Disputes Yearbook 2023:
Financial services regulatory

New FCA standards on ESG disclosures

In November, the Financial Conduct Authority (FCA) confirmed its final rules on sustainability disclosures and labelling for financial products. In summary, the FCA's new regime consists of: 

• An anti-greenwashing rule which will require all authorised firms to ensure that sustainability claims made in communications and financial promotions to any client or relevant persons, not solely retail customers, are fair, clear and not misleading.
• A set of defined product labels based on sustainability goals and criteria that are intended to aid investors' understanding of how their investment is being deployed.
• Marketing requirements which will ensure that products which do not have a positive impact on sustainability may not be described as such.

The anti-greenwashing rule will come into effect from 31 May 2024. Firms can use the investment labels from 31 July 2024. The naming and marketing rules for asset managers come into effect from 2 December 2024. For more on the anti-greenwashing rule, see our blog post here, and for more on the final rules on disclosure requirements, read our blog post here.

Crypto regulation

The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 which brings the promotions of qualifying cryptoassets within scope of the UK FCA's financial promotion regime entered into force on 8 October 2023. This means firms wishing to promote cryptoassets in the UK must be authorised or registered by the FCA, or have their marketing approved by an authorised firm. Firms must also ensure people have the appropriate knowledge and experience to invest in cryptoassets, and they must put in place clear risk warnings and ensure adverts are clear, fair and not misleading.

The FCA took a number of steps in preparation for the regime coming into force, including writing to firms, developing guidance and publicising the change. The FCA reported that it had issued 146 alerts about cryptoasset promotions in the first 24 hours of the regime going live. The regulator also announced that it had imposed restrictions on a firm preventing it from approving cryptoasset financial promotions.    

The FCA, in co-operation with law enforcement, has also continued its crackdown on unregistered crypto ATMs across the UK. 

Looking ahead into 2024, further development of the UK's regulatory regime for cryptoassets as provided for in the Financial Services and Markets Act 2023 (FSMA 2023) is expected. For more on the UK regime, see our blog post here.

In the EU, as the Markets in CryptoAssets Regulation which regulates cryptoasset issuance and service provision in the region came into force in June 2023, focus is now on the European Banking Authority and the European Securities and Markets Authority to deliver their respective policy mandates which will operationalise the regime.

AI and machine learning

In October 2022, the FCA and the Prudential Regulation Authority (PRA) published a discussion paper (DP5/22) on how AI may affect their respective objectives. The paper sought to explore whether stakeholders consider the existing sectoral legal requirements and guidance to be sufficient to address the risks and harms associated with AI; where there are gaps in existing legal requirements and guidance; and how any additional intervention may support the safe and responsible adoption of AI in UK financial markets.

Shortly before the UK AI Summit in November 2023, the regulators issued a feedback statement summarising the responses received to DP5/22. The statement does not include policy proposals, nor does it signal how the supervisory authorities are considering clarifying, designing and/or implementing current or future regulatory proposals on this topic. Among the key points put forward by respondents were: (1) that attempting a regulatory definition of AI would not be helpful; (2) that more regulatory co-ordination to mitigate complexity and fragmentation would be welcome; and (3) that existing firm governance structures and regulatory frameworks such as the UK individual accountability regime – the Senior Managers and Certification Regime – are sufficient to address AI risks.

On an international level, governments continue to grapple with the challenges presented by AI in differing ways, ranging from voluntary self-regulation to pushes for more targeted risk-based requirements.

The new Consumer Duty

In July 2022, the FCA set out the final rules and guidance for the new Consumer Duty (the Duty), a cornerstone of the regulator's three-year strategy and a key element of its work to drive higher standards in the industry. With the introduction of a new Principle 12 to the FCA's longstanding Principles for Businesses, the Duty requires firms to "act to deliver good outcomes for retail clients". This overarching Principle is underpinned by three cross-cutting rules requiring firms to: act in good faith towards retail customers; avoid causing foreseeable harm to retail customers; and enable and support retail customers to pursue their financial objectives.

Firms were required to apply the Duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023 and will need to apply it to products and services held in closed books by 31 July 2024.

The FCA expects the new rules to promote good outcomes in the following four areas: products and services; price and fair value; consumer understanding; and consumer support. The Duty intersects the FCA's vulnerable customer initiative and – to the degree it is applicable to or of concern to consumers – the diversity and inclusion initiatives which both the FCA and the PRA have been focusing on in recent years.

The Edinburgh Reforms, Mansion House Update and FSMA 2023

On 29 June 2023, the Financial Services and Markets Bill 2023 received royal assent. Hailed as a landmark piece of legislation to "regain control of the financial services rulebook", the FSMA also enables the delivery of some of the key proposals announced as part of the Edinburgh Reforms in December 2022.

FSMA 2023 introduced a new secondary objective for both the FCA and PRA whereby the regulators must consider the UK Government's economic growth and international competitiveness policy when discharging their primary objectives. The regulators are now focused on working the objective into their operations.

Herbert Smith Freehills has published a progress tracker on the various components of the Mansion House/Edinburgh Reforms. We continue to track developments under these related reform packages.

UK APP fraud reimbursement rules

Authorised push payment (APP) scams happen when someone is tricked into sending money to a fraudster posing as a genuine payee. In 2022, a reported £485.2 million was lost to APP scams in the UK. In October, the Payment Systems Regulator published its first APP scams performance report which details the performance of banks and other payment firms in tackling APP scams and how they treated victims of such fraud in 2022. The report covers 95% of payments made via the faster payments scheme.

In response to the prevalence of APP fraud, the Financial Services and Markets Act 2023 included provisions which enable the Payment Services Regulator to require reimbursement by payment services providers. This new reimbursement requirement is expected to come into effect in 2024.

For more discussion, including in relation to other jurisdictions, see our insights page in our 2023 Global Bank Review.

Diversity and inclusion in financial services

The UK regulators' long-awaited consultation papers on diversity and inclusion in regulated firms were published at the end of September. The FCA and PRA are making these proposals on the basis that greater diversity and inclusion can improve results for consumers and markets, support prudent decision-making and lead to better risk management by reducing groupthink. Reducing groupthink is relevant to overall governance and leadership but the FCA also link this to individual product design and the focus on consumer outcomes and higher standards under the new Consumer Duty.

The consultations also cover the regulators’ positions on non-financial misconduct which, while providing a degree of clarity, do not fully alleviate current uncertainty about this difficult area, not least around enforcement. While in some cases, there is an obvious answer, there are likely to be plenty of others where firms need to make fine judgement calls.

The consultations are open for response until 18 December 2023, and the regulators propose to bring the final rules into force 12 months from publication of the subsequent policy statement(s), which are on the agenda for 2024.

For more on the proposals and our assessment, see our blog post here.