Article

Key Regulatory Topics: Weekly Update 13-19 October 2023

Published Date
Oct 19, 2023
This week has been relatively quiet in the UK. The FCA outlined its expectations for payment account providers’ systems and controls against money mule activity and the Bank of England published a speech discussing the lessons learnt from recent banking failures. In contrast, in the EU, the European Commission has been busy publishing its 2024 work programme and adopting a package of measures to review the alternative dispute resolution framework. The EBA began consulting on RTS and guidelines under MiCAR, while ESMA published a letter and a statement to encourage preparations for a smooth transition to MiCAR.

Consumer/Retail

Please see the Other Developments section for the EC’s 2024 work programme.

FOS blog post on how financial businesses should work with it to resolve complaints

On 17 October, the FOS published a blog post explaining what firms and claims management companies (CMCs) should do when a complaint is referred to the FOS, and highlighting the support the FOS provides. The FOS: (i) reminds firms of their duty to respond to customer complaints within prescribed time limits; (ii) strongly encourages financial businesses to be open to engagement with professional representatives where they have been retained on the case. The FOS urges CMCs to work with businesses and provide them with the information they need to investigate the complaint; (iii) advises firms to use its website to prepare and to use its online tool that provides a way to check the information that firms should send to it as part of a complaint or case file. When a business regularly fails to respond to information requests, the FOS may notify the regulator; and (iv) reminds firms that they still have time to proactively settle a claim with their customer once the FOS has started moving a complaint to investigation.

Blog

EC adopts package of measures to review alternative dispute resolution framework

On 17 October, the EC adopted a proposal to review the alternative dispute resolution (ADR) framework, which includes: (i) a proposed directive amending the current ADRDirective; (ii) a proposed regulation to repeal the Online Dispute Resolution (ODR) Regulation; and (iii) a recommendation addressed to online marketplaces and EU trade associations having a dispute resolution mechanism and to Member States. The objectives of the review are to: (a) make the ADR framework fit to the digital markets by covering all categories of disputes concerning EU consumer rights; (b) improve the access to ADR in cross-border disputes through the use of digital tools, assistance to consumers and traders; (c) simplify ADR procedures to all actors; including reducing reporting obligations of ADR entities and information obligations of traders whilst encouraging traders to increase their engagement in ADR claims through the duty to reply; (d) discontinue the ODR platform and replace it by user-friendly digital tools to assist consumers in finding a redress tool to resolve their dispute; and (e) incentivise online marketplaces and EU trade associations having a dispute resolution mechanism to get aligned with the quality criteria in the ADR Directive. The EC has also published: (1) a joint ADR/ODR application report 2023; (2) an evaluation on the implementation of theADR Directive; and (3) an impact assessment.

Directive amending the ADR Directive

Regulation repealing the ODR Regulation

Recommendation

ADR/ODR report

ADR Directive implementation evaluation

Impact assessment

Review homepage

Financial Crime and Sanctions

FCA review into proceeds of fraud – detecting and preventing money mules

On 19 October, the FCA published the findings from its review of payment account providers’ systems and controls against money mule activity. Key findings include: (i) some firms are working to address the challenges of money mules by implementing a range of measures and technologies to detect and deter fraudsters from using their organisation and harming their customers for illicit gains. They have implemented proportionate approaches that use innovative solutions including facial recognition systems, device profiling and geolocation; (ii) not all firms are responding with the same focus, and some firms need to do more to tackle the problem. When firms have onboarded customers, they need to ensure that their monitoring systems are set up to detect common mule behaviours and do more to monitor inbound transactions as well as outbound; and (iii) most firms use the National Fraud Database as part of their onboarding checks and sharing information with relevant authorities using lawful gateways and where it is necessary to disrupt and detect fraud. However, where some firms identify a mule account, they do not always report this promptly on relevant reporting systems, therefore delaying notifications to other firms. In addition, some firms in receipt of fraudulent funds are not responding swiftly enough to alerts from notifying institutions. The FCA expects firms to take a proactive and proportionate approach to address the problem of money mule activity. This entails strengthening controls during onboarding, improving transaction monitoring to detect suspicious activity involving money mules, and optimising reporting mechanisms for swift action. Firms should proactively raise consumer awareness about the risks of acting as a money mule in order to protect them. The FCA will use its full regulatory tools, including enforcement action, if it identifies a firm failing to maintain proportionate and adequate systems and controls.

