Your guide to this week in regulation

Digital engagement has become a well-established central pillar of many firms’ propositions. Yet, the Financial Conduct Authority’s (FCA) Consumer Duty has provided a new lens through which the design of the customer journey should also be viewed. Our leading item this week exemplifies how FCA research can contribute to our understanding of regulation, in this case in the effect of digital engagement (including so-called ‘gamification’) on trading behaviour.  

Meanwhile, as the UK continues to find itself in political limbo (our second item), across in Europe we see further steps supporting the implementation of the Artificial Intelligence Act (our third item) and consultation on banking resolution strategies (our fourth item).  

We round off this week with the latest guidance to central banks on their climate-related disclosures. 

FCA’s trading apps experiment  

Recently, the FCA announced its intention to keep trading apps under review over gaming concerns following results from its experimental trading app platform which tested the effect of different digital engagement practices (DEPs) on over 9,000 consumers. 

The results showed that DEPs used by trading apps (such as push notifications and prize draws) can increase trading frequency and risk-taking from consumers, particularly those with low financial literacy, women and younger participants (aged 18-34). 

The FCA has previously warned stock trading apps to review ‘game-like’ design features ahead of the Consumer Duty’s implementation, urging them to ensure services are designed and tested to enable consumers to make effective, timely, and properly-informed investment decisions. 

In the related press release, Sheldon Mills, Executive Director of Consumers and Competition at the FCA, highlighted that: “The FCA continues to educate consumers about making better investment decisions and understanding the opportunities and risks, through its InvestSmart campaign. It has also brought charges against ‘finfluencers’ promoting financial products on social media.” 

Read more from the FCA 

Read the FCA's Research Note

Update on PEPs  

The FCA has provided an update on the publishing of findings from its review of the treatment of domestic Politically Exposed Persons (PEPs) carried out last year. It had originally planned to publish the review by the end of June as required by the Financial Services and Markets Act 2023. However, in a bid to avoid doing this during the pre-election period, the review will now be published in July after Parliament has resumed.   

The review, which invited PEPs to share their experiences, examined financial services firms' approach to managing PEPs in the UK, focusing on ensuring that individuals aren't unfairly excluded from accessing financial products due to their PEP status. It considered how firms are: 

• implementing the classification of PEPs to individuals
• managing risk assessments of UK PEPs, their close associates, and family members
• examining factors considered in rejecting or closing the accounts of PEPs, their family members and known associates
• communicating with their PEP customers
• inspecting PEP controls to ensure they're robust
• ensuring enhanced due diligence and ongoing monitoring are applied adequately. 

Read more on PEPs from FCA

Consultation on AI in FS 

The European Commission (the Commission) is consulting on the use of AI in financial services to identify key use cases, benefits, barriers, and risks. The consultation supports the implementation of the AI Act, the EU’s first comprehensive AI regulation, which aims to ensure safety, protect rights, and promote AI investment and innovation.  

This Act complements existing financial regulations focusing on transparency, market integrity, investor protection, and financial stability. The consultation, open until 13 September 2024, seeks input from all financial services stakeholders, especially those developing or using AI.  

The questionnaire includes general questions, specific finance-related AI use cases, and the AI Act’s impact on finance. The consultation aims to inform the Commission on AI’s market impact and risks enhancing the effective application of AI regulations without creating redundant requirements that could hinder innovation. 

Read the consultation document from European Commission 

SRB to develop new expectations 

The Single Resolution Board (SRB) has recently issued a press release on its intention to develop new expectations on valuation capabilities. The work, part of the Single Resolution Mechanism’s Vision 2028 strategy, aims to ensure all resolution strategies can be immediately operational should a bank fail. 
The SRB will produce new expectations on valuation capabilities, including: 

• banks under its remit setting up permanent valuation data repositories
• an enhanced and streamlined SRB valuation data set taking current regulatory initiatives into account, and
• valuation playbooks. 

The SRB will launch a consultation on valuation capabilities expectations to gather views from the industry and other stakeholders on the approach in 2025.   

Read more on SRB developing new expectations on valuation capabilities

Updated guide on climate-related disclosure for central banks 

Recently, the Network for Greening the Financial System (NGFS) published the second edition of its “Guide on climate-related financial disclosure for central banks”. This updated guide builds on the 2021 edition, incorporating the latest developments and experiences from NGFS members. It includes a new chapter on metrics and targets, aligning with the Task Force on Climate-related Financial Disclosures (TCFD) framework. 

The guide introduces specific recommendations for central banks. For governance, it advises aligning climate-related goals with legal mandates and detailing governance structures for areas like monetary policy and financial stability/supervision. In strategy, it highlights adapting operations to manage climate-related risks, including changes to operational frameworks and cooperation with external entities. In risk management, it provides examples of climate-related risks unique to central banks. For metrics and targets, it recommends disclosing metrics describing adjustments to monetary policy and financial regulation for climate-related reasons. 

Looking ahead, the NGFS plans to explore the inclusion of an addendum on nature-related disclosures, which may be particularly relevant for the metrics and targets chapter. 

Read the guide on climate-related disclosure for central banks