Greg Kilminster
Head of Product - Content
CP23/28: FCA proposes updates to Money Market Fund regulations
The Financial Conduct Authority (FCA) has released the consultation paper (CP)23/28, which proposes updates to the regulations for Money Market Funds (MMFs). The Government has also published a draft statutory instrument (SI) and policy note to establish a new legislative framework for MMFs. These initiatives are part of the Government’s delivery of the Smarter Regulatory Framework (SRF) for financial services.
The proposed changes, which include part of the measures discussed in the discussion paper (DP22/1) Resilience of Money Market Funds issued in May 2023, aim to enhance the resilience of MMFs domiciled in the UK, address vulnerabilities identified during the 2020 ‘dash for cash’ and other times of market stress, mitigate risks to broader financial stability, and reduce the need for central bank support in the future.
The proposals are:
• A significant increase in the minimum liquid asset requirement for all MMFs, raising daily liquid assets (DLA) and weekly liquid assets (WLA) levels to 15% and 50% of their assets, respectively. The assets eligible for WLA for Variable NAV (VNAV) MMFs will also be modified.
• The removal of the regulatory link between liquidity levels in MMFs that can offer subscriptions and redemptions at a constant Net Asset Value (NAV) (so-called ‘stable NAV MMFs’) and the need for the manager to consider or impose tools such as liquidity fees or redemption gates.
• Enhanced ‘know your customer’ (KYC) requirements.
• Enhanced stress testing for stable NAV MMFs.
• Enhanced operational resilience for stable NAV MMFs.
The FCA also plans to streamline the requirements by removing legacy rules that become duplicative or are otherwise unnecessary and providing more clarity. Lastly, the FCA is seeking feedback on how MMFs may be used as collateral, given recent industry initiatives to tokenise funds and improve collateral management.
The FCA has requested feedback on the proposals by 8 March 2024. Based on the responses received, the FCA will aim to publish a final policy statement and final Handbook rules in line with HM Treasury’s finalised SI.
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FCA proposes remedies to address concerns in credit information market
The Financial Conduct Authority (FCA) has released its final credit information market study report. The report proposes a set of remedies aimed at addressing concerns identified in the market. These remedies will affect various stakeholders, including credit reference agencies, credit information service providers, FSMA regulated firms, and non-FSMA regulated firms that use credit information.
Proposals
In an interim report published in November 2022, the FCA found that governance arrangements in the market were slow to respond to changes. Having considered subsequent feedback, the FCA proposes the following remedies:
- Data quality: improving credit information coverage, quality, and consistency to help deliver better outcomes.
- Consumer awareness and engagement: supporting consumers to improve credit information awareness and access.
- Competition and innovation: fostering greater competition and innovation.
- Industry governance: reforming industry governance arrangements to help deliver key measures and enhance transparency and accountability.
The FCA is also proposing new governance arrangements – the Credit Reporting Governance Body (CRGB) – to oversee the development and implementation of some of the remedies.
Next steps
The FCA expects to publish a series of consultation papers, starting with the publication of an initial consultation paper on FCA rules relating to mandatory data sharing by the end of 2024. The FCA also considers that some of the remedies should be industry-led. This combined approach is considered appropriate and proportionate for achieving the desired outcomes in the market.
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FCA publishes update on the cash savings market
The Financial Conduct Authority (FCA) has released an update to its review of the cash savings market, initially published in July. The update includes an action plan to ensure that banks and building societies appropriately pass on interest rate rises to savers, effectively communicate with customers, and offer better savings deals.
This update highlights the progress made by the market since the initial review and emphasises the need for firms to continue working towards the expected consumer outcomes.
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UK amends high risk countries list
In response to the Financial Action Task Force (FATF) October statements identifying jurisdictions with strategic deficiencies in their AML/CTF regimes, the UK has issued secondary legislation confirming changes to its list of high-risk countries which require enhanced due diligence and ongoing monitoring.
Bulgaria, Cameroon, Croatia, Nigeria, South Africa, and Vietnam have been added to the list, which came into force on 5th December 2023.
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ESMA releases updated PRIIPs Q&A
The European Securities and Markets Authority (ESMA) has released an updated version of the PRIIPs Q&A. This update provides guidance on several topics, including:
- The approach for products linked to a single ISIN code but available in both single and recurring premium versions (General topics – Section I)
- The categorisation of products with recurring premiums (Market risk assessment – Section III)
- The treatment of the sum of rents paid up for life annuities, the NAV data frequency to use, the approach when there is no benchmark or a benchmark without sufficient historical data (Performance scenarios – Section VI)
- The approach for insurance-based investment products offering a range of options for investments (Multi-option products – Section X)
- The PRIIPS manufacturer in case of delegated functions (Investment funds – Section XI)
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Ombudsman annual report
Ombudsman annual report
The UK’s Financial Ombudsman Service (FOS), the organisation which resolves complaints between financial businesses and their customers, has published its annual report for 2023. Amongst the key statistics across the core financial services sectors are the following.
