Article

Key Regulatory Topics: Weekly Update 17 November - 23 November 2023

Published Date
Nov 23, 2023
The flurry of draft UK statutory instruments anticipated before year end has commenced. This week, HMT has published a near-final draft statutory instrument on the new UK retail disclosure framework and draft Short Selling Regulations. We have also seen an increased volume of publications on sustainable finance, in the run up to COP 28.

In other news, a private members' bill has been introduced in the UK House of Lords, seeking to amend the UK’s Alternative Investment Fund Managers Regulations 2013, to remove listed investment companies from alternative investment fund designation, and HMT published a report on the future of payments review. Although unrelated to specific new policy updates this week, we would also like to flag that the new appointed representative reporting requirements commence on 1 December with 8 December being the deadline for principals to have carried out their first annual review of appointed representatives.

Conduct and governance

FCA speech on how firms can flex their organisation's power through culture and conduct

On 23 November, the FCA published a speech by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, on how firms can flex their organisation's power through culture and conduct. In order to build a healthy culture, Ms Shepperd proposes starting with diversity and inclusion (D&I), arguing that D&I makes good business sense, because a diverse and inclusive environment is one where colleagues can challenge. It reduces the likelihood of group think and enables firms to better understand their customers' diverse needs. To succeed, the right policies, controls, processes and incentives are necessary, but not sufficient on their own. Colleagues who feel they can be themselves, who feel confident that they can speak up and will be listened to are empowered to perform better. That means fostering an inclusive culture throughout. Second- and third-line functions can also help senior management functions achieve this by holding all leaders to account for their organisation's culture, not just the individual whose statement of responsibilities it sits in. In addition, transparency remains a crucial component, Ms Shepperd explains that it needs to run all the way through to the top, in order to enable good governance, and to make sure boards have the information they need to set cultural and strategic direction.  Ms Shepperd concluded her speech by reminding firms that strong, healthy cultures help to foster good conduct, which translates to healthy, stable, and competitive markets and good outcomes for consumers, the FCA’s main concern as a regulator.

Speech

Consumer/retail

Please see the ‘Fees/Levies’ section for the FCA consultation on proposals for regulatory fees and levies for 2024/25, where the FCA is inviting certain consumer credit firms to resubmit data to calculate their fees for 2024/25.

HMT policy note and near final draft SI on new UK retail disclosure framework

On 22 November, HMT published a policy note and near-final draft statutory instrument on the new UK retail disclosure framework. The draft statutory instrument will replace the retained EU law PRIIPs Regulation and sets out provisions to facilitate the creation of a new UK retail disclosure framework for consumer composite investments (CCIs) using the new designated activities regime introduced by FSMA 2023. The draft statutory instrument will provide the FCA with rule-making powers in relation to all persons engaged in providing CCIs to UK retail investors. Specifically the instrument: (i) establishes the scope of the new framework by defining the designated activities which will require firms to provide disclosure to UK retail investors; (ii) provides the FCA powers to make and enforce rules in respect of those designated activities; (iv) sets out firms’ civil liability regarding disclosure provided to retail investors; (v) restates the FCA’s existing supervision and enforcement powers which will be maintained under the new framework and modified to reflect the UK-specific context of the new framework; and (vi) maintains the transition period for funds currently providing the UCITS KIID. HMT intends to legislate in 2024, subject to Parliamentary time allowing. The deadline for technical comments on the draft SI is 10 January 2024.

Policy Note

Draft Statutory Instrument

Webpage

BBRS announces operational extension into 2024

On 21 November, the Business Banking Resolution Service (BBRS) announced that participating banks  have agreed that the BBRS will continue to operate into 2024. The time extension operations will mean that the BBRS can continue to provide a service to SMEs who have an unresolved complaint with their bank.

