Eva Dauberton
News Editor
FCA issues FG and CP on anti- greenwashing rule and SDR
The Financial Conduct Authority (FCA) has released a finalised guidance (FG) 24/3 on the anti-greenwashing rule and a consultation paper (CP) 24/8 proposing to extend the Sustainability Disclosure Requirements (SDR) regime to portfolio management.
FG 24/3 on the anti‑greenwashing rule
The FG 24/3 provides guidance to firms ahead of the effective date of the anti-greenwashing rule 31 May 2024. It includes examples to assist firms in understanding the guidance’s core principles and how to implement them.
CP 24/8 on extending the SDR regime to portfolio management
The CP 24/8 proposes to extend the SDR regime to portfolio management, including the labelling regime, naming and marketing rules, and disclosure requirements. The FCA has already consulted on including portfolio management in the requirements through the CP22/2, and this proposal largely mirrors the requirements introduced for asset managers in November 2023, with refinements.
Next steps
The consultation period for CP 24/8 will end on 14 June 2024. The FCA will review all feedback and plans to publish final rules in the second half of 2024.
The FCA proposes that the labelling, naming and marketing requirements and associated consumer-facing and pre-contractual disclosures come into force on 2 December 2024. Firms will need to start producing ongoing product-level disclosures from one year later.
Firms with assets under management (AUM) greater than £50 billion will need to produce entity-level disclosures by 2 December 2025.
Firms with AUM greater than £5 billion will need to start producing entity-level disclosures by 2 December 2026.
These dates are consistent with the measures for fund managers, except for the labelling and associated disclosures’ start date.
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FCA speech on UK digital regulation landscape
Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA) and Chair of the Digital Regulation Cooperation Forum (DRCF), delivered a speech at a recent DRCF event. During his speech, he announced the publication of the FCA response to the Government’s white paper on Artificial Intelligence (AI) and the feedback statement (FS) 24/1 to its call for input (CFI) on data sharing between Big Tech and financial services firms. The DRCF has also recently published its 2024/25 work plan.
Some context
Established in 2020, the DRCF brings together the Competition and Markets Authority (CMA), the Information Commissioner’s Office (ICO), the FCA, and the Office of Communications (Ofcom). The main objective of the DRCF is to achieve a coordinated approach to digital regulation, reduce regulatory burdens on the industry, and enhance the global impact of the UK.
Key takeaways
During his speech, Rathi outlined the DRCF’s priorities and how they align with the FCA’s work. He emphasised that one of the DRCF’s primary goals is to coordinate efforts to take advantage of the opportunities presented by Big Tech while mitigating the risks.
- Introducing the DRCF AI digital hub
Rathi announced the launch of the DRCF AI and Digital Hub, which will serve as a shopfront for providing informal advice to tech innovators. The Hub will focus on enhancing the DRCF’s understanding of AI’s cross-regulatory impacts and the appropriate regulatory measures to take in response. He is optimistic that the Hub will offer valuable insights into the future direction of the technology and industry.
In addition, Rathi highlighted the existing FCA programs, such as an innovation hub, policy and tech sprints, and the permanent digital sandbox, which help the FCA better scan the horizon.
- Date use, transfer and governance
Rathi stated that the DRCF aims to create a commercially viable framework for data sharing, an objective that specifically impacts the Open Banking and Finance initiatives. He also acknowledged the industry’s concerns and emphasised the importance of considering potential adverse effects on competition and consumers.
- Building Trust and fostering transparency
Rathi further discussed the issues surrounding data use, trust in AI and Big Tech, and the privacy implications. He expressed confidence that by taking sustained actions and learning from the experiences of other countries, trust can be built, and transparency can be fostered. To ensure safety in this process, he highlighted the need to evaluate the necessity of digital infrastructure and identity authentication, which are among the priorities of the DRCF.
- Ensuring accountability
He also highlighted the FCA’s recent consultation paper (CP) 24/2 on whether to adopt a looser public interest test for the announcement of enforcement investigations, an approach already taken by Ofcom and the CMA. He mentioned the FCA’s hope for a measured debate about these issues and highlighted that the FCA will listen carefully to all feedback.
- Unlocking Big Tech firms’ unique access to large sets of data
Rathi highlighted the FCA response to the CFI on the competition implications of Big Tech and data asymmetry and the need to remain vigilant in that area. He noted that while the respondents did not identify any immediate harms from data asymmetry, the FCA will continue to take proactive steps towards developing a regulatory approach to Big Tech’s activities in financial services, which is crucial for Open Banking and Open Finance initiatives.
