The Model Office Blog

As we embark on 2024, the UK financial landscape is poised for transformation, with the Financial Conduct Authority (FCA) leading the way. In this blog post, we'll delve into key regulatory topics proposed by the FCA for the year ahead. For an FCA view on their regulatory pipeline, you can view their Regulatory Initiatives Grid here.

The good news is, Model Office AI RegTech has the FCA handbook embedded into its platforms, so all relevant issues covered are included in our Governance, Risk and Compliance audit software at the click of a button.

Edinburgh Reforms:

Published in December 2022, the Edinburgh Reforms (ERs) are collaborative efforts between the Scottish and UK governments to bring about wide-ranging regulatory reforms and changes in financial services post BREXIT. The following issues standout;

• The new Designated Activities Regime (DAR) is likely to be used to facilitate some of the ER reforms, with HMT indicating it will use DAR for new securitisation, prospectus and retail disclosure regimes
• With the Financial Services and Markets Act (FSMA) receiving Royal Assent in ’23, both the government and regulators will now enact ER initiatives.
• One key strategy is ‘ringfencing’, consultation on secondary legislation and implement reforms with a policy paper due from HMT Q1 ’24 and PRA Q2 ’24.

Smarter regulatory framework

The EU-UK Financial Regulatory Forum was held in October ’23 following the signing of the UK-EU Memorandum of Understanding on Financial Services Cooperation in June ’23. Subsequent meetings diarised for ’24 will focus on:

• UK equivalence determinations
• Regulatory divergence as set out on the HMT ’23 paper ’Building a Smarter Financial Services Regulatory Framework for the UK’

Strengthening Consumer Protection across the retail investment advice (RIA) sector:

A strong focus on reinforcing transparency, fairness, and accountability in financial products and services. Expectations for clear communication of terms, increased disclosure, and measures to prevent mis-selling. Key issues for ’24 are;

• With PS22/10, strengthening our financial promotion rules for high risk investments and firms approving financial promotions, The FCA’s new regulatory gateway for firms approving financial promotions (FinProms). This comes into force 7^th February ’24 and brings the requirement for firms wishing to authorise FinProms needing to submit their application prior to 6^th February ’24. Also, HMT is introducing FinProm changes to high-net-worth individuals (HNWI) and self-certified sophisticated investors as below;
  • The FCA focus on promoting inclusive economic growth and resilience in the financial sector, means more consultations on the new regime for public offers and admissions to trading with draft rules expected Q1 ’24. This increases HMWI exemption from £100K to £170K or net assets of at least £250K to £430K. For self-certified investors, the requirement to be a director of a company with turnover at least £1M has increased to £1.6M along with made investment in an unlisted company in last 2 years or been a member of a network syndicate of angel investors for at least 6 months and works in past 2 years in a professional capacity in the private equity sector of provision of finance for SMEs.
• The all-encompassing Consumer Duty will start to apply for closed products and services from 31^st July ’24along with the mandatory need for firms to provide a board report on implementation and validation of the Duty’s directives which includes evidencing good client outcomes, data and monitoring, governance and internal assessments.

Also, by 30^th April ’24, manufacturers must have completed all the reviews necessary to meet the outcome rules for their existing open products and services, which they should share with distributors to meet their obligations under the Consumer Duty and identify where changes need to be made Model Office new automated strategic and audit downloadable report will support this area.

• Allied with the Consumer Duty and FinProm, the treatment of consumers in vulnerable circumstances is a key FCA focus for ’24 particularly around ‘finfluencers’ and online consumer harm. Also, complaints and root causes will be one to watch with Financial Ombudsmen (FOS) findings and the FCA new data driven and rigorous supervision strategy that will prioritise serious breaches, ask for evidence across business registers, governance and compliance activities and consumer duty implementation reports.
• 20^th March ’24 sees the recent FCA consultation CP23/24 on Personal Investment Firms (PIFs) to set aside capital for potential redress liabilities closing. This directive wants to address the FCA concerns that those PIFs causing consumer harm, are accountable and the Financial Services Compensation Regime (FSCR) is relieved of significant redress liabilities all falling their way. The FCA’s Dear CEO letter and CP23/24 reminded firms they should seek to avoid potential redress liabilities; indeed the Consumer Duty’s cross cutting rules (Foreseeable Harm in particular) provides a ‘double-lock’ directive here. A policy statement is expected Q1 ’24 with rules in force Q1 ’25.
• The UK Retail Disclosure Framework is expected in ’24 and will replace the onshore Packaged Retail and Insurance based Products (PRIIPs) regulation with new disclosure rules for consumer composite investments (CCIs)
  • Undertakings for the Collective Investment in Transferable Securities (UCITS) are exempted from producing PRIIPS key information documents will be brought into the new UK disclosure regime. This ensure disclosure is aligned across products enabling better consumer informed decisions. A consultation paper is due in’24.
• Consumer finance is due an overhaul, with the ’23 consultation on reforming the Consumer Credit Act (CCA) ’74. The government plan to move the CCA into the FSMA ’00 model and thus into the FCA handbook. This supports the new FCA good outcomes strategy.
• The Tailored Support Guidance (TSG) is likely to be withdrawn, with TSG aspects incorporated into Consumer Credit (CONC), Mortgaged and Home Finance Conduct of Business (MCOB) sourcebook.
• CP23/13Strengthening protection or borrowers in financial difficulty: Consumer credit and mortgages, is closed and rules are expected Q1 ’24.
• Regarding the mortgage market, buy now pay later (BNPL) will see a review on agreements offered by third-party lenders covering A60F(2) agreements offered by third party lenders. This effectively brings BNPL into the regulatory arena. Also firms will need to remain focused on the FCA good outcomes for later life mortgage borrowers in ‘24
• Finally, but not least, The FCA advice boundary review is well underway with DP23/5 open for feedback until 28th February 2024. This may well see a real change to the approach to information/guidance/advice conundrum and offer innovative and far reaching services for the vast majority of consumers who do not engage in financial planning. 

