The Chancellor’s Mansion House Speech and other regulatory updates for financial institutions

Insight

12.12.2024

Financial Institutions 360 – Q3 2024: Regulatory update

Read other sections of this edition of the Financial Institutions 360:

Chancellor’s Mansion House Speech

On 14 November 2024 the Chancellor Rachel Reeves gave her inaugural Mansion House speech. It was accompanied by a flurry of consultations, statements and calls for evidence, which we cover below. Points to note from her speech:

The Chancellor says that the UK has been regulating for risk, but not regulating for growth. The changes following the 2008 financial crisis resulted in a system which sought to eliminate risk taking, which she believes has now gone too far.
The Treasury is planning to update the certification regime for firms with a more “proportionate” approach, intended to free up businesses to focus on growth. A consultation on the proposed changes will follow.
The Chancellor has written remit letters to the FCA, Prudential Regulation Committee, Financial Policy Committee and PSR, emphasising the Government’s focus on growth, covered further below.
In the spring, the Government will publish its first ever Financial Services Growth and Competitiveness Strategy, which will propose focusing on five priority growth opportunities: fintech, sustainable finance, asset management and wholesale services, Insurance and reinsurance, and capital markets. The Treasury published an accompanying Call for Evidence – see below for more detail.
The Chancellor announced an update on the Advice Guidance Boundary, covered in more detail below.
The Financial Ombudsman Service’s framework will be modernised, to give clearer expectations around its decisions for consumers and FS firms. This initiative is partly inspired by the current mass redress event relating to motor finance.
The Government is publishing its National Payments Vision
The Government is launching a Digital Gilt Instrument as a pilot, which relies on distributed ledger technology (DLT).
The Government will legislate to establish Private Securities and Capital Exchange System (PISCES) by May 2025 – this is a world-first regulated market for trading private company shares.
The Government is publishing proposals to merge local government pension schemes into “megafunds”, accompanied by the publication of an interim report on its Pensions Investment Review, covering proposals for legislation
The Chancellor made a number of announcements relating to sustainable finance, including the Government’s plans to:
- Regulate ESG ratings providers.
- Consult on the value case for a UK Green Taxonomy.
- Introduce UK Sustainability Reporting Standards for economically significant companies.
- Launch a Transition Finance Council.

Call for Evidence on Financial Services Growth and Competitiveness Strategy

The Treasury published a Call for Evidence on its proposed Financial Services Growth and Competitiveness Strategy. It is intended to set out the Government’s approach to the sector for the next 10 years. The Government considers that the financial services sector has a central role to play in delivering the Government’s central mission of economic growth.

The purpose of the call for evidence is to ensure that the strategy is fully backed by industry, consumer groups and trade bodies. It sets out, among other things, the Government’s proposed policy pillars for growth, and asks respondents to rank which financial services sectors have the highest growth potential. The call for evidence is only open for four weeks, despite asking for a substantial amount of information and input, including evidence or analysis of how the financial sector can drive growth and industry views on wide-ranging matters including international trade and the skills gap.

Advice Guidance Boundary Review

On 15 November the FCA published feedback on its discussion paper and its next steps on the Advice Guidance Boundary Review. The FCA announced that it is planning to publish a consultation by the end of the year, which will focus on pensions support and will set out how the FCAs envisages targeted support working for pension savers.

By the end of Q2 2025, the FCA plans to develop related proposals for targeted support in relation to wider investments and consult on the draft rules that will apply across consumer investment and pensions.

The FCA also published, jointly with the ICO and TPR, a statement on the communications it considers firms can make which are compatible with privacy legislation and the Consumer Duty.

Remit letter to the Prudential Regulation Authority

The Chancellor sent a letter to the Prudential Regulation Committee (the decision making body for the PRA) stressing the PRA’s important role in the Government’s growth mission. The Chancellor wants the PRA to consider how it can enable informed and responsible risk-taking by authorised firms. The Chancellor asks the PRA to explore opportunities to facilitate innovation by the financial services sector, allowing firms to take risks. The PRC is instructed in the letter to have regard in its decision making to:

the financial services industry’s contribution to economic growth;
creating a regulatory environment which facilitates growth;
maintaining and enhancing the UK’s position as a world-leading global finance hub;
leading the world in sustainable finance;
ensuring the UK’s capital markets are competitive; and
reinforcing financial inclusion and supporting home ownership.

Remit letter to FCA

On 14 November, the Chancellor sent a letter to the FCA, setting out its recommendations. The Chancellor reiterates that growth is the Government’s defining mission, and emphasises the fundamental role that the UK financial services sector has to play in delivering this growth.

The Chancellor notes that the FCA has already made progress in supporting this aim, including the reform of the Listing Rules and the work to launch PISCES.

