Key Regulatory Topics: Weekly Update 24 February - 2 March 2023
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EU court’s judgment sheds new light on how the ECB should apply national administrative measures
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Publications: 02 April 2024
Conduct and governance
PRA consultation on enhancing proportionality of remuneration requirements for small firms
On 27 February, the PRA published a consultation paper on proposed changes to the current rules and expectations to enhance proportionality of the remuneration requirements, which apply to small firms. The proposals aim to increase proportionality of the remuneration regime, by reducing the regulatory burden on small firms to a level more appropriate to the benefits arising from lowering risks to these firms’ safety and soundness and to the UK financial system. The policy proposals include; (i) defining small firms in line with the proposed simpler-regime size threshold, and with reference to selected other simpler-regime criteria under the ‘Strong and Simple’ framework; (ii) removing the requirement for small firms, as defined in this CP, to apply rules on malus, clawback, and buyouts and; (iii) provide clarity on how disclosure requirements apply for all proportionality levels. These proposals would result in changes to the Remuneration Part of the PRA Rulebook and updates to Supervisory Statement (SS) 2/17 – ‘Remuneration’. The deadline for comments is 30 May.
Consumer/retail
Council agrees negotiating position on directive on distance financial services contracts
On 2 March, the Council of the EU announced that ministers had agreed on a general approach for the directive concerning financial services contracts concluded at a distance. The proposed directive updates current EU legislation to create a level playing field in the internal market for distance financial services while raising the level of consumer protection. It will repeal the distance marketing directive and transfer its contents to the consumer rights directive The Council’s general approach for the most part maintains the objectives of the Commission’s proposal; however, it also introduces several changes including: (i) minimum harmonisation as regards pre-contractual obligations which allow member states to have stricter national rules than those established by the directive; (ii) clarification to the scope of application and the safety net-feature of the directive, in particular for financial services that are excluded from other sectoral legislation or only partially covered by it; (iii) applying further provisions of the consumers rights directive to financial services contracts concluded at a distance; (iv) extending provisions of the ‘withdrawal button’ to the general chapter of the consumer rights directive, so that “withdrawal buttons” are applied to all contracts concluded at a distance; (v) modernising pre-contractual information obligations and future-proofing for financial services in the years to come; (vi) allowing member states to adapt the explanations that should be provided by financial services providers to the circumstances of the products and needs of the consumers; and (vii) extending the period of transposition, so the industry will benefit from an additional six months to make all the required changes to their IT-systems. The Council presidency now has a mandate for negotiations with the European Parliament.
Financial crimes and sanctions
Draft The Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations published
On 28 February, HMT published draft regulations entitled the Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023, along with a draft explanatory memorandum. The principal policy objective behind the instrument is to establish processes to enable collection of the levy, ahead of the first levy payments in 2023. This includes levy enforcement frameworks such as, financial penalties, reviews and appeals, provisions for the FCA and Gambling Commission to require information from their populations, record keeping and preservation obligations, recovery of overpayments, and a consequential amendment to the FSMA in relation to the FCA. The HMRC also published guidance on the ECL, detailing how to prepare for the ECL, how the levy will be collected, and how to register.
Outcomes FATF Plenary: 22-24 February 2023
On 24 February, FATF published the outcomes of its plenary meeting that took place between 22 and 24 February. During the meeting, the FATF made the following decisions; (i) members took steps to enhance the transparency of beneficial ownership, and prevent criminals from hiding illicit activity behind opaque corporate structures; (ii) FATF agreed on revisions to Recommendation 25 on transparency and beneficial ownership of legal arrangements; (iii) Delegates agreed on new guidance to help countries and the private sector, implement FATF’s strengthened requirements on Recommendation 24 on transparency and beneficial ownership of legal persons, (iv) Delegates further agreed on an action plan to drive timely global implementation of FATF standards relating to virtual assets globally; (v) members approved a report on disrupting the financial flows relating to ransomware; (iv) the Plenary also agreed on the publication of a report on money laundering and terrorist financing in the art and antiquities market, as well as agreeing to undertake new projects on money laundering and terrorist financing related to cyber-enabled fraud and on the use of crowdfunding for terrorist financing. Also during the plenary, Mr. Jeremy Weil, from Canada, was selected to be the next FATF Vice President. He will succeed Ms Elisa de Anda Madrazo from Mexico, and will hold this position for two years from 1 July.
