Article

Key Regulatory Topics: Weekly Update 7-13 July 2023

Published Date
Jul 14, 2023
This week the regulators have been extremely busy, both in the UK and in Europe. In the UK, the text of the Financial Services and Markets Act 2023 was published. HM Treasury published a plan for delivery in relation to its policy approach to building a smarter regulatory framework for financial services that is tailored to the UK. The PSR consulted on the implementation of mandatory APP scam reimbursement requirements and HM Treasury published its consultation response on reforming the Consumer Credit Act 1974. In Europe, ESMA and the EBA began consulting on the first set of technical standards under MiCAR, and ESMA published a new manual on post-trade transparency, as well as a report in response to its call for evidence on pre-hedging. The FSB published a progress report on its work to complete objectives set out in the July 2021 roadmap for addressing climate-related financial risks.

Capital Markets

Please see the Sustainable Finance section for a statement from ESMA setting out its expectations on how the specific disclosure requirements of the Prospectus Regulation in relation to sustainability-related matters in equity and non-equity prospectuses should be satisfied considering the ESG transition.

FCA engagement paper on public offer platforms under new regime

On 13 July, the FCA launched an engagement paper setting out its initial thinking on the development of rules for the new regulated activity of operating a public offer platform, under the new public offers and admission to trading regime. Overall, the FCA’s aim is that the framework it creates for public offer platform operators should ensure that: (i) sufficient due diligence and checks on companies are conducted to prevent fraud and facilitate genuine capital raising; (ii) investors have sufficient, accurate, and useful information, on both the company and the securities being offered, to understand the opportunity and risks when investing in securities on a platform; and (iii) companies can raise capital efficiently and effectively through such platforms, subject to appropriate scrutiny and transparency. As a starting point, the FCA is focusing on a proposed regime that will impose requirements on platform operators in these areas: (a) due diligence requirements, including systems and controls to ensure that platform operators undertake appropriate due diligence on companies and prospective offers; (b) disclosure requirements for platform operators to provide or ensure a company provides key information; (c) liability for, and the potential for redress from, platform operators; and (d) the role of the FSCS. The FCA’s approach to regulation of platform operators reflects the fact that, based on the current crowdfunding market, offers made via public offer platforms are likely to be largely directed at retail investors and that the new public offer framework extends to non-transferable debt securities (mini-bond type securities) following the Gloster report. The deadline for comments is 29 September. Feedback is intended to create a dialogue between the FCA and stakeholders, which will inform further development of proposed rules, which the FCA will consult on formally during 2024.

Engagement paper

FCA engagement paper on primary multilateral trading facilities under new regime

On 13 July, the FCA launched an engagement paper setting out its initial thinking on the development of rules for primary multilateral trading facilities (MTFs) under the new public offers and admission to trading regime. The regime will create a new 'MTF admission prospectus', which will be subject to the same statutory liability and compensation scheme as regulated market prospectuses. Under the new regime, the FCA will have the power to ensure that certain MTFs operating as primary markets (Primary MTFs) require issuers to produce an MTF admission prospectus in specified circumstances. MTF issuers that publish an MTF admission prospectus will benefit from the amended liability standard for protected forward-looking statements. The FCA aims to explore how regulatory changes can promote broader investor participation and improve the quality of information that investors receive. Where possible, it intends to preserve the existing regulatory model in which Primary MTF operators set their own requirements in terms of the content of an admission document and how it is approved. Consequently, MTF operators will specify the detailed content requirements and process for validating and publishing an MTF admission prospectus, as they do currently for their admission documents, subject to the FCA’s normal supervisory oversight of their activities. The FCA sets out its initial considerations on: (i) the circumstances in which Primary MTFs should require the publication of an MTF admission prospectus; (ii) who should be responsible for such a document; (iii) the circumstances in which a supplementary prospectus should be required; (iv) how and when withdrawal rights should be exercised; and (v) the requirements for advertisements related to securities being admitted to trading on a Primary MTF. The deadline for comments is 29 September. Feedback will inform further development of the FCA’s proposed rules which the FCA will consult on formally during 2024. This paper relates to the draft SI that was published by HMT on 11 July 2023 (see item below).

