FIN Live Quarterly Update: Reconnecting the UK financial framework in a post-Brexit world and other regulatory changes

We recently hosted our quarterly FIN Live event, hosted by Emma Radmore, Legal Director and Counsel for developing the practice for financial institutions, joined by Paul Armstrong, Managing Associate on our Technology team, and Lucy Hadrill, Counsel, and Duncan Scott , Associate of our finance team, joined services regulatory team.

You can listen to it again here or share it with colleagues.

Several hot topics were addressed at the event including Financial Services and Markets Act, operational resilience and the role of critical third parties, excise tax and new FCA requirements for companies with appointed representatives.

The speakers provided attendees with clear recommendations on what companies should do now to prepare for and comply with upcoming changes.

The Financial Services and Markets Act

The Financial Services and Markets Act (the Act) was tabled in Parliament before the summer recess and represented a major milestone in the implementation of the future post-Brexit regulatory framework and in putting in place the mechanisms needed to change UK laws. While complex, the repeal and replacement of previously introduced legislation presents a unique opportunity to make these laws work in the UK financial markets and to clarify and update these laws accordingly. Whilst some onshore legislation has primarily been heavily influenced by the UK, certain others, notably some of the Solvency II regime requirements for insurers, have been widely criticized and amended as soon as possible.

UK Finance described the introduction of the law as “a unique opportunity to improve regulation, improve consumer protection and create a more competitive financial services sector”. The scope of the changes is broad and far-reaching across the UK financial services sector, as detailed in our recent article.

One theme that we expect to return is how the UK’s financial framework can be ‘reconnected’ in a post-Brexit world and whether the supportive framework goes far enough to accommodate the UK’s new self-sufficient economy to make future-proof. Emma Radmore says: “As the UK continues the lengthy post-decoupling process from the EU, the Act and related initiatives set the framework to ensure that UK financial markets and the institutions operating within them can continue to function and compete at international level , with an appropriate regulatory structure”.

But the bill isn’t just about getting Brexit done and adapting Britain’s regulatory framework to the country’s needs. It is also about strengthening regulation in other areas and making it future-proof, as well as taking advantage of the opportunities for innovative technologies in the industry. Examples Emma gave were the proposals to regulate activities related to “digital settlement assets” and to ensure continued access to cash.

The bill is currently being debated in the Public Bill Committee. The committee is due to complete its debate by November 3 and we expect a report soon after, along with a revised version of the bill, after which we will host another webinar to discuss the changes.

We are tracking the changes to the invoice which you can keep up to date on FIN and in our dedicated tracker article on our re:connect hub.

Operational Resilience: Critical Third Parties

Another focus of the bill is a process to create new regulatory or oversight regimes, such as for “critical third parties,” which Paul Armstrong covered.

Paul highlighted the continued concern of regulators over the reliance of regulated entities and financial market infrastructure providers on non-regulated entities for the delivery of critical services. While regulated entities themselves are already subject to stringent outsourcing requirements for key functions, there is now a suggestion that even the largest providers of these services should be subject to some form of oversight.

The bill proposes this framework, but regulators are already considering designating critical third parties.

HM Treasury will have the power to make the decision as to who is a critical third party. The proposed conditions mean that only a very small number of providers – those who pose the greatest systemic risk if they fail – are likely to be identified – ICT framework providers are the obvious targets.

Paul emphasizes that “in reality, the regulatory scrutiny that will be in place is unlikely to be anything that these designated providers will worry about as long as they play by the rules by adhering to the minimum standards set.”

What should companies do now?

Organizations that believe they could be classified as critical third parties should start planning how they would meet the proposed requirements. Regulated entities using critical third parties that are likely to be named could consider this likely status in operational resiliency discussions with providers under existing or currently negotiated agreements.

You can read more about critical third parties, proposed requirements, and a timeline for this process on our Reconnect hub.

Consumer Duty Update

Lucy Hadrill provided an update on Consumer Duty’s and FCA’s expectations for the process and reminded companies that October 31 is the deadline for implementation plans.

Lucy explained to participants: “There is no one-size-fits-all approach to implementation as the application of the duty depends on the company’s business and its structure and the way compliance is assessed is based on the principles of reasonableness and proportionality. It is fundamental that companies in all relevant areas of the business firmly embed an understanding of the need to deliver good outcomes for retail customers and that this is about more than treating customers fairly (TCF) and being clear with the customer to communicate.”

For companies that haven’t started the process yet, Lucy outlines the next key steps:

• Appoint someone to oversee the implementation plan
• Appoint a project team. For example, while this may be driven by compliance, risk or legal, ultimate responsibility rests with senior management, so one or more senior managers should be given specific responsibility for ensuring implementation
• The project team should consist of the senior managers of each relevant business unit.

Lucy added, “At this point, the implementation plan should contain enough detail to allow for effective board challenge and review, but not confirm line by line who is doing what, as this will change and evolve over time.”

Lucy also provided some useful pointers on how companies should plan and conduct their implementation process.

What should companies do now?

All companies should now have completed or be about to complete what they need to do before the end of October, and their focus should be on putting their plans into practice.

New FCA Requirements for Firms with Appointed Agents (ARs)

The last discussion point was led by Duncan Scott, who examined the changes to the requirements for firms with appointed representatives (ARs) and the changes firms need to make to ensure their current AR practices are in line with FCA expectations.

Duncan said: “The key changes relate to the requirement for greater due diligence on ARs, both in onboarding and ongoing management. There will be a greater need to review AR’s business model and governance alongside changes to annual reporting requirements. All AR dates must be notified to the FCA at least 30 calendar days before they become effective and companies that intend to act as a network hosting company must notify the FCA of their plans to do so.”

What should companies focus on now?

Duncan advised, “Companies that act as AR sponsors should focus on conducting a gap analysis of their current onboarding activities and monitoring policies and procedures to confirm that AR activities do not create an unreasonable risk of harm to Consumers or who maintain market integrity, their own systems and controls are appropriate and audit AR agreements. The AR agreement must provide the principal with the right to reasonable MI and reasonable termination rights.” Principal firms also need to prepare for the FCA’s increased reporting requirements and the need for annual management confirmation that the firm’s systems and controls are adequate.

The new FCA rules come into effect on December 8, 2022. However, Duncan also pointed out that HM Treasury had published a separate consultation on how the AR regime would work, but has not yet published any feedback or further proposed changes.