18 Jul 2022
H1 in review: expectations and events
Towards the end of 2021 many firms will have looked ahead – their planning will have logically built on the major existing themes: ESG, Covid-19 recovery, post Brexit competitiveness, fund governance and consumer protection.
However, multiple geopolitical forces already at play in 2022 have impacted the landscape for both firms and regulators. It is also clear that the pace of change will have to continue to escalate in H2.
Events have disrupted the expected running order somewhat, as geopolitics forces firms and regulators to keep pace with a new economic reality including sanctions, side-pockets, high inflation and rising interest rates.
This has necessarily made for a more reactive regulatory environment. The introduction of side-pockets has required a pivot in terms of FCA resources, which has had a tangible impact in terms of other consultation and policy activity. A number of items were pushed back: the second consultation on the Long Term Asset Fund (LTAF) for example, and the consultation on sustainability disclosures.
Looking at the latest Regulatory Initiatives Grid – an overview compiled by all the UK regulators, published in May – it is clear that these developments remain very much on the radar, but the Grid now deals in less specific dates: quarters, months, or in some cases even seasons. A sign of more uncertain times.
The side-pocket consultation has been notable in terms of the pace at which it was progressed: the consultation was open for a mere two weeks, with the policy statement issued in short order thereafter (06 July). It is an example of the regulator attempting to deliver change in an agile and efficient manner; albeit other regulators such as the CBI in Ireland, or ESMA have also demonstrated a desire to accelerate, arguably faster, on this issue.
The side-pocket initiative is an important data point to bear in mind in relation to the FCA’s Business Plan and three-year strategy, which were both published in Q2. In these, the FCA challenges itself to continue to be more assertive, innovative and adaptive and to focus on outcomes. In a busy geopolitical and market environment the FCA has tried to up the ante by challenging itself to continuously improve, with a more agile approach to regulatory change. Observers will be looking out for other examples of this approach in H2.
Overall, the remit is expanding: we saw climate change added to regulators’ remits in 2021, and in 2022 it has been proposed that supporting UK competitiveness should be added as a secondary remit for regulators. There is, therefore, a lot on the FCA’s plate at the moment, and the regulatory agenda, though slightly reordered, remains as busy as ever. The Regulatory Initiatives Grid is just as hefty as in previous iterations.
What can firms expect in H2?
Firstly, we now have clarity on the side-pocket issue, with the publication of the Policy Statement on 06 July. Some firms will make use of the proposals to help affected funds to come out of suspension. Others will consider other options in conversation with the FCA. A number of UK funds are currently suspended and the implementation of side-pockets may bring this number down. Enabling investors to once again be able to redeem where appropriate would ultimately represent a positive outcome for consumers and the market.
Linked to this, the cost of living crisis and high inflation will increase focus on the Consumer Duty and the principle of treating customers fairly, as well as the FCA’s Consumer Investment Strategy. Consumer Duty is a principle area of focus for many firms, although larger firms have argued that they are already meeting the requirements of the Duty, albeit perhaps with a need to document this more clearly. These initiatives will only gain in relevance in H2, as the policy statement is issued and implementation commences.
We will also see a return to the big themes we expected to see at the start of the year: ESG, fund governance, LTAFs, and further efforts to shore up the regulatory position on emerging, contentious matters such as cryptoasset regulation.
It is clear that the pace of change will have to continue to escalate in H2.
However, regardless of how the rest of the year unfolds, the primary principles of consumer protection and market integrity will remain consistently front-and-centre.
When planning ahead, even in uncertain times, these are always the guardrails which firms should hold on to.
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Welcome to Depositary Insights Summer 2022 edition which offers the latest thinking on regulatory and industry developments from NatWest TDS.