1. Final rules expected on non-financial misconduct: The genesis of the UK Financial Conduct Authority’s (FCA) interest in “non-financial misconduct” was a letter from the FCA to the Parliamentary Women and Equalities Committee in September 2018 concerning sexual harassment in the workplace. Since that time, the FCA’s intentions and views on the topic have only been ascertainable through its Final Notices and Upper Tribunal decisions. Usually relating to serious misconduct, including criminal offences, those decisions have not always been easy to apply to what might be considered more mundane day-to-day conduct scenarios. This has generated scope for uncertainty for regulated firms and individuals. However, following a consultation in 2023, the FCA is expected to produce its final rules and guidance in 2024 with a view to implementation in 2025. It is reasonable to expect these to be substantially similar to the draft rules and guidance published in the consultation.

This is part of a wider package of measures from the FCA and UK Prudential Regulation Authority (PRA) in respect of diversity and inclusion, which will apply differently depending on the size of the firm. However, as regards the new rules and guidance on non-financial misconduct, all firms authorised under the Financial Services and Markets Act 2000 (FSMA) (meaning that EMI’s and payments firms will not be included for now) will be impacted, with the changes being implemented through updates to the Code of Conduct and the rules and guidance on “fitness and propriety”. There are also knock-on changes to notification and regulatory reference requirements.

Firms will no doubt want to start to engage with the new rules long before the implementation date.

2. Continuing reforms to the Senior Managers and Certification Regime: In March 2023, the FCA and PRA launched wide-ranging consultations on the efficacy of the Senior Managers and Certification Regime (SMCR), as part of the wider package of Edinburgh reforms. The consultations closed in June 2023. SMCR is fundamental to how individuals in FSMA authorised firms are held to account for their performance and conduct.

Whilst there is no formal date for a next step, it would seem reasonable to expect further progress in 2024.

3. A change in approach for FCA investigations and Upper Tribunal proceedings: As a result of criticism received by the FCA in the Upper Tribunal in 2023 (in the matter of Seiler v. FCA [2023] UKUT 00133 (TCC)), there is an expectation that the FCA will change its approach both to the conduct of investigations and any references to the Upper Tribunal (the tribunal that hears appeals from the FCA’s own internal decision-making body). The Seiler case is an important precedent that covers a number of areas, only two of which we address here.

As regards the conduct of investigations, the Upper Tribunal criticised the length of the FCA’s investigations into the relevant individuals. It urged the FCA to consider, in long-running investigations, whether it was appropriate to continue where it could not complete them in a reasonable period. This criticism will not be a surprise to many, but what impact it will really have on long-running active cases remains to be seen.

The Upper Tribunal also criticised the FCA for acting as though it was a commercial litigant rather than a regulator with public duties, in the conduct of its case. In particular, the Upper Tribunal said the FCA should ensure the Upper Tribunal had all relevant witness evidence before it, even if this means the FCA must call witnesses it does not believe or that otherwise undermine its case. We will have to await further decisions to assess the extent to which this impacts the conduct of cases before the Upper Tribunal.

4. The FCA’s intervention in relation to complaints about motor finance discretionary commission: In 2021 the FCA banned discretionary commission arrangements in relation to motor finance. Prior to the FCA’s ban, brokers (including car dealerships) were able to increase (with the broker keeping the increase) the interest rate a customer paid for their motor finance without the customer being aware that the lender was prepared to lend to the customer at a lower interest rate.

Recently the Financial Ombudsman Service reached the view in relation to two complaints that such arrangements created an unfair relationship between the provider and the customer, and that the lender should repay to the customer the difference between the interest rate the customer was charged and the interest rate the customer would have paid if there was no discretionary commission. In one example the customer paid 5.5% interest but the lender would have been prepared to lend at 2.49%. In addition, the FOS added 8% annual interest to the amount payable to the customer by the lender.

On 11 January 2024 the FCA announced a nine month “pause” imposed on all firms handling motor finance complaints regarding discretionary commission due to:

• a high number of complaints (reportedly tens of thousands);
• many lenders rejecting complaints on the basis that they did not consider the arrangements were unfair;
• the likelihood of increased claims following the FOS’ decision;
• claims being brought in the County Courts; and
• the Financial Services Compensation Scheme not applying in relation to motor finance.

This pause is to enable the FCA to conduct its own review of historic selling practices to then determine the best way for any compensation to be calculated and paid.

This action which has been described as the “new PPI” may result in many firms in the motor finance sector reviewing, during the course of 2024, the manner in which they lent monies in the past.

5. New categories for the promotion of products under the FCA Sustainability Disclosure Requirements: In November 2023, after a substantial consultation process, the FCA published its policy statement setting the UK’s regulatory framework for the promotion of products (including funds) to retail customers.

In a stark contrast to the legalistic European approach to ESG disclosures under its Sustainable Finance Disclosure Regulation the FCA will, during the course of 2024, be introducing four labels to categorise financial products that have an ESG goal:

• Sustainability Focus – which invest at least 70% into credible environmental and/or social sustainability assets;
• Sustainability Improver – which invest into assets which are not environmentally or socially sustainable at the outset but have the potential to deliver measurable improvements;
• Sustainability Impact – which aim to achieve a positive, measurable contribution to real world sustainability outcomes; and
• Sustainability Mixed Goals – which invest at least 70% of assets into a combination of the above categories.

These new categories, when coupled with the FCA’s anti-green washing rule and new ESG reporting requirements, will result in many UK firms in the financial services sector in 2024 re-evaluating how they describe and designate their financial services products from an ESG perspective.

About our Financial Services Regulatory Practice: We help businesses and leading regulated individuals to navigate their interactions with the UK regulators, particularly the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). We have acted on some of the biggest enforcement cases since the financial crash and for household name clients, but much of our work involves advising our clients on UK regulations and pre-empting difficult regulatory interactions. We also have experience in the new-economy sectors of payments and crypto assets.