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Key Regulatory Topics: Weekly Update 9 - 15 Feb 2024

Again, many of the updates this week are in relation to various EU legislative files. The Council of the EU has published texts of political agreement on the proposed MLD6, AML Regulation, EMIR 3.0 and the ESG Rating Regulation. The Council of the EU has also published the text of the proposed Directive amending the AIFMD and the UCITS Directive and ECON has adopted draft reports on the proposed PSD3 and PSR. In the UK, the FCA published its financial promotions data for 2023, as well as issue 77 of its Market Watch which focuses on trade by organised crime groups, and the Home Office published the UK Government’s response to the Law Commission review of the SARs regime.

Consumer/Retail

FCA key findings of multi-firm work on CMCs carrying out unregulated claims

On 15 February, the FCA published the key findings from Claims Management Companies (CMCs) carrying out unregulated claims activity to assess if firms were using their FCA authorisation to legitimise services that are not regulated. The FCA was concerned that consumers may mistakenly assume that all the services CMCs offer come within FCA regulation, which could mislead consumers about the level of protection they have and give unregulated activities extra credibility. In its last portfolio strategy letter to CMCs, the FCA explained that it would carry out proactive work to assess and address consumer harm and issued substantive information requests to 26 CMCs offering unregulated claims services for matters such as tax, timeshare, diesel emissions and flight delay claims. This sample of firms included all the FCA Authorised CMCs that were submitting tax claims. From the sample of firms it reviewed, the FCA found that some firms had: (i) undertaken very little, or no regulated claims management activity; (ii) inadequate systems and controls in place to differentiate between regulated and unregulated claims activity; (iii) charged significantly higher fees for unregulated claims activity; and (iv) issued non-compliant financial promotions. The FCA expects all firms to take account of the findings from this multi-firm work and make the necessary changes.

Webpage 

Financial Crime and Sanctions

Council of the EU publishes texts of political agreement on proposed MLD6 and AML Regulation

On 14 February, the Council of the EU published the compromise texts (dated 13 February) for the following proposals: (i) a Directive on the mechanisms to be put in place by the Member States for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (MLD6); and (ii) a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (AML Regulation). In an accompanying ‘I’ item note (dated 12 February), the Council of the EU explains that the compromise texts reflect the provisional political agreement reached by the Council of the EU and EP in January. 

Compromise Text of MLD6

Compromise Text of AML Regulation

‘I’ Item Note

Updated Press Release 

OFSI guidance on ransomware and financial sanctions

On 13 February, the Office of Financial Sanctions Implementation (OFSI) published guidance on ransomware and financial sanctions. The UK Government is seeking to disrupt and reduce the profitability of ransomware through using financial sanctions against the ransomware threat actors causing the highest harm to the UK.  The guidance defines ransomware as a type of malicious software (“malware”) that prevents victims from accessing their computer or the data that is stored on it until a ransom fee is paid. The OSFI notes that ransomware payments to the criminal groups behind these attacks can perpetuate the threat and does not guarantee victims will regain access to their data. The OFSI explains that it assesses all breaches of financial sanctions on a case-by-case basis, taking several factors into account that will aggravate or mitigate when determining the facts and how seriously OFSI views a case. The guidance also explains that if the mitigating steps outlined in the guidance are taken, OFSI and the NCA would be more likely to resolve a breach case involving a ransomware payment through means other than a monetary penalty or a criminal investigation. Anyone who has been subject to a ransomware attack, is advised to use the UK Government’s ‘Where to Report a Cyber Incident’ portal as soon as possible for direction on how to report the incident.

Guidance 

Webpage 

Home Office response to the Law Commission review of the SARs regime

On 12 February, the Home Office published the UK Government’s response to the Law Commission review of the SARs regime. In 2019, the Law Commission published its report on the SARs regime, which made 19 legislative and non-legislative recommendations covering: (i) exemptions form the substantive money laundering offences; (ii) the use of suspicion as a threshold for information sharing; (iii) statutory guidance; and (iv) data exploitation. The majority of the recommendations made were either wholly or partially rejected. Rejected recommendations include: (a) the recommendation that POCA is amended to impose an obligation on the Secretary of State to issue guidance covering the operation of Part 7 of POCA so far as it relates to businesses in the regulated sector; (b) the recommendation that an Advisory Board should undertake a review as to whether to increase the threshold after further empirical research on the quality of required and authorised disclosures is completed; and (c) the recommendation that POCA is amended to create a provision allowing for funds to be released by a judge sitting in the Crown Court for reasonable living expenses when an application for an extension to the moratorium period is made. The recommendations accepted, wholly or partially, include the establishment of a SARs Advisory Group and the issuing of guidance on the operation of the mixed-funds clause.