Press Release

Fees/levies

BoE policy statement on fees regime for FMI supervision 2023/24

On 23 November, the BoE published a statement of policy on its fees regime for FMI supervision 2023/24. The policy statement provides feedback to responses to the BoE consultation paper on the regime published in July. The statement also confirms the fee rates to meet the BoE’s 2023/24 funding requirement for its FMI supervisory activity and the policy activity that supports this, as permitted by the Bank’s fee-levying powers. In addition, the BoE confirms that the hourly costs incurred by the BoE for FMI special projects are the same as the PRA’s hourly costs for special projects. There has been no change in the hourly costs for 2023/24. Invoices are expected to be issued in November for the 2023/24 fee year. This PS is relevant to all FMIs that currently pay FMI supervisory fees to the Bank or are expecting to do so within the 2023/24 fee year, this includes both UK and incoming FMIs.

Policy Statement

FCA consultation on proposals for regulatory fees and levies for 2024/25

On 21 November, the FCA published a consultation paper on policy proposals for 2024/25 regulatory fees and levies. The paper details the FCA’s plans to change the way it will raise FCA fees from 2024/25. The proposed changes to the Handbook are set out in the draft Periodic Fees (2024/2025) and Other Fees Instrument 2024, in Appendix 1. The deadline for comments on the proposals is 16 January 2024. Due to proposals in Chapter 4 of the consultation paper, on  the approach to the proxy measure for income used by some retail businesses when they act as credit brokers and by firms with limited credit-related permissions as lenders who are required to charge zero interest, the FCA is also inviting certain consumer credit firms to resubmit data to calculate their fees for 2024/25.

Consultation Paper

Webpage

Financial crime and sanctions

FCDO and OFSI guidance on the approach to ownership and control in UK sanctions regulations

On 17 November, the Foreign and Commonwealth Development Office (FCDO) and the Office of Financial Sanctions Implementation (OFSI) published guidance on ownership and control under the UK sanctions regulations. The guidance explains that where a public official is designated, the public bodies they lead and private entities within their jurisdiction are not automatically considered to be controlled by them for sanctions purposes. It is only in the circumstances where a public official is exercising control over a public body under UK sanctions regulations, that FCDO would look to designate the public body. The guidance emphasises that there is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making. Further evidence is required to demonstrate that the relevant official exercises control over that entity under UK sanctions regulations.

Guidance

Fintech 

Please see our FinTech and Digital Assets Talk blog for recent posts on: (i) two ESMA reports on transaction reporting under the DLT Pilot Regime; and (ii) the introduction of a proposed rule by the US’s Consumer Financial Protection Bureau to establish its supervisory authority over larger nonbank providers of certain digital consumer payment functionalities.

UK Finance report on the impact of AI in financial services

On 23 November, UK Finance published a report on the impact of AI in financial services. The report sets out the findings of a survey covering topics such as the adoption and deployment of predictive and generative AI, use cases, anticipated benefits and risks, risk management, and views on regulation. The report examines the state of play of AI in the financial sector, where it is being deployed, where it shows promise for the future and how to make the most of the opportunities on offer. The report also looks at AI risks and mitigations. Key findings include: (i) UK financial institutions see a substantial opportunity in AI, with 90 per cent of survey respondents already leveraging predictive AI in back-office functions, yielding tangible benefits. More than 60 per cent believe it has the potential to deliver significant cost savings and improvements to operational effectiveness. The report observes that there is an appetite within institutions to harness the potential of this technology, which will necessitate a re-evaluation of business processes, employee skills, and staffing considerations; (ii) financial institutions are proceeding carefully with their adoption of AI, with more than 70 per cent of generative AI use cases in the proof of concept or pilot phase; (iii) the learning curve with regard to AI in financial services is steep, with numerous unanswered questions remaining. The report notes that while best practice in AI risk is emerging globally, the advent of generative AI has surfaced additional risks, such as ‘hallucinations’, and accentuated the challenge of needing to procure models from external providers. Although, most institutions believe they are well equipped to identify, monitor, and mitigate the risks, with 60 per cent already leveraging existing risk management capabilities and adjusting their frameworks to include generative AI; and (iv) many survey participants support the UK’s flexible approach to AI regulation, based on principles and outcomes, rather than prescriptive rules on the application of the technology. However, 65 per cent of respondents consider uncertainty regarding the direction of regulation to be a top concern for the adoption of AI in the UK.

