— Treasury Committee launches probe into effectiveness of Russian sanctions.
— Banks criticized for debanking SMEs while keeping fraudsters on the books.
— City minister piles pressure on PRA over bank capital reforms.
Good morning and happy leap day! It’s Thursday and you all know what that means….this is the second last MFS U.K. newsletter of the week!
Today we have the deets of the Treasury Committee’s very timely inquiry into the effectiveness of U.K. sanctions on Russia — including a ripper story on why £2 billion from the sale of Chelsea FC is sitting idle in a frozen London bank account when it should be spent on Ukraine. Elsewhere, we have the latest on the Prudential Regulatory Authority’s plans for extra capital charges for insurers, and why St. James’s Place shareholders are probably VERY unhappy right now.
Oh, and the FCA got grilled by MPs again yesterday — but that shouldn’t be a surprise to anyone, really.
Enjoy!
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RUSKY REVIEW: Influential MPs in Parliament’s Treasury Committee have launched an inquiry into the effectiveness of the U.K. government’s sanctions on Russia two years on from the invasion of Ukraine.
Probe: MPs have asked for written submissions to help it conduct the review, on topics including whether financial sanctions levied by the U.K. are enough to hurt the Russian war machine and economy. They also want input on whether Russian assets that have been frozen should be confiscated, and what legal hurdles exist, as well as opinions on whether the British government should start sanctioning individuals and companies who are still buying Russian oil and gas.
The committee will be….looking closely at the work of the Treasury’s Office of Financial Sanctions Implementation, which was given the remit of ensuring sanctions on Russia and related individuals are properly understood, implemented and enforced.
Good timing: The inquiry is timely for two reasons. First, the war is two years on and looks like it will drag on for a while yet. Second, Foreign Secretary David Cameron said just last month that there are “legal, moral and political justifications” for using the approximately $300 billion in frozen Russian assets to help and rebuild Ukraine.
Freeze to seize: So far, it’s proven nigh-on impossible to use the sanctioned funds. One of the most high-profile examples in the U.K. relates to the forced sale of Chelsea Football Club, which was previously owned by Russian oligarch Roman Abramovich. Nearly two years on, the more-than £2 billion from the sale that was pledged to go towards Ukrainian war victims is sitting idle in a frozen London account. Read our story on why the stasis continues.
Latest thinking: Moral Rating Agency, an organization set up after Russia’s invasion of Ukraine, supports a “syndicated loan solution” underwritten by the frozen assets to help rebuild Ukraine. MRA said it backs a recent proposal which would allow Ukraine to raise up to $300 billion through a group loan, provided by G7 governments, and collateralized by the claim for war damages. If Russia later refuses to fund reparations, the G7 syndicate can use the frozen assets to repay themselves.
Treasury Committee chair Harriett Baldwin said: “We must not let up in our efforts to plug every possible gap which Putin and his cronies exploit to get around our sanctions. Our committee is aiming to identify any areas within the U.K.’s purview which we feel could be improved so that, as a country, we can be confident we’re doing our bit to deal a fatal blow to the Kremlin war chest.”
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Bank of England publishes its money and credit statistics for January, 9:15 a.m.
The central bank also publishes its report into effective interest rates, 9:30 a.m.
Basel Committee on Banking Supervision meets.
**A message from Nationwide: Unlike the banks, Nationwide Building Society is owned by its members, not shareholders. That’s anyone who banks, saves or has a mortgage with us. Which means we can always focus on what’s best for them. It’s our fundamental difference and what makes us a good way to bank.**
COMMITTEES GRILL FCA & CITY MINISTER: Bank accounts were the talk of the town on Wednesday. In the morning, FCA exec Steve Smart was questioned by MPs in the Home Affairs Committee about why fraudsters are able to set up bank accounts. Later in the day, City Minister Bim Afolami was probed by the Treasury Committee as to why SMEs are having theirs closed.
Regulation, regulation, regulation: Afolami said banks were telling him they were scared of breaching regulatory requirements on money-laundering, and that this was driving debanking: “What is mostly happening is a fear of a knock on the door from the regulator,” he told MPs. Afolami said he was hearing from industry that account closures were because of either a perceived financial crime risk or not divulging information upon request, but that it tended to be the latter. He said this was particularly true in industries which use a lot of cash.
No mandate: Afolami said the Treasury wants money-laundering regulations to be “simpler, easier and less onerous” to reduce debanking. But it is not for the government to be “mandating” banks to take on certain customers, he said.
Unstoppable fraud: Meanwhile, Steve Smart of the FCA was grilled on the regulator’s inability to punish banks which are not tough enough on fraudulent accounts. MP Tim Loughton questioned why banks are not preventing accounts being set up with false information, in effect facilitating fraudsters. “You appear to be failing in your basic requirement to make sure that all bank accounts which are being set up, which provide profit to financial institutions, are set up by legitimate people with a proper paper trail,” Loughton said.
