Change is coming: five things to look out for in 2022 in the financial sector

The Financial Conduct Authority's (FCA) latest business plan signalled substantial change for 2022 when it was revealed last summer. In fact, significant shifts have already begun to take place. The new UK Investment Firm Prudential Regime came into force on 1 January 2022 and the remainder of the FCA's general insurance value pricing and loyalty penalty measures also took effect at the start of the year. These changes represent a major shake-up in the investments and insurance sectors and certainly reflect the ambitious nature of the FCA's plans. As we move into spring, what's on the horizon for the rest of the year? In this article, Lucy Hadrill and Emma Radmore of Womble Bond Dickinson explore the key regulatory changes firms should be aware of in the coming months.

A new Consumer Duty

One of 2021's "hot topics" was the FCA's plan for a new Consumer Duty, which is due to take effect this summer. As a reminder, the new Consumer Duty is intended to set higher expectations for the standard of care that firms provide to consumers and will comprise three key elements:

1. A new Consumer Principle (Principle 12) that will replace FCA Principles 6 and 7 for retail businesses and require firms to act to deliver good outcomes for retail customers (Principles 6 and 7 will continue to apply to firms dealing with wholesale or retail customers outside scope of the Consumer Duty). The FCA has confirmed that the new Principle 12 will be: "A firm must act to deliver good outcomes for retail clients".
2. Cross-cutting rules to help develop the standards of conduct expected under the Consumer Principle.
3. Rules and guidance relating to the four outcomes the FCA wants to see under the Consumer Duty. These are outcomes around communications, products and services, customer service and price and value.

The FCA's second consultation on the Consumer Duty, which closed on 15 February, clarified some of the FCA's proposals. For instance, the FCA is proposing that the scope of the Consumer Duty will be aligned to the existing scope of its sectoral sourcebooks, i.e. the scope of the Consumer Duty for insurance firms and intermediaries will follow the position in ICOBS, in respect of mortgages the scope will follow MCOB etc. The FCA has also confirmed that it intends the Consumer Duty to apply to prospective customers as well as a firm's existing customer base.

The second consultation paper includes draft non-Handbook guidance which sets out more detail for firms on what the Consumer Duty does and does not require (at Appendix 2). It also provides examples of good and bad practice on the four outcomes the FCA wants to see as a result of the Consumer Duty.

The FCA intends to publish a policy statement with its final rules by 31 July 2022.

The future of hosting?

In December 2021, the FCA announced a review of the Appointed Representatives (AR) regime. The regulator wants to combat the harm it is currently seeing across all sectors where firms have ARs (there are currently around 40,000 ARs operating under around 3,600 principals across a range of financial services markets). Key harms the FCA is keen to tackle include:

• consumers being offered products and services that are not fit for purpose or their individual needs, or which do not represent fair value
• consumers receiving sub-standard treatment and/or poor service
• consumers being unable to access appropriate redress where ARs act outside the scope of their appointment.

The FCA is concerned that such harms are resulting from principals failing to perform sufficient due diligence and conduct adequate oversight of their ARs. Its proposals seek to reduce harms to both consumers and markets by:

• clarifying and strengthening principals’ responsibilities and its expectations of them in relation to their monitoring, management and oversight of ARs
• improving the quality of available information relating to principals and ARs. The FCA intends to achieve this by requiring principals to provide more information to the FCA, including notifying the FCA of the specific activities ARs are allowed to undertake, so this can be shown on the Financial Services Register.

The FCA is also asking for views on the risks from regulatory hosting arrangements and business models where ARs are large in size relative to the principal, and what measures should be put in place to strengthen consumer protection.

Alongside the consultation, the FCA published a call for evidence in collaboration with HM Treasury to gather information on how market participants use the AR regime, and their views on its effectiveness, in order to assess whether legislative change is needed. One possibility could be to introduce a "regulatory gateway" such that firms wanting to appoint ARs would need specific FCA approval before they could do so.

The FCA expects to publish a policy statement and final rules by mid-2022.

Financial promotions

Following some build up over the last couple of years, we are expecting that 2022 will see changes to the financial promotions regime. In June 2021, HM Treasury outlined its plans for a financial promotions gateway, which it consulted on in July 2020.

These proposals signal a fundamental change. The Financial Services and Markets Act 2000 (FSMA) is to be amended such that an authorised person can only approve financial promotions if the FCA consents to it doing so (thus providing the "regulatory gateway" similar to what may also be introduced for firms wishing to appoint ARs). There will be a few exemptions to this overall ban, for example to allow authorised firms to approve promotions for their own group companies, and also to allow principal firms to approve promotions for their ARs in relation to matters for which the principal takes regulatory responsibility under the AR agreement.

Clearly, this will require an implementation plan. Treasury proposes that FSMA will be amended "when Parliamentary time allows", which we hope will be during H1 2022. The FCA will then need to consult on its own plans for implementing the gateway, following which it will place on all firms a requirement that they must not approve financial promotions. Firms will need to apply to the FCA to either vary or cancel this requirement, so as to enable them to approve all, or a defined type, of financial promotions.

Treasury is also consulting on proposed amendments to various exemptions within the FSMA 2000 (Financial Promotion) Order 2005 (FPO) and is aiming to ensure, amongst other things, that the thresholds for use are calibrated properly such that they reflect investors' experience or capacity to absorb loss. Treasury also wants to ensure investors who fall within the high net worth individual (HNWI) and self-certified sophisticated investor (SCSI) exemptions understand the protections they lose, and can take responsibility for their own decisions.

Meanwhile, the FCA has its own agenda in respect of financial promotions and wants them to better enable consumers to understand and assess the investment features of the relevant product or service, its costs, its risks and benefits and ultimately whether it would meet their needs. Its own plans therefore focus on a more granular categorisation of investments and whether its restrictions are properly focussed.

