FCA Updates – October 2021

  • Jane Stoakes is a managing director at Duff & Phelps.
    Jane Stoakes JaneStoakes
  • Peter Ray is a managing director at Duff & Phelps.
    Peter Ray PeterRay
  • Kroll
    Alex Lander AlexLander
  • Warren Radloff is a director in the London office at Duff & Phelp
    Warren Radloff WarrenRadloff
  • Amelie Snape Amelie Snape
  • Peter Timson Peter Timson
  • Vishan Singh Vishan Singh
  • Tom Bevan Tom Bevan
  • Kristian Sotiriou Kristian Sotiriou
  • Sascha Cordonnier Sascha Cordonnier
  • Sam Smith Sam Smith

Greening the Financial System — The Government's Roadmap

Jane Stoakes

The Chancellor Rishi Sunak published an updated roadmap for new standards for environmental reporting called SDR. He called on the investment community to help cement the UK’s status as the best place in the world for green investment.

SDR builds on Task Force on Climate-related Financial Disclosures (TCFD) implementation and covers three types of disclosures:

  • Corporate disclosure
  • Asset manager and asset owner disclosure
  • Investment product disclosure

SDR will be a fully integrated regime that will use the same framework and metric across the economy to ensure a clear and direct link from investors through the financial system to the businesses they are invested in and their relationship with the environment. 

In summary, the roadmap covers the following areas:

  • The International Financial Reporting Standards Foundation is establishing an International Sustainability Standards Board to develop global baseline reporting standards for sustainability, building on TCFD’s and other voluntary organizations' work.
  • Under SDR, asset managers/owners and investment products will be required to do the following:
  • To substantiate environmental, social and governance (ESG) claims they make in a way that is comparable between products and is accessible to clients and consumers
  • To disclose whether and how they take ESG-related matters into account in their governance arrangements and in their investment policies and strategies
  • The UK’s green taxonomy requires sustainable investments to satisfy minimum safeguards relating to basic good business practice. SDR will require disclosure against these minimum safeguards and any related metrics.
  • The FCA is working closely with the Treasury on the development of a sustainable investment labelling regime.
  • SDR will require firms to make disclosures on their transition plans to support their commitment to reach net-zero emissions.
  • The government and regulators are considering bringing ESG data and ratings providers into scope of FCA authorisation and regulation.
  • Why investor stewardship is important, the government and regulators’ action to support investment stewardship to date and expectations for the future.
  • How the UK government has made green finance an international priority, using its influential position to drive progress, particularly this year with the UK holding both the G7 presidency and hosting COP26.

 

FCA to Move Faster to Remove Unused Firm Permissions

Amelie Snape and Peter Ray

Following its recent “use it or lose it” exercise with firms, the FCA published draft guidance on its new power to remove firms’ regulatory permissions when they are no longer being used on 9 September 2021.

The new power, granted to the FCA via the Financial Services Act 2021, will shorten the process of removing firms’ unused permissions. The FCA will now be able to start the cancellation process by serving 14 days’ notice to a firm, after which the FCA will be able to vary or cancel a firm’s permissions after one month. Firms that haven’t used their permissions for 12 months or more are at risk of having them cancelled.
 
The FCA’s aim is to improve transparency to end consumers by presenting a clearer and more accurate picture of firms’ activities on the FCA’s public register. This comes as part of the FCA’s response to address issues raised by Dame Elizabeth Gloster’s review into the regulation of London Capital & Finance.

At a practical level, all FCA-regulated firms should already be confirming the accuracy of the details held on the FCA’s public financial services register on an annual basis and should always reassess their scope of permissions in light of any planned business developments or new product launches to ensure that their regulatory permissions remain appropriate. There can also be benefits to streamlining unnecessary permissions in terms of ongoing regulatory burden and capital requirements.

The consultation closed on 29 October 2021. 

The press release can be found here.

Modernizing the Listing Regime — Clare Cole Speech

Peter Timson and Peter Ray

The FCA Director of Market Oversight Clare Cole delivered a speech concerning a proposed new listing regime following the UK Listing Review chaired by Lord Hill. In it, she outlined how this is a unique time for the listing regime and primary markets and she put forward the case for change. 

Cole noted that large aspects of the listing regime have remained unchanged for decades and capital market activity can be disjointed and unclear to users, sometimes prohibiting high-quality issuers from listing in the UK.

Governance reforms should ensure that the listings regime leads the way in providing information and data to investors so that they can understand and challenge the quality of governance in companies they wish to invest in. Climate-related disclosure requirements and calls for more disclosure of diversity on company boards should enhance standards; however, these are outcomes-focused and rely on disclosure.
 
