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Key Regulatory Topics: Weekly Update 10 November - 16 November 2023
In the EU, the European Parliament's Economic and Monetary Affairs Committee published draft reports on the proposed new payment services package, while ESMA delivered a speech on the next steps on the MiCAR journey. The European Commission began consulting on two draft Delegated Regulations under DORA and the EBA published a speech on DORA and operational resilience. In addition, IOSCO finalised its policy recommendations for crypto and digital asset markets and the BCBS published a discussion paper on digital fraud.
Consumer/retail
FCA reviews approach to secondary credit brokers that supply a non-financial service
On 16 November, the FCA announced that it has reviewed its interpretation of the consumer credit legislation for Limited Permission secondary credit brokers, specifically, how it applies to credit broking firms whose main business activity is the supply of non-financial services. Firms that are authorised by the FCA as a Full Permission credit broker firm, may be eligible to apply to become authorised as a Limited Permission firm instead, depending on what activities they undertake. Firms eligible to change from Full to Limited Permission, may be entitled to a refund on a proportion of their past regulatory fees. The FCA sets out a series of questions that will enable Full Permission secondary credit brokers to check whether they are eligible to change, as well as a related set of FAQs.
Financial crime and sanctions
FATF updates standards and best practices in relation to non-profit organisations
On 16 November, the FATF published amendments to Recommendation 8 and its best practices on combating the potential terrorist financing abuse of non-profit organisations (NPOs). At its October Plenary, the FATF agreed on amendments to Recommendation 8, that aim to protect NPOs through the effective implementation of risk-based measures. These amendments include: (i) requiring countries to periodically identify organisations that fall within the FATF definition of NPOs and assess the terrorist financing risks posed to them; (ii) requiring countries to have in place focused, proportionate and risk-based measures to address terrorist finance risks identified; and (iii) clarifying that countries should ensure oversight or monitoring of NPOs, but they need not designate and supervise NPOs as reporting entities or require them to conduct customer due diligence. The FATF explains that it has updated its best practices to reflect the amendments to Recommendation 8 and to help countries, the non-profit sector and financial institutions understand how best to protect relevant NPOs from abuse for terrorist financing, without unduly disrupting or discouraging legitimate NPO activities. The FATF believes that when implemented appropriately, the best practices will preserve the integrity of the NPO sector, the donor community, and the financial institutions and intermediaries they use, without unduly disrupting or discouraging legitimate NPO activities. For the first time, the best practices paper also includes examples of bad practices and specifically explains how not to implement the FATF’s requirements.
Best practices: Combating the terrorist financing abuse of non-profit organisations
Economic Crime and Corporate Transparency Act 2023 (Commencement No. 1) Regulations 2023
On 15 November, the Economic Crime and Corporate Transparency Act 2023 (Commencement No. 1) Regulations 2023 were published. The Regulations, which were made on 13 November, bring into force a number of provisions of the Economic Crime and Corporate Transparency Act 2023 (the Act): (i) Regulation 3(g) brings into force the provisions of section 187 of the Act, which amends particular provisions of the Sanctions and Anti-Money Laundering Act 2018, to allow for regulations concerning enhanced due diligence measures for the purposes of anti-money laundering and counter terrorist financing to be made referencing directly the list of high-risk countries published by the FATF as it has effect from time to time; (ii) Regulation 3(a) to (e) brings into force various provisions inserted into the Companies Act 2006 by the Act which establish national security-related defences, exemptions and exceptions to new requirements concerning company names, identity verification requirements and false statement offences; and (iii) Regulation 3(f) brings into force amendments to the Proceeds of Crime Act 2002, which create exemptions from money laundering offences for regulated businesses dealing with only part of a client’s property. Regulation 3 brings these provisions of the Act into force on 15 January 2024. Regulation 2 brought into force section 214 of the Act, which makes clear that HMT can impose monetary penalties under the Policing and Crime Act 2017 for breaches of provisions that are supplemental to financial sanctions, on 15 November.
