Consumer protection at the forefront of regulatory change

In a fast-evolving regulatory environment, financial institutions need to combine strong leadership with agility and operational resilience to thrive in turbulent times, says Odgers Interim Principal, Financial Services, Richard Plaistowe.

The collective impact of Covid-19, war in Ukraine, the cost of living crisis and a variety of other factors has led to market volatility and economic uncertainty. In response, regulatory trends reflect the ongoing need to strengthen operational resilience in the financial services sector and protect consumers, many of whom are struggling to make ends meet in this era of high inflation.

In June 2022, the Financial Conduct Authority sent a Dear CEO letter to 3,500 executives in the financial sector, including every buy now pay later provider operating in the UK, highlighting that consumers in vulnerable circumstances are feeling the greatest impact of the cost of living crisis and urging companies to treat borrowers fairly.

It steered firms to its guidance on fair treatment of vulnerable customers and reiterated that its Tailored Support Guidance (TSG) for mortgages, consumer credit and overdrafts, issued to address exceptional circumstances arising out of the pandemic, was equally applicable for helping borrowers in financial difficulties due to the rising cost of living.

On the back of its extensive research into Borrowers in Financial Difficulty, summarised in the letter, the FCA underlined its expectations across a series of areas including customer communication, forbearance, staff competence, adequate oversight of customer experience and outcomes, and charges and fees for those in arrears. More recently, on 29 September 2022, the FCA sent a letter along similar lines to leaders in the insurance industry, outlining its expectations on cost of living and insurance.

The Dear CEO letters reflect the FCA’s avowed transformation into a “more assertive and data-led regulator” and foreshadow its plans to bring in a new Consumer Duty that sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first. Comprehensive finalised guidance on the planned changes was published in July 2022.

While undoubtedly supervision, risk management and major banks’ capital levels have improved hugely since the dark days of the global financial crisis, concerns have been raised about a new complacency. In March 2022, the Bank of England’s Prudential Regulation Authority (PRA) and the ECB took the unusual step of issuing a joint statement on the perils or excessive leverage, warning that in some financial markets risk taking is high by historical standards. The authorities pledged to act in alignment by continuing to share information on banks’ practices and called for greater vigilance, flagging two areas of specific concern: leveraged lending and prime brokerage.

The PRA followed this up on 12 October 2022 with a consultation paper on identifying, monitoring and mitigating contingent leverage risk. Not only will this update guidance provided to firms for assessing the risks of excessive leverage as part of their Internal Capital Adequacy Assessment Processes (ICAAPs), it also proposes a new PRA rule requiring relevant firms to report data on trading exposures where contingent leverage risks may arise, including netted repurchase agreements, agency models to transact security financing transactions, collateral swaps and prime brokerage positions.

Meanwhile, Benchmark Regulation is evolving at a European level. On 1 January 2022, the European Securities and Markets Authority (ESMA) became the relevant competent authority responsible for the direct supervision of EU critical benchmarks administrators and recognised third-country (TC) administrators. And in August 2022 it published its response to the EU’s consultation on the Benchmarks Regulation (BMR) review. ESMA argues that to ensure the smooth functioning of the internal market and the availability of TC benchmarks for EU investors after the end of the transitional period, “restrictions of the use of TC benchmarks should be removed for some benchmarks not widely used in the EU, following a risk-based approach. To that end it is essential to change the scope of the BMR as regards the TC regime, while continuing to ensure a level playing field between EU and TC administrators and avoid circumvention of the BMR.”

Clearly, operational resilience is of huge importance to firms, consumers and financial markets. The FCA and Bank of England/PRA initiated a consultation on building operational resilience at the tail end of 2019, taking the stance that it is in the public interest to have a financial system resilient enough to supply the most important services with minimal interruption, even during severe operational events. New rules and guidance came into effect on 31 March 2022 and state that, by no later than 31 March 2025, firms must have performed mapping and testing so that they are able to remain within impact tolerances for each important business service.

Operational resilience is not just about business continuity planning but the end to end, thorough view of an FI’s customers. A keen understanding of the market landscape is essential when planning how to manage disruption. Some FIs are more accomplished at this than others, who will need to accelerate mapping and testing work to ensure they are line with regulatory expectations.