Engagement paper

Near-final Public Offers and Admissions to Trading Regulations 2023

On 11 July, the government published the near-final Public Offers and Admissions to Trading Regulations 2023, together with an explanatory policy note. The SI will replace retained EU law relating to the prospectus regime and create a new regulatory framework for public offers and admissions to trading. The SI includes a number of refinements and clarifications to the previous illustrative version published as part of the Edinburgh Reforms, including: (i) clarifying that certain securities such as OTC derivatives, the shares of building societies, credit unions, and cooperative and mutual benefits societies are out of scope and not covered by the definition of ‘relevant securities’; (ii) the provisional drafting in relation to the FCA’s proposed powers over multilateral trading facilities (MTFs) has been revised, including clarifying that the FCA will only have powers to require an MTF admission prospectus where the securities are being admitted to trading on markets open to retail investors; (iii) the provisional drafting clarifying the key information required in prospectuses to meet the ‘necessary information test’ for those issuing bonds has been further revised to provide greater clarity. The key requirements of the necessary information test have not changed; (iv) amending the RAO to create a new regulated activity of operating a public offer platform; (v) setting the public offer platform threshold at £5 million. Offers above this level will either need to be made via a public offer platform or within the scope of one of the other exceptions in Part 1 of Schedule 1 to the SI.; and (vi) aside from the public offer platform threshold, the government has also revised various exceptions to the regime to ensure their scope is appropriate and that they do not cause unintended disruption. See Schedule 1, Part 1, paragraphs 1, 8, 9, and 10 for more information. The deadline for comments on the SI is 21 August. The government intends to lay the SI before year end.

Near-final Regulations

Policy note

UK Investment Research Review outcomes

On 10 July, HMT published a report containing the outcomes of the UK Investment Research Review (IRR). The key recommendations are: (i)  to introduce a Research Platform that will provide a central facility for the promotion, sourcing and dissemination of research – in particular, in relation to smaller companies; (ii) to amend regulations to allow additional optionality for paying for investment research and align the UK with other key jurisdictions including the US and EU; (iii) to facilitate greater access to investment research for retail investors; (iv) involve academic institutions in supporting investment research initiatives; (v) support issuer-sponsored research by implementing a code of conduct; (vi) clarify aspects of the UK regulatory regime for investment research and consider introducing a bespoke regime; and (vii) review the rules relating to investment research in the context of IPOs including the making of connected analyst research available on a similar basis to the prospectus. The Chancellor welcomed the report, and accepted all recommendations made to government. The FCA has stated that it will consider the recommendations, in line with its objectives. The FCA intends to consult on an accelerated timetable on potential regulatory changes that could introduce more options on how to pay for investment research so as to achieve an outcome of improving investor research into markets while providing value for money to institutional and retail investors. Subject to this detailed consultation feedback and FCA Board approval, the FCA will aim to make relevant rules in H1 2024.

Review webpage

Investment Research Review

FCA statement

Conduct and Governance

Financial Regulators Complaints Commissioner annual report 2022/23

On 13 July, the Office of the Complaints Commissioner published the Financial Regulators Complaints Commissioner's annual report for 2022/23, covering the period from 1 April 2022 to 31 March 2023. The Complaints Commissioner welcomes the new requirements set out in the FSMA 2023 (FSM Bill at the time of writing) requiring the regulators to include a summary of instances where they have not complied with the Complaints Commissioner’s recommendations in their response to the annual report, including their reasoning for not complying with the recommendations to HMT. During this year, 421 cases were dealt with by the Complaints Commissioner’s office, compared to 492 excluding LCF in the previous year. Overall, the Complaints Commissioner made 62 recommendations, suggestions or criticisms. Of these, one criticism was about a joint complaint between the FCA and the PRA and one suggestion was about the PRA complaint, with the remaining relating to the FCA. The Complaints Commissioner found the reason for most of the complainant’s dissatisfaction with the FCA centred upon its oversight role of firms and the customer service received from the FCA Complaints Team and other departments. In its response, the FCA notes the Complaints Commissioner's themes and observations and commits to continue making improvements in these areas. In its response, the BoE/PRA states that it remains committed to updating and improving the complaints scheme, which will happen as soon as possible after the provisions of the FSMA 2023 impacting the scheme come into force.

Report

FCA response

BoE/PRA response

Consumer/Retail

Please see the FinTech section for a feedback statement from the FCA to its discussion paper assessing potential competition benefits and harms arising from Big Tech entry and expansion in retail financial services.