BCBS discussion paper on digital fraud
On 15 November, the BCBS issued a discussion paper on digital fraud and banking. The paper provides a high-level assessment of the supervisory and financial stability implications of digital fraud for the global banking system. It is structured around topics including: (i) what digital fraud is, its main defining features and its effect on banks; (ii) the supervisory and financial stability implications and the relevance of digital fraud to the BCBS mandate; and (iii) what initiatives in the banking sector at a domestic, regional and global level have been pursued, or are planned, to mitigate digital fraud risks. The paper does not make a formal distinction between retail and wholesale digital fraud. While most of the paper is primarily focused on retail, the BCBS considers that there are also some elements that may have a connection to wholesale digital fraud. The deadline for comments is 16 February 2024.
Fintech
Please see the Financial Crime and Sanctions section for the BCBS’s discussion paper on digital fraud and banking.
ESMA speech on the next steps on the MiCAR journey
On 16 November, Verena Ross, ESMA Chair, delivered a speech on innovation with protection, detailing the next steps on the MiCAR journey. In her speech, Ms Ross presents some of the key features of ESMA’s most recent consultation paper on the level 2 measures under MiCAR, as well as ESMAs stance on the preparation for MiCAR implementation. Ms Ross explains that the recent ESMA consultation on the second MiCAR package published in October aims to empower investors and regulators with robust tools to enable them to work as smoothly as possible within cryptoasset markets. Ms Ross goes on to discuss MiCAR implementation, explaining that ESMA is encouraging uniform implementation of MiCAR across Member States to discourage the industry from engaging in “forum shopping”, as there should be no competitive advantage for service providers based on where they choose to establish themselves. This is also true of the supervisory practices in relation to authorisation procedures, as ESMA is aiming to prevent regulatory arbitrage. In preparing for MiCAR implementation, ESMA encourages Member States to designate competent authorities and empower them with the resources and expertise to carry out their new supervisory and enforcement functions under MiCAR, ideally by the end of this year. Ms Ross also notes that while the need for time to adjust is acknowledged in the grand-fathering clause, lasting for up to 18 months, she thinks that Member States should consider limiting this transitional phase to 12 months. It is ESMA’s view that, by minimising the time during which a patchwork of different laws will apply across the Member States, it will more easily create a level playing field and limit potential harm to investors who may have difficulty discerning the regulatory status of an asset or service they are using during the transitional phase. ESMA also confirms that breaches of the reverse solicitation clause will be met with stringent enforcement by ESMA and the competent authorities. This is both to protect MiCAR-compliant firms from unfair competition and to shield EU investors from unknowingly using unregulated cryptoasset services. Ms Ross concludes her speech by reminding all investors of the limits of MiCAR, that while the framework is deigned to make the market safer for investors by regulating the intermediaries, it cannot prevent investors themselves from seeking out quick and easy profits. Therefore, investors should continue to protect themselves from scams, especially when they venture into the decentralised corners of the market that MiCAR cannot reach.
IOSCO finalises policy recommendations for crypto and digital asset markets
On 16 November, IOSCO finalised its report setting out policy recommendations for crypto and digital asset markets. IOSCO’s 18 targeted recommendations are principles-based and outcomes-focused and are aimed at the activities performed by crypto-asset service providers (CASPs). They apply IOSCO’s global standards for securities markets regulation to address key issues and risks identified in these markets. IOSCO aims to: (i) promote greater consistency with respect to how IOSCO members approach the regulation and oversight of crypto-asset activities, given the cross-border nature of the markets, the risks of regulatory arbitrage and the significant risk of harm to which retail investors continue to be exposed; and (ii) ensure that CASPs meet the standards of business conduct that apply in traditional financial markets. The recommendations cover six key areas, consistent with the IOSCO Objectives and Principles for Securities Regulation and relevant supporting IOSCO standards, recommendations, and good practices: (a) conflicts of interest arising from vertical integration of activities and functions; (b) market manipulation, insider trading and fraud; (c) custody and client asset protection; (d) cross-border risks and regulatory cooperation; (e) operational and technological risk; and (f) retail distribution. Though not addressed to them, all cryptoasset market participants are encouraged to carefully consider the expectations and outcomes articulated through the recommendations and the respective supporting guidance.
