The speed read

  • New rules brought in for non-UCITS retail schemes
  • Changes to mortgage reporting requirements confirmed
  • Updates to the FCA’s Temporary Transitional Power
  • The human impact of a potential future recession
  • Independent investigation into FCA regulation of UCIS firms
  • Insurer fined £24 million for failings in non-advised annuities sales

New rules brought in for non-UCITS retail schemes

The FCA has brought in new rules for certain open-ended funds investing in inherently illiquid assets, like property and real estate. The new rules will not apply to UCITS and other funds which already have restrictions in place. Instead these rules cover non-UCITS retail schemes (NURSs).

The new rules mean that investors must be given clear and obvious information on the risks associated with liquidity, and the fund must be transparent about the circumstances where access to funds may be restricted. Managers of these funds will now be obligated to maintain plans to manage liquidity risk.

The rules aim to protect investors’ interests, especially during stressed market conditions. The regulator wants to reduce the potential for some investors to gain at other investors’ expense, and to reduce the possibility of runs on funds, which can lead to a ‘fire sale’ of assets, harming fund investors. Such a situation came about shortly after the 2016 EU referendum when several property funds had to suspend dealing.

Under the new rules the FCA has introduced a new category of ‘funds investing in inherently illiquid assets’ (FIIA). These funds will have to follow extra requirements, including:

  • Increased transparency and disclosure on how they manage liquidity
  • Standard risk warnings in financial promotions
  • Enhanced depositary oversight
  • Providing liquidity risk contingency plans.

However, these requirements will not apply where a fund matches the dealing frequency of its shares to the liquidity of its assets.

NURSs that invest in inherently illiquid assets will have to suspend dealing if the independent valuer decides there is material uncertainty around the value of more than 20% of the fund’s assets, under the new rules. But the FCA has said that, following feedback, it will allow fund managers to continue to deal when they have agreement from the fund’s depositary that this is in the investors’ best interests.

Though these rules do not include UCITS, the high-profile suspension of a recent UCITS fund highlights the wider importance of effective liquidity management in open-ended funds, according to the regulator.


Changes to mortgage reporting requirements confirmed

Following a consultation that opened in December 2018, the FCA and PRA have released a policy statement on changes to mortgage reporting requirements.

The regulators wanted to close the gaps in the information they held on mortgage markets. This information includes data which refers to internal product transfers, which make up 40% of mortgage sales. The other area covers performance data about mortgage books sold to entities that do not hold FSMA permission, and books that have been securitised into a special purpose vehicle (SPV). The aim is for the regulators to be able to carry out their function effectively and identify potential consumer harm.

Overall respondents supported the changes, which would apply to regulated mortgage lenders and home finance administrators – in fact they were already implementing proposals as they appeared in the consultation.

These proposals, which have now been confirmed, include:

  • Requiring firms to start providing sales data report (PSD001) returns on further advances in internal product transfers, also known as ‘internal switches’
  • Adding extra fields in the product sales data report, such as outstanding mortgage debt and contractual reversion rate
  • Requiring administrators to provide performance data report (PSD007) returns on all mortgage books, including those held by non-FSMA-authorised entities
  • Fixing an omission in regulators’ reporting forms and clarifying Mortgage Lender and Administration Return (MLAR) guidance on reporting requirements.

As a result of the consultation, the FCA and PRA are making a number of changes to their original proposal, including:

  • Extending the implementation time for the product sales data report (PSD001) changes to 18 months. Implementation times for the performance sales data report (PSD007) and MLAR changes will stay at the proposed 12 months.
  • Introducing data items in the performance data report (PSD007) to give regulators a clearer picture of how mortgage books are held, as well as making changes to clarify and simplify the content.
  • Adapting the sales data report (PSD001), clarifying content and reducing the number of data fields for internal switches, as well as adding fields to cover affordability tests for stepped rate products.
  • Minor alterations to content on MLAR in line with the PSD001 changes.


Updates to the FCA’s Temporary Transitional Power

The regulator has updated draft directions under its Temporary Transitional Power (TTP). As outlined in February, the legislation gives the FCA flexibility following Brexit and would only come into effect on the day the UK leaves the EU without an implementation period.

The TTP is designed to reduce disruption for organisations and markets in a no-deal scenario, giving firms a chance to transition to new UK regulatory obligations.

These new directions published under the TTP update those shared at the end of March. The regulator also took the opportunity to clarify the use of the power.