Delegated Regulation amending the list of high-risk third countries under MLD4
On 24 February, Commission Delegated Regulation (EU) 2023/410, which amends Delegated Regulation (EU) 2016/1675 on the list of high-risk third countries with strategic deficiencies under MLD4 was published in the OJ. The Delegated Regulation adds the Democratic Republic of the Congo, Gibraltar, Mozambique, Tanzania and the United Arab Emirates to Table I of the Annex to Delegated Regulation (EU) 2016/1675, as they are considered to have strategic deficiencies in their regimes on AML/CFT that pose significant threats to the financial system of the Union. The Regulation also removes Nicaragua, Pakistan and Zimbabwe from that table, as they are no longer considered to have such strategic deficiencies. The Delegated Regulation will enter into force on 16 March, the twentieth day following its publication in the OJ.
Markets and markets infrastructure
FCA report on trade data review
On 2 March, the FCA published a findings report on its trade data review. The review looked at concerns raised about accessing and using wholesale data. The report suggests the market currently does not work as effectively as it could in allowing effective competition and innovation, which is a key part of the FCA’s strategy to improve the UK’s financial services sector. Among the findings, the report found: (i) some trading markets are concentrated among a few firms so there is little choice for users not to buy this important data and switching supplier is not an easy option; (ii) the way data is sold can be complex, making it harder for data users to make informed choices; (iii) complexity and limited choice result in additional costs to data users. These are likely to be passed on to UK retail investors and savers; and (iv) despite rules in place requiring delayed data to be distributed for free, many users end up with little choice but to pay for data. Moving forward, the FCA is working with the Government to develop consolidated tapes, which collect wholesale data across the market and distribute them in single, standardised data feeds. It is hoped that the consolidated tapes could help improve the overall cost, quality and accessibility of wholesale data. The FCA also launched a wholesale data market study to investigate whether the markets for benchmarks, credit ratings data and market data vendor services are working well. The deadline for comments on the issues raised in the terms of reference is 30 March. The FCA will publish an interim report by 1 September, stating whether or not it intends to make a market investigation reference. The FCA must publish the final report on the market study by 1 March 2024.
Commission call for evidence on the scope of third-country regime of Benchmarks Regulation
On 2 March, the Commission published a call for evidence on the scope and third-country regime of the Benchmark Regulation. The initiative aims to tackle two issues. The first is ensuring continued access to benchmarks worldwide for EU businesses and investors. When the new rules on the use of non-EU benchmarks come into force, on 1 January 2024, it will deprive market participants in the EU access to the majority of the world’s benchmarks, putting some of them at a significant disadvantage in global competition. Secondly, the Commission seeks to promote EU benchmark labels as an open standard under EU supervision. In light of potential modifications to the rules for the use of non-EU benchmarks, the supervisory status of non-EU benchmarks bearing EU climate benchmark labels will also need to be amended. There is however no intention to change the substantive requirements for the EU climate benchmark labels. The deadline for comments is 29 March.
Results of the annual transparency calculations for equity and equity-like instruments published
On 1 March, ESMA published the results of the annual transparency calculations for equity and equity-like instruments. The calculations made available include: (i) the liquidity assessment as per Articles 1 to 5 of Commission Delegated Regulation 2017/567; (ii) the determination of the most relevant market in terms of liquidity as per Article 4 of Commission Delegated Regulation 2017/587 (RTS 1); (iii) the determination of the average daily turnover relevant for the determination of the pre-trade and post-trade large in scale thresholds; (iv) the determination of the average value of the transactions and the related the standard market size; and (v) the determination of the average daily number of transactions on the most relevant market in terms of liquidity relevant for the determination of the tick-size regime. Market participants are invited to monitor the release of the transparency calculations for equity and equity-like instruments on a daily basis to obtain the estimated calculations for newly traded instruments and the four-weeks calculations applicable to newly traded instruments after the first six-weeks of trading. The results of the annual transparency calculations published will apply from 1 April until 31 March 2024. The next annual transparency calculations for equity and equity-like instruments will be published by 1 March 2024.
Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 published
On 1 March, HMT published a draft version of the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023, along with a draft explanatory memorandum. The FCA will put in place a simpler and therefore lower cost regime for determining when a firm that trades commodities or emission allowances as an ancillary activity does not need to be authorised as an investment firm. The instrument removes: (i) the obligation for firms relying on the ancillary activities exemption to notify the FCA of their exemption annually; (ii) article 72J of the RAO, which enables firms to carry on their business without obtaining authorisation if there is no data available to enable them to perform the test establishing when an activity is ancillary; and (iii) references to Commission Delegated Regulation (EU) 2017/592 (RTS 20) which outlines the regulatory technical standards for determining when a firm’s activity is considered to be ancillary to its main commercial business. The draft order reflects the findings of HMT’s Wholesale Markets Review.