Review

JMLSG revised guidance on discrepancy reporting

On 13 October, the JMLSG published a final revised version of paragraphs 5.3.129A-C of chapter 5 of Part I of its AML and CTF guidance for the financial services sector. The revisions take account of provisions on discrepancy reporting which were introduced by the Money Laundering and Terrorist Financing (Amendment) (No 2) Regulations 2022.

The revisions have been submitted to HMT for Ministerial approval.

Press release

Revised paragraphs

Fintech

EBA consults on guidelines and RTS under MiCAR

On 19 October, the EBA began consulting on a set of guidelines and two RTS under MiCAR: (i) draft RTS on the minimum content of the governance arrangements on the remuneration policy – sets out the main governance processes regarding the adoption and maintenance of the remuneration policy and the main policy’s elements that should be adopted; (ii) draft guidelines on the minimum content of the governance arrangements for issuers of asset-referenced tokens (ARTs) – it covers: (a) the tasks and responsibilities of the management body as well as the organisation of issuers of ARTs; (b) how issuers of ARTs should identify sources of operational risk and minimise those risks through the development of appropriate systems, controls, and procedures; (c) the arrangements to be put in place when relying on third-party entities for operating the reserve of assets, for the investment of the reserve assets, the custody of the reserve assets and, where applicable, the distribution of the ARTs to the public; and (d) the establishment of business continuity plans; and (iii) draft RTS on the approval process for white papers of ARTs issued by credit institutions – it covers: (1) the submission of an application for approval of a cryptoasset white paper; (2) the acknowledgment of the receipt and processing for approval of a white paper; (3) the assessment of completeness of the white paper and request of missing information to a white paper; (4) the information exchange between the competent authority and the ECB or other central bank, where applicable; (5) the assessment in the absence of the ECB’s or another central bank’s opinion and request of changes to a white paper; and (6) the approval of the white paper. The deadline for comments for all three papers is 22 January 2024.

Consultation – draft guidelines

Consultation – draft remuneration RTS

Consultation – draft white paper RTS

JROC welcomes Open Banking Limited’s submission of two data collection frameworks

On 18 October, the Joint Regulatory Oversight Committee (JROC) announced that Open Banking Limited (OBL) has published two data collection frameworks on the themes of: (i) ‘Levelling up availability and performance’ – the data will give insight on how often outages happen and provide OBL the opportunity to investigate whether further clarification or changes to the application programme interface standards are needed. The objective is to support consumers and businesses access to high-performing and reliable services that enhance user experience and continue to build trust in the ecosystem; and (ii) ‘Mitigating the risks of financial crime’ – this new framework enhances financial crime reporting, increasing understanding of the level of fraud occurring within the open banking channel. Building on existing reporting requirements, the framework will collect data on the total open banking payments by volume and value, and the total open banking fraud volume and value each on a monthly basis. Insights from the framework will also inform the design of improved intervention tools, helping effectively mitigate risks to ensure consumers are safe. The OBL will undertake the first data collection by relying on the voluntary submissions from third-party providers and account servicing payment service providers. The submissions received under these frameworks will be shared with the PSR and the FCA as co-chairs of the JROC.

Press release

Data collection frameworks

BCBS consults on banks’ disclosure of cryptoasset exposures

On 17 October, the BCBS began consulting on a set of standardised disclosure templates to support banks in meeting the prudential requirements to disclosure their exposures to cryptoassets that will apply from 1 January 2025. The consultation proposes a disclosure table for banks to provide a qualitative disclosure for their activities related to cryptoassets and the approach used in assessing the classification conditions. It also includes three templates for banks' cryptoasset exposures covering capital requirements, accounting classification of exposures and liquidity requirements for exposures. The proposed requirements will apply to internationally active banks at the top consolidated level. The proposed implementation date is 1 January 2025, in line with the new prudential requirements. The deadline for comments is 31 January 2024.