Fund regulation
Please see the Sustainable Finance section for the FCA’s review on how AFMs are embedding the Guiding Principles in ESG and sustainable investment funds.
Treasury Sub-Committee seeks clarification about impact of cost disclosures on investment companies
On 15 November, the House of Commons Treasury Sub-Committee on Financial Services Regulations published a letter from Harriet Baldwin, Chair, to Jeremy Hunt, Chancellor of the Exchequer, about investment companies and cost disclosures. In the letter, Ms Baldwin seeks HMT’s assessment of: (i) the extent to which cost transparency requirements imposed on investment companies is creating unfairness, or is causing undue problems for the industry; (ii) how such cost disclosures are being used by market participants, such as wealth managers, fund-of-funds managers and discretionary fund managers, and independent financial advisers, and any support services they use, such as software providers; (iii) the genesis of any identified problems, and to what extent remediation of the identified problems is needed through changes to regulation and/or legislation; (iv) the timeframe for any permanent remediation; and (v) whether interim relief can be provided before a more permanent solution is found, and if so, how and how quickly such relief can be provided. Ms Baldwin requests a reply by 28 November. These requests come as a result of concerns related to the requirements imposed on investment companies by cost-disclosure requirements, which may create the impression they are unduly expensive. Those concerned argue that it stifles investment, it does not happen in other countries and it could be put right without any cost to HMT.
Final compromise text on proposed Directive amending UCITS Directive and AIFMD
On 10 November, the Council of the EU published the final compromise text of the proposed Directive amending the AIFMD and the UCITS Directive as regards delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services and loan origination by AIFs. The General Secretariat of the Council invites the Permanent Representatives Committee to: (i) approve the compromise text with a view to reaching an agreement at first reading with the EP; and (ii) give to the Chairman of the Permanent Representatives Committee the mandate to inform the Chair of the EP’s ECON Committee that, should the EP adopt the compromise text of the proposal, the Council of the EU would adopt the proposed Regulation as amended, subject to legal-linguistic revision by both institutions.
Markets and markets infrastructure
Central Counterparties (Equivalence) (Singapore) (Monetary Authority of Singapore) Regulations 2023
On 13 November, the Central Counterparties (Equivalence) (Singapore) (Monetary Authority of Singapore) Regulations 2023 were published, together with an explanatory memorandum. The instrument specifies that the legal and supervisory arrangements in relation to certain CCPs authorised by the Monetary Authority of Singapore (MAS) as Approved Clearing Houses (ACHs) are equivalent to the UK’s corresponding regime. The equivalence determination made in this instrument does not alter the scope, or types, of service that a recognised ACH CCP authorised by the MAS is able to provide to UK clearing members and trading venues. Rather it would, if accompanied by a subsequent recognition decision by the BoE for the CCP, change the basis on which it is accessing the UK from the post Brexit temporary regime (the TRR and its run-off) to a non-time limited regime. The BoE will conduct, separately, and subsequent to, this instrument coming into force, its own firm-level recognition assessment. The Regulations will come into force on 4 December.
Payment services and payment systems
ECON draft reports on proposed PSD3 and PSR
On 16 November, ECON published draft reports on the PSD3 package. In the PSD3 report, amendments tabled by the Rapporteur include in relation to: (i) authorisation of PSPs and grandfathering provisions; (ii) access to settlement systems; (iii) the use of central contact points; (iv) access to cash; and (v) opening of accounts by payment institutions and e-money institutions. In the PSR1 report, amendments tabled by the Rapporteur include in relation to: (a) transparency measures in ATMs, currency exchanges and mark-ups on the exchange reference rates; (b) transparency measures when third party providers access the data of users not through APIs; (c) strengthening the role of the EBA; and (d) better protections for consumers from fraud and an extension of the responsibility to provide this protection to electronic communication service providers.