ESMA assessment of the impact of the market correction mechanism on financial markets
On 1 March, ESMA published its effects assessment of the introduction of the market correction mechanism (MCM) on gas derivative markets. In the report, ESMA explores whether some shift of trading has unfolded because of the MCM. Based on this analysis, ESMA notes that so far no changes in the EU gas derivatives trading could be identified that could be unequivocally and directly attributed to the MCM. This confirms the findings of the preliminary data report. The report also describes the impact of the MCM on the CCPs’ capacity to conduct their risk management activities, in particular to calculate their exposures and to manage potential clearing member defaults. ESMA emphasises that the absence of a significant impact of the MCM on the trading and clearing environment should not be understood as the MCM not having any impact, and reflects the current market environment characterised by low gas prices and high storage levels. ESMA will continue monitoring developments in the trading and clearing of EU gas derivatives, and stands ready to provide further technical advice on these topics upon request, including where the activation of the MCM is imminent.
ECON votes to adopt changes to financial instruments settlement regime
On 1 March, ECON announced that MEP’s had adopted changes to CSDR, with the aim of improving organisation of CSDs in the EU, to promote efficiency and prevent settlement fails. The new rules introduce a number of measures including: (i) to prevent settlement fails, when a party to a transaction does not deliver a security or funds on time MEPs proposed to apply deterrent and proportionate cash penalties, agreeing that mandatory buy-in rules should apply only as a last resort measure MEPs also want to exclude transactions that failed for reasons not attributable to the participants, transactions that do not involve two trading parties, or when it could lead to detrimental consequences for the market. The Commission should have the power to suspend mandatory buy-ins where necessary; (ii) to minimise administrative burden and third-country CSDs, ECON voted for the recognition regime for CSDs established in a third-country to be expanded to cover securities settlement services. Additionally, MEPs voted to substantially simplify the Commission's proposal on the establishment of colleges of supervisors and proposed a stronger role for ESMA in those colleges; and (iii) regarding banking-type ancillary services, ECON proposed that CSDs non-authorised as banks should be able to offer a sufficient amount of arrange foreign currency settlement through a bank account.
ECON votes to adopt draft reports on proposed amendments to MiFIR and MiFID II Directive
On 1 March, ECON announced that MEPs had voted for harmonised rules to enhance market data transparency, optimise the trading obligations and prohibit receiving payments for forwarding client order. With their vote, ECON supported changes to the Commission’s proposals concerning: (i) EU-wide consolidated tape. MEPs supported an EU-wide CT, an electronic system which combines sales volume and price data from different exchanges and consolidates these into a continuous live feed, providing a single reference price for each asset class across markets; (ii) market structure and transparency. The text clarifies and simplifies the limitations on trading without pre-trade transparency by establishing a single volume cap that limits the amount of dark trading in an equity instrument in the EU to 7% of total trading in that instrument. They also ask ESMA to define the size of financial transactions in equities that could benefit from a waiver from the MiFIR transparency obligations. The text also modifies the deferral times applicable to the publication of the details of transactions in bonds, structured products, emission allowances and derivatives; (iii) investor protection and orderly trading. The text mandates member states to require regulated markets to be able to temporarily halt or constrain trading in emergencies or if there is a significant price movement in a financial instrument and, in exceptional cases, to be able to cancel, vary or correct any transaction.
FCA and BoE policy statement on changes to reporting requirements, procedures for data quality and registration of Trade Repositories under UK EMIR
On 24 February, the FCA and BoE published a joint policy statement on the changes to reporting requirements, procedures for data quality and registration of Trade Repositories under UK EMIR. This joint Policy Statement summarises the feedback received to CP21/31 and sets out the final rules and approach to the supporting guidance required to support implementation. The changes are: (i) the FCA and BoE will amend the table of reportable fields in the RTS under UK EMIR, primarily so that it aligns with international guidance issued by CPMI-IOSCO; (ii) the FCA will streamline the registration process for TRs that are already registered or recognised under the UK SFTR and; (iii) the FCA will introduce new requirements for TRs which will improve data quality, promote consistency of reporting, and facilitate the orderly transfer of data between TRs and to regulatory authorities. A new sourcebook will be added to the FCA Handbook: the European Market Infrastructure Regulation Rules (EMIRR). The FCA encourages stakeholders to familiarise themselves with final rules, plan and appropriately update their systems and processes ahead of implementation.
