International Regulatory Strategy Group (IRSG) has published an interim report on the current UK regulatory regime for overseas firms and whether it could be improved, with a view to enhancing the UK's global competitiveness. The IRSG intends to publish a more detailed report in early 2021, with detailed suggestions for legislative and regulatory changes.

Advanced analytics and AI in financial services: UK Finance report on ethical principles

UK Finance has published a report on ethical principles for advanced analytics and artificial intelligence (AI) in financial services. The report sets out the following five, high-level ethical principles that financial services firms can apply when developing products, services and back-office applications that rely on advanced analytics and AI (AAAI):

  • Principle 1: explainability and transparency - be transparent about how AAAI is used and provide appropriate explanations on decisions;
  • Principle 2: integrity of AAAI - adopt appropriate controls for the integrity, sourcing and sharing of AAAI and its associated data throughout the AAAI lifecycle;
  • Principle 3: fairness and alignment to human rights - design and use AAAI that produces fair outcomes;
  • Principle 4: contestability and human empowerment - support the empowerment of AAAI subjects, respecting their decision-making; and
  • Principle 5: responsibility and accountability - be responsible and accountable for AAAI.

The principles are not rules; they are intended to serve as a valuable resource to firms as a point of reference for developing or enhancing their own internal principles and governance. They are designed to be sufficiently flexible to be adapted, as appropriate, to the diverse use cases to which AAAI can be applied, using a proportionate and risk-based approach. Each principle is supported by several sub-principles, which provide more detailed consideration.

Tackling algorithmic bias: Centre for Data Ethics and Innovation report

The Centre for Data Ethics and Innovation (CDEI) has published a report on the use of algorithms in the financial services, local government, policing and recruitment sectors. For each sector it includes findings, case studies and recommendations as well as overarching recommendations for government, regulators and organisations.

In financial services the report found the sector more mature and keen to test systems for bias. However, there was still a risk of bias in relation to historically underrepresented groups in the financial system and issues around data availability, quality and ethical sourcing of data in relation to credit scoring decisions. The report suggests that future regulation may need to be adapted or adjusted to account for developments in money laundering algorithms in order to protect consumers. The CDEI will be an observer on the FCA's and Bank of England's AI Public Private Forum, which will explore means to support the safe adoption of machine learning and artificial intelligence within financial services.

IFD and IFR: corrigenda

The following corrigenda to the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR) have been published in the Official Journal of the EU.

  • corrigendum to the IFD amending Article 2(2), Article 54, Article 63(2) and Article 67(1) (second sub-paragraph); and
  • corrigendum to the IFR amending Article 57(2), Article 62(10)(a), (11)(a), (12)(a), (25) and (33), Article 63(6) and (7), and Article 66(3)(b).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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