SMCR+ View – May 2024

As May blossoms and the anticipation of summer festivities (and more than 2 consecutive days of sunshine) brews, we are thrilled to bring you May’s edition of SMCR+ View. Upfront this month, our focus remains on the Treasury Select Committee and the Sexism in the City report with responses from HM Treasury, PRA and FCA just in. We’re also covering the ongoing scrutiny of the FCA’s enforcement transparency proposals, the most recent final and decision notices from the FCA, the Lords’ inquiry into the FCA’s secondary objective, the role of governance arrangements in preventing market abuse, and much more.

As always, we appreciate your thoughts and suggestions for future improvements and we’re available to discuss any of the topics in more detail.

1. Sexism in the City Report: responses of HM Treasury, PRA and FCA

HM Treasury, the PRA and the FCA have formally responded to the Treasury Select Committee’s (TSC) Sexism in the City report and the FCA has been in the hot seat again this month, giving evidence to the Treasury Committee as part of Parliament’s ongoing scrutiny of the regulator. ….drumroll please....

You’ll remember from March’s SMCR+ View which outlined the TSC’s recommendations, that they were very direct with their concerns over some of the FCA and PRA’s D&I proposals. In the responses to the Sexism in the City report and the FCA’s oral evidence, (and in response to the messaging from the TSC), the FCA is now clear that it will prioritise work on non-financial misconduct (NFM), including sexual harassment and bullying, and the guidance around it. In oral evidence here the FCA indicated that it is not “prioritising” moving forwards with the D&I proposals at this stage because it needs time to understand the extensive responses received and the recommendations from the TSC. It is therefore likely that the NFM guidance and D&I proposals will be separated with the D&I proposals to follow (or indeed be watered down significantly in light of the concerns raised or dropped altogether!). The PRA and the FCA both in their responses and oral evidence appear somewhat defensive in their response to the TSC’s recommendations and spend a significant number of times reiterating the rationale and legal basis for the D&I consultation paper and you definitely get the sense when it was in front of the TSC that they feel they are getting slightly mixed messages!

In a recent speech for brokers, Emily Shepperd, FCA COO, talked about the industry policing NFM and promoting healthy work cultures and emphasised the role of senior management setting examples and informing culture from the top down. The FCA have also said that they may decide to issue a similar NFM survey to the ones wholesale banks, insurers and brokers received earlier this year to other sectors in the industry (we can hear your sharp intake of breath from here). If you want more details on the NFM survey, see our SMCR+ View Flash Alert from February, or do get in touch – it has the potential to be quite a torturous exercise…

In its response, the government makes limited commitments towards taking action in relation to the TCS’s recommendations. It expressly states that it does not support expanding the scope of the Women in Finance Charter which would require signatories to submit additional data, increasing the burden on firms and potentially making the Charter less attractive to new signatories. It also believes it is too soon to make changes to the pay gap reporting regulations and does not believe that mandatory action plans for specific subsets of employers would be fair or effective. However, the government response does note that it is currently reviewing the existing whistleblowing framework and legislation in relation to the abusive use of non-disclosure agreements (NDAs) given concerns that (despite efforts to improve clarity and make carve outs clear) they are being used to intimidate victims of discrimination and harassment into silence. This is not the first time that the use of NDAs has been reviewed – the last time we saw representatives of employees and employers both commenting on the value and importance of suitable (and voluntary) confidentiality agreements.

Please reach out to Andrea Finn (Partner), Penny Miller (Partner) or Amy Sumaria (Managing Associate).

2. FCA - Further pushback on FCA’s proposals for enforcement transparency

In addition to the above, when giving evidence to the Treasury Committee as part of Parliament’s ongoing scrutiny of the regulator, the FCA stated that it is currently going through the feedback on its enforcement consultation (CP24/2), which has received backlash from the industry, ministry and the House of Lords (see April’s SMCR+ View). This follows the Treasury Committee’s letter, sent to the FCA, and the FCA’s response, as well as a letter from Nikhil Rathi himself.