Report

Webpage

HMT response to consultation on Digital Securities Sandbox

On 22 November, HMT published a response to its consultation on the Digital Securities Sandbox. After having analysed the responses received, the Government intends largely to retain the approach originally outlined in the consultation. This will involve instituting a broad framework for the DSS in legislation, with the regulators given appropriate flexibility to manage requirements for participating entities. The document summarises the feedback HMT received regarding the key features of the DSS proposal, on topics such as activities, designations and authorisations, eligibility to participate in DSS and legislative modifications. It also covers responses to various policy issues relating to the DSS, the adoption of digital assets more widely and to some specific legal issues raised in the consultation document, such as typology of digital securities and jurisdiction and choice of law. The Government will shortly lay a statutory instrument before Parliament to implement the DSS. The BoE and FCA will set out the application process, as well guidance and rules for the DSS.  

Response

Webpage

Fund regulation 

Alternative Investment Fund Designation Bill

On 23 November, the Alternative Investment Fund Designation Bill had its first reading in the House of Lords, on the same day UK Parliament published the Bill and explanatory notes. The Bill is a private members' bill introduced by Baroness Altmann, amending the Alternative Investment Fund Managers Regulations 2013 to remove listed investment companies from alternative investment fund (AIF) designation. The lack of recognition within the AIFMD of the listed company structure and role of share price as the investment value has given rise to reporting requirements on costs that do not distinguish between costs already accounted for within share price and costs that are yet to be deducted from value.  The Bill seeks to recognise a company’s share price as having costs included by removing closed-ended investment companies whose shares are admitted to trading on any market or venue operated by a UK recognised investment exchange from the Regulations, which implemented the AIFMD in the UK. The removal of listed investment companies from designation as an AIF also aims to remove unnecessary reporting requirements, recognising that the listing requirements and requirements in Companies Act 2006 already provide substantial transparency. Clauses 2 to 4 of the Bill also make consequential changes to UK MiFID Org Regulation, UK PRIIPs key information document Delegated Regulation and UK key investor information Regulation. The date for the Bill’s second reading has not been set.

Alternative Investment Fund Designation Bill

Explanatory Notes

Hansard: First Reading in House of Lords

Minutes of Proceedings

Webpage

Markets and markets infrastructure

FCA and BoE reaffirm memorandum of understanding on the supervision of FMI and payment systems

On 23 November, the BoE published its memorandum of understanding with the FCA on the supervision of FMI and payment systems. The BoE and FCA held a consultation with FMIs to review their co-operation regarding market infrastructure in 2022. Following the consultation, the BoE and FCA concluded that overall their existing memordanum of understanding’s arrangements for co-operation remain effective and that in the main there has been strong co-ordination and material duplication has been avoided. As such the authorities re-affirmed their commitment to enhance co-operation domestically and internationally. They have made minor updates to the MoU to ensure it remains up to date in light of regulatory changes, including the UK’s withdrawal from the European Union and will keep it under review to ensure the ongoing effectiveness of cooperation on policy development as the programme of rulemaking to replace retained EU law continues.

BoE Statement

HMT response to Short Selling Regulation Consultation

On 22 November, HMT published a response to its consultation on the proposal to delete aspects of the Short Selling Regulation related to sovereign debt and credit default swaps. The consultation proposed to remove requirements currently placed on investors when taking out short positions in sovereign debt or sovereign CDS, and the related reporting requirements. Following the positive responses received to this consultation, the government will remove the requirements. The government will retain sovereign debt and CDS in scope of the FCA’s emergency intervention powers for short selling, which will be treated the same as other financial instruments. The draft Statutory Instrument discussed below includes the government’s position on sovereign debt and CDS, as set out in this consultation response.

Consultation Response

Webpage

Draft statutory instrument and policy note on Short Selling Regulations 2024

On 22 November, HMT published a draft Short Selling Regulations 2024 statutory instrument, along with an accompanying policy note. The draft statutory instrument, establishes the scope of the new UK short selling regime by defining the designated activity of short selling of shares and related instruments, and other related terms.  and the draft SI also provides the FCA with a range of related rulemaking powers to specify firm-facing short selling requirements in its handbook. It also includes emergency intervention powers for the FCA to require additional short selling-related information and to restrict short selling in exceptional circumstances where there is a serious threat to financial stability or market confidence, or to prevent a disorderly decline in the price of a financial instrument. The policy note explains that the FCA is working closely with the government to support the development of this new legislative framework and plans to set out its detailed approach for how it will use its new rule making powers. The FCA plans to consult market participants on this topic. HMT intends to legislate in 2024, subject to Parliamentary time allowing. The deadline for technical comments on the draft SI is 10 January 2024.

