Your guide to this week in regulation

Gavin Stewart Gavin Stewart

Welcome to our weekly round-up for UK financial services regulation. Gavin Stewart summarises the key announcements and developments. Be sure to subscribe to receive our updates in your inbox every week.

While this summer holiday season will be anything but typical, one familiar July feature is the traditional high volume of publications just before the regulator heads off on their staycation.

This week several important releases occurred, including guidance to investment funds to prevent 'greenwashing', and the consultation on the rewrite of the heavily criticised Packaged Retail Investment and Insurance-based Products (PRIIPs) disclosure rules.

Both of these are examples of the Financial Conduct Authority (FCA) steering its own course away from the EU rules, as is the Bank of England (BoE) proposing to tweak the rules regarding the composition of capital required to be held in order to meet the costs of resolving a bank.

We also cover below further guidance on the treatment of vulnerable customers, and market study work on 'mortgage prisoners', both topics we expect to be a significant future focus for supervisory activity and potential policy change.


Guiding principles on ESG and sustainable investment funds

The FCA has published a letter to the chairs of authorised fund managers (AFM) setting out its expectations on the design, delivery, and disclosure of environmental, social and governance (ESG) and sustainable investment funds.

The letter includes a set of guiding principles to ensure that any ESG-related claims are clear and not misleading, both at the time of application and on an ongoing basis, so that consumers can make informed choices. This guidance follows a number of authorisation applications that have been of poor quality and fallen below the FCA's expectations.

The guiding principles are relevant where an AFM pursues a responsible or sustainable investment strategy and claims to pursue sustainability characteristics, themes, or outcomes.

The overarching principle is consistency. A fund's ESG or sustainability focus should be reflected consistently in its design, delivery, and disclosure, particularly in its name, stated objectives, documented investment policy and strategy, and holdings.

FCA "dear chair" letter on authorised ESG and sustainable investment funds →

FAQs on fair treatment of vulnerable consumers

The FCA has published answers to frequently asked questions in relation to its finalised guidance for firms on the fair treatment of vulnerable customer published in February. The FCA reiterates that it wants to drive improvements in the way firms treat consumers with vulnerable characteristics, which it hopes will bring about a practical shift in firms' actions and behaviours. It stops short of prescribing exactly how to do this.

The questions themselves show that many firms have some way to go to meet expectations. In our opinion, it is worth firms challenging themselves on how mature their approach to vulnerability is, and whether they have looked holistically at every aspect of how it treats its customers.

A key theme in the FAQs is that it is up to firms to determine how to comply; not for the FCA to specify this. It highlights its timetable to evaluate firms' progress in 2023/24 and that firms falling short of expectations can expect greater supervisory attention or enforcement action.

Guidance for the fair treatment of vulnerable customers FAQs →

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FCA publishes terms of reference for 'mortgage prisoners'

The FCA has published the terms of reference setting out the steps it intends to take in its review of 'mortgage prisoners'. In summary, the review will cover:

Data review:

The FCA will review and update its data, using its product sales and credit reference agency data and test-difference assumptions, in order to consider the demographic and loan characteristics

Interventions review:

The FCA will review data on the take-up of resources and support provided by the Money and Pensions Service, FCA product sales data and mortgage brokers, as well as engage with industry stakeholders, in order to consider the effect of its recent interventions to remove barriers to switching.

The exploratory work has already begun, and the review and analysis are intended to take place between July and October this year, with a report to be submitted to the treasury before being presented to parliament by the end of November 2021.

Mortgage prisoners review terms of reference →

BoE consultation paper on framework for setting MREL

The Bank of England (BoE) has published a consultation paper on proposed changes to its minimum requirement for own funds and eligible liabilities (MREL) framework. The consultation paper includes the BoE's feedback to the points raised following its discussion paper on the same topic, which was published in December 2020.

The BoE's proposals include:

  • changes to the resolution strategy thresholds and the calibration of MREL
  • amendments to the BoE's MREL statement of policy to require that non-CET1 own funds instruments issued from non-resolution entity UK subsidiaries to holders outside the group should no longer be eligible to count towards external or internal MREL
  • leaving its policy on intragroup MREL distribution, including MREL in the context of groups and internal MREL, unchanged.

The BoE has asked for responses by 1 October 2021, with policy changes due to be made by the end of the year.

The Bank of England’s review of its approach to setting a MREL →

FCA consults on post-Brexit divergence for PRIIPs regulation

The FCA has released a consultation paper setting out proposals to change disclosure documents provided to retail investors under the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation (CP21/23).

CP21/23 contains details on the FCA's proposals intended to address the areas of PRIIPs that potentially pose the greatest harm to customers. The FCA proposes to:

  • refine the scope of the PRIIPs regulation making it clearer that some common features of these instruments do not make them into PRIIPs
  • offer guidance on PRIIPs being 'made available' to retail investors
  • amend the PRIIPs regulatory technical standards (RTS) to require written explanation on performance in the key information document (KID)
  • eliminate the potential for PRIIPs being assigned an unsuitably low summary risk indicator in the KID
  • investigate concerns over applications of the slippage methodology when calculating transaction costs.

Comments are invited until 30 September 2021. The FCA plans to provide detail of the final rules and amend the PRIIPs RTS by the end of 2021, with any changes made coming into effect on 1 January 2022.

FCA consults post-Brexit divergence PRIIPs regulation →

To discuss these or how any other regulations might impact your firm, get in touch.