ESMA highlights risks arising from securities lending to retail investors

On 12 July, ESMA published a statement on securities lending to retail clients setting out the applicable requirements under MiFID II. ESMA highlights investor protection concerns related to securities lending and outlines the obligations of firms engaging in this practice. ESMA also outlines its expectations for firms’ compliance with the relevant MiFID II requirements regarding: (i) revenues from securities lending should directly accrue to the retail client, net of a normal compensation for the firm’s services; (ii) express prior consent of retail clients should not be sought by way of the firm’s general terms and conditions. ESMA will continue to monitor the practice of securities lending to retail clients and, if needed, issue further technical advice to the EC on this topic.

Press release

Statement

HMT consultation response on new UK retail disclosure regime

On 11 July, HMT published the response to its consultation on the proposed revocation of the UK PRIIPs Regulation and an alternative framework for a new UK retail disclosure regime. The response briefly sets out the proposals in the HMT consultation and summarises the responses received. It also sets out the government’s vision for the new retail disclosure framework and further detail about next steps to deliver this reform. The government confirms that: (i) UCITS vehicles will be brought into scope of the new retail disclosure regime. The government and FCA will provide clarity on the transition period from current disclosure requirements (for both packaged products and UCITS) in due course; (ii) it intends to proceed with its plan to entirely remove all PRIIPs firm facing retail disclosure requirements from legislation; and (iii) further analysis since the consultation has found that the FCA will require some additional tailored powers to ensure that the new regime applies to: (a) certain unauthorised firms – which make up a substantial part of the PRIIPs market and are currently subject to directly applicable obligations under the existing PRIIPs regime, which will fall away when PRIIPs is repealed; and (b) overseas funds. Further detail will be set out in due course. The government notes the feedback provided on MiFID II cost and charges disclosure and will reflect on this feedback as it repeals and replaces the remainder of the MiFID II framework in due course. The government will publish a draft SI by 2024 to enable the FCA to deliver the new retail disclosure regime, following the repeal of the PRIIPs Regulation (and related secondary legislation). The FCA will also consult on its draft rules for the new retail disclosure regime, building on the principles discussed in this consultation and December 2022 Discussion Paper.

Response

HMT consultation response on reforming the CCA

On 11 July, HMT published a response to its consultation on reforming the Consumer Credit Act 1974 (CCA). The response provides an overview of the feedback to the consultation and outlines the government’s proposed next steps. Given the widespread support, the government plans to move forward with reforming the CCA. The government plans to develop proposals that move the majority of the CCA into the FSMA model. This will involve repealing much of the CCA and recasting it in the FCA rulebook. However, the government recognises that there may be specific aspects of consumer credit regulation that may warrant legislative-based provisions. After considering stakeholder feedback to this consultation, the government will seek to make these decisions guided by the principles set out in its consultation: proportionate, aligned, forward-looking, deliverable and simplified. The government notes that due to its scale and complexity, the CCA reform will take a number of years to deliver. As a next step, a second stage consultation is expected in 2024. In advance of that, the government will engage further with stakeholders to inform its proposals, both through bilateral meetings and broader roundtables. The government notes that there may be benefits to a phased approach to implementation, though notes the difficulty of this approach due to the interconnected nature of the CCA. Nonetheless, it is keen to hear representations from stakeholders on the desirability and deliverability of a phased approach.

Response

Fees/Levies

FCA changes to fees rates for 2023/2024

On 13 July, the FCA set out on a new webpage the changes to fee rates for 2023/24 compared to the previous year. Overall, the FCA’s annual funding requirement has increased in 2023/24 by 8.1%. The fee rate movements for each fee-block broadly reflect this percentage increase (adjusted for other factors) and the change in total tariff data reported by firms. The FCA reminds firms that, since their actual fees are based on the volume of business (tariff data) they have reported, reporting a large change in their tariff data this year will also have an impact on their actual fees.