Payment services and payment systems
CPMI consultative report on ISO 20022 harmonisation requirements for enhancing cross-border payments
On 1 March, the CPMI published a consultative report on ISO 20022 harmonisation requirements for enhancing cross-border payments. The proposed requirements aim to provide overarching guidance for global and domestic market practice guidelines, to ensure that the ISO 20022 messaging standard, where adopted, is consistently used to facilitate faster, cheaper, more accessible and more transparent cross-border payments. The CPMI explains that the harmonisation requirements would complement existing market practice guidance by providing high-level requirements to be adopted by the various international and local usage guidelines. Following the consultation period, the report will be revised and the final report will be delivered to the Indian G20 Presidency by end-2023. The CPMI proposes that payment system operators and participants begin preparations to align their ISO 20022 usage guidelines with the finalised CPMI requirements to be effective in November 2025. The proposed 2025 introduction of the requirements would align with SWIFT’s decision to remove the ability to send cross-border MT payment messages over its network. The deadline for comments is 10 May.
Prudential regulation
PRA consultation on liquidity and disclosure requirements for simpler-regime firms
On 27 February, the PRA published a consultation paper setting out the first phase of the PRA proposed simplifications to the prudential framework that would apply to simpler-regime firms. The proposals consist of: (i) new liquidity requirements for the application of the NSFR; (ii) revisions to the application of Pillar 2 liquidity add-ons; (iii) a new, streamlined ILAAP template; (iv) the removal of certain liquidity reporting templates; (v) new Pillar 3 disclosure requirements for simpler-regime firms; and (vi) simplifications to certain proportionality approaches currently applicable in the PRA Rulebook. These aspects were raised as significant by firms in their feedback to DP1/21. The deadline for comments is 30 May.
EBA opinion on the application of provisions relating to the boundary between the banking books and the trading book
On 27 February, the EBA published an opinion on the application of the provisions relating to the boundary between trading book and banking book, and on the internal risk transfer between books as referred to in Article 3(6) of Regulation (EU) No 2019/876 (CRR2). CRR2 introduced certain elements of the Basel standards on the trading book / non-trading book boundary framework, which will enter into application from 28 June. As part of the ,Banking Package 2021, which fully implements the FRTB framework for capital purposes (as opposed to a mere reporting requirement), both the Council and the Parliament propose to postpone the application date of the boundary provisions to 1 January 2025. The front-loaded application of the boundary provisions compared to the rest of the FRTB framework creates several significant operational issues, these include: (i) institutions would be subject to an operationally complex and fragmented two-step implementation of the boundary framework; (ii) they would be subject to an operationally burdensome and costly fragmented application of the rules for the reclassification of positions and internal-risk transfer between the trading and non-trading books and; (iii) there are no jurisdictions at global level that envisaged such a two-step implementation of the boundary and internal-risk transfer frameworks. This would de-facto lead global institutions to be subject to very different regulatory requirements depending on where the risk management is performed, leading to fragmentation in the regulatory framework and, hence, in the financial markets, as well as potential unlevel playing field issues. However, the legislators’ effort to postpone the application date of the boundary provisions is void if the legislative process ends after 28 June. The EBA, therefore, advocate a legislative proposal to provide the necessary legal certainty and postpone the entry into force of the provisions referred to in Article 3(6) of Regulation 2019/876 by the Commission, under an accelerated adoption procedure by the European Parliament and the Council, if possible. Alternatively, if the provisions should enter into force when the applicable legal framework would not provide for the application of the FRTB-inspired approaches for capital calculation purposes, the EBA is of the view that competent authorities should not prioritise any supervisory or enforcement action in relation to those requirements until the adoption of the legislative proposal achieving the full implementation of the FRTB, also taking into account any transitional period provided for.
