2022, a recap. What’s next for capital markets firms…?!

There were many standout events of 2022; the Ukraine war, the death of Queen Elizabeth and who can forget the Liz Truss premiership. In financial markets terms however, 2022 may come to be seen as the start of the “great unwind” – the reversal of a raft of investment strategies that became no-brainers during a decade and a half of low inflation, near-zero interest rates and multiple rounds of central bank quantitative easing. Events as diverse as Tesla’s 70% drop in market capitalisation over the past year, the crisis of confidence in crypto assets, and the near collapse of the UK government bond market in October, can all arguably be traced back (at least in part) to this new reality. The world of financial regulation has, frankly, been dull by comparison! That said, there have been a number of new regulations to keep us busy. Keep reading for an overview of these, with links through to more detailed articles and resources. At the end we look forward to 2023 and what might be in store.

A new prudential regime

January 2022 saw the start of the new MIFIDPRU regime which tries to simplify the previous GENPRU and BIPRU requirements for investment firms. The Internal Capital Adequacy and Risk Assessment (“ICARA”) is a completely new challenge for advisory firms and a twist on the ICAAP/Liquidity Risk assessment previously undertaken by investment managers. Although the FCA has shown flexibility for firms meeting the deadline for reporting the new MIF007 (ICARA Questionnaire), this is now a very imminent prospect for remaining firms. In October, we discussed  the topic of Wind-down Planning, one of the main focus points of the ICARA process, during a webinar which can be accessed here. A guide we created about wind-down planning can also be accessed here.

Consumer Duty

in July 2022, the FCA published its final rules, forcing affected firms to start serious engagement with the new regime. Manufacturers of open products and services (i.e. those still on offer) are required to review and update these for compliance with the Consumer Duty by July 2023, followed by an equivalent deadline for closed products 12 months later. The Consumer Duty sets higher standards of consumer protection across the entirety of financial services, with the intention to “fundamentally improve how firms serve consumers”. Since November, in-scope firms (essentially, those with a retail focus) have been required to have in place a framework for implementing the new requirements. Our Consumer Duty resources, including a guide to the four outcomes and a FAQ webinar recording, can be viewed here.

Financial promotions on high-risk investments

On 1 December 2022, the FCA introduced a new classification of investment products, together with new restrictions on issuing financial promotions on higher-risk products to retail consumers. From 1 February 2023, the FCA is revising the declarations for the High Net Worth and Certified/Self-Certified Sophisticated Investor Statements, as well as amending the requirements around Appropriateness Assessments. Taken together with related initiatives from HM Treasury on approving financial promotions and qualifying crypto assets, these changes represent a significant reboot of the regulation of financial promotions. See here for an overview of the new rules on promoting high-risk investments.

Hiatus at the FCA Authorisations Division

2022 was not a harmonious year inside the FCA itself, with ongoing disputes about pay and working conditions between management and staff led by Unite. It is hard to quantify the impacts that a succession of industrial actions had on output, but firms seeking authorisation from the FCA have experienced lengthy delays. Certainly, this situation appears at odds with the declared UK government objective of financial services being “open for business”. An update from the FCA in October showed that management are taking the issue seriously and at last its recruitment drive seems to be bearing fruit. We discussed the likely impact of these upheavals into 2023 here.

Regulatory permissions – use it or lose it

The FCA has continue to remind firms of its powers and intent to ensure that only firms conducting regulated activities remain authorised. The reasoning behind this initiative (which was first identified in its 2021-22 Business Plan) relates to concerns raised that some firms are authorised only for the perceived credibility that comes along with being “approved” by the FCA, which in turn could mislead consumers. Read our article on this topic here.

Market abuse

Cleaning up the integrity of UK financial markets remained a key objective for the FCA during 2022. On 8 December 2022, the FCA published Final Notices imposing fines totalling some £4.8 million on three inter-dealer brokerage firms for failing to ensure appropriate systems and controls were in place to monitor and detect market abuse. This is an important requirement imposed by the Market Abuse Regulation and the enforcement actions are a powerful signal from the FCA that it has now run out of patience with firms. In Market Watch 71, published on 13 December, the FCA also reminded advisory firms of the requirement to maintain accurate lists of insiders and restricting access to inside information to those for whom it is essential to perform their roles.

The Edinburgh Reforms – a new dawn for light-touch regulation?

One of the final developments of 2022 was probably the most far-reaching. On 9 December, Chancellor Jeremy Hunt announced a top-to-bottom re-launch of the UK government’s agenda for simplifying its regulation of financial services with a focus on taking advantage of the opportunities presented by the UK’s departure from the EU. Whilst parts of the package were rehashes of previously announcement initiatives, some new areas of enquiry are completely new. See here for our summary of what the reforms may mean in practice.

2023...what’s in store?

One to watch closely is the progress of the UK government’s lynchpin Financial Services and Markets (“FSM”) Bill. Currently at the committee stage in the House of Lords, this contains the provisions which repeal all EU-derived law and ultimately replace it with a regulatory framework designed to meet the needs of the UK financial services industry. Closely, associated with FSM are several initiatives coming out of the Edinburgh Reforms, including reviews of the Senior Managers and Certification Regime, investment research and the Short Selling Regulation.

• In early 2023, we will see publication of the FCA’s final rules on the Long Term Asset Fund (“LTAF”), a new category of authorised open-ended fund.
• The FCA’s consultation on Sustainability Disclosure Requirements (“SDR”) and investment labels has just closed and the final rules of this important initiative aimed at clamping down on greenwashing will be published by the end of Q2 2023.
• HM Treasury’s consultation on the repeal of the UK PRIIPs Regulation closes on 3 March 2023 and is expected to lead to an FCA consultation on retail disclosures, its eventual replacement.
• Finally (in this selective overview), the temporary marketing permissions regime (“TMPR”) for EEA funds closes on 31 December 2023 although HM Treasury has the power to push this back a further 12 months. It should be noted that the equivalent regime for EEA UCITS has already been extended until 31 December 2025.

So, maybe on reflection, the world of financial regulation is not quite so dull after all.