1. Non-financial misconduct – FCA guidance expected
It is anticipated that in 2023 the Financial Conduct Authority (FCA) will provide further guidance on the increasingly uncertain question of what kinds of “non-financial misconduct” may be relevant to an assessment of a regulated individual’s “fitness and propriety”. “Fitness and propriety” is the keystone test for whether an individual can conduct regulated activities and, as such, the guidance will be important for regulated individuals and employers.
The genesis of the FCA’s interest in “non-financial misconduct” is a letter from the FCA to the Parliamentary Women and Equalities Committee in September 2018 on the subject of workplace sexual harassment. In that letter the FCA said it would (and had already) acted against individuals on the basis of non-financial misconduct. However, since that time, the precise scope of “non-financial misconduct” has been left to regulated businesses, the RDC and the Upper Tribunal, to decide. This has resulted in uncertainty and inconsistent application of the “fitness and propriety” test.
Whilst regulatory guidance is not always illuminating particularly in such a potentially broad and fact-specific area, structured guidance focussed on principles, should not only set out the expectations for regulated individuals, but allow regulated businesses to more confidently discharge their obligations under the Senior Managers and Certification Regime, without concern for regulatory or litigation risk.
2. UK moves closer to regulation of crypto assets
The UK has adopted a cautious and incremental approach to the regulation of crypto assets. Such assets are not currently regulated, although the FCA does have a limited role ensuring compliance with money-laundering requirements for crypto asset businesses, and maintaining a register. However, 2023 should finally see some more significant reforms.
For example, following a consultation process in 2022, financial promotions relating to crypto assets will be brought into the same regulatory regime used for other types of financial promotion (which has itself been overhauled). Stablecoins used as a form of payment will also be brought into the UK payments regime. A wider consultation on the regulation of crypto asset related activities is also expected.
These reforms are significant for businesses dealing with or exposed to crypto assets and those who invest in or use crypto assets personally.
3. Fallout expected from Consumer Duty requirement implementation
Following extensive consultation, 2023 will see the start of the implementation of the FCA’s Consumer Duty. This is an overarching requirement, supplemented by detailed rules and guidance, aimed at ensuring fair outcomes for retail customers (and small and medium sized enterprises in certain cases). It applies to businesses all across the ‘distribution chain’ for financial products sold to such customers. The impact of the new Consumer Duty is expected to be significant, including in terms of product design, outcomes and in the regulator’s approach to Supervision and Enforcement.
On a related note, regulated businesses dealing directly with retail customers continue to seek to comply with the FCA’s important guidance on the identification and treatment of vulnerable customers. This continues to create difficult judgment calls for businesses in practice, not least as the FCA define vulnerability very broadly indeed, including financial and personal circumstances. Increased FCA supervision and enforcement is expected in this area.
4. Senior Managers and Certification Regime review likely to yield reforms for all regulated businesses and individuals
In December 2022, as part of the so called “Edinburgh Reforms” and taking forward the UK government’s stated ambition for the UK to be the world’s most innovative and competitive financial centre, HM Treasury announced a review into reforming the Senior Managers & Certification Regime (SMCR) to take place in Q1 2023.
Implemented in 2016, SMCR was introduced largely in response to the global financial crisis of 2007/2008 and the public outcry surrounding LIBOR-rigging and, in particular, the absence of accountability within the senior management of financial institutions. Previous reviews of SMCR by the FCA and PRA had pointed to the regime bringing improvements to the culture within firms and the drive to senior accountability, however, many have bemoaned the fact that there has been very little enforcement of the regime at senior management level.
The UK Government’s call for evidence is referred to as “an information gathering exercise to garner views on the regime’s effectiveness, scope and proportionality, and to seek views on potential improvements and reforms.” Whilst, in light of the significant time and cost of implementing SMCR so recently, regulators and firms alike may be against significant reform, there remains political and public pressure for greater accountability and the review will no doubt elicit strong views on all sides. Any reforms in this area will be relevant to all regulated businesses and individuals, but are likely to be some way off.
5. Appointed Representative Regime scrutiny increases
In December 2022, the FCA sent all principal firms mandatory Section 165 data requests seeking information about their appointed representatives (ARs). This followed the implementation of new rules for principal firms which came into effect on 8 December 2022 [see advisory on final rules here]. Principals must respond to the request by 28 February 2023.
The new rules, designed to address the FCA’s concern that ARs are a disproportionate source of conduct risk, require principals to provide more information about their ARs. The Section 165 request requires principals to set out details of ARs (and introducer ARs) including the reason for their appointment, nature of their regulated business, anticipated revenue, financial arrangements between principal and AR and details of complaints.
The FCA has said that the data submitted will “inform” their supervisory work on principals and ARs. It is likely that this exercise will result in the removal of ARs in some cases and enhanced supervision, even enforcement where principals have failed to manage and supervise ARs appropriately. It is also expected that this scrutiny will result in further regulatory guidance for principals and ARs in an area which has long been overlooked. Any principals or ARs who have any concerns about their arrangements should take advice now.