Greg Kilminster
Head of Product - Content
Building a healthy culture in financial services: FCA’s COO speech
In a speech at City & Financial’s Culture and Conduct Forum, Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, discussed the implementation of the Consumer Duty and efforts to foster a healthy culture through diversity and inclusion (D&I).
Consumer Duty implementation
The Consumer Duty, which came into force on 31 July 2023, emphasises treating customers with greater consideration, focusing on their best interests, and facilitating effective decision-making. Shepperd noted the example of a wealth manager’s positive transition to a simpler and more transparent fee structure, which she said demonstrated the alignment of good business practices with the Consumer Duty. The importance of culture in supporting the Senior Managers & Certification Regime (SMCR) objectives was reiterated by Shepperd, who has spoken before on the subject.
Diversity and inclusion (D&I)
Shepperd noted the role of D&I in building, indeed starting, a healthy culture, adding that recent FCA proposals, intend to set flexible minimum standards, encouraging firms to develop a D&I strategy with clear objectives. She also stressed the need for an holistic approach, including a clear articulation of purpose and actions. Whilst acknowledging the commitment of many firms to progress in D&I, Shepperd did mention the generic nature of strategies which lack the holistic approach required. The link between a diverse and inclusive environment and improved customer outcomes was highlighted.
Inclusive environment and conduct
The speech underscored the significance of a healthy culture in preventing “calamity”’ citing a notable firm closure due to non-financial misconduct.
The proposed guidance aims to address misconduct such as bullying and sexual harassment, emphasising the importance of policies, controls, and aligned strategies. Shepperd said that second and third-line functions should be positioned to hold senioe management functions (SMFs) accountable for fostering an inclusive culture, adding that transparent articulation of policies and targets is crucial for instilling confidence in hiring and promotion practices.
Operational efficiency and value addition
Shepperd discussed efforts within the FCA to strengthen the operational base, reduce costs, and enhance value addition. Initiatives such as digitising authoristion forms, simplifying project management, adjusting governance over the change portfolio and the charging model, and addressing internal processes demonstrate a commitment to efficiency, she said. Focussing on outcome-oriented measures, transparency around challenges, and investment in people and processes have resulted in improved processing times and enhanced collaboration with firms.
Leveraging new technology
Shepperd acknowledged the ongoing journey of improving processes by evaluating and adapting to technological developments. The potential of machine learning and artificial intelligence, including large language models (LLMs), was touched on, but Shepperd also noted the importance of strong controls, governance, and ongoing coordination in the regulatory work on AI.
In concluding, Shepperd reiterated the connection between culture, conduct, and the regulatory purpose. Strong, healthy cultures are essential for fostering good conduct, contributing to healthy, stable, and competitive markets, and ultimately ensuring positive outcomes for consumers. Shepperd’s commitment to transparency, accountability, and continuous improvement is evident throughout the speech, with the overall message aligned with the ongoing industry focus on responsible and effective practices within the financial services sector.
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UK publishes short selling draft statutory instrument to replace EU law
The UK government has published a draft statutory instrument (SI) to explain how the the UK will replace the existing EU law on short selling regulations.
The SI is accompanied by a response published to confirm the final policy on short selling following the consultation on sovereign debt and credit default swaps in July 2023. The final policy confirms that requirements currently placed on investors when taking out short positions in sovereign debt or sovereign CDS, and the related reporting requirements under the UK’s new short selling regime will be removed.
The paper also confirms that the government will retain sovereign debt and credit default swaps in scope of the FCA’s emergency intervention powers for short selling, which will be treated the same as other financial instruments. As part of these retained powers, the government will require the FCA to set out its approach to using these powers.
Any technical comments on the draft SI are requested by 10 January 2024.
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UK Finance report on AI in financial services: opportunities, risks and policy considerations
UK Finance and Oliver Wyman, a global management consultancy, have jointly published a report on the use of Artificial Intelligence (AI) in Financial Services and the future prospects and challenges for the industry. The report:
- Includes a snapshot survey of 23 companies ranging from large international banks to mid-size banks and non-banking financial services firms.