Asset management

The FCA will be looking at improving the UK regime for asset management with three main priorities for reform in this area,

• making the regime for alternative fund managers more proportionate.
• Updating the Alternative Investment Fund Managers Directive
• Support technological innovation, including fund tokenisation, with a blueprint already now available through the Technology Working Group (TWG)

Other areas the FCA are interested in this year are;

• Overseas Funds Regime (OFR) and integrating this into the FCA handbook which consultation closes 12^thFebruary ’24
• Money Market Funds (MMFs) will come under the spotlight in ’24 with the FCA launching a consultation (CP23/28) to update the MMFs regime which is open until 8^th March ’24

Regarding Crypto-assets; with the US Securities and Exchange Commission (SEC) approving the first spot BitCoin exchange traded funds (ETFs) this marks a potential introduction of digital currencies into mainstream asset management funds and financial services in general. It's a watch this space moment!

Pensions

Pension transfers and the British Steel Pension Scheme and thematic review of retirement income advice will be key strategies in 2024;

• The FCA have published their British Steel Pension Scheme (BSPS): Tools for firms post their November ’22 Policy statement covering the redress scheme. This initiative will continue and subject to scrutiny under CONRED 4.8
• A key concern for the FCA is advice, income drawdown and advice fees in retirement and assessing the quality of outcomes consumers are gaining in line with the Consumer Duty and cost of living crises. The FCA are expected to publish their final report in Q1 ‘24

Focus on Market Integrity and Fair Competition:

Reinforcement of market integrity through regulations targeting market abuse and manipulative practices. Stricter oversight and surveillance measures emphasizing fair competition and market transparency. The Wholesale Markets Review is on-going with the FCA CP23/27 focused on reforming the commodity derivatives regulatory framework including position limits, exemptions, position management controls, the reporting requirements and an ancillary activities test.

• The Bond and Derivatives consultation (CP23/32) seeks to strengthen transparency in this market in ’24
• Payments to data providers will be scrutinised this year with a focus on the transparency regime and relevant changes required
• Derivates reporting requirements will come into force 30^th September ’24 with the FCA stipulating in PS23/2 it would provide further clarity on how the rules are to be implemented.

Fintech Innovation and digital assets oversight:

 Introduction of regulations to balance fintech innovation with effective risk management.

Guidelines to foster responsible innovation in emerging technologies, such as blockchain, artificial intelligence, and digital assets.

• HMT published final proposals on the UK’s future financial services regulatory regime for crypto assets in October ’23. This covered the fact crypto assets are to become expansively regulated with secondary legislation to be published in ‘24
• Q2 ’24 should see the FCA and BoE produce consultation papers on the stable coins regime. A focus will also be on unregistered crypto ATMs (purchasing Bitcoin/cryptocurrencies by cash or credit card) They are judged as a crypto asset exchange provider and thus must be FCA registered and comply with AML regulations.
• Artificial Intelligence (AI) saw a government paper on regulation facilitating a safe and innovate use of AI with a joint BoE, FCA, PRA feedback statement (FS2/23) focused on how they are considering, clarifying, designing and implementing regulatory proposals in ’24
• The Data Protection and Digital Information Bill due to be enforced Q1 ’24 will bring an Introduction of new regulations to strengthen consumer data protection measures. This will Increase responsibilities for financial institutions in safeguarding customer information with stringent guidelines on data storage, encryption, and breach reporting, with some changes as follows;
  • Providing a more limited definition of personal data so that the focus is on the data controller or processor’s specific knowledge and not the wider public
  • Changing the threshold for charging a fee to deal with data subject access requests from ‘manifestly unfounded or excessive’ requests to ‘vexatious or excessive’ requests
  • Introducing a new legal basis for processing where processing is ‘necessary for the purpose of a recognised legitimate interest’ with a list of recognised legitimate interests being included in the Bill
  • Removing the need to appoint a Data Protection Officer in some cases

Climate Change and Sustainable Finance (ESG):

 Emphasis on integrating environmental, social, and governance (ESG) considerations into financial decision-making. Introduction of regulations for enhanced disclosure on ESG initiatives and strategies.