The FCA says they were “not expecting such a stern reaction” from the industry, but they maintain that some degree of increased transparency is necessary. They plan to spend several months considering the feedback received and further engaging with stakeholders to build a broad consensus on its approach to enforcement. Nikhil Rathi states that they “remain open minded” as to how to address the issues the FCA has identified, which arguably is him setting some of the foundations to give them wiggle room to adjust their stance. And as if this soap opera had had enough drama, this month the Financial Services Regulation Committee has launched an inquiry into the consultation’s proposals and is seeking views in a related call for evidence. The deadline for written submissions is 4 June 2024. It’s hard to see how the FCA won´t make quite substantive changes to the proposals.

Other areas covered in this session include debanking (and Nikhil Rathi stated that it is a matter for government and Parliament to decide whether banking should be considered a fundamental service and a right). Access to cash was another area where Nikhil Rathi acknowledged the Committee’s frustration with the slow rollout of banking hubs, but he emphasised that the Consumer Duty cannot, in the FCA’s view, be used to step in and stop commercial decisions. There was a wave of other topics covered from unbundling of research, the cost disclosure regime for investment trust sector, motor finance, mortgages, and more – it’s an interesting read, we promise!

Both of these developments, and the D&I and NFM developments, are interesting to consider in the broader context of the pressure the FCA and PRA are getting to promote the competitiveness of the UK. There is yet another inquiry into how well the FCA and PRA are boosting the UK's economic growth and competitiveness and whether things (like their objectives) are holding them back (written evidence submissions are due by 11 July 2024). The Committee is also interested in how effectively the regulators are working with the industry and if they have the capability and capacity to support innovation and businesses of all sizes. This comes at the same time as Labour's shadow City minister, Tulip Siddiq, announced the party's plans to push the FCA to "tear down the barriers to competitiveness and growth" and the expected telling off the FCA is set to receive from Chancellor Jeremy Hunt' for falling short of meeting its secondary objective on growth and competitiveness.

To discuss any of the above further, please reach out to Penny Miller (Partner), Emma Sutcliffe (Partner), Thomas Makin (Managing Associate) or Amy Sumaria (Managing Associate).

3. FCA – Key Final Notices and Decision Notices

• Following two separate instances of providing incorrect information, which was required for finalising accounts, Mr. James William Edward Lewis, former CEO of Shard Capital Partners, was found to have breached Principle 2 (due skill, care and diligence) under the Approved Persons Regime and later to have breached Conduct Rule 1 (acting with integrity). Mr. Lewis was later also found to lack fitness and propriety, was fined £120,300 and has been banned from performing a SMF role in the future. Interestingly there were WhatsApp messages disclosed to the regulator where it was evident that Mr. Lewis acknowledged the seriousness of his misconduct and said that he expected to face serious consequences, including a significant penalty and prohibition.

• Following on from April’s SMCR+ View, Mr. Stuart Bayes was sentenced to 18 months’ imprisonment, suspended for two years, after being found guilty of insider dealing.

Please do reach out to Thomas Makin (Managing Associate) or Amy Sumaria (Managing Associate) if you have any specific questions.

4. PRA – Dear CEO Letter – recovery planning for non-systemic firms

The PRA’s Dear CEO Letter this month underscored the importance of robust recovery planning for non-systemic firms. The Letter is addressed to the CEO but specifically states that it is also for the attention of the Board.

It highlights that many firms need to improve their use of severe scenarios and their calculation of recovery capacity. Firms are recommended to follow the guidelines in supervisory statement SS9/17 to enhance their recovery planning. Recovery planning aids executives in understanding the firm’s vulnerabilities and potential actions under stress, while enabling the board to oversee management actions, effectively challenge, and understand the firm’s ability to detect stress and evaluate its recovery options under different scenarios. The PRA plans to discuss these findings with firms and trade associations in H2 2024 (so pretty soon…). Looking ahead, firms should prepare to meet new rules and expectations set out in policy statement PS5/24 (solvent exit planning for non-systemic banks and building societies) and the related expectations in supervisory statement SS2/24, effective from October 2025. The PRA suggests that firms could leverage their recovery planning work when implementing their solvent exit approach.