ECB Decision amending Decision on terms and conditions of TARGET-ECB
On 16 November, ECB Decision (EU) 2023/2532 (dated 9 November) amending ECB Decision (EU) 2022/911 concerning the terms and conditions of TARGET-ECB (ECB/2022/22) was published in the OJ. Decision (EU) 2023/2532 states that: (i) in February 2022, the ECB's Governing Council adopted Guideline (EU) 2022/912 that provides for the start of operations of a new-generation TARGET. These amendments made to Guideline (EU) 2022/912 that affect the terms and conditions of TARGET-ECB need to be reflected in Decision (EU) 2022/911; and (ii) in September 2023, the ECB's Governing Council adopted Guideline (EU) 2023/2415, which amends Guideline (EU) 2022/912 to clarify certain aspects. The national central banks of the Member States whose currency is the euro are required to take the necessary measures to comply with Guideline (EU) 2023/415 and apply them from 20 November 2023. Decision (EU) 2022/911 must be amended accordingly. Decision (EU) 2023/2532 enters into force on 20 November, to ensure alignment with the provisions of Guideline (EU) 2023/2415.
Prudential regulation
PRA Dear CFO letter on working with deposit aggregators
On 15 November, the PRA sent a letter to CFOs setting out steps firms should consider taking to mitigate risks relating to deposit aggregators (DAs). The PRA aims to mitigate risks in three main areas: (i) managing liquidity risk – firms must factor the potential correlation and concentration risk connected with deposits from DAs, as well as the potential speed of outflows, into their management of liquidity risk and funding needs; (ii) outsourcing and third party risk management – deposit-takers should manage their arrangements with service providers closely and prudently, consistent with the PRA’s expectations on outsourcing and third party risk management; and (iii) ensuring depositor protection – the PRA wants to ensure that the FSCS can respond effectively to the failure of a deposit-taker that uses DAs. It sets out steps that firms could take to mitigate risks that could impact FSCS pay-outs, including in relation to: (a) verifying ‘absolute entitlement’ for underlying beneficiaries; (b) managing data to permit orderly failure; (c) confirming customer checks are performed and evidenced to a sufficient standard; and (d) FSCS testing facilities for DAs.
ESAs amended ITS on mapping of External Credit Assessment Institutions
On 13 November, the ESAs published final draft amended ITS on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs). The ITS on ECAIs aim to ensure that EU-based financial institutions may only use external credit assessments for the calculation of their capital requirements when these are issued or endorsed by recognised institutions. The amendments reflect the outcome of a monitoring exercise on the adequacy of existing mappings, and the deregistration of three CRAs, which must now be removed. The ESAs have also published individual draft mapping reports illustrating how the methodology was applied to produce the amended mappings in line with the CRR mandate. The ITS will be submitted to the EC for endorsement, following which they will be published in the OJ. They will apply 20 days after their publication in the OJ.
PRA policy statement on non-performing exposures capital deduction
On 13 November, the PRA published a policy statement on non-performing exposures (NPEs) capital deduction. The new policy removes the CET1 deduction requirement for NPEs that are treated as insufficiently covered by firms’ accounting provisions and related reporting requirements for CRR firms. After considering responses to the consultation, the PRA has made non-significant additional changes to reporting and disclosure instructions. The rule change to remove the NPE deduction requirement came into effect on 14 November. The necessary modifications to reporting requirements are also effective from that date. Firms will no longer be required to complete the associated reporting templates. The PRA intends to make any required changes to existing reporting templates and taxonomy at a later date.
BoE launches scenario phase of System-wide Exploratory Scenario
On 10 November, the BoE launched the latest phase of the System-wide Exploratory Scenario (SWES) with bank and non-bank participants provided a hypothetical severe, but plausible stress scenario. The severity of the aggregate shocks included in the scenario is faster, wider ranging and more persistent than observed both in the September/October 2022 liability driven investment and the March 2020 dash for cash episodes. The exercise aims to improve understanding of how banks and non-banks behave in stressed conditions but is not a test of the resilience of the individual firms participating. SWES participants will submit their responses in January 2024. The BoE intends to run a second round of the scenario phase through 2024 and to publish a final report on the SWES by end 2024.
