There are some significant changes coming down the line for FCA regulated firms during 2023. We have put together some initial highlights;

Edinburgh Reforms- Changes to Consumer Credit

In December 2022 the UK Chancellor of the Exchequer announced a package of reforms to the UK financial services sector, known as the “Edinburgh Reforms”.  The Edinburgh Reforms, which includes around 30 reforms to existing financial regulation, included reforms to the Consumer Credit Act. The proposals aim to simplify the regime to encourage innovation in the credit sector. The proposals will also look to cut costs for consumers and businesses, while also increasing equality and fairness in the credit market by improving accessibility.

The Consumer Credit Act (“CCA”) was introduced in 1974. The legislation governs consumer credit products such as credit cards, personal loans and motor vehicle finance agreements. A review by Christopher Woolard into the unsecured credit market in 2021 (known as the Woolard Report) recommended a shift to an outcomes-focused, holistic approach to regulating consumer credit.

HM Treasury confirmed its intention is to remove many of the current requirements from statute and replace them with “recast” FCA rules. Precise details of the changes to expect to the CCA requirements are not outlined in the Treasury’s consultation paper. However, the outlines some core principles that the reforms will be built around;

• The reforms will be proportionate.
• The reforms will align with other areas of UK financial services regulation.
• The reforms will align with the Consumer Duty requirements.
• The reforms will be ‘will be forward-looking’.

The consultation noted that these changes overall objectives are  to “modernise and streamline regulation to the benefit of consumers and business. In practice, this will mean creating a simpler, more focused regulatory regime for consumer credit and modernising consumer credit regulation so that it follows more closely the approaches in other areas of financial services regulation.”

HM Treasury is seeking responses to a number of potential changes. These include whether respondents would support possible amendment of the Financial Conduct Authority’s rule-making powers under Financial Services and Markets Act 2000 (“FSMA”) in relation to consumer credit and consumer hire; and whether exemptions for “small agreements” should continue to exist.

The consultation will close on 17 March 2023.

Edinburgh Reforms- New Policy Statement on UK Regulatory Framework

Since Brexit, the government has undertaken work on the Future Regulatory Framework (“FRF”) Review, to establish how the UK could adapt its UK regulatory framework to take advantage of its position outside the EU.

As a way of pushing forward this regulatory change, the government published a policy statement “Building a smarter financial services framework for the UK” which builds on the FRF Review to determine how the UK financial services regulatory framework should adapt post-Brexit. The policy statement sets out the plan and the tools the government intends to use to implement this new UK financial services regulatory framework.

Edinburgh Reforms- Reforms to the Senior Managers and Certification Regime (SM&CR)

The chancellor has also announced a review of SM&CR through a ‘Call for Evidence’ expected to be opened during in Q1 2023. The Call for Evidence will look for views on the regime’s effectiveness, scope and proportionality. The FCA will review the regulatory framework contained within the handbooks. It is unlikely that there will be substantial changes to the regime because of this review. However, any changes will likely be subject to rounds of consultation and policy statements, so any changes will take time.

Consumer Duty

The Financial Conduct Authority (commonly called the ‘FCA’) conducted an initial consultation on a Consumer Duty in 2021.  The FCA then released their finalised Policy Statement (PS22/9) and Final Guidance (FG22/5) in July 2022. These publications set out how the FCA will set higher and clearer standards on consumer protection across financial services.

The Duty requires firms to put their consumers’ needs first and produce communications that consumers can understand, provide fair-value products and services that meet consumer needs and provide consumer support when they need it.

The Duty is comprised of the following components:

• A new Consumer Principle (Principle 12) that requires firms to act to deliver good outcomes for retail customers.
• Cross-cutting rules requiring firms to act in good faith, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.
• Four Outcomes requiring firms to ensure consumers receive communications they can understand, products and services meet their needs and offer fair value, as well as the customer support they need.

What is coming for Consumer Duty in 2023?