At present, it categorises a number of investments as high risk and applies additional restrictions to them, ultimately meaning that even authorised firms cannot freely promote them. The main current categories are non-readily realisable securities and P2P agreements; non-mainstream pooled investments and speculative illiquid securities (aka mini-bonds); and complex products.

However, the FCA considers there are other types of investment that are equally risky and should probably be subject to restrictions. So, in tandem with what the FCA will need to do to create the financial promotions gateway, the regulator is looking at various granular issues, including:

• what should be included within its concept of a high risk investment, in particular, what should be regarded as high risk but currently is not?
• whether it is right to treat all readily realisable securities as safer products
• in line with Treasury's consultation on the FPO, whether the HNWI and SCSI regime really works properly or whether people within these buckets end up receiving promotions that they are not really equipped to understand.

Regulation of funeral plans

Another significant regime change for 2022 is that funeral plan providers and intermediaries will be brought within the scope of FCA regulation from 29 July. Firms who want to carry on providing pre-paid funeral plans beyond this date will need to either:

• be directly authorised by the FCA with one or more of two new permissions:
  • entering as provider into a funeral plan contract, and/or
  • carrying out a funeral plan contract as provider, or
• apply to become an appointed representative of a principal firm.

Once authorised, firms will need to comply with new rules set out in the FCA's Making the Funeral Plan: Conduct of Business Sourcebook (FPCOB), together with other high-level obligations set out elsewhere in the FCA's Handbook. These rules present substantial new requirements for all affected firms and include, for example:

• a ban on cold-calling and new standards on advertising. Firms must comply with the financial promotion rules, including ensuring that all communications are fair, clear and not misleading
• a ban on funeral plan instalment products that do not guarantee delivery of a funeral (after a moratorium period)
• a ban on commission payments to intermediaries
• all products must be backed by an appropriate trust or insurance arrangement
• providers must notify customers and their nominated representative following a transfer of a firm's funeral plan contracts within 30 days of such transfer
• providers must ensure that the contracts of insurance which back a funeral plan comply with FPCOB requirements, in particular that they do not terminate on the failure of the regulated funeral plan provider
• firms must ensure that plans can be transferred if the provider fails
• providers must ensure that there are no terms in the funeral plan contract that limit liability, including via the Financial Services Compensation Scheme
• funeral plan providers must have arrangements in place to reimburse amounts to customers upon insolvency, where a transfer of funeral plan contracts to an alternative provider cannot be arranged.

The FCA's authorisation window opened in September 2021 so providers seeking authorisation should already have submitted their applications to the regulator. Whilst awaiting authorisation, firms should be preparing for what it will mean to be regulated and the additional requirements this will place on them. For instance, the Senior Managers and Certification Regime will apply to authorised funeral plan providers so firms will need to ensure that Senior Managers are aware of their responsibilities under the regime and that all staff are aware of, and appropriately trained on, the Conduct Rules.

Authorised providers will also fall under the jurisdiction of the Financial Ombudsman Service (FOS) so should be preparing by implementing policies, procedures and controls to ensure complaints are recorded and handled appropriately to minimise FOS costs and remediation processes.

Buy-now pay-later (BNPL) regulation

We also expect to see further movement on the regulation of interest free BNPL products in 2022. As a reminder, HM Treasury published its long-awaited consultation on BNPL regulation in October 2021, following the announcement earlier in 2021 that the government would implement the Woolard Review recommendation to bring interest free BNPL products within the scope of regulation.

Treasury's consultation explored how to regulate BNPL products whilst drawing a distinction between BNPL and other short-term interest-free credit (such as loans to help consumers finance higher-value furniture and electrical goods and those allowing monthly payments for memberships and season tickets). It considered two options:

1. Restricting the extension of regulation to interest-free credit agreements where there is a third party lender involved in the transaction, and keeping arrangements directly between a merchant and a consumer exempt from regulation.
2. Defining a BNPL agreement as one where there is a pre-existing, overarching relationship between the lender and consumer, for instance where a consumer opens an account with a lender under which the lender agrees to finance one or more transactions but where any repayments made are towards specific agreements made as part of that relationship.

The consultation also looked at how the current credit broking regulation might apply to merchants, whether the current controls around advertising of BNPL products are sufficient or whether they should be brought within the financial promotion regime, and whether the current requirements under the Consumer Credit Act 1974 in relation to customer documentation would be appropriate for BNPL products.

We expect there will be many responses to the consultation (which closed on 6 January) following which Treasury will need to consider and consult on legislative changes. The FCA will also need to consult on changes to its rules.

In the meantime, elsewhere in the BNPL market, Klarna has recently announced that it is making changes to its BNPL service ahead of regulation. It has already introduced a pay now option alongside its instalment options so that the BNPL product isn’t the default payment option. Klarna says it will also be introducing new wording to clarify that customers are being offered credit, alongside stronger credit checks and allowing customers to share income and spending data via open banking to prove they can afford repayments.

So it seems the market is already starting to react to the concerns highlighted in the Woolard Review and is perhaps pre-empting some of the changes that are coming. It will be interesting to see what feedback the Treasury gets in response to its consultation and how this will shape what happens next.

Conclusion

The above demonstrates just how many significant changes are already in the pipeline for 2022 and, in line with the ambitious nature of the FCA's business plan, we expect many more items to hit the regulatory agenda. In particular, over the coming months we anticipate hearing a lot more noise around ESG, the development of the crypto market and a continued focus on consumer harm, headlined by the introduction of the Consumer Duty. All in all, it's shaping up to be a busy year for the regulated sector.