Welcome to our weekly round-up for UK financial services regulation. Gavin Stewart summarises the key announcements and developments. Subscribe to receive our updates in your inbox every week.
This week's newsletter includes contrasting examples of regulation in practice. PRA stress tests and the FCA’s Dear CEO letter about misleading adverts are explicitly preventative, while the FCA speech on innovation and the EIOPA policy process around smart insurance contracts are looking for ways to make the markets work better. Both approaches are core elements of modern regulatory practice, though neither is entirely without risk.
Stress tests are now, rightly, a fundamental part of the regulatory toolkit, but it's easy to forget the amount of subjective judgement involved in their design and evaluation, and Dear CEO letters work best when used in tandem with an effective supervisory monitoring programme. Meanwhile, as the financial crisis demonstrated, not all innovation is good and, as a minimum, regulators need to build the expertise to understand it properly and manage any risks accordingly.
None of these are new challenges, but it would be wrong to forget or underestimate them, especially as the new Financial Services Bill heralds the move into the next phase of UK regulation.
IN THIS WEEK'S UPDATE
PRA launches insurance stress tests
The PRA has written to insurance sector CEOs launching its biennial Insurance Stress Test (IST). The exercise will involve a number of the largest life and general insurers, and aims to:
assess the sector’s resilience to “severe but plausible” shocks
guide supervisory activity
enhance the PRA’s and firms’ abilities to respond to future financial shocks.
Alongside the Dear CEO letter, the PRA has also published a web page containing the technical instructions and templates for completion of the IST.
The deadline for submission is 28 September 2022. The PRA will offer roundtable discussions of the IST on 18 July 2022 (general insurers) and 20 July 2022 (life insurers). Firms wishing to take part should contact the PRA by 20 June 2022.
In his recent speech to the Chartered Institute for Securities and Investment (CISI), Nikhil Rathi, Chief Executive of the FCA, spoke about the lessons learned in the last 30 years. Highlights included:
Resilience and standards – economic and political pressures remain, but the UK is now more resilient
Transformation and digital challenges – there are vast potential benefits of increased digitalisation
EIOPA (the European Insurance and Occupational Pension Authority) has published a feedback statement on blockchain and smart contracts in insurance. It contains high level summaries of the responses received from industry, national, and European industry associations, technology providers and academia, together with EIOPA reactions.
Overall, the feedback received is mostly positive and demonstrates blockchain’s potential as a technology that could benefit both customers and the industry. The responses discussed associated risks with blockchain, most notably cyber and operational IT risks, and suggested that going forward the key focus should be on training staff on IT and digitalisation issues.
EIOPA will consider this feedback with its ongoing and future work on digitalisation. Based on the feedback statement, EIOPA stated that the proposed follow-up work seems to remain “generally valid”.
Following its Market Study in 2019, the FCA has recently published findings from its investment platforms costs and charges review.
The review focused on the experience of non-advised consumers in accessing charging information and whether the information available helped them to understand what they pay. The FCA found that they could generally identify and compare the main platform charges and the fund charges were signposted. Activity-based charges, however, were sometimes harder to locate. The FCA has usefully provided examples of good and bad practice.
Firms are encouraged to take the following steps:
Review the FCA’s findings and ensure compliance with the applicable Handbook rules
Become familiar with the FCA’s proposed Consumer Duty
Be aware of the FCA’s Consumer Investments Strategy
The FCA has published a Dear CEO letter about ensuring financial promotions are clear, fair, and not misleading. The letter was sent to almost 28,000 credit brokers and firms providing high-cost lending products - and may also be relevant to other firms involved in these activities.
The FCA expects to see an increased demand for credit, including short-term credit, as a result of the cost-of-living crisis. It's therefore keeping the consumer credit sector under review to ensure that the demand for credit doesn't result in unaffordable and unsustainable lending.
Firms are encouraged to consider the following:
ensure any issued or approved financial promotions currently in use comply with CONC 3
review internal processes and systems and controls for financial promotions
Board engagement to consider the matters raised.
The letter makes reference to the introduction of new Consumer Duty, but also clarifies that the FCA will act now to improve consumer outcomes.