In November 2023 the FCA and PRA published consultation papers reviewing proposed changes to the future prudential expectations of firms. The main objective of these changes is to advance the regulators’ objectives of protecting consumers, enhancing market integrity and promoting competition (in the case of the FCA) as well as protecting the safety and soundness of firms and providing policyholder protection (in the case of the PRA). The PRA and FCA jointly produced CP25/23 – Prudential assessment of acquisitions and increases in control whilst the FCA produced a further consultation CP23/24 – Capital deductions for redress: personal investment firms, which was followed up by a Dear CEO Letter on the same subject.
PRA and FCA – CP25/23 – Reviewing Framework regarding Acquisitions and Increase in Control Assessment
The joint paper between the PRA and FCA, which is relevant to all PRA and FCA regulated firms, focuses the replacement of old EU guidelines on prudential assessment of acquisitions and increases in holdings in the financial sector. These are proposed to be replaced by one centralised Supervisory Statement, accompanied by additional FCA guidance, which are both currently in draft format. These new documents will set expectations on the following areas:
- Identification of qualified holdings (along with clarification on the concept of significant influence), aggregated holdings and indirect controllers;
- Guidance on submission of change in control notifications, including the additional information that the PRA and FCA may require;
- Guidance regarding the assessment criteria (detailed in FSMA s186) to assess notifications to acquire or increase control in an PRA or FCA authorised firm operating in the UK; and
- Application of FCA and PRA statutory powers to impose conditions on an approval when it advances their objectives.
The new Supervisory Statement and FCA guidance is proposed to replace the existing EU 3L3 Guidelines. This move would not see a significant shift in the information in these guidelines as they will jointly largely replicate the existing information. However, there would be simplification and changes that will see the approach be more reflective of the UK’s system and align with the UK’s financial approach.
There will be some element of change, with the new guidance having additional sections that the 3L3 Guidelines do not currently have, these include:
- A new PRA approach to use of conditional approvals to advance objectives while not restricting their use of such conditions;
- Introduction of a ‘Significant Influence’ section that provides examples where a person may exercise significant influence over a target firm, these will be relevant to the UK market specifically; and
- New and revised content in the ‘Submitting the Notification’ section explaining how applicants can make notifications specifically to the PRA and FCA and when a submission may require additional information.
The consultation closes on 23rd February 2024 with implementation of the new proposed Supervisory Statement and FCA Guidance in the Summer of 2024.
FCA – CP23/24 and Dear CEO Letter – Reviewing Capital Requirements for Personal Investment Firms
Continuing the theme of prudential refresh, the FCA consultation focuses on the need for Personal Investment Firms (PIFs) (i.e. firms that mainly provide advice and arrange deals in retail investment and personal pensions) to set aside capital for redress liabilities at an early stage. . The consultation continues the theme of the FCA cracking down on damaging practices in the retail market in line with the implementation of the Consumer Duty in 2023.
The main concern harbored by the FCA is the fact that PIFs are continuing to cause significant harm to consumers with many not having the required capital to implement appropriate redress, resulting in liabilities falling on the Financial Services Compensation Scheme, and the wider financial services sector as a result. Therefore the FCA is proposing to strengthen the prudential requirements to ensure PIFs hold more capital, in the form of specific capital reserves for potential redress, within their prudential requirements. This intervention is specifically looking to be proportionate and targeting a key sector where redress liabilities are particularly high and thus reserves are required to ensure consumer protection. This is, in effect, an ICARA for non MiFIDPRU firms.
It is proposed that these additional prudential requirements on PIFs will be reflected in IPRU-INV 13, which already houses the existing prudential regime for PIFs. These updates will include:
- Quantification of an amount for potential redress liabilities;
- PIFs to set aside capital resources for potential redress through new capital deduction; and
- If a PIF falls below their capital requirements they will have to comply with an asset retention requirement.
These requirements will work in tandem with the Consumer Duty looking to incentivise firms to deliver better consumer outcomes whilst also enhancing firms’ resilience in the event that something goes wrong.
The Dear CEO Letter discusses this matter further and reminds firms to continue to handle complaints in accordance with DISP requirements whilst continuing to assess their financial resources to meet any potential redress liabilities due to the risk and complexity of their business model. The FCA would also expect immediate notification, detailed in SUP 15, in the event of a firm:
- Not having adequate financial resource to provide potential redress;
- Potentially or actually selling a client bank could have an impact on a firm’s risk profile, value or resources; and/or
- Has potential redress liabilities and wants to offer consumers less redress than they may be due.
Increased Monitoring of PIFs by the FCA
Finally it is also worth highlighting that the FCA will be increasing monitoring of firms applying to cancel or seek new authorisation into the PIF space during the consultation period. This is to prevent firms and individuals from attempting to avoid potential redress liabilities or trying to phoenix in the face of such liabilities. Such scrutiny will be applied in the face of perceived risk when assessed by the FCA.
How Complyport Can Help
With the FCA’s and PRA’s plans to ensure consumer protection through firms holding adequate capital for redress, It is important to ensure your firm meets the strengthened requirements being proposed.
If this Article has raised any queries or your firm requires assistance with navigating the proposed regulatory changes, contact via email
About Complyport
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