Sustainable finance
FCA review on how AFMs are embedding the Guiding Principles in ESG and sustainable investment funds
On 16 November, the FCA published the outcome of its review on authorised fund managers’ (AFMs) compliance with existing regulatory requirements and the FCA’s expectations on the design, delivery, and disclosure of ESG and sustainable investment funds. The FCA review found evidence of good practice, such as: (i) the development and use of appropriate ESG and sustainability scoring systems and benchmarks; and (ii) AFMs conducting thorough due diligence on third party data providers. The FCA found particular issues, however, in relation to the disclosure and clarity of information being given to retail investors and consumers. Examples of poor practice include: (a) inconsistent aligning of products with their ESG and sustainability goals even if they referenced them in their name; (b) inconsistent fund holdings with a fund’s ESG or sustainability objectives, and some AFMs were not able to explain how these investments fit with their goals; (c) key ESG and sustainability information often not being explained, put into context or included in disclosures, meaning relevant information was not immediately or clearly accessible to investors; and (d) the design of AFMs’ stewardship approaches did not meet the FCA’s expectations. The FCA expects firms to address the good and poor practices outlined in the report to meet the proposed new Sustainability Disclosure Requirements alongside the Consumer Duty. The FCA expect boards to take the lead in monitoring and ensuring firms make any changes required to further enhance sustainability disclosures and practices.
Transition Plan Taskforce consults on guidance for preparers and users of climate transition plans
On 13 November, the Transition Plan Taskforce (TPT) began consulting on sector-specific guidance for preparers and users of private sector climate transition plans. The TPT was established at COP26 in November 2021 by the UK Chancellor to establish best practice for firm-level transition plans and develop guidance and a set of templates setting out both generic and sector-specific disclosures and metrics. The sector-specific guidance complements the TPT disclosure framework, which was finalised in October. The sectors covered by the guidance are: asset managers; asset owners; banks; electric utilities and power generators; food and beverage; metals and mining; and oil and gas. The deadline for comments is 29 December.
Other developments
EC consults on two draft Delegated Regulations under DORA
On 16 November, the EC began consulting on two draft Delegated Regulations supplementing DORA by: (a) specifying the criteria for the designation of ICT third-party service providers as critical for financial entities (CTPPs) – to address potential systemic and concentration risks posed by the financial sectors’ reliance on a small number of ICT third-party service providers, DORA establishes an EU oversight framework for CTPPs. As Lead Overseers, each of the ESAs will have the power to monitor on pan-European scale the activity of CTPPs in the context of their ICT services to the financial sector; and (b) determining the amount of the oversight fees to be charged by the Lead Overseer to CTPPs and the way in which those fees are to be paid – to ensure that Lead Overseers have the necessary resources to effectively carry on the oversight tasks under DORA. The deadline for comments is 14 December. The EC intends to adopt the Delegated Regulations in Q2 2024. It is mandated to adopt the delegated acts by 17 July 2024.
ESRB speech on first general warning, one year on
On 16 November, the ESRB published a speech given by Christine Lagarde, President of the ECB and Chair of the ESRB, on its first general warning about financial stability risks that it published in September last year. The ESRB considers that the general warning has indeed proved impactful over the past year and that it has worked towards reducing policymakers’ “inaction bias” with regard to the implementation of macroprudential policy. The ESRB’s view remains that all relevant institutions will need to continue to take action to prevent the risks identified in its warning that have not yet materialised from doing so over the medium term. The ESRB expects that bank profitability will be adversely affected by the rise in funding costs, reflecting higher policy rates, and by much lower lending volumes. And the enduring combination of low growth and higher debt servicing costs will continue to strain vulnerable households and firms, which could see non-performing loans rising. The ESRB considers that the list of vulnerable nodes in the financial system remains long – for example, money market funds and investment funds, notably those investing in illiquid assets. And channels of contagion could still re-emerge. In particular, the margin policies of CCP clearing houses could amplify stress in the system. EU banks’ holdings of fixed income securities could be marked down quite significantly, should they need to be sold. The ESRB will therefore continue to monitor developments carefully.