Cole further noted that HM Treasury will be reviewing the prospectus regime from the ground up alongside the FCA discussing the listing regime, and that the two projects go together—a modern listing regime needs a modern prospectus regime that is fit for the purposes of the UK economy.

To read the full speech, click here

FCA Speech on Seizing Opportunity, Challenges and Priorities

Vishan Singh and Matteo Basso

The FCA’s new CEO, Nikhil Rathi, delivered a speech on the challenges and priorities that the FCA is facing.

In his speech, Rathi reflected on how the FCA is now coming out of the extraordinary measures taken during the COVID-19 pandemic as well as in the aftermath of Brexit, and he outlined the FCA’s plans to:

  • Test its powers to the limit by applying a broader risk appetite, using criminal powers in more serious cases, and litigate more, where needed
  • Focus on international leadership by supporting capital raising in the UK, coordinating the London Interbank Offer Rate (LIBOR) transition with other regulators, cooperating with international counterparties on the transition to net-zero emissions and ESG and working with HM Treasury on the Wholesale Markets Review to create an open and transparent framework for international firms
  • Become both a data and financial regulator, working with partners towards the goal of achieving near-real-time compliance checks

Rathi concluded his speech by inviting an open and timely dialogue with the financial services sector and partnering with the FCA to seize future opportunities and navigate challenges.

Libor Update on Orderly Wind-down at the End of 2021

Tom Bevan and Alex Lander

The FCA confirmed that sterling, Japanese yen, Swiss franc and euro LIBOR panels are ceasing on 31 December 2021. 

To minimize disruption to legacy contracts that reference the one-, three- and six-month sterling and Japanese yen LIBOR settings, the regulator will require the LIBOR benchmark administrator to publish these settings using a “synthetic methodology,” which is based on term risk-free rates, for the duration of 2022. These six LIBOR settings will be available only for use in some legacy contracts; they are not for use in new business.

Intercontinental Exchange Benchmark Administration currently publishes 35 LIBOR settings that cover sterling, US dollar, Japanese yen, Swiss franc and euro. As set out in the regulator’s announcement earlier this year, publication of 24 of these settings will cease at the end of 2021. The FCA expects that five US dollar settings (overnight, and one-, three-, six- and twelve-month) will continue to be published based on the current “panel bank” LIBOR methodology, and on a representative basis, until the end of June 2023.

The FCA has published notices confirming its decisions to compel the continued publication of the six remaining sterling and Japanese yen LIBOR settings for a limited time post-year-end 2021, using a “synthetic methodology.” This is to help ensure an orderly wind-down.

For more information, please click here.

A Bank Fined £147 Million and Undertakes to the FCA to Forgive USD $200 Million of Debt

Kristian Sotiriou and Peter Ray

A Bank was fined over EUR 147 million by the FCA on 7 October, for financial crime due diligence failings relating to two Mozambican loans and a bond exchange in respect to government-sponsored projects. The loans arranged for the Republic of Mozambique were worth USD 1 billion. 

The Bank has also agreed to forgive USD 200 million of debt owed by the Republic of Mozambique as a result of these failings.

The Bank was aware that the risk of corruption of government officials was high, but between October 2012 and March 2016, the Bank failed to properly manage the risk of financial crime. There was an unsatisfactory level of challenge from the employees within the Bank in the face of important risk factors and warnings. 

It was also noted that the contractor that Mozambique engaged on the projects covertly paid significant bribes of over USD 50 million to the Bank’s deal team, including to two managing directors, as a way of securing the loans. 

The FCA fine is part of a USD 475 million global resolution agreement involving the US Department of Justice, the US Securities and Exchange Commission, and the Swiss Financial Market Supervisory Authority.

The Bank has agreed to resolve this case with the FCA, qualifying it for a 30% discount in the overall penalty. 

The link to the original article can be found here. The FCA final notice can be found here.

Bank Pleads Guilty in Criminal Proceedings

Sascha Cordonnier and Warren Radloff

One of Britain’s largest business banks pleaded guilty to criminal charges brought by the FCA under the 2007 Money Laundering Regulations. The FCA alleged the bank failed to monitor a client’s suspicious activity of depositing about EUR 365 million in its accounts over five years, EUR 264 million of which was cash. The bank accepted that it had failed to prevent the laundering through the accounts in breach of its requirements to ensure that it had adequate systems and controls to prevent money laundering. It has been reported in the press that the FCA would not strip the bank of any banking licenses nor act against any employees, but the bank faced a very large penalty.
 
The case has now been referred for sentencing.