As outlined in her speech, the Chancellor states her expectation that the FCA should consider how it can enable informed and responsible risk-taking by authorised firms, and explore opportunities to facilitate innovation by the financial services sector. The Chancellor is particularly keen to ensure that:

Innovative new firms are supported to enter the market, and existing firms are enabled to innovate and invest in new technologies, including the safe adoption of AI.
UK financial services firms are supported to play a significant role in supporting the Net Zero transition globally.
Customers can access appropriate advice and products.
Administrative burdens on firms are streamlined as far as possible.
The UK demonstrates international leadership on key regulatory issues.

The letter also sets out aspects of the Government’s economic policy that the FCA should consider, which mirror those included in the letter to the PRA set out above.

UK MiFID

On 14 November, the Treasury published an update on next steps for reforming UK MiFID. First, the Treasury will legislate to give the FCA fuller powers of direction in relation to the reporting of over the counter (OTC) positions. Secondly, the Treasury will commence the revocation of the MiFIR firm-facing requirements relating to transaction reporting, giving powers to set the new regime to the FCA. Thirdly, the Treasury will revoke the firm-facing regulations within the MiFID Organisational Regulation.

On 15 November the FCA issued a discussion paper on improving the UK transaction reporting regime. The FCA has identified opportunities both to improve the quality of data reported to them and reduce reporting burdens on market participants. It is also seeking initial views on these potential improvements as part of its review of the UK MiFID framework. This closes in February 2025, and the FCA will then consult on proposed changes. In its November Market Watch, the FCA discusses recent observations from its supervision of the UK MiFID transaction reporting regime, including setting out examples of poor practice.

On 27 November, the FCA launched a consultation on transferring the firm-facing requirements of the MiFID Organisational Regulation to the FCA Handbook. This is mainly a transfer of the rules, but they also discuss how they might improve certain areas of the regime. This is so that the rules are in place for when the MiFID Org Reg is repealed by the Treasury. This closes in February 2025.

The FCA is asking for views on how they could make the rules better suited to the range of UK authorised firms and clients they provide services to. This includes in circumstances where the Consumer Duty does not apply – the FCA wants to consider how they could improve MiFID II derived conduct and organisational rules, including for Article 3 firms. They also discuss whether and how the client categorisation rules could work more effectively. This closes in March 2025.

The PRA also published a statement, saying they would publish an equivalent consultation in Q1 2025. They will then aim to publish their policy statement (PS) on the same day as the FCA in H2 2025.

PISCES

The Treasury published a draft SI, Policy Note and consultation response relating to the proposed Private Securities and Capital Exchange System (PISCES) Sandbox. It is intended that PISCES will be established in a financial market infrastructure sandbox in order to trial the new platform.

ESG Ratings providers

The Treasury published a draft SI setting out the regulatory regime for ESG ratings providers, including what activities will be covered. Once the legislation is finalised, the FCA will consult on the detailed requirements. Separately, the European Council also adopted a regulation on ESG rating activities.

Green Taxonomy

The Treasury published a consultation on whether to introduce a Green Taxonomy. One of the Government’s key goals is to be a world leader in sustainable finance, which includes delivering a suitable regulatory framework. The previous government attempted to develop a Green Taxonomy, with the assistance of the Green Technical Advisory Group, but this was never finalised.

The purpose of the consultation is to establish whether a UK Taxonomy would be additional and complementary to existing policies in meeting the objectives of mitigating greenwashing and channelling capital to support the Government’s sustainability objectives. The Treasury is interested in understanding if there are market and regulatory use cases for a UK Taxonomy and wants to learn lessons from the development of taxonomies in other jurisdictions. The consultation closes on 6 February 2025.

Critical Third Parties: operational resilience

The final rules relating to the regulation of critical third parties were published on 12 November. The Bank of England, PRA and FCA will jointly oversee the resilience of the firms that provide services to financial firms and financial market infrastructures (FMIs), to ensure that they do not threaten the stability of the UK financial system.

The rules are due to come into force on 1 January 2025, but the Treasury needs to designate which firms it considers to be critical third parties, and has not done so yet.

The rules will require critical third parties, once designated, to:

provide regular assurance, information and notifications to the financial regulators on their services;
undertake various forms of resilience testing and scenario-based exercises, including collaborating on some with their firms and financial market infrastructures (FMIs); and
report major incidents like cyber-attacks, natural disasters and power outages.

Prudential assessment of acquisitions and increases in control

On 1 November 2024 the PRA and the FCA published their joint policy statement providing feedback on their consultation paper on prudential assessment of acquisitions and increases in control. This was published along with their updated supervisory statement, the FCA guidance referred to below, and their updated statement of policy on the interpretation of EU Guidelines and Recommendations.