Do get in touch with Alex Ainley (Partner) if you’d like to discuss further.

5. PRA - PE risk management

One for Chief Risk Officers (SMF 4s) - in a letter to CROs, the PRA’s thematic review of private equity (PE) related financing activities highlights the continuing growth of the PE industry, PE linked bank exposures, and private credit markets; increased bank exposures to ‘non-traditional’ PE finance e.g. NAV-financing and subscription financing; a degree of consolidation in banks that provide subscription financing credit facilities to PE funds globally; and the illiquid nature of collateral underpinning many lending structures.

The PRA’s review identified a number of thematic gaps in banks’ overarching risk management frameworks that control their aggregate PE sector related exposures. Key take-aways for bank CROs are:

• to improve tracking of PE-related exposures
• to improve stress testing analysis
• to improve MI to the Boards

Boards should satisfy themselves that the scale and composition of risk exposures linked to material financial sponsor clients, and the PE sector in general, is appropriate in the context of the overall risk profile of the bank.

Banks have until 30 August 2024 to provide detailed plans for addressing any gaps in their processes to the PRA.

Interestingly, you may have seen in the financial press that the FCA Chief Executive, Nikhil Rathi declared that he is “not yet convinced” that PE poses a systemic risk, despite warnings from the Bank of England. He emphasised the need for the PE sector to provide data for understanding the evidence and taking a view on what is happening, rather than rushing into over-regulation without sufficient evidence.

If you have any questions, please contact Penny Miller (Partner), James Wallace (Partner) or Amy Sumaria (Managing Associate).

6. FCA – Dear CEO Letters – Consumer Duty

In a flurry of Dear CEO letters, the FCA has sent out not one, not two, but six Dear CEO letters regarding the implementation the Consumer Duty for closed products to: asset managers, retail banks, life insurers, consumer finance firms, consumer investment firms and everyone else subject to the Consumer Duty. Like with everything Consumer Duty related they’re quite long – but the main point for this email is the FCA has said that they expect firms’ senior management to carefully consider the contents of this letter and take steps to ensure their firm is compliant with the Duty by the deadline (31 July 2024). More details on these letters will be in Consumer Duty View.

We’re doing a lot of work with clients on meeting this deadline and also with their annual report for open products and services – if you need any help or guidance we are here.

If you have any questions, please contact Penny Miller (Partner), Caroline Hunter-Years (Partner), Rosie MacArthur (Managing Associate) or Amy Sumaria (Managing Associate).

7. FCA – Market Watch 79

One for your relevant Senior Managers responsible for financial crime and compliance - in its Market Watch 79, the FCA considered market abuse surveillance failures and sets out examples of malfunctions the regulator has observed. From a governance perspective, there are some interesting points made including that (1) some firms have complex governance arrangements where approvals and validations go through multiple steps, taking significant time. Therefore, firms should consider whether intricacy and volume in governance necessarily delivers timely, efficient and effective outcomes, and (2) there’s mention of artificial intelligence and specifically that developments in relation to surveillance, such as the use of artificial intelligence, will need to be accompanied by governance that keeps pace and remains effective.

Please contact Alex Ainley (Partner) with any questions.

8. FCA metrics on authorisations

The FCA has published an operating metrics update that shows an almost perfect rate for the past two quarters for the time taken to process Approved Person applications. For January to March 2024, the FCA determined 98.7% of applications within the statutory time period (3 months), with the median determination time being 41 days. The updates includes other helpful stats, including on change in control and variation in permissions.

We provide assistance to a number of firms with their Senior Manager applications, particularly in responding to queries from the FCA on specific applications. If you would like to discuss or need any assistance, please contact Penny Miller (Partner) or Amy Sumaria (Managing Associate).