Response 

Webpage 

Fintech

Please see the ‘Other Developments’ section for the FCA’s financial promotions data for Q4 2023 and 2023 in relation to firms’ compliance with the financial promotion rules for cryptoassets.

Fund Regulation

Council of the EU publishes text of proposed Directive amending AIFMD and UCITS 

On 15 February, the Council of the EU published the text of the proposed Directive amending the AIFMD and the UCITS Directive relating to delegation arrangements, liquidity risk management, supervisory reporting, the provision of depositary and custody services, and loan origination by AIFs. The EP adopted the proposed Directive at first reading on 7 February.

Proposed Directive 

Markets and Markets Infrastructure

FCA Market Watch 77

On 14 February, the FCA published issue 77 of Market Watch which focuses on trade by organised crime groups (OCGs) and how firms can mitigate the risks of being used to facilitate their trade. The FCA explains that suspicious trading by members of OCGs in products whose underlying securities are UK and internationally listed equities, forms a significant component of the overall volume of suspicious trading it observes in equity markets. The FCA reminds executing firms that they should be alert to the possibility of being used to facilitate insider dealing by members of OCGs. They should also be familiar with their obligations to counter the risk of being used to further financial crime under SYSC 6.1.1R. The FCA then lists measures executing firms may want to consider to guard against being used to facilitate insider dealing by OCGs including: (i) communicating to all clients, both existing and prospective, that the firm has a zero-tolerance approach to market abuse, has an open relationship with its regulator, submits STORs to the FCA, terminates accounts based on very low thresholds of suspicion, and liaises with other law enforcement agencies as appropriate; (ii) requesting all overseas broking firms that are clients to submit documentary evidence of adequate surveillance arrangements and a zero-tolerance approach to market abuse; and (iii) regarding trades placed before media reports of M&A as potentially suspicious, and submitting STORs where appropriate, even if no public confirmation of the matter described in the media reports is made.

Market Watch 77

Council of the EU publishes texts of political agreement on EMIR 3.0

On 14 February, the Council of the EU published the compromise texts (dated 13 February) for the following proposals: (i) a Regulation amending EMIR, the CRR and the MMF Regulation as regards measures to mitigate excessive exposures to third-country CCPs and improve the efficiency of EU clearing markets (EMIR 3.0); and (ii) a Directive amending the UCTIS Directive, CRD IV and the IFD as regards the treatment of concentration risk towards CCPs and the counterparty risk on centrally cleared derivative transactions (Amending Directive). In an accompanying ‘I’ item note (dated 13 February), the Council of the EU explains that the compromise texts reflect the provisional political agreement reached by the Council of the EU and the EP on 7 February. The provisional political agreement is subject to approval by the Council of the EU and the EP before going through the formal adoption procedure.

Compromise Text of EMIR 3

Compromise Text of Amending Directive 

‘I’ Item Note 

Updated Press Release

CPMI-IOSCO report on streamlining variation margin in centrally cleared markets

On 13 February, the Committee on Payments and Market Infrastructures (CPMI) and IOSCO published a joint report on examples of effective practices for streamlining variation margin (VM) in centrally cleared markets. The report sets out eight examples of effective practices for CCPs and their clearing members (CMs) regarding VM processes and transparency. The examples of effective practices include (i) scheduled and ad hoc intraday VM calls; (ii) the use of excess collateral held at CCPs to meet VM requirements; (iii) the pass-through of VM by CCPs; and (iv) CCP-CM and CM-client transparency regarding VM processes. These examples of effective practices are intended to inform CCPs as they design their VM call and collection processes in line with the PFMI and the CPMI-IOSCO 2017 guidance on the resilience of CCPs. The effective practices have been informed by the responses to three surveys issued by CPMI-IOSCO to CCPs, CMs and end user clients. They are not intended to create additional standards for FMIs, nor to provide guidance on existing standards. The CPMI-IOSCO findings do not represent an assessment of current CCP practices. The CPMI and IOSCO welcome feedback on the report and the deadline for comments is 14 April.

Report

ESMA statement on the deprioritisation of supervisory actions on the obligation to publish RTS 28 reports in light of agreement on MiFID II/MiFIR review 

On 13 February, ESMA published a public statement on the deprioritisation of supervisory actions on the obligation to publish RTS 28 reports in light of the agreement on the MiFID II/MiFIR review. ESMA expects NCAs not to prioritise supervisory actions towards investment firms relating to the periodic RTS 28 reporting obligation, from 13 February until the forthcoming transposition into national legislation in all Member States of the MiFID II review. Under the reviewed MiFID II/MiFIR framework, investment firms are no longer required to annually report detailed information on trading venues and execution quality through RTS 28 reports, and the statement will promote coordinated action by NCAs under MiFID II.