Consultation

ESMA speech on being ready for the digital age

On 17 October, ESMA published a speech by Verena Ross, ESMA Chair, on ESMA's strategic initiatives in the technology and data domain. Points of interest include: (i) data-driven supervision – ESMA wishes to further strengthen its cooperation with and amongst NCAs, with common tools and methodologies. It is starting two AI related projects with NCAs in relation to monitoring market abuse and using Natural Language Processing tools to scan investment funds’ public disclosures to spot potential bad practices such as greenwashing. ESMA also intends to share its Data Platform with NCAs; (ii) MiCAR and DLT Pilot Regime – these developments provide the opportunity to explore more efficient ways to monitor markets. ESMA has launched two studies to support NCAs: one to understand the specificities of different DLT and blockchain solutions, and another, in the context of MiCAR, to explore further integrating monitoring of crypto markets at EU level. Due to MiCAR specificities and the different technologies underpinning crypto markets, the method for accessing and analysing data for market monitoring differs from the current approach under MiFIR and MAR. Therefore, NCAs will not be able to rely on existing processes and a new approach should be developed for the monitoring of cryptoassets under MiCAR; and (iii) shortening the EU settlement cycle – Ms Ross highlights two considerations that must be balanced as the work in this area develops: that EU markets remain stable and that they remain efficient and competitive globally.

Speech

ESMA clarifies timeline and encourages preparations for a smooth transition to MiCAR

On 17 October, ESMA published a letter and a statement to encourage preparations for a smooth transition to MiCAR. In the letter, addressed to the Economic and Financial Affairs Council (ECOFIN), ESMA calls on Member States to, among other things: (i) designate without delay the NCAs responsible for carrying out the functions and duties provided for under MiCAR; (ii) establish as early as possible their supervisory procedures related to the authorisation regimes set out in MiCAR, including simplified authorisation procedures for entities already authorised to provide cryptoasset services under national law; and (iii) consider limiting the optional grand-fathering period to 12-months for entities already providing cryptoasset services, should they choose to offer it in their jurisdictions. In a statement, addressed to entities providing cryptoasset services and the NCAs that will be responsible for their supervision, ESMA sets out some expectations for each from now until the end of the MiCAR transitional period. Points of interest include: (a) ESMA highlights the importance for holders of cryptoassets and current or prospective clients of cryptoasset services in the EU being aware that in addition to the risks inherent to cryptoassets, MiCAR rules on the provision of cryptoasset services will not enter into application until December 2024; (b) NCAs are encouraged to dedicate resources and align their supervisory practices with those of their counterparts across the EU to begin effective supervision from day one; (c) market participants are encouraged to begin planning towards a smooth transition and to clarify to clients the regulatory status of their ‘grand-fathered’ cryptoasset offerings; and (d) ESMA emphasises that the reverse solicitation exemption in MiCAR is to be understood as very narrowly framed and cannot be used to circumvent MiCAR.

Press release

Letter

Statement

Markets and Markets Infrastructure

Please see the Recovery and Resolution section for: (i) minutes from a CCP Resolution Liaison Panel meeting discussing HMT’s implementation of the expanded CCP resolution regime; and (ii) a draft SI that makes necessary corporate law modifications and consequential amendments to ensure the resolution regime for CCPs will function effectively.

Final compromise texts on proposals to improve MiFID II market data access and transparency

On 18 October, the Council of the EU set out final compromise texts for the legislative proposals on the: (i) Regulation on amendments to MiFIR; and (ii) Directive on amendments to MiFID II. The amendments relate to enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations and prohibiting receiving payments for forwarding client orders. The Council of the EU has also confirmed that its Permanent Representatives Committee has endorsed the final compromised texts. Provided the EP adopts the acts in the form agreed, the Council of the EU will then proceed to adopt the acts.

Regulation amending MiFIR

Directive amending MiFID II

Council note

Delegated Regulation on securitisation risk retention requirements published in OJ

On 18 October, Delegated Regulation (EU) 2023/2175 supplementing the EU Securitisation Regulation with regard to RTS specifying in greater detail the risk retention requirements for originators, sponsors, original lenders and servicers was published in the OJ. The RTS, in accordance with Article 6(7) of the EU Securitisation Regulation, specify the risk retention requirements and, in particular: (i) requirements on the methods of retaining risk; (ii) the measurement of the level of retention; (iii) the prohibition on hedging or selling the retained interest; (iv) the conditions for retention on a consolidated basis; (v) the conditions for exempting transactions based on a clear, transparent and accessible index; (vi) the methods of retaining risk in case of traditional securitisations of non-performing exposures; and (vii) the impact of fees paid to the retainer on the effective material net economic interest. The Delegated Regulation enters into force on 9 November, twenty days following its publication in the OJ, whereupon Commission Delegated Regulation (EU) 625/2014 is repealed.

