Key Takeaways from the UK Regulatory Industry for Q3 2022

The Economic Crime (Transparency and Enforcement) Act 2022 – The Register of Overseas Entities

In March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (“Act”) was enacted by the Government to crack down on foreign criminals using UK property to launder money and, in part, as a response to the Russian invasion of Ukraine. The Act establishes a register for overseas entities who own, or wish to acquire, property or land in the UK. The new register came into force in the UK on August 1, 2022.

The new register will require anonymous foreign owners of UK property to reveal their real identities to ensure criminals cannot hide behind secretive chains of shell companies. The measures will apply to any company or similar legal entity that is governed by the law of a country or territory outside the UK (overseas entity); individuals who have significant influence or control over the entity e.g. they hold 25% or more of the shares or voting rights (beneficial owners).

An overseas entity will be required to identify its beneficial owner(s) and to register them with Companies House. Information supplied to the register will be required to be verified.

If a foreign company does not comply with the new obligations, its managing officers can face criminal sanctions, including fines of up to £500 per day or a prison sentence of up to 5 years. Civil sanctions may also be introduced in the form of financial penalties and an overseas entity will face restrictions when trying to sell or lease their land. If they are already registered, they will face restrictions over dealing with their land.

FATF is conducting a review of the transparency and beneficial ownership (BO) of legal arrangements

The Financial Action Task Force (“FATF”) objective is to better prevent the misuse of legal arrangements for money laundering or terrorist financing with regard to beneficial ownership transparency. FATF’s work in this area is ongoing, and will benefit from hearing views from stakeholders, including trustees, financial institutions, designated non-financial businesses and professions (“DNFBPs”), and non-profit organisations.

Further information can be found at the below link:

https://www.fatf-gafi.org/publications/fatfrecommendations/documents/r25-public-consultation.html

The Bank of England, PRA and FCA set out potential measures to oversee critical third parties in a move to increase resilience of the financial sector

In an increasingly digital world, financial businesses are more dependent on a small number of third-party providers. That can bring significant benefits, but also comes with resilience risk. The Bank of England (“the Bank”), Prudential Regulation Authority (“PRA”) and The Financial Conduct Authority (“FCA”), collectively known as the “supervisory authorities” have set out potential measures in a discussion paper to oversee and strengthen the resilience of services provided by critical third parties (“CTPs”) to the UK financial sector.

A CTP is a third party that HM Treasury (“HMT”) would designate as ‘critical’ using its proposed powers under the Financial Services and Markets Bill (“FSM Bill”). Under the proposals in the Bill, HMT would be able to designate a third party as ‘critical’ if it was satisfied that a failure in, or disruption to, the provision of the services that it provides to firms and financial market infrastructure firms (“FMIs”) (either individually or where more than one service is provided, taken together) could threaten the stability of, or confidence in, the financial system of the UK. For example, a cloud service provider.

The proposed potential measures include:

• A framework for identifying potential CTPs, which would inform the supervisory authorities’ recommendations for formal designation by HM Treasury;
• Minimum resilience standards, which would apply to the services that designated CTPs provide to firms and FMIs; and
• A framework for testing the resilience of material services that CTPs provide to firms and FMIs using a range of tools, including but not limited to scenario testing, participation in sector-wide exercises, cyber resilience testing, and skilled persons reviews of CTPs.

The discussion paper is open to feedback until December 23, 2022. 

The FCA’s Consumer Duty will lead to a major shift in financial services

The FCA has confirmed its plans to bring in a new Consumer Duty (“The Duty”). The Duty will affect regulated firms, including those in the e-money and payments sector, consumer business and individual consumers, industry groups/trade bodies, policy makers and regulatory bodies, industry experts and commentators and academics and think tanks.

The Duty will require firms to end rip-off charges and fees; make it as easy to switch or cancel products as it was to take them out in the first place; provide helpful and accessible customer support; provide timely and clear information on products and services; provide products and services that are right for their customers; and focus on the real and diverse needs of their customers at every stage and in each interaction.

The FCA is giving firms 12 months to implement the new rules for all new and existing products and services that are currently on sale. The rules will be extended to closed book products 12 months later, to give firms more time to bring these older products, that are no longer on sale, up to the new standards.

PS22/11 - Improvements to the Appointed representatives regime: The FCA confirms new rules to make authorised financial firms more responsible for their appointed representatives (ARs).

