REG Reviews
4th January 2024
Last month, the FCA unveiled an overseas funds regime and measures to improve accuracy of credit files, $420m was pledged to climate ‘loss and damage’ fund at COP28, the digital pound has been cautioned to pose risks to financial stability and the UK insurance sector advocated for relaxed regulations to better attract captive insurance companies.
Read these articles and many more, as we bring you all the important news from the insurance and financial services world…
The Financial Conduct Authority (FCA) has outlined its proposals for the upcoming Overseas Funds Regime (OFR). This regulatory framework is being introduced to govern the operation of overseas funds in the financial landscape.
The OFR has been introduced by Parliament to streamline the process for non-UK funds to market to UK retail customers in jurisdictions deemed equivalent by the government.
The OFR supports global asset managers, enhances consumer choice, and maintains high standards.
The FCA is proposing rule changes to accommodate overseas schemes under the OFR, pending government equivalence determination, allowing time for preparation. The FCA may consult on additional investor protection requirements after each government decision on equivalence.
The FCA has outlined the information categories that overseas schemes must submit for recognition under the OFR. This includes crucial details about the scheme’s investment objective, policy, and the primary asset categories it invests in.
The FCA aims to create an efficient and effective regulatory framework.
Additionally, the FCA has proposed new measures to enhance investor awareness of available protections, such as access to the Financial Ombudsman Service and the Financial Services Compensation Scheme, when investing in overseas funds.
To ensure transparency, overseas funds will be required to explicitly communicate when certain customer protections, such as access to the Financial Ombudsman Service and the Financial Services Compensation Scheme, are not available.
The Executive Director of Markets at the FCA, Sarah Pritchard, stated; “We want to balance making the transition into the new regime as smooth as possible for firms, while also meeting our primary objective to protect UK retail investors.”
“With our proposed rules and guidance, we set out what we think a strong but proportionate model looks like.”
Supporters of a UK digital pound are yet to present a compelling argument demonstrating that its advantages would outweigh potential threats to financial stability and individual privacy, cautioned a prominent group of MPs.
The Treasury committee in the House of Commons suggested that while the Bank of England (BoE) and HM Treasury should persist in examining a central bank digital currency, they should do so cautiously due to “significant risks and challenges.”
These concerns encompass uncertainties about the utilisation of personal data belonging to digital pound holders by authorities and the potential scenario of households transferring savings from conventional accounts to the digital currency during times of banking strain.
Similar to authorities in other economies, including the eurozone, the Treasury and the BoE have been assessing the potential for a central bank digital currency (CBDC) in response to declining cash usage and the looming competition from major tech companies.
According to the Atlantic Council think-tank, approximately 100 countries globally are exploring CBDCs, with 11 having already launched one. The overarching idea is to establish a secure and universally accepted electronic alternative to cash.
Publicly endorsed digital currencies would be stored in smartphone wallets, mitigating the risk of privately controlled digital currencies, developed by tech companies, gaining excessive influence.
Nonetheless, officials and politicians across Europe have not reached a consensus that the argument for CBDCs is compelling enough to outweigh the potential risks they might pose.
A consultation paper released by the Treasury and BoE in February suggested that current trends and technological advancements make it increasingly probable that a digital pound will be necessary by the end of the decade, although the formal approval for the project is still pending.
The Treasury committee’s report struck a cautious tone, expressing scepticism about whether the benefits are likely to outweigh the risks at this stage, while not outright opposing further exploration of the idea.
Conservative MP and Committee Chair, Harriet Baldwin, stated; “It must be clearly evidenced that a retail digital pound will provide benefits to the UK economy without increasing risks or leading to unmanageable costs before any decision is taken to introduce it into our financial system.”
The committee highlighted the potential vulnerability of the UK to bank runs if individuals could swiftly transfer substantial savings into digital pounds during market turbulence.
Another concern raised was the possibility of increased interest rates on bank loans by 0.8 percentage points or more if a significant portion of bank deposits were shifted into digital pounds.
To mitigate these risks, the Treasury Select Committee (TSC) suggested considering a lower initial limit on individual holdings than the Bank of England’s proposed £10,000-£20,000 ceiling, drawing parallels with the European Central Bank’s discussion of a €3,000 digital euro limit per person.
The TSC emphasised the need for “strong privacy safeguards” to address concerns about potential government surveillance of digital pound users.
The TSC stressed the importance of ensuring that any CBDC implementation does not exacerbate financial exclusion by hastening the decline of physical cash.
In response to the committee’s report, the Treasury and BoE issued a joint statement, assuring that they would formally address the recommendations and reiterating their commitment to introducing a digital pound alongside cash while prioritising individual privacy in the design.
Five countries and the EU have committed over $420 million to establish a groundbreaking “loss and damage” fund designed to assist developing nations in coping with the impacts of climate change.