Delegated Regulation

EC adopts proposed regulation amending BMR on scope, the use of third-country benchmarks and reporting requirements

On 17 October, the EC adopted a Regulation amending the BMR as regards the scope of the rules for benchmarks, the use in the EU of benchmarks provided by an administrator located in a third-country, and certain reporting requirements. The key elements of the package include: (i) streamlining reporting and overall regulatory burden by removing the obligation for EU benchmark users to individually verify the regulatory status of indices they wish to use as benchmarks by consulting websites and public registers. Under the proposal, it should suffice to consult the Article 36 register; (ii) recalibrating the scope of the BMR and its rules for the use of non-EU benchmarks. While the substantive rules remain the same, they will apply to smaller number of market participants. This proposal will reduce the burden associated with the registration and related supervision of administrators of non-significant benchmarks; and (iii) for EU supervised entities, such as banks, asset managers and insurance companies using benchmarks, the proposal removes the use restrictions contained in the third-country chapter of the current BMR that were identified as a barrier to the use of many non-EU benchmarks.

Proposed regulation

Factsheet

Implementing Decision on equivalence of Australian markets under EMIR published in OJ

On 17 October, an Implementing Decision amending Implementing Decision (EU) 2016/2272 on the equivalence of financial markets in Australia in accordance with EMIR to take account of recent developments in the financial markets in Australia was published in the OJ. The Implementing Decision updates the names of the three financial markets authorised in Australia that had previously been granted equivalence and adds a fourth financial market. The EC adopted the Implementing Decision on 13 October. The Implementing Decision will enter into force on 6 November, 20 days following its publication in the OJ.

Implementing Decision

ESMA opinion on CCP back testing requirements under EMIR

On 16 October, ESMA published an opinion on CCP back testing requirements under Article 49 of EMIR and Article 49 of Commission Delegated Regulation (EU) 153/2013.

This opinion aims to: (i) clarify CCPs back testing practices under EMIR, and in particular where back testing is performed for the purpose of core model back testing for the purpose of model validation in accordance with Article 47 of the Delegated Regulation or for margin adequacy back testing in accordance with Article 49 of the Delegated Regulation; and (ii) harmonise back testing practices across authorised EU CCPs but does not intend to limit CCPs’ freedom of modelling, nor to prescribe a specific margin model.

Opinion

FCA addendum to consultation on new securitisation rules

On 16 October, the FCA published an addendum to the draft handbook text that was included in its ongoing consultation on new securitisation rules (CP23/17). The addendum relates to the due diligence requirements and institutional investor delegation provisions contained in the text of the draft securitisation sourcebook (SECN) in Appendix 1 of CP23/17, as certain policy intentions set out in CP23/17 were not reflected in the text. Changes have been made to the definition of occupational pension scheme, paragraph 4.1 of SECN (application of chapter 4) and paragraph 4.4 of SECN (institutional investor delegation). As a result of the change, the FCA has extended the consultation deadline for chapter 4 of CP23/17 by 3 weeks, until 20 November. Otherwise, the consultation period for CP23/17 will close on 30 October.

Addendum

ESMA extends temporary CCP collateral emergency measures by six months

On 13 October, ESMA published a final report on draft RTS which extend for a limited period of six months the emergency measures which temporarily expand the pool of eligible collateral for all types of counterparties. Uncollateralised bank guarantees for non-financial counterparties (NFCs) acting as clearing members and public guarantees for all types of counterparties will continue to be temporarily eligible by CCPs in order to avoid potential disruption during the upcoming cold season. The temporary measures were initially adopted during the height of the energy crisis to alleviate the liquidity pressure on NFCs active on gas and electricity regulated markets that clear in EU-based CCPs. ESMA is proposing that they should now expire on 29 May 2024. The final draft RTS will be sent to the EC for endorsement and will then be subject to non-objection by the EP and the Council of the EU.