- Using AI technology
Rathi referred to the recently published FCA’s response to the Government’s white paper on AI, emphasising that the FCA will prioritise gaining clarity on the deployment strategies of regulated firms. This will involve conducting a new edition of the machine learning survey in collaboration with the PRA.
Additionally, the FCA is investing in digital skills internally by recruiting over 75 data scientists and exploring how AI and Machine Learning (ML) can be leveraged to achieve FCA objectives. This has already significantly enhanced the FCA’s ability to swiftly monitor and address issues such as scam websites, money laundering, and sanctions breaches.
As for the DRCF, various initiatives are currently underway to tackle this challenge. These initiatives include supporting the adoption of responsible AI through the AI and Digital Hub, conducting joint research into consumer usage and understanding of generative AI, and placing a greater emphasis on testing, validation, and explainability of AI modls, as well as adhering to strong accountability principles.
In line with the general FCA approach to being a technology-agnostic, principles-based, and outcomes-focused regulator, Rathi concluded by saying, “Digitisation has broken down borders; it is for us to make sure our regulatory barriers are effective, proportionate, and pro-innovation. Without industry, there would be no innovation, so your engagement is vital."
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FCA issues FS on competition implications of Big Tech and data asymmetry
The FCA has released a feedback statement (FS) regarding the potential impact of data asymmetry between Big Tech firms and financial services firms on competition in financial services markets. This statement follows a call for input (CFI) issued in November 2023.
Key issues noted
The responses to the call for input indicate that there are currently no significant effects resulting from the data asymmetry between Big Tech firms and financial services firms. However, three key issues have been identified that could negatively impact the evolution of competition in retail financial markets, potentially becoming more significant over time.
- The risk of data asymmetry increasing barriers to entry and expansion in financial markets, thereby allowing Big Tech firms to gain market power.
- The risk of Big Tech firms’ platforms becoming the primary access channel (gatekeeper) for retail financial services in the future.
- The risk of financial services firms’ partnerships with Big Tech firms being concentrated, thus limiting the bargaining power of financial services firms.
FCA response
In light of these concerns, the FCA proposes the following actions:
- Continuously monitor the activities of Big Tech firms in financial services, both within and outside the regulatory perimeter, to assess the need for policy changes and mitigate competition-related issues. This includes ongoing internal supervisory work and collaboration with other regulators.
- Identify and pilot “use cases” to empirically test the value of Big Tech firms’ data from their core digital activities in retail financial markets. Based on the results, develop proposals within the framework of Open Finance.
- If the use cases demonstrate the value of Big Tech firms’ data, examine ways to align the incentives of firms, including Big Tech firms, to share data that benefits the entire data-sharing ecosystem and ensures positive outcomes for consumers.
Regarding the issue of digital wallets, the FCA and the Payments Systems Regulator (PSR) will closely collaborate to understand the associated risks and opportunities.
Regarding data asymmetry in wholesale markets, the FCA will not focus on or extend analysis to competitive outcomes at this stage but will continue monitoring Big Tech firms’ activity in these markets.
The FCA will address asymmetries in the share of open banking costs through the work of the Joint Regulatory Oversight Committee (JROC).
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FCA publishes update on its approach to AI
The Financial Conduct Authority (FCA) has responded to the Government’s white paper on artificial intelligence (AI) regulation and the initial guidance for regulators, with a detailed analysis of how the regulatory framework aligns with the Government’s principles of safety, security, robustness, transparency, explainability, fairness, accountability, governance, contestability, and redress.
On safety, security, and robustness, the FCA has assessed its regulatory approach to third-party risks and outsourcing, with the Bank, PRA, and FCA currently evaluating their approach to Critical Third Parties (CTPs) with consultation paper (CP) 26/23. The response also highlights the FCA’s response to the call for input on data asymmetry between Big Tech and traditional financial services firms. Additionally, the FCA has collaborated with the Competition and Markets Authority (CMA) on its market investigation into cloud services and has taken note of the CMA’s review into AI Foundation Models.
On fairness, the response highlights the Consumer Duty, the guidance for firms on the fair treatment of vulnerable customers, and the threshold conditions. It also mentions the Information Commissioner’s Office (ICO) guidance on AI and Data Protection to clarify how the law should be interpreted and applied in this area.
As part of the efforts towards accountability and governance, the FCA is reviewing the SM&CR and published a discussion paper in March 2023. The plan is to publish a CP in June 2024. The FCA is also looking at the expected first boards’ annual reports under Consumer Duty, due on 31 July 2024.
Finally, the response includes FCA plans for the next 12 months, including:
- Further understanding of AI deployment in the UK by re-running a third edition of the machine learning survey, jointly with the Bank of England.