- Investigates the potential risks of AI and provides strategies to mitigate them
- Examines the policy landscape and options for resolving key policy questions that will need to be answered to ensure a regulatory approach that effectively mitigates risks while enabling responsible innovation.
Key statistics from the survey reveal that:
- 75% of the participating firms believe that they will benefit from generative AI. In fact, 70% of the participating firms are currently at the pilot stage for generative AI.
- Predictive AI, which is used for functions such as fraud detection and risk analysis, is already employed by 91% of the companies.
- 95% of the participating firms have already accounted for AI risks in their control frameworks, and 60% have taken action to prepare for the risks of generative AI.
- 80% of the firms indicated that collaboration with regulators has been beneficial in highlighting best practices in AI and creating an internationally aligned regulatory system.
Overall, the report highlights the importance of taking appropriate measures to mitigate AI risks while promoting responsible innovation. Collaboration with regulators is seen as a key element in ensuring an effective regulatory system that can keep pace with the rapid advances in AI technology.
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CBI and CSSF issue macroprudential measures for GBP LDI funds
In response to the 2022 gilt market crisis, the Central Bank of Ireland (CBI) and the Commission de Surveillance du Secteur Financier (CSSF), are proposing the implementation of macroprudential measures to mitigate risks posed by GBP Liability Driven Investment (LDI) funds.
The rapid increase in yields following the UK government mini-budget announcement forced GBP LDI funds to sell gilts in an illiquid market, triggering financial instability.
To ensure greater resilience, the CSSF and CBI released an industry letter in November 2022 outlining their supervisory expectations for GBP LDI funds.
They are now looking to codify the minimum yield buffer measure from the industry letter and strengthen the steady-state resilience of GBP-denominated LDI funds managed by Luxembourg and Ireland alternative investment fund managers.
Both regulators are seeking input on proposals by 18 January 2024.
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MAS strengthens regulatory measures for digital payment token services
The Monetary Authority of Singapore (MAS) has released the second part of its regulatory response to the feedback received on its proposed regulations for Digital Payment Token (DPT) service providers, which follows a consultation paper released in October 2022.
The first part of the consultation response, which was published in July 2023, focused on the segregation and custody of customers’ assets.
The second part covers business conduct, consumer access measures, and cyber risk management provisions.
MAS plans to implement regulations and guidelines that will be phased in from mid-2024.
These measures are needed, especially due to recent events. In the consultation paper, MAS notes that the cryptocurrency market experienced a significant downturn, with the market capitalisation of cryptocurrencies plummeting from its peak of about US$3 trillion in November 2021 to less than US$1 trillion in July 2022. Additionally, numerous cryptocurrency firms collapsed, leaving billions of dollars in debt to their customers.
Despite the high risks involved, cryptocurrencies continue to attract speculative consumer interest. MAS has issued repeated warnings about the unsuitability of cryptocurrencies for consumers and the dangers of cryptocurrency speculation.
By laying a foundation for a resilient and trusted crypto space in Singapore and fostering innovation in collaboration with industry stakeholders and regulators, Singapore is steadily positioning itself as a leader in the digital asset ecosystem and cryptocurrency innovation.
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ECB issues November 2023 financial stability review
The European Central Bank (ECB) has recently published its biannual financial stability review. In the report, the ECB observed that despite tight financial and credit conditions, weak economic prospects, and the ongoing correction in real estate markets, financial markets have remained resilient with expectations of a soft landing.
Key highlights
- The risk sentiment in the markets remains fragile and highly sensitive to surprises regarding inflation, growth, and monetary policy.
- Adverse market dynamics could be triggered by unexpected geopolitical shocks and vulnerabilities associated with the digitalisation of financial services.
- Non-banks, particularly those investing in highly indebted corporates and real estate, continue to face high credit risks.
- Low liquidity buffers across the investment fund sector could expose funds to forced asset sales and amplify adverse market dynamics.
The next release is provisionally set for 15 May 2024.
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