Policy Note

Draft Statutory Instrument

Webpage

Payment services and payment systems

Legislative progress of Regulation on instant credit transfers in euro

On 23 November, the EP updated its procedure file on the proposed Regulation amending the SEPA Migration Regulation and the Cross-Border Payments Regulation as regards instant credit transfers in euro to indicate that it will consider the proposed Regulation during its plenary session to be held from 5 to 8 February 2024.

Procedure File

Future of payments review 2023 report

On 22 November, HMT published its future of payments review report. Overall, feedback to the review was that the UK payments landscape is in a good position, but lacks vision and clear priorities. Therefore, the report’s strongest recommendation is that the government develops a national payments vision and strategy, to bring clarity to its future desired outcomes for UK payments, with the primary aim of simplifying the landscape over time. The review also observed that: (i) the UK has a relatively mature banking, cards and digital wallets environment, and a well-developed regulatory environment. However, consumer experience could be improved, specifically in relation to the strong customer authentication requirements consumers experience at the point of purchase; (ii) there are concerns with digital exclusion, that could be adding to the financial exclusion problem, i.e. access to cash.  The report asks that HMT and the FCA closely monitor the situation; (iii) the consumer-to-consumer bank transfer process is clunky and in need of improvement. In addition, many merchants and retailers are frustrated by the costs of taking card payments, and the lack of viable alternatives; (iv) while Open Banking could help improve the consumer-to-consumer process and provide an alternative to the card schemes for retailers, it currently lacks a consumer dispute resolution process for Open Banking transactions which could be a barrier to adoption if not addressed. The same is true of the current commercial arrangements, which the report concludes do not create the conditions for Open Banking to thrive in a healthy way, with costs and benefits misaligned; and (v) there should be an increased emphasis on preventing crime in the first place, suggesting that the PSR conducts a review of the new APP fraud rules after 12 months of implementation and that the Government set a more ambitious fraud crime reduction target beyond 2024. The Chancellor’s Autumn Statement (see our ‘Other developments’ section below) states that the government will publish a National Payments Vision next year. Building from the review’s findings, this will include consideration of priorities for UK payments and, working with the Payment Systems Regulator and the Bank of England, will consider the role of the New Payments Architecture.

Report

Webpage

Prudential regulation 

Please see the ‘Sustainable Finance’ section for the BCBS newsletter on the implementation of its principles for the effective management and supervision of climate-related financial risks.

FCA and PRA consult on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector

On 23 November, the PRA published a joint consultation with the FCA on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector. The PRA and FCA are proposing to replace the EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (3L3 Guidelines) with a new PRA supervisory statement and new FCA guidance. The regulators are also proposing to delete supervisory statement 33/15, aggregation of holdings for the purpose of prudential assessment of controllers, and transfer the content to the new supervisory statement. In addition, they also propose to remove reference to the 3L3 Guidelines in the statement of policy on interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU. The PRA’s proposed supervisory statement and the FCA’s guidance would set expectations on: (i) identifying qualified holdings, including the concepts of significant influence, aggregated holdings and indirect controllers; (ii) submitting the change in control notification, the additional information the PRA and the FCA may require, and the approach to completeness; (iii) the assessment criteria used to assess notifications to acquire or increase control in PRA and FCA authorised firms operating in the UK; and (iv) how the PRA and the FCA would use their statutory powers to impose conditions on an approval when it advances their objectives. The deadline for comments is 23 February 2024.

