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Regulatory change, pressure on cost management and growth, and increased investment in technology and data are dominating the financial services industry.
Welcome to our weekly round-up for UK financial services regulation. Paul Staples summarises the key announcements and developments. Be sure to subscribe to receive our updates in your inbox every week.
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Growth seems likely to take centre stage when the new government delivers its first budget on 30 October. Our leading item this week mirrors a similar theme as UK regulators underline their own focus on growth.
Innovation and growth is celebrated in our second item that acknowledges the success of the Regulatory Sandbox since its inception. In our third item, the Treasury gives indications about reforms to the bank ringfencing regime, focusing on proportionality and enhancing growth.
We wrap up this week with latest developments from the Financial Ombudsman Service (FOS) and a recent consultation on changes to the Large Exposures Framework.
Regulators' focus on growth
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are committed to their new secondary objective of enhancing UK growth and competitiveness. In recent speeches, the respective Chief Executive Officers, Nikhil Rathi and Sam Woods, discuss the importance of this objective, address market concerns, and outline the steps taken by both regulators. Common themes include improving operational efficiency, transparency, and technological investment.
The FCA highlighted its improvements in processing times (notably in the approval of new Senior Managers through the Senior Managers and Certification Regime), digitisation, and enforcement actions, while calling for collaboration with its innovation services. The PRA referenced measures it has adopted such as Basel 3.1 standards, the Solvency UK framework, the Strong and Simple framework, revamping the PRA rulebook, and scrapping the bankers bonus cap.
Both regulators aim to balance their primary objectives with the growth mandate by leveraging technology and fostering innovation to enhance the UK’s financial competitiveness.
The FCA recently celebrated the 10-year anniversary of its forward-looking initiative, FCA Innovation. The initiative has supported nearly 1000 firms in developing and testing their innovative ideas, from promoting financial inclusion to experimenting with fund tokenisation.
FCA Innovation has evolved with the market, offering a range of services to support firms throughout the innovation lifecycle, including TechSprints, Digital Sandbox testing, Innovation Pathways, Regulatory Sandbox, and Early and High Growth Oversight. This approach has inspired regulators worldwide and led to the establishment of the Global Financial Innovation Network (GFIN).
Looking ahead, FCA Innovation is adapting to technological advancements by launching their AI Lab, and remains committed to addressing industry challenges and fostering innovation. As part this milestone, the regulator has released a report which provides comprehensive data and case studies showcasing the support offered by FCA Innovation and its vision for the future.
Tulip Siddiq, Economic Secretary to the Treasury, recently made a statement addressing upcoming reforms to the UK’s bank ring-fencing regime. The reforms stem from Sir Keith Skeoch’s 2022 review of ring-fencing and proprietary trading which made recommendations to improve the effectiveness of the ring-fencing regime.
Key changes include:
exempting retail-focused banks from the ring-fencing requirements if their investment banking activity is under 10% of Tier 1 capital
increasing the primary deposit threshold for ring-fenced banks from £25 billion to £35 billion
introducing measures to encourage investment by ring-fenced banks in UK SMEs
introducing measures to ease associated compliance burdens
providing more flexibility for ring-fenced banks to carry out global operations.
These changes are designed to enhance growth, boost competition and maintain financial stability in the UK banking sector.
The FOS recently published an article detailing their handling of Authorised Push Payment (APP) fraud and other scams associated with authorised payments or withdrawals. The article shows how FOS deals with the following claims:
APP fraud, where individuals are persuaded to transfer money from their own account to the scammer
Scams involve other authorised payments, such as when scammers deceive individuals into making a card payment or withdrawing cash
Complaints against receiving banks from scam victims who believe the receiving bank should have detected fraud and taken further action to prevent it
Additionally, the article emphasised the detrimental impact of scams, highlighting the financial and emotional harm experienced by victims. It also outlined the benefits to firms of effective complaint handling systems, including their ability to repair relationships, build trust and confidence in financial services, and enhance customers' understanding of financial products.
The article serves as a reminder to firms about the importance of considering the Consumer Duty when handling complaints.
The PRA has published a consultation paper (CP) on its prudential framework for large exposures. This framework supplements the risk-weighted capital requirements, aiming to protect firms from large losses caused by the sudden default of a single counterparty or groups of connected counterparties.
The CP outlines the PRA’s proposals to implement the remaining Basel large exposures standards. These proposals include:
removing the possibility for firms to use internal model methods to calculate exposure values to securities financing transactions
introducing a mandatory substitution approach to calculate the effect of the use of credit risk mitigation techniques.
The PRA is also proposing a number of amendments to the large exposures framework. This includes removing the ability for firms to exceed large exposures limits for trading book exposures to third parties, and allowing firms to apply for higher large exposures limits to intragroup entities.
Responses to the consultation are due by 17 January 2025.
David Morrey and Ben Farmer discuss the impact of the general election on the financial services sector, such as the delays to the regulatory initiatives grid, the finance act, the alternative investment fund designation bill, and the FCA's proposals on naming and shaming.