• PS23/16 confirmed the FCA final rules and guidance on sustainability disclosure requirements (SDR) and investment labels. The anti-greenwashing rule takes no prisoners applying to all regulated firms from 31^stMay ‘24
• Labels with disclosures can be used by firms from 31^st July ’24, and the naming and marketing rules apply from 2^nd December ’24.
• The FCA will also issue a consultant early this year regarding their approach on labels disclosures and naming and marketing rules to UK portfolio management. Pensions, and other investment products will be looked at, along with updating product disclosure requirements once the UK Green Taxonomy is in use plus product and entity level disclosure requirements.in line with international sustainability standard board standards (ISSB). HMT should also be expected to extent SDR to overseas funds.
• The FCA are expected to issue a ISSB consultation paper on TCFD aligned disclosure rules for listed companies to refer to endorsed ISSB standards.
• Diversity and Inclusion will also be looked at in relation to ESG with policy statements expected from the FCA and PRA.
• The Advertising Standards Authority, Competition and Markets Authority and Financial Reporting Council will also be very active in the ESG arena this year with good governance seen as central to a healthy culture and positive competence and conduct.

Firm authorisations, change in control and short selling

Although the FCA authorisation process is working well key areas such as payment services and e-money authorisations will be under scrutiny in ’24.

• The FCA and PRA are currently working on assessment of acquisitions and increases in control where they are replacing the European Supervisory Authorities non-binding guideline with new supervisory statement and guidance which has a deadline of 23rd February ’24.
• The Short Selling (notification threshold) Regulations 2023 amend the onshored EU regulation on short selling and credit default swaps increasing the notification threshold for reporting of net short positions from 0.1% to 0.2% of total issued share capital. This comes into force 5^th February ’24.

Operational Resilience (OR) Standards:

 Implementation of regulations to enhance the operational resilience of financial institutions. Expectations for robust business continuity planning, cybersecurity measures, and stress testing.

• March ’22 saw in-scope firms come under the new OR regime with mapping and testing period until 31^stMarch ’25 to show firms can stay within impact tolerances for all important business services (IBS)
• December ’23 saw FCA, PRA and BoE launch a joint consultation (PRA CP26/23 FCA CP23/30) on OR and critical third parties (CTPs) This closes 15^th March ’24. This is a hot area for regulators and in-scope firms need to ensure outsourcing and cybersecurity governance arrangements are well embedded and tested this year.
• Digital Securities Sandbox (DSS) is the first financial market infrastructure sandbox to be granted under the FSMA ’23 and much more will be revealed in ’24.

Financial Crime and Strengthening Anti-Money Laundering (AML) Controls:

 Introduction of stricter AML regulations to address evolving money laundering risks. Anticipation of enhanced due diligence requirements, improved information sharing mechanisms, and increased focus on detecting and preventing financial crimes.

• The Economic Crime and Corporate Transparency Act (ECCTA) gained royal assent in ’23, this introduces a new corporate offence of failing to prevent fraud for in-scope large firms. The test for corporate criminal liability will be reformed along with Companies House UK companies registry. A good job then Model Office have now introduced our new Companies House streaming API integration to provide real time alerts for such risks!
• Authorised Push Payment (APP) fraud will also come under the FCA spotlight with a ’23 report key findings focusing on APP fraud mitigation.
• AML and Crypto assets are now also in the frame for ’24 with new technologies being utilised by cyber-criminals. Crypto asset firms will need to evidence how they collect, verify and share information regarding transfers known as the ‘Travel Rule’.
• Disrupting money mule activity will mean the FCA will focus on a proportionate and risk-based approach to a firm’s systems and controls against such activity.
• Politically Exposed Persons (PEPs) will be reviewed mid ’24 with strong emphasis on improving any identified deficiencies
• The Criminal Justice Bill introduced in November ’23 and reforms the AML focused confiscation regime in part 2 of the Proceeds of Crime Act ’02 and creates a suspended accounts scheme.
• Preventing detecting and punishing market abuse with enforcement will also be a key FCSA focus for ’24.
• Finally sanctions will again be front and centre for the FCAS this year, particularly with the continuing European and Middle East wars this plays into the ongoing FCA focus on systems and controls relating to sanctions compliance across a number for select firms across sectors. There is also a new unit, the Office of Trade Sanctions Implementation to clampdown on firms seeking to evade sanctions

The FCA focus on the Investment Firms Prudential Regime (IFPR) gave 2 papers in Q4 ’23 a final report on IFPR implementation observations and the latest IFPR newsletter. Of the 10 steps, it looks like the FCA will be particularly concerned with

• Publishing the remuneration structure and amounts of the three highest earners
• Establishing risk and remuneration committees
• Comply with the “pay-out process”
• Liquidity requirements

 Summary:

As the UK Financial Conduct Authority introduces new regulations in 2024, the financial industry faces both challenges and opportunities. Proactive adaptation, prioritisation of consumer protection, embrace of sustainable finance, and ensuring operational resilience will position firms as leaders in a dynamic and evolving financial landscape. Thoughtful navigation of these incoming regulations can foster innovation, instil trust, and contribute to a robust and resilient financial ecosystem.

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