Banking
- 61,995 new cases
- 76,637 resolved cases with 36% upheld
- 21,673 fraud and scam cases, up by 15.5% on the previous period
- Nearly 3,000 complaints about account closures, up by 7%
Consumer credit
- 39,607 new cases
- 55,535 resolved cases with 41% upheld
- Motor finance commission the most complained about product
Insurance
- 39,711 new cases
- 45, 109 resolved cases with 31% upheld
- Nearly 15,000 complaints about valuation of vehicles in insurance claims
Mortgages, pensions and investments
Mortgages
- 8,241 new cases
- 11,288 resolved cases with 28% upheld
- Around 1,300 complaints about standard variable rate mortgages answered
Pensions
- 6,683 new cases
- 10, 302 resolved with 43% upheld
- 538 complaints about the British Steel Pension Scheme, being addressed in conjuntion with the Financial Conduct Authority and the Financial Services Compensation Scheme (FSCS)
Investments
- 7,314 new cases
- 9,668 resolved cases with 30% upheld including complaints about minibonds and funeral plans
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MAS ESG code of conduct
The Monetary Authority of Singapore (MAS) has published a revised Code of Conduct for Providers of Environmental, Social, and Governance (ESG) Rating and Data Products. The code notes that “it is to be applied by ESG rating and data product providers on a ‘Comply or Explain’ basis. That is, providers will comply with the principles and best practices set out in the Code, or explain why they do not comply with the Code (or specific principles/best practices).” The code sets out seven key principles summarised below:
- Principle 1: ESG rating and data providers should use high-quality data sources and transparent methodologies to produce accurate and reliable ratings.
- Principle 2: ESG rating and data providers should maintain independence from political or economic pressures and avoid conflicts of interest that could compromise the objectivity of their ratings.
- Principle 3: ESG rating and data providers should identify, manage, and disclose potential conflicts of interest to ensure their ratings are credible and trustworthy.
- Principle 4: ESG rating and data providers should provide adequate levels of public disclosure and transparency about their methodologies, processes, and data sources to enable users to understand the basis for their ratings.
- Principle 5: ESG rating and data providers should protect non-public information received from or communicated to them by any entity to maintain the confidentiality of sensitive data.
- Principle 6: ESG rating and data providers should establish efficient information gathering processes with covered entities, ensuring data collection is timely and effective.
- Principle 7: ESG rating and data providers should address issues raised by covered entities in a prompt and objective manner to maintain the integrity of their ratings.
Whilst the code applies to entities in Singapore, all financial services firms would benefit from adopting the core principles of the code.
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FS COP28 finance day: keynote speech by Ravi Menon
On December 4, 2023, Ravi Menon, Managing Director of the Monetary Authority of Singapore and Chair of the Network for Greening the Financial System (NGFS), delivered a speech at the NGFS COP28 finance day. In his remarks, Menon highlighted the NGFS’s current work and plans.
The NGFS is a coalition of 150 central banks and financial supervisors worldwide. Menon stated that the NGFS’s primary focus areas are:
- Climate scenarios and their impact.
- Blended finance for emerging markets and developing economies.
- Transition planning by financial institutions.
Climate scenarios
Menon discussed the key findings from the fourth vintage of the NGFS climate scenarios published in November 2023. He emphasised that reaching net zero by 2050 will require significant economic transformation and financial investments against much higher carbon prices than today. Additionally, carbon prices would have to be raised much higher and much earlier to achieve an orderly transition. Menon warned that the world will incur substantial economic costs if we fail to transition successfully.
The NGFS scenarios will facilitate a deeper understanding of climate change’s macroeconomic and financial impacts and inform monetary policy and supervisory approaches. In the next phase of the NGFS’s work on climate scenarios, they will focus on developing new short-term climate scenarios to inform stress tests and macroeconomic assessments for monetary policy formulation. They will also work to better understand the implications of climate change for monetary policy.
Blended finance
Menon noted that while climate finance flows have grown over the last decade, they still lag far behind what is needed to meet the Paris Agreement goals. Blended finance can help mobilise capital for marginally bankable green and transition projects. Blended finance is about partnership and synergy across multiple players. Governments, development finance institutions, and philanthropies could provide concessional capital through grants, limited guarantees, and debt or equity at below-market rates of return. Multilateral development banks can provide technical assistance through project development expertise, capacity building, and institutional support.
The scaling of blended finance requires collective action from the entire ecosystem of stakeholders. The NGFS has launched a technical document on scaling up blended finance for climate mitigation and adaptation in emerging markets and developing economies (EMDEs). The document outlines guiding principles and policy recommendations for scaling blended finance up and how each key stakeholder in the ecosystem can step up. Multilateral development banks need to play a more catalytic role in mobilising private capital, governments in EMDEs need to deepen and broaden their domestic capital markets, and ESG data providers and credit rating agencies must continually enhance their data collection and risk assessment methodologies. The NGFS technical document also showcases some interesting blended finance projects across regions, demonstrating the application of these policy recommendations and illustrating how innovative and scalable solutions can unlock private capital.
Transition planning
Menon highlighted that there is no commonly agreed definition of a transition plan, partly because transition plans are motivated by different objectives. In the next stage of the NGFS’s work on transition planning, they will study how the prudential approach to transition planning can factor in the needs and challenges of emerging markets, how corporate transition plans feed into financial institutions’ transition plans, and how the credibility of financial institutions’ transition plans can be assessed.
Menon concluded by stating that the NGFS plans to establish a new task force on Adaptation Finance and further enhance their efforts in evaluating financial risks related to nature. This initiative will be based on the conceptual framework for nature-related financial risks that they released earlier this year.
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