30th April 2023- Manufacturers of products

Manufacturers of products must have completed all reviews necessary to meet the outcome rules for their open products and services. They must have also shared relevant information with their distributors to meet their obligations under the Consumer Duty and identify any changes which need to be made.

31st July 2023- Implementation Date

Date by which firms must have implemented the new rules for new and existing products or services that are open to sale or renewal.

31st July 2024- Closed Book Implementation Date

Date by which firms must have implemented the new rules for closed book products or services.

Consultation on Introducing a gateway for firms who approve financial promotions

In CP22/27- Introducing a gateway for firms who approve financial promotions, the regulator outlines new checks for firms that wish to approve financial promotions. The new measures will require firms to demonstrate they have the right expertise for the promotions they wish to approve.

Under current rules, any FCA authorised firm is allowed to approve financial promotions on behalf of other firms who are not authorised by the regulator. The changes being introduced will require authorised firms to undergo a new screening process before they are allowed to approve financial promotions. Firms will also be required to regularly report back to the FCA on financial promotions they have approved.

The consultation focuses on the following aspects of the proposed gateway:

How the FCA will assess applicants at the gateway;

The basis for the FCA granting or refusing applications;

A bi-annual reporting requirement for firms that are given permission to approve financial promotions;

A requirement for firms that are granted permission to approve financial promotions must notify the FCA when they approve, or amend or withdraw approval of, a financial promotion, within 7 days of doing so;

Not extending the compulsory jurisdiction of the Financial Ombudsman Service to the approval of financial promotions; and

When the new regime comes into force, though, a firm that wants to be able to approve financial promotions will need (subject to some exceptions) to apply to the FCA for permission to do so.

The exceptions may mean that an authorised firm would not have to apply to the gateway where it is only approving financial promotions which are:

• of its own for onward communication by an unauthorised firm
• for an unauthorised business in its corporate group
• for its Appointed Representatives, where the promotion relates to a regulated activity for which the Principal has the relevant permissions and has agreed to accept responsibility.

The FCA does not expect its proposals to be generally relevant to authorised persons which fall within one of these exceptions.

The proposed reforms aim to ensure that the FCA can act quickly to put a stop to harmful financial promotions communicated by unauthorised firms, including in areas such as high-risk investments and Buy Now Pay Later.

Section 165 requests due in February 2023

The FCA’s new rules for Principals and Appointed Representatives (“ARs”) came into force on the 8th of December 2022. These new rules solidify the FCA’s expectations for Principal firms and how they monitor their ARs. Between the 8th and 12th of December, the FCA will begin to send Section 165 information requests to Principal firms, including firms with Introducer Appointed Representatives (“IARs”), which request information in line with the FCA’s new rules.

The latest Section 165 is a one-off request for information which firms will have until 28th February 2023 to respond and provide data about ARs and IARs which includes;

• The reason for any appointments
• The nature of regulated activity
• Whether any unregulated business is conducted and if so, the nature of the business.
• Anticipated revenue
• The nature of financial arrangements between the Principal and ARs
• Complaints information

Although, this request is a one-off Section 165, firms will report information on an ongoing basis through annual reporting and whenever the Principal firms submit a new notification when they onboard a new AR/IAR or whether the activities of an AR changes.

The Section 165 request is completed online and will be sent to firms via an email link to the Principal User details on the FCA’s Connect portal.

Changes to FCA Firm Reference Numbers (FRNs)

The FCA will begin to introduce new seven digit Firm Refence Numbers (“FRN”) to firms applying to the regulator for authorisation. The FCA currently use a  six-digit FRN to uniquely identify firms but the regulator has stated that it will likely reach the six-digit limit (999999) during 2023.

The FCA is planning a move to a seven-digit FRN for all newly registered firms. Firms that have previously been allocated a six-digit FRN will continue to use the FRN already assigned to it. Seven-digit numbers will start to be allocated for new applications and notifications once the six-digit range is exhausted.

There is currently no fixed date for when this will happen but the FCA have stated that they are on track to make the necessary changes to their internal systems in good time.