Public Statement 

Press Release 

Payment Services and Payment Systems

ECON adopts draft reports on proposed PSD3 and PSR

On 14 February, ECON announced that it had adopted draft reports on the EC’s legislative proposals for: (i) a Directive on payment services and electronic money services in the internal market (PSD3). ECON highlights proposed amendments to PSD3 relating to better access to cash, the ability of new types of payment services to enter the EU payment service sector and the authorisation process for undertakings intending to provide payment services or electronic money services; and (ii) a Regulation on payment services in the internal market (PSR). ECON highlights proposed amendments to the PSR relating to the security of transfers (including changes relating to unique identifiers and strong customer authentication, the security of personal data and disclosures concerning charges prior to the initiation of a payment transaction. The EP is expected to vote on both texts during the first plenary session in April, to close the first reading without agreement with the Council of the EU. Negotiations between the EP and the Council of the EU are then expected to start after the elections.

Press Release 

Prudential Regulation

EBA peer review follow-up report on prudential assessment of the acquisition of qualifying holdings

On 12 February, the EBA published a follow-up report to the EBA 2021 peer review report on the application of the Joint ESAs guidelines on the prudential assessment of the acquisition of qualifying holdings. The review assesses the adequacy and effectiveness of the actions undertaken by the competent authorities subject to the previous review and finds good progress in remedying the deficiencies identified in 2021. The follow-up report focuses on the 17 competent authorities assessed as having at least one supervisory benchmark which was not ‘fully applied’ in the 2021 report. All 17 competent authorities were found to have responded to the assessment of the initial peer review seriously and most have adopted measures to remedy the deficiencies identified. Improvements were identified in the areas of assessment of the financial soundness of proposed acquirers and of suspicions of money laundering/terrorist financing issues.

Peer Review Follow-up

Press Release 

Recovery and Resolution

SRB publishes SRM Vision 2028 strategy

On 13 February, the SRB published its SRM Vision 2028 strategy. The strategy marks a clear shift for the SRM, as it begins a new phase of work that takes into account the evolving risk landscape. The SRB and national resolution authorities (NRAs) are moving from the key elements of resolution planning and preparation to include a new focus on operationalisation, resolution testing and crisis readiness. This will ensure that each plan and preferred resolution strategy for each bank can be implemented and at short notice, making it even more crisis-ready and resilient. The strategy was developed over the past 12 months, with a total of seven different consultations, both internally as well as with NRAs and industry. The strategy covers three key areas: (i) core business; (ii) governance, organisation and tools; and (iii) human resources. It has nine strategic objectives with 20 actions to be implemented between now and the end of 2028. The specific activities and performance indicators will be included in the upcoming SRB’s Multi-Annual Plan.

SRM Vision 2028

Press Release 

ESMA publishes official translations of guidelines on CCP resolution and resolvability assessments

On 9 February, ESMA published the official translations of guidelines on the summary of resolution plans of CCPs and resolvability assessments under the CCPRRR: (i) guidelines on the assessment of resolvability, which establish a common set of aspects for resolution authorities to consider when applying the 26 matters provided in Section C to the Annex of CCPRRR during the conduct of resolvability assessments; and (ii) guidelines on the summary of resolution plans of CCPs, which provide clarity on the key elements of the resolution plan that should be included in the summary referred to in Article 12(7), point (a), of the CCPRRR and disclosed to the CCP in accordance with Article 12(8) of the CCPRRR. The guidelines will apply from 9 April, two months after their publication on ESMA's website in the official EU languages. Within two months of the date of publication on ESMA’s website, competent authorities are required to inform ESMA whether they comply, do not comply but intend to comply, or do not comply and do not intend to comply, with the guidelines.

Guidelines on the assessment of resolvability

Guidelines on the assessment of resolvability webpage

Guidelines on the summary of resolution plans

Guidelines on the summary of resolution plans webpage

Sustainable Finance

Council of the EU publishes text of political agreement on proposed ESG Rating Regulation 

On 14 February, the Council of the EU published the compromise text (dated 9 February) on the proposal for a Regulation on the transparency and integrity of ESG rating activities, and amending the SFDR.  

In the accompanying ‘I’ item note (dated 9 February), the Council of the EU explains that the compromise text reflects the provisional political agreement reached by the Council of the EU and the EP in February. The provisional political agreement is subject to approval by the Council of the EU and the EP before going through the formal adoption procedure.