Read the full article here

Charles Randall to Step Down as FCA and PSR Chair in Spring 2022

Vishan Singh and Warren Radloff

The FCA announced that Charles Randall plans to step down from his role as chair at both the FCA and the Payment Systems Regulator (PSR) in spring 2022. Randall believes that it is the right time for a new chairperson to carry on the “close and continuous oversight” of the FCA’s transformation program under CEO Nikhil Rathi.

In the press release, the regulator mentioned some successes during Randall’s stewardship, including:

  • Establishing a multiyear transformation to become a more proactive, data-led and forward-looking regulator
  • Successfully transitioning the regulator to a new executive team
  • Supported the UK’s departure from the EU with minimal disruption
  • Ensuring financial markets support the transition to a low-carbon economy
  • Improved protections to prevent payment scams

Chancellor Rishi Sunak, who will commence the process to appoint his successor, thanked Randall for his contribution. 

The full press release can be found here.

Joint Statement by the FCA, PRA, TPR and FRC on the Publication of Climate Change Adaptation Reports

Amelie Snape

The UK financial regulators announced on October 28 2021 that they had published their Climate Change Adaptation Reports, setting out how climate change affects their responsibilities and actions in tandem with the financial sector. The joint statement highlights the regulators’ focus on ensuring that climate change risks and opportunities are properly identified and managed as the UK transitions to a net-zero economy.

The FCA’s report identifies both retail investments and mortgages as areas where more needs to be done to mitigate climate change risk. The report also makes clear that climate change considerations will be integral to their policy choices, supervision and enforcement approaches going forward.

The Prudential Regulation Authority’s (PRA) report notes the tangible progress that firms have made against the supervisory expectations for managing climate-related financial risks that were set back in 2019. However, this progress hasn’t been universal across the industry, and some firms are significantly ahead of others. The PRA also highlights the importance of the relationship between climate change and the regulatory capital framework, specifically how firms’ regulatory returns help it monitor the financial risks arising from climate change.

The Pensions Regulator (TPR) will publish new guidance for schemes on assessing, managing and preparing to report on climate-related risks and opportunities. The TPR’s new code of practice will include climate change modules to support trustees in meeting their duties.

The full statement can be read here .

The CFRF Published Guides on Managing Climate-related Financial Risks

Sam Smith and Alex Lander

The FCA stated on 21 October 2021 that the Climate Financial Risk Forum (CFRF) has published a second round of guides to help financial firms manage climate-related financial risk, building on guides published in July 2020. Written by industry, for industry, the guides focus on risk management, scenario analysis, disclosure, innovation and climate data and metrics.
 
The CFRF, which has been running since March 2019, is chaired jointly by the Prudential Regulation Authority and the FCA, reflecting the increasing importance of climate change to their respective strategic objectives. The aim of the guides is to assist firms in managing climate-related financial risk, with the risk appetite statements, online scenario analysis tool and climate metrics dashboard having been deliberately designed to enable firms to overcome the significant challenges that they have encountered in these areas.

The five CFRF working groups have collectively published a total of 10 deliverables as part of the second round of guides, which are summarized below:

  • Risk Management Working Group (RMWG): Outputs have been designed to help firms, such as asset managers, produce and implement risk appetite statements that integrate climate-related financial risks. Additionally, the RMWG has produced a paper that summarizes a firm’s training needs for climate risks and opportunities as well as ideas for how they could be delivered.
  • Scenario Analysis Working Group (SAWG): The SAWG has produced practical examples on how firms can incorporate sector-specific points when developing an effective approach to scenario analysis. The SAWG will also publish a publicly available online scenario analysis tool in Q1 2022 that is designed for use by smaller firms who may not have the experience or resources to attempt independent analysis. 
  • Disclosure Working Group (DWG): The DWG has collated several case studies on disclosure from a variety of organizations that will be of interest to firms as they develop their approach to climate-related disclosures. Further guidance highlights the legal risks associated with publishing a climate-related disclosure and how these risks can be effectively managed.
  • Innovation Working Group (IWG): The IWG has focused on identifying and sharing practical opportunities to mobilize financial capital and steward an economywide transition to meet climate targets. Additionally, the IWG has produced a set of seven short films that highlight innovative approaches to mobilizing finance in support of the transition to net-zero.
  • Climate Data and Metrics Working Group (CDMWG): The CDMWG has recommended five areas where climate-related metrics can be employed: transition risks, physical risks, portfolio decarbonization, mobilizing transition finance and engagement. Whilst the first part of the CDMWG report provides detail on each of these areas, the second part focusses on implementation and provides practical guidance and support on convergence towards a set of common and consistent climate metrics.

The full FCA article can be found here

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