The Financial Conduct Authority (FCA) did not formally request firms' plans for transitioning to a shorter settlement cycle, despite warning about concerns over the move, according to a letter sent by the regulator and seen by Financial News.
Regulator's Warning and Firms' Response
The FCA wrote to firms in November, expressing 'concerns' about the industry's preparedness for the shift to T+1 settlement — the process of settling trades one day after execution, down from two days. The letter, which was not made public, urged firms to consider the risks and to ensure they had robust plans in place.
However, the regulator did not formally request that firms submit their transition plans for review. This has led to questions about how the FCA will monitor readiness ahead of the planned move, which is expected to take place in 2027.
Industry Concerns and Next Steps
Industry participants have expressed concerns about the tight timeline and the operational challenges of compressing the settlement cycle. The move to T+1 is part of a broader global trend, with the US and Canada already having made the switch in May 2024.
The FCA's letter, which was reported by Financial News, did not set a deadline for firms to respond, nor did it mandate a specific format for their plans. Instead, it encouraged firms to engage with the regulator if they had any concerns.
According to the letter, the FCA said it would continue to engage with industry bodies and firms to monitor progress. The regulator also highlighted the importance of cross-border coordination, given the global nature of securities markets.
Impact on UK Markets
The UK's move to T+1 is expected to have significant implications for market infrastructure, including clearing and settlement systems, as well as for firms' operational processes and technology. The transition could reduce counterparty risk and improve market efficiency, but it also requires substantial investment and coordination.
The FCA's approach has been described as 'light-touch' by some industry observers, who note that the regulator has not imposed formal reporting requirements. This has raised concerns that some firms may be underprepared, potentially leading to operational glitches when the new cycle comes into effect.
The UK's transition is being coordinated with the European Union, which is also planning to move to T+1 in 2027. The FCA has said it is working closely with other regulators to ensure a smooth transition.
As the deadline approaches, industry participants will be watching closely to see whether the FCA takes a more hands-on approach. The regulator's next steps could include formal requests for information or targeted reviews of firms' readiness.