This accomplishment at COP28 in Dubai follows the agreement reached last year at COP27 in Egypt, where the establishment of the fund was a significant outcome.
The UAE and Germany pledged $100 million each, the UK committed $50 million, and the US and Japan contributed $17.5 million and $10 million, respectively.
In addition to Germany’s contribution, an EU representative announced a further commitment of $145 million on behalf of the 27-member bloc towards the “loss and damage” fund at COP28 in Dubai.
Negotiators express optimism for additional pledges from individual European countries as the summit progresses.
Despite the challenges in establishing the fund, COP28 President, Sultan Al-Jaber, highlighted the “unprecedented” timeline for a UN process, underscoring the significance of the commitment to address climate change impacts in developing nations.
Simon Stiell, the top climate official at the UN, noted that the funding for loss and damage has provided the UN climate conference with a “running start.”
Avinash Persaud, a negotiator from a developing country and special climate envoy to Barbados, characterised the agreement as a “hard-fought historic agreement.”
He added; “It shows recognition that climate loss and damage is not a distant risk but part of the lived reality of almost half of the world’s population.”
German Development Minister, Svenja Schulze, stated that Germany and the UAE are encouraging “all countries that are willing and able” to contribute to the fund.”
She stated; “After all, many countries that were still developing countries 30 years ago can now afford shouldering their share of responsibility for global climate-related loss and damage.”
In the lead-up to COP28, attempts were made by Western nations to persuade Saudi Arabia, a prosperous fossil fuel-based economy, to contribute to the fund. However, this proposition was met with resistance.
Developing countries have advocated for wealthier nations, responsible for approximately 80% of historical greenhouse gas emissions, to take a leading role in providing financial support to the new fund.
On the other hand, the US and some other nations have maintained that no country should be obligated to make contributions to the fund.
Earlier this year, developing nations threatened to withdraw from talks as the US and others pushed for the World Bank to host the fund, contrary to the preference of setting up an independent facility by countries.
The 77 developing countries initially raised objections to the World Bank hosting the facility due to negative past experiences with its bureaucracy.
Eventually, an agreement was reached that the World Bank would host the fund, with the understanding that its role would undergo regular reviews over the next five years.
The Financial Conduct Authority (FCA) has announced proposals aimed at enhancing the accuracy of credit files to better reflect individuals’ financial circumstances.
These measures are part of a broader initiative to improve the quality of information gathered by credit reference agencies (CRAs), which is crucial in influencing lending decisions and promoting market competition.
The FCA had previously published an interim report in November 2022, identifying areas where the credit information market could function more effectively.
The proposed changes seek to address these concerns and ensure that credit files provide a more accurate representation of individuals’ financial positions.
The proposed measures by the FCA aim to address issues identified in the credit information market. Key concerns included substantial disparities in data among CRAs and limited consumer awareness on accessing and disputing credit information.
The proposed changes include:
The Executive Director, Consumers and Competition at the FCA, Sheldon Mills, stated; “Poor quality credit information can result in people being cut out of the credit market or taking on more debt than they can afford.”
“Our proposals aim to improve competition and enhance the quality of credit information as tech developments occur. These improvements will help deliver more effective lending decisions, particularly for consumers with limited or poor credit records, and support sustainable economic growth.”
“The changes will also enable people to more easily raise disputes when mistakes are made.”
The FCA is proposing measures to improve credit reporting, including standardised data reporting and increased consumer control.
An Interim Working Group will establish a new governance body, aiming for inclusivity and transparency. Set to begin in January, the group plans to deliver outcomes within nine months, addressing issues in the credit reporting sector.
Jackie Keogh, with over 30 years of experience in the financial industry, particularly in corporate banking, has been appointed as the Chair of the Interim Working Group. She has served as a Senior Advisor at the FCA since 2020 and will step down from that role before assuming her new position.
The FCA anticipates initiating consultations on additional measures, including the implementation of a mandatory reporting requirement, by the end of 2024.
Google has announced its intention to initiate testing of a groundbreaking feature named Tracking Protection on its widely used Chrome browser, commencing from January 4.
This innovative feature is strategically designed to eliminate the presence of third-party cookies utilised by advertisers for consumer tracking purposes.
The initial phase of the rollout will target 1% of Chrome users globally, with the primary objective of defaulting to restricted cross-site tracking.
This significant move, however, has not been without its share of concerns, particularly from industry watchdogs who are apprehensive about potential competition issues within the digital advertising market.
The concern revolves around the impact of limiting advertisers’ access to valuable consumer data and the subsequent implications for fair competition.
Google has set ambitious plans to completely phase out the use of third-party cookies for all users by the latter half of 2024.