Webpage

Financial Crime and Sanctions

Fourth EBA opinion on ML/TF risks across the EU

On 13 July, the EBA published its fourth biennial opinion on the risks of ML/TF affecting the EU’s financial sector, based on data from January 2020 to January 2023. The EBA’s findings include that: (i) since the EBA’s third Opinion on ML/TF risks was published in 2021, geopolitical events and technological advances have had a profound impact on the financial sector’s exposure to financial crime risks. Russia’s invasion of Ukraine led to the imposition by the EU of restrictive measures that are unprecedented in terms of their scale and their scope, but national approaches to enforcing restrictive measures are not harmonised and create pressure on institutions’ compliance resources. At the same time, the risk of financial institutions being used to circumvent sanctions has increased. New risks arise from the laundering of proceeds from environmental and cybercrimes, with a perceived increase in risks associated with financial innovation linked to market growth; (ii) legislative developments, such as MiCAR, create legal uncertainty and some competent authorities and institutions have been hesitant to invest in better financial crime controls; (iii) the TF risks identified in 2021 continue to exist, though the changed geopolitical situation and an increase in right-wing extremism and terrorism have given rise to new TF risks; and (iv) with few exceptions, awareness of ML/TF risks is increasing across all sectors under the EBA’s AML/CFT remit, but the AML/CFT systems and controls institutions have put in place are not always effective. Transaction monitoring and the reporting of suspicious transactions are particularly weak with payment institutions and e-money institutions among the worst performing sectors. More competent authorities than ever before have carried out formal ML/TF risk assessments in line with EBA guidelines, and the frequency and intensity of supervisory engagement is increasing. The EBA issues 23 proposals to the EU co-legislators and competent authorities to address these risks and to strengthen the EU’s financial crime defences.

Press release

Opinion

EBA report on competent authorities’ approaches to AML/CTF supervision of banks

On 11 July, the EBA published the findings from its 2022 review of competent authorities’ approaches to tackling ML/TF risks in the banking sector. Overall, the EBA’s findings suggest that supervisors are making progress in the fight against ML/TF. The review found that: (i) some competent authorities have made far-reaching changes in recent years, and their approach to AML/CFT supervision of banks is now broadly effective; (ii) many competent authorities have made tangible progress in tackling ML/TF risks through prudential supervision and most are on track to embed cooperation and information exchange in their supervisory processes. Nevertheless, most supervisors in the 2022 sample were asked to do more to tackle ML/TF risk in their banking sector; (iii) as was the case in the previous rounds of reviews, competent authorities find assessing ML/TF risk difficult. Several competent authorities did not use their ML/TF risk assessments to inform their supervisory strategy and inspection plans. A general lack of formalised processes and targeted training for AML/CFT and prudential supervisors meant that opportunities for intervening at an early stage, before risks crystallise, were sometimes missed. The EBA notes that the findings and recommended actions in this report will be relevant to all competent authorities responsible for tackling ML/TF risks in credit and financial institutions across the single market. The EBA has entered its fourth and last round of implementation reviews of competent authorities in 2023. After this round, the EBA will publish a final report, which will include an assessment of progress made since 2019.

Press release

Report

Fintech

Please see the Other Developments section for a letter sent from the FSB Chair to G20 Finance Ministers and Central Bank Governors ahead of their meeting on 17-18 July, providing updates on its key workstreams, including recommendations for regulating global stablecoin arrangements.

FCA speech on emerging regulatory approach to Big Tech and AI

On 12 July, the FCA published a speech given by Nikhil Rathi, FCA Chief Executive, on the FCA's emerging regulatory approach to artificial intelligence (AI) and Big Tech. Highlights include: (i) Big Tech and their gatekeeping of financial data -  the FCA has announced a call for further input on the role of Big Tech firms as gatekeepers of data and the implications of the ensuing data-sharing asymmetry between Big Tech firms and financial services firms. The FCA is also considering the risks that Big Tech may pose to operational resilience in payments, retail services and financial infrastructure; (ii) ensuring market integrity in the age of AI - Mr Rathi warns that using AI can cause imbalances and risks affecting the integrity, price discovery, transparency and fairness of markets. The FCA expects firms to accelerate investment in fraud prevention and operational and cyber resilience as AI is further adopted; and (iii) regulatory frameworks - any regulation must be proportionate enough to foster beneficial innovation but robust enough to avoid a race to the bottom and a loss in trust and confidence, which when it happens can be deleterious for financial services and very hard to win back. Mr Rathi considers that the consumer duty and the SMCR provide frameworks that address many of the issues arising from AI. He highlights recent calls in Parliament for a bespoke SMCR-type regime for the most senior individuals managing AI systems.

