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    UK Authorities Issue Multiple Regulatory Updates in February 2023

    February 14, 2023

    The Prudential Regulation Authority (PRA) published a policy statement (PS1/23) that provides feedback to responses to consultation paper (CP8/22) on remuneration related to unvested pay, material risk-taking, and public appointments. The Financial Conduct Authority (FCA) seeks views on a discussion paper (DP23/1) on sustainability-related governance, incentives, and competence in regulated firms, with the comment period ending on May 10, 2023; it also published a feedback statement (FS23/1) on the benefits and limitations of synthetic data within financial services. Additionally, the HM Treasury (HMT) is seeking comments, until April 11, 2023, on the proposed draft legislation that will bring Buy-Now Pay-Later (BNPL) products into the Financial Conduct Authority regulation.

    PRA PS1/23. Based on the feedback received, PRA made amendments to the supervisory statement (SS2/17) on remuneration (Appendix 1). The purpose of the supervisory statement was to set out the PRA expectations on how firms should comply with the requirements of the remuneration part, enabling firms to make judgements which advance the objectives of the PRA. The amendments include addition of a footnote (number 19) clarifying circumstances other than public appointments where a conversion is appropriate, addition of footnote (number 20) clarifying that the use of the terms ‘equity’ and ‘other instruments’ include all instruments that can fall under sections 15.15(1)(a) and 15.15(1)(b) of the remuneration part of the PRA Rulebook, addition of a line (paragraph 4A.11) clarifying that the public sector employer should determine whether (or not) its conflicts of interest policy is able to address any conflicts, as well as other changes to add more clarity. The policy statement is relevant to all PRA-authorized banks, building societies, PRA-designated investment firms, including third-country branches, that are subject to the remuneration part of the PRA Rulebook. The new policy will come in effect from February 10, 2023.

    FCA DP23/1. The discussion paper aims to help the financial industry deliver against its potential to drive positive sustainable change, by encouraging an industry-wide dialog on firms’ sustainability-related governance, incentives, and competencies. The paper also includes a collection of 10 commissioned articles from experts, including industry practitioners, academics and other thought leaders, with relevant and interesting perspectives on firms’ sustainability-related governance, incentives, competence and stewardship arrangements. Based on the feedback, FCA will assess how to better support the industry in this evolving field and whether there is a case for further regulatory measures in the area of firm governance, incentives and competencies to support the role of finance in contributing to positive change. Going forward, FCA encourage firms to reflect on the matters discussed, and consider incorporating them as they review and refine their current approaches to governance, remuneration, incentives and training.  The discussion paper is relevant to all regulated firms across the financial sector including banks, building societies, insurers, asset management firms, and investment firms.

    FCA FS23/1. The feedback statement sets out responses to the Call for Input, which was published in March 2022 and aimed to understand the market maturity of synthetic data within financial services, along with its potential to expand data-sharing between firms, regulators, and other public bodies. Synthetic data is a privacy preserving technique that could expand opportunities for data-sharing by generating statistically realistic, but "artificial" data that is readily accessible. Synthetic data is useful for augmenting rare patterns and ‘edge cases’ that are scarce in real datasets, to better train models to respond to infrequent events. FCA, as part of this feedback statement, sets out the responses to the feedback received in relation to four key areas:

    • Data access and innovation: Respondents unanimously agreed that data is crucial for innovation, although there are challenges to accessing and sharing data in financial services.
    • Assessment of synthetic data: Respondents indicated that data protection regulation places specific conditions on the data they can share and access, and also reiterated the importance of consumer privacy, and that data access should have privacy built in by design at every stage of the process.
    • Synthetic data use cases: Feedback indicated fraud and anti-money laundering as a key use case for synthetic data, in part due to its ability to augment rare patterns of behavior in a dataset.
    • The role of the regulator: Respondents indicated that the regulator could perform an intermediary role in the provision of synthetic data. Feedback also strongly indicated the need for guidelines, standards and/or governance frameworks to build trust in synthetic data and encourage wider adoption.

    Going forward, FCA will host a joint industry-academic roundtable in partnership with the Alan Turing Institute and the Information Commissioner’s Office to understand the challenges of validating synthetic data in early 2023. FCA plans to publish a paper in the coming months outlining its key findings and next steps. FCA will establish a Synthetic Data Expert Group to create an effective framework for collaboration across industry, regulators, academia and wider civil society on issues related to synthetic data. Applications to join the group will open in February, and the first session is expected to take place in the Spring of 2023.

    HMT Consultation on BNPL. The consultation summarizes the feedback received from stakeholders on the additional questions on the scope of regulation that were asked in the Government’s June response document and also seeks comments on the draft legislation which will bring BNPL products within the regulatory perimeter. HM Treasury also published BNPL draft statutory instrument, along with the draft legislation. The term BNPL refers to a type of interest-free installment credit that allows borrowers to split the cost of purchases into regular repayments not exceeding a twelve-month period. Based on responses to this consultation, HM Treasury will consider any necessary changes to the draft legislation and intends to publish a consultation response which will set out the anticipated key milestones for regulation. Following that, the government will lay legislation when Parliamentary time allows, with the ambition that this will be during 2023.


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    Keywords: Europe, UK, Banking, Remuneration, Material Risk Takers, Reporting, PRA Rulebook, Supervisory Statement, Governance, Synthetic Data, Buy Now Pay Later, Credit Risk, Lending, Basel, FCA, PRA, HM Treasury

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