Press release

Final report

ESMA updates Q&As on MiFID II and MiFIR market structure topics

On 13 October, ESMA updated its Q&As on MiFID II and MiFIR market structure topics. ESMA has added two new Q&As in relation to access to CCPs and trading venues (TVs): (i) on the extent to which a TV can apply different fee schedules to CCPs under Article 36 of MiFIR; and (ii) under what circumstances a TV can charge new fees to a CCP that has already been granted access.

Q&As

Payment Services and Payment Systems

Please see the Financial Crime and Sanctions section for the FCA’s review of payment account providers’ systems and controls against money mule activity.

Please see the Fintech section for the JROC’s announcement of Open Banking Limited’s submission of two data collection frameworks.

CPMI interim report on linking fast payment systems across borders

On 18 October, the CPMI published an interim report on linking fast payment systems (FPS) across borders which sets out considerations for governance and oversight. The interim report describes ten initial considerations resulting from a series of workshops with global stakeholders that was undertaken by the CPMI to better understand the sensitivities, complexities, and experiences in this area. The considerations can be grouped into three categories: (i) considerations 1–2 relate to the initial structural conditions that appear to create favourable conditions for effective governance. This includes strategic alignment of the involved jurisdictions and agreement on the objectives and vision of the arrangement; (ii) considerations 3–6 discuss insights related to specific governance design considerations and priorities that stakeholders have viewed as important for the coherence, scalability, business viability and inclusiveness of an FPS interlinking arrangement; and (iii) considerations 7–10 address what the special characteristics of FPS interlinking arrangements imply for the design and conduct of oversight in a multi-jurisdictional context. The deadline for comments on the report is 13 December. The CPMI intends to deliver a final report by end-2024.

Interim report

CPMI report on harmonised ISO 20022 data requirements for enhancing cross-border payments

On 17 October, the CPMI published its report on harmonised data requirements for the use of ISO 20022 messages in cross-border payments. The twelve data requirements are presented as overarching data requirements across a core set of ISO 20022 messages, complementing existing market usage guidelines, with the aim of ensuring that the benefits of ISO 20022 can be realised to the maximum possible extent for cross-border payments. As such, they represent ISO 20022 data use practices that, when applied consistently, will improve the efficiency (i.e. straight through processing) of cross-border payments. The CPMI requirements are set for end-2027 with a two-year transition period between 2025 and 2027 (during which the requirements can be treated as recommendations).

Report

Prudential Regulation

Please see the Fintech section for BCBS’s consultation on banks’ disclosure of cryptoasset exposures.

EBA sets EU-wide examination programme priorities for prudential supervisors for 2024

On 19 October, the EBA published the European Supervisory Examination Programme (ESEP) for 2024, which identifies key topics for heightened supervisory attention across the EU. The EBA selected three key topics for supervisory attention for 2024 on the basis of its EU-wide risk analysis, its relevant policy work and the practical experience of competent authorities: liquidity and funding risk, interest rate risk and hedging, and recovery operationalisation. The choice of such topics was supported by structural changes, such as: (i) the end of the abundant liquidity in the system; (ii) the increased interest rate environment; (iii) the implementation of the IRRBB package in the EU; (iv) lessons learned from the spring bank failures; and (v) energy and food markets volatility. The EBA also identifies two priorities of Union-wide relevance for the 2023-2025 period: (i) monitoring and addressing financial stability and sustainability in a context of increased interest rates; and (ii) developing an oversight and supervisory capacity for DORA and MiCAR.

Press release

ESEP

BoE speech on recent bank failures

On 16 October, the BoE published a speech by Sam Woods, BoE Deputy Governor for Prudential Regulation and PRA CEO, about the recent banking failures, the lessons learnt, and how the regulatory framework is working. Mr Woods considers that there is a lot of work to be done to improve and refine the regulatory regime for banks. Lessons to be learnt from recent events fall into four categories: (i) measuring risk correctly – the regulatory framework must put resilience in the places where it is needed most – and do so in a robust, credible, and fair way. The recent failures raise the question as to whether the current liquidity regulation framework adequately covers the risk of flighty non-wholesale depositors; (ii) money isn’t everything – fin

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