Being better informed: October 2016

The past month brought dramatic developments on the PRIIPs Regulation, and major FCA publications on the SM&CR and implementation of MiFID II.

After a calm initial six months of the SM&CR, the FCA and PRA took their individual accountability mission to the next stage with a raft of publications. Among these, the FCA revealed findings of a supervisory review of firms’ statements of responsibility and management responsibility maps, in which it highlighted a lack of clarity on individuals’ responsibility in some documents. The FCA also confirmed final rules on regulatory references, which aim to prevent individuals with poor conduct records being ‘recycled’ between firms.

Elsewhere, the FCA gave firms more of an insight into its approach to MiFID II implementation, with its third and probably final consultation paper. Key proposals include strengthening inducement and research rules, and implementing requirements on full disclosure of costs and charges.

Staying with retail distribution, HMT consulted on narrowing the definition of advice, which could boost firms’ appetite to offer guidance services. As part of FAMR, HMT wants to align the definition of regulated advice with the EU definition set out in MiFID.

In the mortgage sector, the PRA introduced tougher underwriting standards for buy-to-let mortgage contracts that are not already regulated by the FCA. In final rules, the PRA confirmed it expects lenders to assess affordability by looking at whether the income from the property is sufficient to support monthly interest payments using an interest coverage ratio test. Firms will also need to take into account likely interest rate rises.

Governance issues remain high on the regulators’ agenda, with the FCA expressing concerns about firms’ compliance with governance arrangements under CRD IV. In a letter to the largest firms that fall under its prudential sourcebook for investment firms (IFPRU), the FCA explained it’s found many firms not complying with the additional governance arrangements needed to support their risk management framework under the directive.

And in an update that will be of interest to a range of financial services firms, HMT consulted on its approach for implementing AMLD4, which it must do by 26 June 2017. The directive will bring in new requirements on customer due diligence and relying on third parties, and broaden existing AML/CTF requirements for politically exposed persons.

Our first feature article this month looks at the PRIIPs Regulation, following a historic decision by the EP to reject the Level 2 standards. The EP’s objection is centred on the core of the regulation – how disclosure of cost, performance and risk should be presented in the PRIIPs KID. With the regulation due to be implemented in less than three months, we look at what’s likely to happen next and the steps firms should consider taking.

The second feature article examines the findings of the FCA’s recently published thematic review on mortgage lenders’ readiness for mitigating the impact of an interest rate rise on vulnerable customers. The FCA proposes a number of potential actions firms may wish to consider to prepare for an interest rate rise and engage with customers to improve their awareness.

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