FCA multi-firm review of IFPR implementation
On 27 February, the FCA published findings from its review of how firms are implementing requirements on the internal capital adequacy and risk assessment (ICARA) process and reporting under the Investment Firms Prudential Regime (IFPR). The review highlighted the following areas for firms to improve: (i) for firms that opted to complete a "group ICARA" process, there was insufficient consideration of firm-specific risk and harms in the assessment of threshold requirements of individual firms required by MIFIDPRU; (ii) among investment firm groups who completed an ICARA process on a ‘consolidated basis’, only a few of them also operated solo ICARA processes by independently assessing the financial resource requirements of individual firms in the group, as required by MIFIDPRU; (iii) assessments made as part of the ICARA process should be cohesive and be fully integrated in the firm’s approach to managing financial resources to mitigate the risk and harms from its operations; (iv) wind-down planning assessments remain weak in terms of scope and quantification, reflecting an incomplete understanding of the purpose of the exercise and of guidance previously provide and; (v) firms should ensure that all data submitted is accurate and of high quality. The FCA is continuing with this multi-firm review and intends to publish a concluding report after completion of the review; they may also publish further interim observations, where appropriate.
Recovery and resolution
HMT call for evidence on aligning the ring-fencing and resolution regimes
On 2 March, HMT published a call for evidence on aligning the ring fencing and resolution regimes. The all for evidence seeks views on the ongoing benefits that ring-fencing provides to financial stability not found elsewhere in the regulatory framework and on the steps that could be taken to better align the ring-fencing and resolution regimes without losing financial stability benefits. It invites respondents to consider a wide range of options for the longer-term future of ring-fencing and seeks views on: (i) the benefits of the ring-fencing regime; (ii) the costs of the ring-fencing regime; and (iii) the long-term options for aligning the ring-fencing and resolution regimes. At a high level, the government believes that there are three basic options: retention, disapplication for some or all firms, or further reform of the ring-fencing regime. For these purposes, the government is taking the resolution regime as a given and is not seeking views on changes to it. The deadline for comments is 7 May.
Regulatory reform post Brexit
Please see the ‘Other Developments’ section for the sixth edition of the Financial Services Regulatory Initiatives Forum regulatory initiatives grid.
Structural reform
Please see the ‘Recovery and Resolution’ section for the HMT’s call for evidence on aligning the ring-fencing and resolution regimes.
Other developments
Financial services regulatory initiatives grid
On 28 February, the Financial Services Regulatory Initiatives Forum published the sixth edition of its regulatory initiatives grid, which sets out the regulatory pipeline, in order to give firms a clear view of upcoming regulatory initiatives. The Forum is comprised of the BoE (including the PRA), FCA, PSR, CMA, FRC, TPR, and IOC, with HMT attending as an observer member. The Forum explains that the delay of this edition of the grid from November 2022 to now has also allowed the regulators to better consider how the opportunities provided by the Edinburgh Reforms will affect the regulatory pipeline and initiatives over the coming years, as well as any updates to key initiatives affected by the FSM Bill. The Forum intends in future editions to provide stakeholders with more information in the Grid about proposals for repeal of retained UK law, and will be reflecting in future iterations of the grid the timings and impacts of any further changes under the Government’s future regulatory framework reforms, as they are confirmed. There will continue to be two editions of the grid published each year, this is the first for 2023, with the next edition to be published towards the end of the year. However, the Forum will provide a short statement after the FSM Bill is granted Royal Assent, informing the sector of any important and imminent changes.
In February, we published our own interactive timeline, which considers key regulatory updates on the horizon for 2023.
FCA Handbook Notice No 107
On 24 February, the FCA published Handbook Notice 107, which sets out changes to the FCA Handbook made by the FCA board on 23 February by the following instruments: (i) EMIR Rules (Procedures for Ensuring Data Quality) Instrument 2023, FCA Standards Instrument: Technical Standards (EMIR Reporting and Data Quality and Miscellaneous Amendments) Instrument 2023 and; Technical Standards (EMIR Registration of Trade Repositories and Miscellaneous Amendments) Instrument 2023. The substance of these three instruments is discussed further in the update on the FCA and BoE policy statement on changes to reporting requirements, procedures for data quality and registration of Trade Repositories under UK EMIR in our markets section above; (ii) FCA Registration Function Under the Co-Operative and Community Benefit Societies Act 2014 Guide Instrument 2023, which makes changes to the format of Finalised Guidance (FG) 15/12; (iii) Enforcement Guide (Amendment) Instrument 2023, which makes changes to update the Enforcement Guide to reflect the application of Regulation 74C to include Annex 1 financial institutions; (iv) Training and Competence Sourcebook (Amendment No 11) Instrument 2023, which makes changes to enable the FCA to provide firms and consumers with the most up-to-date information in relation to its qualifications table and the Glossary definition of accredited bodies and; (v) Handbook Administration (No 63) Instrument 202, which makes a minor changes to handbook section CONRED 3.1.