The Appointed Representatives (“AR”) regime offers firms who intend to conduct certain regulated activities an exemption from full independent authorisation by the FCA. Principal Firms, which have independent authorisation by the FCA, may permit firms, subject to a number of conditions, to operate under their FCA license. As such, the Principal Firm is liable to the FCA for the activities of the AR as if the Principal Firm had conducted the activities themselves. The AR Regime is an attractive option to firms, particularly small and emerging firms, as it provides efficiencies and a reduced burden in relation to time to market, costs and required resources.

The policy statement clarifies the rules for appointing new, amending and terminating Principles and Appointed Representatives. The rules furthermore detail what fees, reporting, oversight and tracking is required.

Pension trustees plead guilty to illegal loans

Two trustees, Kyprianou and Werb, have pleaded guilty to making illegal loans amounting to £236,000 from a company pension scheme to the scheme's employer, in a prosecution brought by the Pensions Regulator (TPR).  They had also been charged with providing false or misleading information to TPR contrary to section 80 of the Pensions Act 2004. TPR had alleged that they fabricated minutes of trustee meetings to disguise the loans as investments.

Per Section 40 of the Pensions Act 1995 and the occupational Pen Schemes (investment) Regulations 2005, employer-related investments are prohibited, regardless of the amount involved. Breach of Section 40 is a criminal offence and can potentially lead to an unlimited fine and/or imprisonment.

For more information, please visit:

https://www.thepensionsregulator.gov.uk/en/media-hub/press-releases/2022-press-releases/pension-trustees-plead-guilty-to-illegal-loans

TPR publishes revised guidance on tendering for fiduciary managers and setting objectives for investment consultants

The Pensions Regulator (“TPR”) has revised its guidance on the tender process for fiduciary management services and trustees setting objectives for their investment consultants. Since December 2019, trustees have been legally required to run a competitive tender process when appointing fiduciary managers in relation to 20% or more of scheme assets. They have also been prohibited from receiving investment consultancy services without having set strategic objectives for their investment consultancy provider. From October 1 , 2022, TPR will take over the monitoring of compliance with these requirements from the Competition and Markets Authority (“CMA”).

For more information, please visit:

https://www.thepensionsregulator.gov.uk/en/media-hub/press-releases/2022-press-releases/revised-tendering-for-fmps-and-setting-objectives-for-fiduciary-managers-guidance-by-tpr

TPR publishes action plan to boost diversity and inclusion across trustee boards

TPR has published the Equality Diversity and Inclusion (ED&I) action plan in partnership with the pensions industry to improve diversity and inclusion across trustee boards on September 27,  2022.

The action plan sets out steps TPR, in partnership with the Diversity and Inclusion Industry Working Group (“IWG”) will take to encourage and support trustees to recruit diverse candidates and create a culture of inclusion:

• Develop a mechanism for how TPR will collect and use diversity data in the longer term to measure success;
• Set clear ED&I expectations in TPR’s upcoming single code of practice;
• Publish guidance in partnership with the IWG to help trustees understand and meet TPR’s expectations. The guidance, which will be regularly updated, will be published at the end of this year or in early 2023;
• Continue to work with industry stakeholders to focus on how the roles of employers, chairs, and professional trustees can be influential in diverse recruitment and developing a culture of inclusion;
• Engage directly with trustees through TPR supervision to identify barriers to diversity and highlight best practice.
  
  

For more information, please visit:

https://www.thepensionsregulator.gov.uk/en/media-hub/press-releases/2022-press-releases/tpr-publishes-action-plan-to-boost-diversity-and-inclusion-across-trustee-boards

Trustees: get set to meet new climate reporting rules

TPR has updated its guidance on September 29, 2022 to help trustees of pension schemes meet their duties of managing and reporting on climate-related risks and opportunities under The Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021 and the Occupational Pension Schemes (Climate Change Governance and Reporting) (Miscellaneous Provisions and Amendments) Regulations 2021, which come into force from October 1, 2022.

The regulations had a phased introduction, initially applying to trustees of authorised master trusts and of larger schemes with net relevant assets of £5 billion or more from October1, 2021. However, from October 1, 2022, the rules will also apply to trustees of schemes with net relevant assets of £1 billion or more. The Department for Work and Pensions intends to consider whether to extend these rules to smaller schemes in 2023.

The amended regulations require affected trustees to calculate and report on a portfolio alignment metric. This is a metric which gives the alignment of the scheme’s assets with the Paris Agreement goal of limiting global warming to 1.5°C above pre-industrial levels. While trustees do not need to be climate change experts, they should have sufficient knowledge and understanding to be able to identify, assess and manage climate-related risks and opportunities for their scheme.

For more information, please visit:

https://www.thepensionsregulator.gov.uk/en/media-hub/press-releases/2022-press-releases/get-set-to-meet-new-climate-reporting-rules

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