Yet, this timeline is subject to addressing antitrust concerns raised by regulatory bodies, such as the UK’s Competition and Markets Authority (CMA).
The CMA has been actively scrutinising Google’s plan to curtail support for specific cookies in Chrome, expressing reservations about the potential adverse effects on competition in the lucrative digital advertising sector, which is a cornerstone of Google’s revenue stream.
Cookies, those unique files enabling websites and advertisers to identify and monitor individual internet users’ browsing behaviours, are at the core of this digital transformation.
The European Union’s Antitrust Chief, Margrethe Vestager, emphasised in June that investigations into Google’s implementation of tools to block third-party cookies, a critical component of the broader “Privacy Sandbox” initiative, would persist.
Advertisers, key stakeholders in this evolving landscape, have voiced their concerns over the absence of cookies in the world’s leading browser.
They fear that this shift could constrain their ability to gather essential data for personalised ads, potentially making them overly dependent on Google’s proprietary user databases.
In a noteworthy development, BofA Global Research highlighted in a recent note that the elimination of cookies could lead to a significant boost in the influence of media agencies, especially those capable of providing substantial proprietary insights to advertisers.
This observation underscores the far-reaching implications of Google’s proposed changes on the dynamics of the digital advertising ecosystem.
As the tech giant navigates the complexities of regulatory scrutiny, the industry is bracing itself for a paradigm shift that could reshape the landscape of personalised advertising in the digital realm.
The UK insurance sector is advocating for a relaxed regulatory framework for captive insurance companies, aiming to incentivise numerous businesses to relocate these subsidiaries onshore, addressing a gap in London’s specialised insurance market.
This initiative precedes a scheduled government consultation in early 2024 to establish a new framework supporting the establishment and growth of captive insurance companies in the UK, as outlined in the Autumn Statement.
Captives, internal insurers established by large corporations to mitigate specific risks like property damage, have seen increased interest amid a sustained uptrend in commercial insurance premiums for 24 consecutive quarters, as noted by brokers.
A study conducted on behalf of the London Market Group indicates that adopting more lenient regulations could prompt nearly 700 captive insurers to either relocate onshore from jurisdictions like Guernsey and Bermuda or establish themselves in the UK.
The results of the upcoming consultation will serve as a pivotal measure of the government and the Bank of England’s commitment to enhancing the UK financial sector’s competitiveness post-Brexit.
Executives stress that the new regulatory framework must align with those in other jurisdictions, involving considerably lighter capital and regulatory requirements for captives compared to standalone insurance companies.
London Market Group’s Chief Executive, Caroline Wagstaff, stated; “There are lots of good reasons why companies would want to come to the UK, but we can’t take it for granted that if we build it, they will come.”
She further highlighted the positive impact on the insurance sector, estimating that the creation of new UK captives could generate an economic value of £153 million.
Additionally, bringing captives onshore is seen as advantageous for companies, as it aligns with the typical requirement for board meetings and underwriting decisions to be conducted in the same location as the specialist unit. In the view of insurers, this move by the government simplifies the operational landscape for UK-based businesses.
Chris Lay, CEO of the UK arm of insurance broking giant, Marsh McLennan, emphasised that the current regulatory environment hampers the UK’s potential as a favourable location for captive insurance vehicles.
He emphasised the necessity for the government to demonstrate that the UK will be as inviting for new businesses as some of the more established captive domiciles. Lay highlighted that his clients had established 400 new captives globally since 2020, covering risks such as cyber and property catastrophe damage.
The government has expressed its intention to seek input on proposals aimed at establishing an attractive and competitive new UK captive insurance regime tailored to meet the needs of businesses.
The Financial Times reported that Sam Woods, the Chief Executive of the Prudential Regulation Authority, expressed openness to exploring the notion of providing a more lenient regulatory treatment for captives focused on holding a single business’s risk.
However, he cautioned that if cultivating a robust UK captive insurance market became a priority for policymakers, additional staffing might be required at the regulator.
The United States, United Kingdom, and Australia have agreed to strengthen their capability to monitor “emerging threats” in space as part of the trilateral security pact signed in 2021 to counter challenges, particularly from China.
The allies plan to construct three ground-based radars, one in each country, to enhance space domain awareness and improve their ability to detect, track, and identify objects in deep space.
The first radar, situated in Western Australia, is expected to be operational by 2026, with the remaining two completed by 2030.
The announcement was made by US Defence Secretary, Lloyd Austin, Australian Defence Minister, Richard Marles, and British Defence Secretary, Grant Shapps, during an annual meeting in California focused on enhancing cooperation under the Aukus agreement, which centres on Australia acquiring nuclear-propelled submarines.
The US, UK, and Australia plan to build ground-based radars to enhance space domain awareness and protect communication and navigation satellites.