Letter to CEOs of UK banks on charity banking access and customer service
On 15 November, the chief executives of the Charity Commission for England and Wales, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland published a letter urging the UK's main high street banks to address challenges charities (particularly smaller, local organisations) regularly face when seeking to access banking services, which include: (i) having accounts closed or suspended suddenly for long periods of time; (ii) facing a reduction in bespoke banking services; (iii) experiencing poor customer service and administrative delays; and (iv) finding that online banking is not designed to match the way charities operate. Charity trustees are obliged by law to account for the money they raise and the funds they distribute. Adequate banking provisions and control over cashflow are critical to robust financial governance procedures, and that underpins the sustainability of the sector. The regulators urge banks to: (a) make the process for setting up a charity bank account more straightforward and better explain to their banking staff how to support charities; and (b) provide training to banking staff on how charities are structured and governed to avoid any misunderstandings.
EBA speech on DORA and operational resilience
On 15 November, the EBA published a speech given by José Manuel Campa, EBA Chair, on operational resilience in the EU financial services sector. Mr Campa begins by sharing some observations on digitalisation trends across the EU. These include that digitalisation is deepening interconnections and dependencies within the EU financial sector and with third-party infrastructure and ICT providers. Further, the growing reliance on ICT providers can potentially create risks to financial stability. In relation to the ESAs’ preparatory work for DORA, they have conducted a high-level exercise to trace the landscape of ICT providers in the EU financial sector. Findings included that: (i) there are around 15,000 ICT providers directly serving EU financial entities; (ii) it is a highly concentrated market, despite the high number of ICT TPPs identified and the number of ICT services provided; and (iii) frequently, the suppliers that provide services for the operation of most critical functions are not replaceable or the contingency of alternative suppliers is not foreseen by the financial institution. The ESAs are using the information obtained to develop the new supervisory framework under DORA (for example, in determining the criteria to determine a supplier as critical or essential).
HoL Liaison Committee recommends creation of Financial Services Regulation Committee
On 15 November, the HoL Liaison Committee recommended to the HoL the creation of a Financial Services Regulation Committee. The Liaison Committee considers that given the importance of financial services for the operation of the UK economy, there is a pressing need for enhanced scrutiny not only of individual consultations, but also of financial services regulation generally. This would enable it to undertake horizon-scanning of forthcoming consultations, scrutinise financial regulations after they come into force (thereby enabling a committee to look at any consultations or regulations which predated its appointment), scrutinise the work of the regulators (including through regular engagement with them), and carry out thematic inquiries. The recommendation report will now go to the floor of the HoL for approval.
Press release
Report
Outcomes from FSB November Plenary meeting
On 14 November, the FSB published a press release in relation to its Plenary meeting that took place on 13 and 14 November. Topics discussed by the Plenary include: (i) financial stability outlook - while the banking system as a whole remains resilient, the Plenary discussed pockets of remaining banking-sector vulnerabilities, property markets and operational resilience. Members stressed the importance to work in close coordination with IOSCO in the FSB’s work addressing structural vulnerabilities from liquidity mismatch in open-ended funds; (ii) implementation of cryptoasset recommendations – members stressed the importance of global and consistent implementation of the FSB’s high-level recommendations, including in non-FSB jurisdictions, and of actions to guard against the risk of regulatory arbitrage, in cooperation with the standard-setting bodies and relevant international organisations; and (iii) the FSB’s work programme – the FSB will continue to work on the lessons from the March turmoil and to monitor macro-financial vulnerabilities in a higher interest rate environment. The finalised work programme will be published in early 2024.
Press release
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