- Collaborating with the Payment Services Regulator (PSR) to consider AI across systems areas.
- Closely monitoring the situation and actively considering future regulatory adaptations if needed,
- Collaborating with partners domestically and internationally, considering the need for global alignment and standardisation on how best to regulate AI.
- Testing for beneficial AI with Digital Regulation Cooperation Forum (DRCF) AI Digital Hub and FCA Digital Sandbox.
In the response, the FCA also mentions its advanced analytics unit, tools to monitor scam websites, and an in-house synthetic data tool for sanctions screening testing. The FCA plans to continue developing such tools in the next year.
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PRA issues CP5/24 on restatement of assimilated law as part of Solvency II review
The Prudential Regulation Authority (PRA) has issued a consultation paper (CP5/24) to implement the conclusions of the Solvency II Review and finalise PRA rules and policy materials that will replace Solvency II assimilated law, which the government is revoking under its Smart Regulatory Framework program.
Some context
The PRA has already consulted on reforms to Solvency II and restatements of parts of assimilated law within those consultations. This consultation is the final PRA consultation needed to implement the conclusions of the Solvency II Review.
Key takeaways
The proposals included in this CP entail:
- The restatement of assimilated law into PRA policy material.
- The removal of cross-references to the EU’s prudential framework.
- The incorporation of certain elements of the EIOPA Guidelines.
- Addressing inconsistencies in assimilated law.
Additionally, the CP includes small areas of policy reforms, including proposals for a new time-limited transitional rule in the Own Funds Part of the PRA Rulebook and using the same conversion rate confirmed in PS2/24 when considering restating amounts denominated in EUR into the UK framework.
Next steps
The deadline for feedback is 22 July 2024. The PRA proposes that the implementation date for the changes resulting from this CP would be 31 December 2024.
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PSR speech on open banking proposals
In a speech at the Payment Leaders' Summit, Chris Hemsley, managing director of the Payment Systems Regulator (PSR), spoke about how open banking can help the challenges and opportunities facing the UK economy.
Hemsley began by noting the pace of change in payments, referencing current developments, including:
- The creation of a new taskforce to advise on how best to unlock new data use cases in Open Banking.
- Publication of a report outlining a 'Progressive Vision for Fintech', with a number of its recommendations making reference to the potential of open banking.
- Publication by the Joint Regulatory Oversight Committee (JROC) of the PSR’s recommendations for the next phase of open banking in the UK.
Turning to the main part of his speech, Hemsley noted that open banking had been a significant subject of discussion at a Competition & Markets Authority (CMA) event he had attended the previous week. He noted CMA chief executive Sarah Cardell’s comment that “open banking [is] spurring an explosion of digital and data-driven innovation, not just by the big high-street banks but by smaller companies” before discussing the issue of open banking and payments in particular.
Hemsley noted that the potential of open banking payments in the UK has garnered broad agreement within the industry. These innovative payment methods promise increased choice, enhanced capabilities, and heightened competition. Moreover, with the right regulatory framework, they can pave the way for a safer payment ecosystem by addressing various forms of fraud.
To maximise the benefits of open banking payments and support new markets, Hemsley argued several critical elements need to be addressed.
Trust
For open banking payments and variable recurring payments (VRP), trust translates into clear dispute resolution mechanisms, well-defined accountabilities, and robust consumer protection measures. Initial focus from the PSR has been on low-risk use cases in regulated financial services, local government payments, and regulated utilities. This phased approach aims to establish trust before expanding to more complex use cases.
Building a network
Effective collaboration among Account Servicing Payment Service Providers (ASPSPs), businesses, and consumers is essential. For VRP and open banking payments to thrive, participation from all ASPSPs is crucial. A key debate revolves around incentivising ASPSPs to participate without compromising competition or inflating costs.
Infrastructure
A reliable and efficient infrastructure is paramount. This involves raising performance standards across the ecosystem and ensuring the payment system supports open banking, including real-time retail transactions. Investments in the payment system are essential to achieve these objectives.
Towards a sustainable future
Targeted regulatory intervention is a catalyst to unlock competition and fosters a dynamic open banking payment market, said Hemsley. The objective of the latest consultation is to transition to a framework that allows firms to recover costs efficiently and encourages new entrants and innovators. This approach moves away from the current CMA order-centric model towards a more inclusive and sustainable ecosystem.
Hemsley concluded by suggesting that the UK stands at the forefront of a transformative shift in the payments landscape. As the industry navigates this evolution, collaborative efforts, informed debates, and decisive actions will be key to realising the substantial benefits for competition, businesses, consumers, and the fintech sector at large.
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