Speech

FCA feedback statement on competition impacts of Big Tech in retail financial services

On 12 July, the FCA published a feedback statement to its discussion paper assessing potential competition benefits and harms arising from Big Tech entry and expansion in four retail financial services sectors – payments, deposits, consumer credit and insurance. The key themes that emerged following the FCA’s analysis are: (i) Big Tech firms have the potential to enhance the overall value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions; (ii) in the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term they may seek to rely less on partnerships and compete more directly with existing firms; (iii) Big Tech firms’ entry may not be sequential or predictable. Big Tech firms’ ecosystem business models and conglomerate operations mean entry into one financial services market may create opportunities for expansion into complementary financial markets; (iv) in the short-term and possibly enduring longer term, Big Tech firms’ entry in financial services could benefit many consumers. These benefits could arise from Big Tech firms’ own innovations or by increasing other market participants’ incentives to innovate, improve quality and reduce prices of financial products and services through increased competition; and (v) in the longer term, there is a risk that the competition benefits could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes. In response, the FCA has announced three initiatives: (a) a call for input on Big Tech firms as ‘gatekeepers’ and key drivers, including the role of data sharing asymmetry between Big Tech firms and financial services firms, by the end of 2023; (b) to review its supervisory approach for Big Tech firms to improve how it monitors Big Tech activities within and outside its regulatory perimeter; and (c) continue its work with the government and the DMU as the Digital Markets, Competition and Consumers Bill passes through Parliament.

Feedback statement

ESMA consults on first package of technical standards under MiCAR

On 12 July, ESMA began consulting on the first of three packages of technical standards under MiCAR, consisting of five draft RTS and two ITS on: (i) the notification by certain financial entities of their intention to provide crypto-asset services; (ii) the authorisation of crypto-asset service providers (CASPs); (iii) complaints handling by CASPs; (iv) the identification, prevention, management and disclosure of conflicts of interest; and (v) the proposed acquisition of a qualifying holding in a CASP. In addition, ESMA aims to gather more insight on respondents’ current and planned activities, as a fact-finding exercise to better understand the EU crypto-asset markets and their future development. These questions relate to elements such as the expected turnover of the respondents, the number of white papers they plan to publish and the use of on-chain vs off-chain trading. The input to this part of the consultation will remain confidential and will serve to calibrate certain proposals to be inserted in the second and third consultation packages. The deadline for comments is 20 September. ESMA expects to publish a final report and submit the draft technical standards to the EC for endorsement by 30 June 2024 at the latest.

Press release

Consultation

EBA encourages timely preparatory steps towards application of MiCAR to ARTs and EMTs

On 12 July, the EBA published a statement for the attention of financial institutions and other undertakings who intend to commence, or have commenced, asset-referenced token (ART) or electronic money token (EMT) activities prior to 30 June 2024 (the application date for the relevant provisions of MiCAR) and for competent authorities. The statement is intended to encourage timely preparatory actions to MiCAR application, to hopefully reduce the risks of potentially disruptive and sharp business model adjustments at a later stage, to foster supervisory convergence, and to facilitate the protection of consumers. The statement includes ‘guiding principles’ to which undertakings carrying out ART/EMT activities are encouraged to have regard until the application date. These guiding principles encompass: (i) disclosures to, and fair treatment of, potential acquirers and holders of ARTs and EMTs; (ii) the business model; (iii) sound governance, including effective risk management; (iv) reserve, recovery and redemption arrangements; and (v) communications with the relevant competent authority. The statement is accompanied by a template that undertakings intending to carry out, or carrying out, ART/EMT activities, are encouraged to communicate, on a timely basis, to the relevant competent authority.

Press release

Statement

Template

EBA consults on three draft technical standards under MiCAR

On 12 July, the EBA began consulting on the first set of technical standards under MiCAR; (i) RTS on the specification of information to be contained in an application to offer to the public or to seek admission to trading of asset-referenced tokens (ARTs). The information requirements cover the business model, internal governance, including ICT risk management, liquidity, reserve of assets, sufficiently good repute of the members of the management body and of shareholders with qualifying holdings. Consistent with the general regime applicable in the financial sector, MiCAR envisages a prudential assessment by competent authorities for the acquisition of qualifying holdings in issuers of ARTs that are not credit institutions. The draft RTS clarify the information requirements that are necessary for such an assessment; (ii) ITS on the establishment of standard forms, templates and procedures for the information to be included in the application in order to ensure uniformity across the EU

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