June Update

UK Updates

There was limited FCA news in the lead up to the general election. Labour's vision for financial services was set out in their Financial Services Strategy, with six policy priorities:

1. Deliver inclusive growth of the UK's financial services sector by scaling regional financial centres alongside established hubs in London and Edinburgh and unlocking the full potential of the mutuals sector.
2. Enhance the international competitiveness of the UK's financial services sector by pursuing a more joined up and innovation-centred approach to regulation and supervision, streamlining the regulatory rulebook in line with the Consumer Duty, strengthening our international engagement in financial services, and building a more collaborative relationship with the EU.
3. Reinforce consumer protection and financial inclusion by exploring alternative models for increasing financial resilience including longer-term fixed rate mortgages, adopting a coordinated cross-sectoral approach to fraud prevention, creating a national financial inclusion strategy, and regulating the Buy Now Pay Later sector.
4. Lead the world in sustainable finance by making the UK a global hub for green finance activity, delivering a world-leading green finance regulatory framework, and partnering with the financial services sector to support the decarbonisation of our homes.
5. Embrace innovation and fintech as the future of financial services by becoming a global standard-setter for the use of AI in financial services, delivering the next phase of Open Banking, defining a roadmap for Open Finance, embracing securities tokenisation and a central bank digital currency, and establishing a regulatory sandbox for financial products to reach underserved communities.
6. Reinvigorate our capital markets by reviewing the pensions and retirement savings landscape, enabling greater consolidation of all types of schemes, empowering the British Business Bank to invest more in growth capital, establishing a British 'Tibi' scheme to increase institutional investment in venture capital and small cap growth equity, and increasing investment in infrastructure and green industries through Solvency UK reforms.

The NRS View

Financial services were not prominent in Labour's policy offering during the election campaign and we therefore do not expect to see major changes to UK financial services regulation because of the change in government. Labour has previously said it will streamline the FCA rulebook to align with the Consumer Duty and is also committed to introducing a 'Regulatory Innovation Office', which will have a focus on improving accountability and promoting innovation in regulation across sectors (this is not financial services specific).

However, we do expect movement and announcements in the following areas: strengthening of a closer EU/UK relationship, a more proactive approach to sustainable finance rulemaking, delivery of the previous government's Mansion House compact proposals for UK capital markets, next steps on the FCA advice and boundary review, and a review of the pensions and retirement savings landscape.

We will provide updates on any key policy changes impacting financial services as they are announced over the coming weeks and months.

Europe

Things have been more active in Europe with a couple of announcements from ESMA including:

1. The Retail Investment Package

The retail investment package measures are aimed at supporting retail investors who wish to invest in the EU's capital markets, by better protecting their investments, providing them with clearer information about investment products and ensuring more transparency and disclosure. The proposed package is wide in scope and will make pivotal reforms to the EU retail landscape.

The latest update from the European Council is that it has reached agreement on the retail investment package with proposed changes including a proposed Directive on retail investment protection (an "Omnibus Directive") amending MiFID, the Insurance Distribution Directive, Solvency II, the UCITS Directive and AIFMD, and a proposed Regulation amending the PRIIPs regulation, specifically major changes to the Key Information Documents.

The changes to MiFID include modernising the disclosure rules by adaptation to digital, introducing a new concept of "value for money", addressing potential conflicts of interest by banning inducements for execution-only sales, addressing misleading marketing, preserving high standards of qualifications for professionals, and enhancing supervisory cooperation to ensure that rules are consistently applied across the EU.

The next stage in the process is for the European Council to negotiate with the European Parliament to finalise the legislation.

The NRS View

The retail investment package is in response to the EU's concern that the level of retail participation in capital markets remains low compared with other advanced economies. However, concerns remain across the industry on some of the proposals and the challenge for firms to implement them (despite the changes already made to the original proposals).

These changes to the EU retail sector are still at proposal stage whereas the UK is much further advanced in some areas, notably having introduced the Consumer Duty in July 2023. A key question for firms operating in both the UK and EU will be how aligned or how far apart the Duty is from the retail investment package. Under the new rules, manufacturers and distributors would assess whether costs and charges related to a product are justified and proportionate regarding their performance, other benefits and characteristics, and their objectives.

Aside from the Consumer Duty, the UK and the EU have taken different paths when it comes to the ban on inducements. The UK has a full ban on commissions paid from manufacturers to distributors. The EU currently proposes a partial ban but also to allow Member States new powers for discretion on the prohibition of, or restriction to, inducements — which directly contradicts the objective of enhancing EU competitiveness by harmonising and improving consistency of legislation and reducing red tape. Another concern is that the investment universe could shrink for investment firms and their clients, as only products that are (based on hard-to-test predictions) "cost effective" can be sold.

2. Potential Review of the Investment Firm's Prudential Framework

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have released a discussion paper to request advice and feedback on the Investment Firms Regime (IFR), applicable to MiFID investment firms in the EU.

The IFR contains review clauses requiring the European Commission to submit a report and, if needed, a legislative proposal to the Council of the EU and the European Parliament on the functioning of the prudential framework for MiFID investment firms. This discussion paper aims at gathering early stakeholder feedback on a wide range of topics, the key proposed areas being:

• Firm categorisation — consistency in calculating and applying thresholds across all firm sizes and activities
• K-factors — looking at risks not currently covered by K-factors, including K-AUM in relation to investment advice, K-DTF suitability based on activity level, and K-ASA appropriateness considering custody-asset risk
• Fixed Overhead Requirement (FOR) — is three months of relevant costs appropriate?
• Liquidity — seeking clarity on high-quality liquid assets and increasing requirements in line with FOR
• Risks not covered by the current framework
• Interaction with the new EU banking regulations for trading firms (CRD VI and CRR 3)
• Prudential consolidation and a possible extension to crowdfunding and crypto-asset service providers
• Remuneration — tailored rules for different business models
• Treatment of firms currently non-prudentially regulated and active in commodity markets

The NRS View

The IFR was implemented in the EU in June 2021, with the FCA implementing its own version of the rules, the Investment Firm Prudential Regime (IFPR), on 1 January 2022. The FCA has already provided feedback on the implementation of its own regime, and we now see the European regulators asking EU investment firms to provide their feedback on several areas of the IFR. Firms with EU operations should review this consultation to see how the proposals may impact their business.

There is also the question of future divergence of prudential rules and the complications for firms that may pose. The FCA has already provided clarifications on some of the discussion areas raised by the EBA and ESMA in its feedback on the implementation of IFPR last year. It remains to be seen whether the FCA will conduct a similar all-encompassing review and any resulting divergence on EU and UK prudential rules.

To discuss any of the above or how NRS can support your business please contact us by ringing 0330 043 4288 or by emailing enquiries@rawlinsreg.co.uk.