The FCA’s Finalised Guidance FG24/5 (non-handbook guidance) sets out the FCA’s expectations in relation to:

How to identify controllers, including the concepts of significant influence, aggregated holdings and indirect controllers.
Submitting the change in control application.
The assessment criteria.
How the FCA will use its statutory powers to impose conditions on an approval.

The guidance replaces the Joint Committee Guidelines on Acquisitions and Increases of Qualifying Holdings published by the Joint European Supervisory Authorities in 2017. It includes some illustrative examples to assist firms to identify controllers for the purposes of FSMA.

Designated Activities Regulations and Consumer Composite Investments

The Government published a draft version of the Financial Services and Markets Act 2000 (Designated Activities) (Supervision and Enforcement) Regulations 2024. The Regulations relate to the designated activities regime under FSMA.

The Designated Activities Regime (DAR) was introduced in FSMA 2023 and is part of the Government’s Smarter Regulatory Framework. It will enable the regulation of activities that do not require those carrying out the activities to become authorised persons (including financial markets exchanges, instruments, products or investments) but were previously regulated under firm-facing requirements in assimilated EU law.

The new legislation, once passed, will provide the FCA with powers to supervise, investigate, and enforce rules in relation to these activities. This has the aim of putting cross-cutting supervisory, investigatory, and enforcement powers in a single place to reduce the complexity for firms which perform more than one designated activity. As with the Regulated Activities Order (RAO), the DAR statutory instrument (SI) will be updated over time, as activities move in or out of scope. The new regime for Consumer Composite Investments will come under the DAR.

Consumer Composite Investments

On 21 November 2024, the final Consumer Composite Investments (Designated Activities) Regulations 2024 were published, but only come into force once the PRIIPS Regulation is revoked. These Regulations set out the legislative basis for the new UK retail disclosure framework for consumer composite investments (which are investments or contracts of insurance where the value or amount payable to the investor can vary because of exposure to reference values).

Principal firms and effective AR oversight: Good practice and areas for improvement

On 6 September 2024, the FCA released its findings on its review of how principal firms are embedding the FCA’s rules and enhanced expectations that were effective from 8 December 2022, for overseeing their appointed representatives (ARs). These findings are relevant to all principal firms and ARs, including Introducer ARs (IARs).

The FCA found principal firms had made some effort to comply with the FCA’s new rules, but noted that although 96% of participants said they were very confident that they were effectively implementing the rules, this reflected some over-confidence as the FCA found that some firms were either not implementing the rules, or not implementing them to a good standard.

The FCA commented that given that the new rules came into effect in December 2022, it would have expected every principal firm to have completed its annual reviews and completed a self-assessment at least once. Where a firm considers its current practices to be sufficiently robust, it must be able to evidence why in light of the new rules.

The FCA did helpfully set out examples of good practice as well as areas for improvement with respect to self-assessments, annual reviews, monitoring, oversight and acting out of scope, the approach to onboarding ARs, termination and orderly wind-down and offboarding. Principal firms should also note that the FCA has said that it will continue to monitor compliance with the rules, with a particular focus on annual reviews, self-assessments, and the quality of oversight of ARs, and will take “swift action” where it considers principals to be substandard.

Remuneration reform

On 26 November the PRA and FCA published a joint consultation CP16/24 on Remuneration Reform.

The proposals complement previous remuneration changes, including the removal of the bonus cap. The proposed reforms are as follows:

Reducing the number of individuals subject to the remuneration rules (known as Material Risk Takers (MRTs).
Simplifying the approach for identifying MRTs, placing more emphasis on firms to own and safeguard the process.
Bringing rules on deferral of variable remuneration (“bonus deferral”) more in line with international practice through changes including reducing the seven-year minimum deferral period that applies to certain SMFs to five years, and also allowing immediate pro rata vesting.
Ensuring that variable remuneration better reflects risk taking outcomes and individual responsibilities.
Aligning the regulators’ rules on buy-outs in relation to small firms.

The FCA is also proposing to change the structure of its rules in SYSC 19D by cross-referring to the Rem Part of the PRA rulebook to remove the need for the FCA to maintain its own parallel rules. This will be welcome news to firms, who will no longer need to check both versions.

IA principles of remuneration

On 9 October 2024, the Investment Association published an updated version of the IA principles of remuneration. The updated principles build on the remuneration expectations set out in the UK Corporate Governance Code, and have been rewritten with the aim of both simplifying the guidance and providing flexibility for companies to adapt pay structures to best suit their business. Guidance on leavers and malus and clawback has been rewritten, removing the examples of specific triggers has been removed, but keeping the underlying concepts.

Compliance with these guidelines is completely voluntary. The IA notes that some stakeholders have previously considered their principles and guidance to be rules that must be followed, but reiterate that they are guidelines, not rules, and seek to foster good practice, align with investor expectations and support a competitive market environment.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.