As the FCA’s remit continues to grow, the regulator pledges flexibility in the face of global financial and geopolitical headwinds.

By Rob Moulton, Anne Mainwaring, Jaime O’Connell, and Dianne Bell

On 7 April 2022, the FCA released its new Business Plan as part of a package including  a three-year strategy document setting out the outcomes it expects all firms to deliver across UK markets. In his introductory message, FCA Chief Executive Nikhil Rathi noted that the regulator’s broad and growing remit means “prioritisation is inevitable”. The FCA’s more outcomes-based approach means its commitments for the next three years fall into three stated areas of focus:

  1. Reducing and preventing serious harm: for example, protecting consumers from harm caused by authorised firms, including tackling fraud and poor treatment. The FCA expects to “harness data to assess problems more quickly”, with the aim of preventing harm from happening in the first place.
  2. Setting and testing higher standards: for example, focusing on the impact authorised firms’ actions have on consumers and markets. The FCA expects the new Consumer Duty to give firms greater certainty about how they should treat consumers as well as flexibility on how they deliver good outcomes.
  3. Promoting competition and positive change: greater regulatory open-mindedness, for example, by building on the globally copied “sandbox” and introducing a “scalebox”.

The regulators suggest improvements to the supervision of firms passporting retail products and services in the EU.

By Rob Moulton, Thomas Vogel, and Charlotte Collins

The French and Dutch financial services regulators (the AFM and the AMF) have published a joint position paper on strengthening conduct supervision of cross-border retail financial services.

The regulators are concerned that the current split of responsibilities between home and host state regulators in relation to cross-border retail business needs to be adjusted to ensure better consumer protection. While the paper does not represent agreed EU policy at this stage, it gives a clear picture of the regulators’ views in these prominent jurisdictions, and could well lead to changes to the supervisory approach in the future.

FCA makes clear that it expects a cultural shift in how firms focus on consumers.

By David Berman, Nicola Higgs, Rob Moulton, and Charlotte Collins

On 7 December 2021, the FCA published its second Consultation Paper (CP21/36) on introducing a new Consumer Duty. This follows an earlier consultation in May 2021, which set out high-level proposals for how the Consumer Duty would work, but did not include any draft rules or guidance (see FCA Proposes New Consumer Duty). This second consultation sets out more developed proposals, taking on board feedback received to the first consultation, and so gives firms a clearer idea of what the regulator will expect.

This decision shines a spotlight on the activities of unregulated introducers.

By Rob Moulton, Nicola Higgs, and Charlotte Collins

In a recent decision, the Court of Appeal upheld the FCA’s findings that unregulated introducers had been carrying on regulated activities without permission by persuading individuals to transfer their personal pensions into alternative investment products and assisting them with this process. The case turned on the interpretation of the regulated activity of making arrangements with a view to transactions in investments. The ruling is significant because a number of High Court cases appear to have taken somewhat different approaches, and the Court of Appeal’s broad interpretation of this activity shines a spotlight on the business of unregulated introducers who take steps beyond the initial introduction. Both introducers and regulated firms that rely on referrals from introducers need to understand the scope of activities that unregulated introducers can legitimately carry on.

UK rules will diverge from the much-criticised EU framework.

By Nicola Higgs and Charlotte Collins

On 20 July 2021, the FCA published a Consultation Paper (CP21/23) on amending the UK PRIIPs Regulation. The FCA has long held concerns about the PRIIPs framework, and pre-Brexit had been heavily involved in efforts to persuade EU lawmakers to amend the rules. The UK government and the FCA had indicated that the UK PRIIPs Regulation would be a priority area for change post-Brexit, given the consumer protection concerns arising as a result of ambiguities and unintended consequences of the rules. Now that the FCA has the flexibility to amend the regime, the regulator is looking at how it can address some of the most serious concerns, which will come as welcome relief to market participants.

New ESMA guidance less strict than the established UK position on PFOF.

By Rob Moulton, Axel Schiemann, Thomas Vogel, and Charlotte Collins

On 13 July 2021, ESMA published a statement on payment for order flow (PFOF), the practice of brokers receiving payments from third parties for directing client order flow to these third parties as execution venues.

