Financial Services Update - June 2021

Here is our financial services update for June covering all the major compliance and regulatory updates you should be aware of.

The Financial Services Act 2021

The Financial Services Act 2021 (Commencement No 1) Regulations 2021 have been published. This Act is one of the first steps for the UK’s financial services following Brexit, setting out a new regulatory framework. There are some significant changes, and individual provisions within the Act come into force in different timescales:

• 9th June 2021 – Section 3 (transfer of certain prudential regulation matters into PRA rules); section 4 (CRR Basel standards); section 5 (prudential regulation of credit institutions etc by PRA rules); Schedule 3 (prudential regulation of credit institutions etc)

• 26th June 2021 – section 7 (amendments of the Capital Requirements Regulation)

• 1st July 2021 – section 2 and Schedule 2 (legislative framework for prudential regulation of investment firms)

• 1 January 2022 – section 1, Schedule 1, and the remainder of Schedule 4 (amending of the UK CRR to end the application to most investment firms, and reflect amendments to be implemented through UK CRR rather than through PRA rules

The Act brings a new prudential regime for credit institutions and investment firms. The FCA is also required to consult about the level of care provided to consumers by authorised persons, and the current consultation on a potential ‘Consumer Duty’ is ongoing, with feedback requested by 31 July 2021.

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FCA quarterly consultation 32

The Financial Conduct Authority’s latest quarterly consultation was published in June.

The Regulator proposes changes to CONC 6.7.4R. Currently this rule requires firms providing credit card and retail revolving credit to allocate customer payments to the debt with the highest rate of interest first. But over the previous five years, the FCA have granted a number of firms a modification to offer customers a credit card feature known as an instalment plan, which allow customers to pay off eligible purchases made using their credit card over a fixed term, and for these plans to operate effectively, a partial reversal of the allocation requirements in CONC 6.7.4R is needed, since the instalment plan balance needs to be allocated to be paid first, even though the interest rate is lower than the interest rates on other types of transactions on the credit card.

To offer this feature, firms have had to obtain a modification to this rule in CONC to avoid breaching it, and the FCA now propose to amend CONC 6.7.4R to make it unnecessary for firms to apply for modifications to the rule, and to include new guidance which will set out examples where it would not be considered reasonable for a firm to conclude the instalment plan is likely to be in the customer’s best interests, plus examples of reasonable steps to take to ensure a customer can make an informed decision before taking out an instalment plan.

The deadline for comments is 2 August 2021.

Also proposed are minor changes to CONC relating to the FCA’s 24 May update to the statutory information sheets sent to customers in arrears and default under the Consumer Credit Act 1974.

The two new sheets – one for arrears, the other for default – will need to be used from 25 October 2021, which allows firms five months until implementation. Due to the use of the new sheets, CONC will need to be updated to require high-cost short-term lenders and peer-to-peer lending platforms to send information sheets to customers upon refinancing or arrears.

The changes will affect CONC 6.7.20R and CONC 7.175R(4) from 25 October 2021.

Handbook Notice no. 89

Following Consultation Paper 21/5, the FCA has updated the Training and Competence Sourcebook section 2.1 to make sure that retail investment advisers are ‘appropriately trained and qualified’, with rules 2.1.9 and 2.1.31 updated, and additions made to the appropriate qualifications tables in 4.1.1CG.

The instrument came into force on 25 June 2021.

Preventing claims management phoenixing

The FCA’s consultation on CMC Phoenixing has closed, with the FCA’s response expected later this year. Proposed rules are designed to prevent the practice where an individual from a wound-up financial services firm reappears in a claims management company and attempts to benefit from the former firm’s poor conduct by carrying on claims management activities against it. The Regulator has found at least 7% of the 250 CMCs it regulates have connections to former financial services firms.

The proposals include implementing a prohibiting on managing connected claims – any activity where the CMC has a ‘relevant connection’ with a claim, where any employee of the CMC was directly involved in, or related to someone who was involved in, managing the activity that is the subject of a claim. Firms would also be required to notify the FCA of any financial services activity in which an employee was directly involved in or responsible for managing, that could be the subject of a claim. Under this requirement, CMC firms would be required to attest annually to the accuracy of these notifications.

Regulatory Framework for Approval of Financial Promotions

HM Treasury has published their response to the July 2020 consultation ‘Regulatory Framework for Approval of Financial Promotions’. Under the Financial Services and Markets Act 2000, unauthorised persons – those who have not been approved by either the FCA or PRA to carry on a regulated activity – can only communicate financial promotions if they are approved by an authorised firm. However, the government is concerned as authorised firms are not subject to any specific assessment before they are able to approve financial promotions, and has identified potential risks that the approver firm may lack expertise or fail to undertake adequate due diligence, and there may be challenges in exercising appropriate regulatory oversight.

The Consultation proposed that FSMA should be amended to prevent authorised firms from approving financial promotions of unauthorised persons, unless the authorised firm had passed through a new regulatory gateway. Two gateways were proposed: option 1 would restrict the approval of financial promotions through the imposition of requirements by the FCA, and option 2 would specify that the approval of financial promotions is a regulated activity.

The consultation has confirmed that option 1 should be implemented, which will have the effect that all firms will be prohibited from approving financial promotions of unauthorised persons through the imposition of a requirement on their permission – the Financial Promotion Requirement. Firms will need to apply to the FCA to have the prohibition removed either entirely or partially, through a variation of requirement.

The FCA will consult on proposals for implementation in due course.