The speed read

  • SMCR now extended to solo-regulated firms
  • Building a resilient financial system
  • Call for input on open finance
  • Open-ended investment funds review findings
  • Reducing conduct risk in LIBOR transition
  • FCA clamps down on speculative mini-bonds

SMCR now extended to solo-regulated firms

As of 9th December, the Senior Managers and Certification Regime (SMCR) applies to almost all regulated firms. Up until now, the regime only affected banks and insurers. Extending it to a further 47,000 firms has been the next step in the FCA’s work to drive cultural transformation in the financial services industry.

The FCA has also launched a consultation on how they intend to extend the Senior Managers Regime (SMR) to all benchmark administrators. Given that the pricing of many products and contracts relies on the integrity of these firms, the FCA is keen to align standards of personal conduct and expectations with the rest of the industry. The consultation is open until 28th February 2020, with the aim of implementing the new regime in December 2020.

SMCR is designed to help firms embed a culture of accountability, diversity and inclusion, which in turn will bring about better consumer outcomes. But to do this, you need to go beyond just ticking the implementation boxes. The new regime requires a full overhaul of your culture, policies, procedures and day-to-day operations.

With the deadline now passed, you should have already implemented the required changes. But the regulator has made its intentions clear and will be spending 2020 making sure that firms are properly embedding SMCR as business-as-usual.

We can help you make sure your house is in order before the FCA comes knocking. Read how our post-implementation review helped a leading insurance broker improve their approach to SMCR, saving them from costly reworks.


Building a resilient financial system

The Bank of England (BoE), Prudential Regulation Authority (PRA) and FCA have published co-ordinated consultation papers on proposed policies to build the operational resilience of firms and Financial Market Infrastructures (FMIs).

Operational resilience is a firm’s ability to prevent, respond to and recover from operational disruptions, such as technology failures or cyber-attacks. Proposed changes are designed to strengthen resilience across the financial services industry, but should not conflict with or replace existing business continuity planning. These include:

  • Identify points of failure that have the potential to cause consumer harm and map the people, processes, technology, facilities and information that support them
  • Agree on thresholds of tolerable disruption and test them
  • Create plans for ongoing resilience and preparedness, including self-assessments, lessons learned exercises, and communication plans to be used in the event of significant disruption

Responses to the consultation paper are due by 3rd April 2020.


Call for input on open finance

The FCA has asked for ideas on how open finance could benefit the industry and how the regulator can support it.

Open finance refers to the cross-party sharing of data, allowing consumers to better understand and make the most of their financial products.

There are many potential benefits for consumers and businesses alike, such as:

  • Making price and product comparison easier
  • Giving consumers greater control over their data and empowering them to make better financial decisions
  • Driving innovation and efficiency across the industry.

The call for input closes on 17th March 2020.


More work needed on open-ended investment funds

A joint review by the FCA and Bank of England on open-ended investment funds has found that greater consistency is required between the liquidity of a fund’s assets and its redemption terms.

The Financial Policy Committee published its desired outcomes in its recent Financial Stability Report. These include:

  • Measures of liquidity should be based on the price discount needed for a quick sale, or the time period needed for a non-discounted sale
  • Redemption prices should reflect the discount needed to sell assets within the specified redemption notice period
  • Redemption notice periods should reflect the time needed to sell without further discounts, beyond those already worked into the price.

In 2020, the FCA will develop rules for open-ended funds off the back of these findings.


Conduct risk in LIBOR transition: what does the FCA say?

The transition away from LIBOR to other sterling risk-free rates (RFRs) in 2021 will have cross-sector impact. For many firms, it will involve:

  • Developing new product offers linked to RFRs
  • Amending or replacing their own or their client’s legacy LIBOR contracts
  • Effectively managing risks associated with LIBOR discontinuation, if investing on a clients’ behalf.

The FCA has made it clear that it expects firms to take action during LIBOR transition and to have a strategy in place that protects customers. Last month it released a series of FAQs which address some important issues about the prudential, operational and conduct risk associated with LIBOR transition.

Key takeaways include:

Governance and accountability

Firms must have robust processes, governance and controls in place including, where appropriate, a nominated senior manager who will be responsible for overseeing the transition away from LIBOR. Management will need be able to evidence that they have considered the firms overall business strategy and model, and acted appropriately when making decisions that could impact customers. Keeping solid records of meetings and committees will help with that.

Treating customers fairly

Firms should not use LIBOR discontinuation as a way to introduce inferior terms for customers with continuing contracts. But neither are firms expected to give up the difference between LIBOR and an alternative reference rate, for example the Sterling Overnight Index Average rate (SONIA). This difference is a result of LIBOR being calculated to reflect credit risk, while SONIA is not.

The best way to ensure customers are treated fairly is to avoid new LIBOR contracts that mature after end-2021, instead adopting a reference rate that is considered appropriate by relevant national working groups and was agreed on through a robust consultation process.

Appropriate use of alternative rates

The SONIA rate compounded in arrears is established as the preferred alternative reference rate. But the RFR Working Group also supports the production of a forward-looking term rate, which sets the interest rate at the start of the interest period and may be better for customers who prefer cash flow certainty.

Communicating with customers

Firms need to engage with customers as soon as possible, giving them good time to understand the risks and make informed decisions about products. Customers should understand the impact that rate transition will have on the performance of LIBOR-linked products, especially if they mature after 2021.


FCA clamps down on speculative mini-bonds

In November 2019 the FCA announced it will ban the promotion of speculative mini-bonds to retail consumers, due to the high risk nature of the investment and the significant potential for consumer harm.

The temporary changes will come into effect without consultation, and apply specifically to mini-bonds where the funds are used to lend to a third party, invest in other companies or develop property.

But changes only affect the marketing of speculative mini-bonds to retail consumers. Firms can continue promoting the products to high net worth or sophisticated investors, although they will need to be clearer about the associated risks, costs and fees to any investor.