ESMA warns that the increase in retail client activity in the past year has highlighted the use of PFOF, both in the US and in some EU jurisdictions. ESMA explains that PFOF causes an inherent conflict of interest, as it incentivises brokers to choose the execution venue offering the highest payment, rather than the venue that will achieve the best outcome for the brokers’ clients.

Therefore, ESMA is of the view that, in most cases, the receipt of PFOF is unlikely to be compatible with MiFID II. ESMA requires firms to thoroughly assess whether, by receiving PFOF, they are able to comply with relevant MiFID II requirements, in particular those on best execution, conflicts of interest, inducements, and cost transparency. Interestingly, this contrasts with the stricter UK position. The UK FCA has made clear for many years that the receipt of PFOF is not compatible with firms’ obligations regarding conflicts of interest, inducements, and best execution. This is because the FCA considers that the price quoted by the execution venue will always be influenced by the fact that any profit will be reduced by the PFOF they are paying.

The FCA is proposing to set higher expectations for firms operating in retail markets.

By Andrea Monks, David Berman, Jon Holland and Charlotte Collins

On 14 May 2021, the FCA published a Consultation Paper (CP21/13) on introducing a new Consumer Duty. This consultation is intended to fulfil the FCA’s new statutory obligation to consult on whether or not to introduce a duty of care in financial services.

Rather than a standalone duty, the FCA is consulting on a package of measures, including a Consumer Principle and supporting rules and guidance (referred to collectively as the Consumer Duty). While some may consider that the proposed new Principle would not add much (or anything) of substance to firms’ existing obligations, the FCA considers that it would nevertheless be helpful to its stated desire to  hold firms to a higher standard. In practice, additional expectations are most likely to be set by the accompanying more granular rules and guidance. Although the FCA has not proposed drafting for these rules and guidance at this stage, the regulator is seemingly planning to use this opportunity to advance several aspects of its retail-sector work relating to, for example, customer communications, product governance, and the treatment of vulnerable customers.

The Woolard Review emphasises the urgency to bring all BNPL products under FCA supervision and sets out recommendations for the unsecured credit market.

By Stuart Davis, Becky Critchley, and Anna Lewis-Martinez

The UK government has announced that interest-free buy-now-pay-later (BNPL) credit agreements will be regulated by the FCA. Currently, the BNPL market operates under an exemption from regulations for consumer credit lending.

The announcement comes as a review of the unsecured credit market, led by Christopher Woolard, unexpectedly urgently recommends regulating all BNPL products.

The Woolard Review (Review) sets out 26 recommendations for the FCA, UK government, and other bodies to reform the unsecured credit market. The recommendations take into account the impact of the COVID-19 pandemic, changing business models, and new developments in unregulated BNPL unsecured lending.

The proposal would require financial institutions to use certain categories of information for non-face-to-face verification before undertaking transactions or requests.

By Farhana Sharmeen and Gen Huong Tan

In November 2020, the Monetary Authority of Singapore (the MAS) published a consultation paper proposing to issue a Notice on Identity Verification (the Notice) that would require financial institutions to obtain specific categories of information to verify an individual’s identity for non-face-to-face financial transactions.

The Notice would apply to a broad range of entities regulated by the MAS, including licensed banks, insurers, registered insurance brokers, capital markets services licensees, registered fund management companies, financial advisers, and licensed payment services providers.

In setting forth its rationale, FINRA observed that private placement retail communications reviewed by AdReg have “revealed significant and pervasive” violations of FINRA Rule 2210.

By Dana G. Fleischman, Stephen P. Wink, Naim Culhaci, and Deric Behar

On October 28, 2020, the Financial Industry Regulatory Authority, Inc. (FINRA) filed with the US Securities and Exchange Commission (SEC) proposed amendments (the Proposal) to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities). The proposed amendments would require FINRA members to file all retail communications used by members in connection with private placement offerings that are subject to those Rules’ filing requirements (Covered Private Placements).[1]