Same: Elsewhere, Chris Hemsley, head of the U.K. payments regulator, told the Fraud Leaders’ Summit that the introduction of rules mandating banks to reimburse victims of fraud “will mean receiving firms have a financial incentive to prevent scammers opening accounts with them in the first place and to close suspicious accounts much more quickly than has happened to date.”
Not strong on numbers: Smart said the FCA had prosecuted ten people last year, an increase on the year before. Rather than congratulations, he was asked how many financial firms the FCA regulates (50,000).
TREASURY PRESSURES PRA ON BASEL: The U.K. Treasury has made it clear to the Prudential Regulation Authority that global capital reforms must not damage lending to small businesses, City Minister Bim Afolami told MPs on Wednesday.
Reminder: The PRA is working on its plans to bring in the final Basel III capital standards but is under pressure from the government and industry to water down its proposals on charges for lending to small and medium-sized enterprises. Read Hannah’s story here as a recap.
Matter of priority: Afolami told Parliament’s Treasury Committee on Wednesday that the PRA’s approach is “a matter of live debate.” But he said that did not necessarily mean the U.K. would keep a favorable supporting factor inherited from the EU.
“The Treasury and I myself have made very clear to the PRA that it’s a matter of priority that we support the lending of finance to small and medium-sized businesses,” he said. “And that we should be very careful if that is going to be made harder.”
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PRA STICKS WITH CAPITAL ADD-ONS: The Prudential Regulation Authority on Wednesday stuck with plans to hit insurers with extra capital charges for bubbling risks that are not totally captured in their own models — despite the industry warning the policy may undermine their ability to plow money into U.K. investments.
Recap: The Treasury over-ruled the U.K. supervisor back in November 2022 to slash capital charges for insurers in a bid to unleash an investment surge into the economy. The most controversial steps related to the “matching adjustment” — which allows insurers to count future cash flows as capital upfront when they match their liabilities.
Via the back door? But there’s been some industry concern that the PRA could limit their capital release by hitting them with extra capital add-ons when the authority thinks they’ve over-indulged on the matching adjustment to lower their requirements.
The PRA said on Wednesday that’s not its plan. In its near-final plans, the U.K.’s top insurance cop said it was absolutely not intending to use the add-ons as “a mechanism to structurally increase capital held by firms.” Still, that doesn’t mean it isn’t going to use them. And it argued the add-ons would allow for more internal models to be approved by including a safeguard.
Disclosures: In a concession to insurers, the PRA said any companies that are hit with an extra capital charge — or residual model limitation capital add-ons, RML CAOs, in the catchy shorthand — won’t have to disclose it separately to investors. The PRA will just publish a summary report in 2027 which will keep everything anonymous.
Dynamic: Plus, the U.K. supervisor said the add-on may be set dynamically so that it moves up or down depending on changes in the business or economic conditions — rather than a fixed amount. But it won’t let insurers negotiate the charges. “It is the PRA’s responsibility to use the tool when needed,” the authority said.
Anything else? The PRA said it would also give insurers an extra six months leeway to sort out their internal models after an acquisition, rather than at the point of the takeover.
FREE FALL: Almost a billion pounds was wiped off St. James’s Place’s (SJP) market cap on Wednesday as the company’s share price fell by as much as 30 percent. The astonishing drop happened after the wealth management company’s management announced it was setting aside a £426 million provision to refund clients’ ongoing financial advice fees.
Review: SJP has been hit by a flurry of customer complaints in recent months, who believe that they received no actual ongoing advice service from the firm despite being charged for it. The firm brought on a “skilled person” to review customer files last year as a result, and has been engaging “extensively” with the FCA on the matter, SJP said on Wednesday.
Crackdown: The FCA has been banging on about ongoing advice fees for years, but the City watchdog has gotten much more serious over the last six months post-Consumer Duty implementation. Earlier in February the regulator began a review into ongoing advice over concerns that some clients were not receiving an annual review despite paying for one. As part of that review, the FCA has requested annual review data from the 20 biggest financial advice firms.
The FCA said: “We have had significant engagement with SJP ahead of [the] announcement. We welcome its plans to refund clients who may not have received the ongoing advice service for which they had paid or where this cannot be appropriately evidenced.”
LABOUR LEAKS: A recent report suggested Labour was set to protect certain public sector workers — headteachers, doctors etc — by bringing back the pensions lifetime allowance if it wins the next general election — which was a fairly unpopular idea. BUT, the Sun reckons that the Shadow Treasury has now ditched this idea, and will probably increase the limit instead to protect more people from having their pensions pinged by penalties.
Jeremy Hunt considers scrapping ‘non-dom’ tax status at the Budget, finds the FT.
Sam Bankman-Fried begs judge to shorten 100-year sentence, writes The Telegraph.
Klarna’s AI chatbot does the work of 700 full-time staff: The Times has it.
DirectLine shares surge amid takeover speculation: Read it in the Guardian
Thanks to: Fiona Maxwell, Izabella Kaminska, Giulia Poloni
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