The update covers:

  • Extending the directions from 30 June 2020 to 31 December 2020
  • Adjusting plans for prudential requirements in line with new HM Treasury legislation and FCA exit instruments published since 29 March 2019
  • Removing some directions related to payment services provided by EEA credit institutions in the financial services contracts regime, as these areas are now covered by government legislation amendments
  • Allowing EEA Central Banks and the European Central Bank to continue their status as exempt persons until 31 December 2020.

The regulator reiterated its statements from February that there are still areas which will not receive transitional relief. An example of this is in relation to key reporting obligations.


The human impact of a potential future recession

FCA Chair Charles Randell gave a speech this week which outlined the impact to real people, not just markets and institutions, in the event of a recession.

Randell explained that there are two ways that the Bank of England looks at the financial system’s resilience during their annual stress test of the major banks. These are whether the banking system has the capital and liquidity to provide credit to the economy through a recession, and whether any of the banks need to act to strengthen their financial position to survive the downturn.

But, he said, there was another aspect that needed to be considered when thinking about a recession, particularly for the regulator. He admitted that, while banks and the system can be sustained to deal with losses during a financial downturn, behind the losses will be millions of real people in genuine financial trouble.

Randell went on to describe the financial reality of life for many people in the UK. This included:

  • 26 million UK adults have unsecured debt, such as short-term loans, £10,000 each on average
  • Around 8.3 million people are defined as ‘over-indebted’
  • There are over 800,000 UK households who have mortgage debt of more than four times their household income
  • Around a third of UK adults have less than £2,000 of cash savings. One in eight has no cash savings at all.

The scenario laid out in the Bank of England’s annual stress test uses a ‘severe but plausible’ set of circumstances to seriously test the banks and banking system. The conditions for the 2019 test are that unemployment rises to 9.2%, house prices fall by 33%, and the stock market falls by 41%. Randell was clear to point out that this is not a prediction of the next recession, just a way of thinking about preparation for the future.

He used the theoretical circumstances of the stress test to illustrate what would happen to millions of consumers in the UK, particularly people in a less financially resilient position, like those listed above.

Randell then asked what policymakers and regulators should be doing about this. Among the suggestions, he noted:

  • The FCA is right to continue its focus on the market for unsecured credit
  • In a recession the regulator would need to work with government and other authorities to look at various responses in financial services, for example increased demand for debt advice
  • All creditors – including in council tax, utility and mobile phone bills – would need to respond to the situation brought on by a recession
  • The FCA should consider what support consumers would need if a recession caused falls in the value of their investments, the need to use pension savings for everyday living expenses and increasing gaps in new retirement saving.

In his speech, Randell said the regulator would use the tools at its disposal to reduce the impact on people’s debt, savings and investments. But he drew attention to the fact that, while it’s the responsibility of the regulator to consider these scenarios, the response required from various industries and authorities lies far outside the FCA’s remit to enforce.

He also said that the FCA continues to expect firms to consider issues of affordability and arrears handling, as well as guiding savers to the right options for their savings. The regulator has a low tolerance for firms who fall short of the FCA’s standards in these areas.


Independent investigation into FCA regulation of UCIS firms

An independent review has begun into the FCA’s regulation of firms involved in a 2012 UCIS collapse.

The FCA first commissioned this independent review in June 2019. It will examine the approach, judgements and processes implemented by the FSA, and later the FCA, when supervising several firms running an unregulated collective investment scheme which collapsed in 2012.

Barrister Raj Parker, commissioned by the regulator to lead the review, announced that the investigation is up and running, inviting those affected to contact the independent team. A website with information on the investigation is now also live.


Insurer fined £24 million for failings in non-advised annuities sales

A large insurer has received a fine of £23,875,000 from the FCA, a result of serious breaches between July 2008 and September 2017 relating the non-advised sale of annuities.

During those nine years, the insurer focused on selling annuities directly to existing pensions customers. The complexity of annuities means that customers need accurate information when choosing to buy. This is especially the case for non-advised sales.

Firms are also required to explain to customers that they could get a better deal elsewhere. The insurer knew that many customers could get a higher income in retirement by shopping around on the open market. But the documentation provided to call handlers, and the sales-linked incentives in place until 2013, meant there was a risk the interests of customers were not prioritised. The insurer also failed to record and monitor customer interactions adequately.

So far, the insurer has offered approximately £110 million in redress to 17,240 customers.