The radar system, operational by 2026, will allow detection and tracking of space threats up to 36,000km away, strengthening the three nations’ defensc capabilities.
Aukus encompasses a second pillar concentrating on various technologies, including cyber capabilities, artificial intelligence, quantum technologies, and research and development for hypersonic and counter-hypersonic weapons.
The allies, in a statement, outlined plans to conduct experiments and exercises aimed at enhancing the sophistication and scale of autonomous systems at sea.
This initiative aims to refine their collective ability to operate un-crewed maritime systems and enhance real-time maritime domain awareness.
The US State Department has given its approval for a $2 billion sale of Aukus-related training equipment to Australia. However, the deal still requires Congressional approval to proceed.Top of Form
As part of Aukus, the allies intend to leverage advanced AI algorithms on P-8 surveillance aircraft to enhance their anti-submarine warfare capabilities.
These algorithms will enhance the processing of data collected by the aircraft from small “sonobuoys” dropped into the ocean, a crucial aspect as China expands its submarine fleets.
Additionally, the Aukus partners will expedite the development of quantum technologies to enhance navigation, particularly in scenarios where GPS signals could be degraded.
An Aukus “innovation challenge” will also be initiated, inviting companies to compete for prizes in various areas, including the development of electronic warfare capabilities.
The three allies, as part of Aukus, are set to establish an “industry forum” aiming to facilitate collaboration between government and business executives.
This initiative is designed to streamline efforts on advanced technologies and create a more accessible platform for defence contractors.
The move is intended to address concerns raised by some companies regarding the challenges in understanding how they can contribute to Aukus due to the secrecy surrounding many initiatives and limited information provided by governments.
The European Banking Authority Chair announced an in-depth exploration by EU regulators into the interconnections among banks and various financial entities, such as hedge funds, citing escalating concerns about potential contagion arising from strains in the broader system.
José Manuel Campa emphasised the necessity for increased regulatory actions, stating; “There is room for enhancement, and we are committed to undertaking more.”
He stressed the importance of regulators gaining insight into the entire underlying structure of non-bank financial institutions (NBFIs), encompassing hedge funds, private capital firms, and cryptocurrency groups.
NBFIs, occasionally referred to as alternative banks, command nearly half of the globe’s financial assets, estimated at around $218 trillion. The sector burgeoned after a series of post-crisis regulations pushed certain activities beyond the conventional banking sector, while other areas expanded beyond the scope of regulators, such as the cryptocurrency domain.
Following the 2020 rush for liquidity, where the widespread divestment of stocks, bonds, and other high-risk assets triggered market turmoil and central bank interventions, and the 2022 crisis in the UK gilt markets, regulators have sounded the alarm regarding risks in the non-banking sector. These risks include substantial wagers by hedge funds on US Treasuries and private capital’s vulnerability to escalating interest rates.
Campa detailed that the European Banking Authority (EBA), responsible for biennial stress tests on European lenders, would collaborate with the European Systemic Risk Board and Financial Stability Board to cultivate a more profound understanding of how a shock to shadow banking would permeate the broader system. The ESRB serves as the financial stability watchdog for the eurozone, while the FSB oversees global financial stability.
Campa conveyed that the EBA had already conducted evaluations of banks’ balance sheet exposures to non-banks, encompassing loans.
“These are only the direct connections,” Campa mentioned in an interview with the Financial Times.
“The challenge lies in how it translates into the banks… We are in the early stages, but comprehending that is at the heart of the objectives of the ESRB and FSB.”
Indirect connections involve assessing whether banks could suffer from a sharp devaluation of assets favoured by NBFIs, such as treasuries or real estate, if the latter group were compelled to divest these assets.
Campa proposed that enhancing the understanding of these issues could be facilitated by establishing “substantial minimum reporting areas,” providing regulators with transparent data on critical non-bank exposures.
“In this situation, the initial step is always information gathering; it’s a sector shrouded in obscurity where data quality is not uniform,” he stated.
Furthermore, Campa rebuffed European banks’ efforts to secure a six-month extension to the latest global bank capital reforms aligning the EU with the US and UK.
“The regulation stipulates January 2025, so naturally, they should be formulating plans for implementation by that date,” he remarked regarding the final Basel package, whose implementation continues to be a contentious topic in the US nearly two years after the initially planned start date in January 2022. “We cannot afford further delays.”
He emphasised; “I don’t believe there is a compelling argument that, to maintain a level playing field, we must all implement on the same date.”
Campa also displayed little sympathy for EU banks advocating for lawmakers to relax a post-crisis bonus cap after the UK recently abolished the measure.
“The crucial aspect is ensuring that these banks assure us that these bonuses are firmly integrated into the risk management of the institutions,” he added, echoing recent statements from Elizabeth McCaul, a member of the ECB’s supervisory board.
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