Consultation Paper

Webpage

EBA final standards for assessing new market risk internal models

On 21 November, the EBA published its final draft RTS on the assessment methodology under which competent authorities verify institutions’ compliance with the requirements applicable to their internal models under the Fundamental Review of the Trading Book (FRTB) rules. The RTS are part of the phase 4 deliverables of the EBA roadmap on market risk and counterparty credit risk approaches. The RTS provide clarity on the assessment performed by competent authorities when granting an internal model approval under the FRTB framework. They set out a framework for competent authorities to assess the FRTB requirements and focus on three central themes: governance, the internal risk-measurement model used to compute the expected shortfall measure and the stress scenario risk measure and the internal default risk mode lused to compute the additional own funds requirement for default risk. The RTS include assessment techniques that the competent authorities must apply, while other techniques remain optional depending on the situation of the institution. As a result, these RTS provide clarity regarding the nature of requests institutions can expect to receive from competent authorities during the investigation phase.

Final Report

Press Release

PRA sets the 2023 O-SII buffer rates for ring-fenced banks and large building societies

On 20 November, the PRA published a statement setting out the 2023 O-SII buffer rates for ring-fenced banks and large building societies. In line with the FPC’s updated framework for the O-SII buffer, the PRA has set O-SII buffer rates based on UK leverage exposure measure data as of end-2022, assessed on a sub-consolidated basis for RFBs, and on a consolidated basis for building societies. The O-SII buffer rates set out in this statement will apply from 1 January 2025.

Statement

Amending Implementing Regulation on ITS on supervisory disclosure under IFD published in OJ

On 20 November, Commission Implementing Regulation (EU) 2023/2526 amending the ITS laid down in Implementing Regulation (EU) 2022/389 as regards the content lists of the information on individual data to be disclosed by competent authorities, was published in the OJ. Implementing Regulation (EU) 2022/389 contains templates for the publication of information that competent authorities have to disclose under Article 57(1) of the IFD. That information concerns the composition of own funds and the own funds requirements by type of requirement. Implementing Regulation (EU) 2023/2526 amends Annex IV to Implementing Regulation (EU) 2022/389 to refer to the data on the composition of own funds and own funds requirements by type of requirement for those investment firms that qualify as small and non-interconnected. The Regulation will enter into force on 10 December, the twentieth day following its publication in the OJ.

Implementing Regulation

Recovery and resolution 

Council of EU agrees common position on proposed Directive on MREL reforms

On 17 November, the Council of the EU announced that it had agreed a common position on the proposed Directive making targeted amendments to the BRRD and the SRM Regulation addressing certain issues in relation to the treatment of ‘internal MREL’ in bank resolution groups. The so-called ‘Daisy Chain’ Directive aims to give the resolution authorities the power of setting internal MREL on a consolidated basis subject to certain conditions. Where the resolution authority allows a banking group to apply such consolidated treatment, the subsidiaries will not be obliged to deduct their individual holdings of internal MREL. The proposal also introduces a specific MREL treatment for ‘liquidation entities’. The main changes agreed by the Council clarify the definition and scope of liquidation entities and provide further detail on the conditions for the application of the consolidated treatment of internal MREL.

Press release

Note

Sustainable finance 

ESMA explanatory notes covering key topics of the sustainable finance framework

On 22 November, ESMA published three explanatory notes covering key topics of the sustainable finance framework: (i) concepts of sustainable investments and environmentally sustainable activities in the EU sustainable finance framework. This explanatory note explains how the concept of sustainability is inscribed in the EU sustainable finance framework. The concept of sustainability is reflected in the definition of "sustainable investments" in the SFDR and the definition of "environmentally sustainable economic activities" introduced under the Taxonomy Regulation; (ii) ‘Do no significant harm" definitions and criteria across the sustainable finance framework. This explanatory note explains the "do no significant harm" (DNSH) principle that is embedded in several pieces of EU sustainable finance legislation. The DNSH principle is a key element in the Taxonomy Regulation, SFDR and the Benchmarks Regulation (BMR); and (iii) the concept of estimates across the EU sustainable finance framework. This explanatory note explains how key sustainable finance legislation deals with the use of "estimates" and "equivalent information", and the conditions under which these are allowed as sources of data to prepare mandatory ESG metrics for the compliance of regulated entities with their obligations. Different pieces of the sustainable finance framework impose requirements for the calculation and disclosure of various ESG metrics or sustainability indicators by financial market participants. These di

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