Compromise Text of ESG Rating Regulation

‘I’ Item Note

Updated Press Release

Other Developments  

FCA survey for financial advisers about their delivery of ongoing services

On 15 February, the FCA announced that it has sent a survey to a number of financial adviser firms requesting information about their delivery of ongoing services, for which their clients continue to be charged after advice has been given. In the survey, the FCA asks firms if they have assessed their ongoing services in response to the introduction of the Consumer Duty, and whether they have made any changes as a result. The FCA has also asked for data on: (i) the number of clients due a review of the ongoing suitability of the advice as part of the service; (ii) how many clients received that review; and (iii) how many clients paid for ongoing advice but had their fee refunded as the suitability review did not happen. The FCA is collecting this information to assess what, if any, further regulatory work it may undertake in this area. It anticipates providing a further update after having considered the firms’ responses. The FCA notes that around 20 of the largest advice firms are receiving the survey so the widest possible understanding of market practice is achieved, but their selection is not based on any particular concerns with those firms. 

Statement 

FCA publishes financial promotions data for Q4 2023

On 14 February, the FCA published a new webpage on its financial promotions quarterly data for Q4 2023. The webpage gives a summary of data generated between 1 October 2023 and 31 December 2023 from the FCA’s actions against firms breaching financial promotion rules, and referrals and investigations into unregulated activity. It provides an overview of how the FCA is working to improve standards across the market so that consumers are provided with clear and fair financial promotions which are not misleading. Key messages include: (i) the FCA’s interventions in Q4 2023 resulted in 1,004 promotions being amended or withdrawn by authorised firms; (ii) the FCA issued 793 alerts on unauthorised firms and individuals, 6% of these were clone scams; (iii) on 8 October 2023, the FCA’s financial promotion rules for cryptoassets went live. These rules require financial promotions to be clear, fair, and not misleading, firms to display clear risk warnings, to disclose the firm’s regulated status and cease promoting any form of incentive to invest; and (iv) for crypto firms who successfully applied for a modification by consent, the customer journey financial promotion rules came into force on 8 January. The FCA is now conducting reviews to test the level of compliance with these rules, and will take action where it sees breaches, using its supervisory tools and potentially using enforcement action, where necessary.

Financial Promotions Q4 2023 Data  

FCA publishes financial promotions data for 2023

On 14 February, the FCA published a new webpage on its financial promotions data for 2023. The page sets out the FCA’s analysis and provides insights on the data, between 1 January to 31 December 2023, resulting from action taken against authorised firms breaching financial promotion rules and referrals and investigations into unregulated activity. In the analysis, the FCA highlights trends relating to: (i) ‘finfluencers’ - the FCA has seen an increase in the number of bloggers and influencers (finfluencers) on social media promoting financial products, particularly investment products, to younger age groups. It has also observed an ongoing trend in the number of bloggers promoting credit on behalf of unauthorised third parties, with a particular growth in financial promotions targeting students. The FCA explains that where it identifies an unlawful promotion, while it has no powers to require sites to be taken down, it will continue to request that the platform hosting the harmful content removes it; (ii) cost of living - with the continued rising cost of living, the FCA has been focusing its attention on unauthorised firms that appear to be looking to capitalise on the trend in consumers seeking debt advice, debt solutions and loans. This includes firms straying beyond the provision of information and lead generation into providing debt advice. The FCA notes that it has seen an increase in the use of TikTok and sponsored advertising to attract vulnerable consumers to engage in discussions on managing debt; and (iii) cryptoassets - following the FCA’s work since the entry into force of its cryptoasset financial promotion rules in October 2023, it remains concerned that regulated firms are not doing enough to meet their own obligations when providing support services, such as payment services, to crypto firms that are illegally promoting to UK consumers. The FCA is continuing to engage with these firms to remind them about their regulatory obligations and expects to have a renewed focus on this area in 2024.

Financial Promotions 2023 Data

Press Release 

LSB report on outcome of the review of the Standards of Lending Practice for business customers

On 13 February, the LSB published a report on the outcome of the review of its Standards of Lending Practice for business customers. In June 2023, the LSB published a consultation on the Standards seeking views on how changes in the regulatory, social and economic environment should be taken into account within the Standards, if the protections continue to reflect industry best practice, and whether the products covered by the Standards remain appropriate. The LSB explains that the feedback received indicated that the existing framework and content of the Standards continues to set appropriate levels of protections for business customers. This report provides a summary of the consultation responses received and sets out the LSB’s next steps across areas such as: (i) the ongoing monitoring of regulatory developments, and the output of the LSB’s oversight work, to ensure the business Standards continue to reflect wider regulatory requirements; (ii) the exploration of how the business Standards and/or supporting guidance can be updated to reflect the emergence and provision of sustainability linked lending, and support firms to deliver good customer outcomes in this space; and (iii) the development of guidance to support the application of the business Standards within the digital journey, as well as keeping a watching brief over the business lending landscape to inform the LSB’s view as to whether amendments may be required to reflect the range of business finance providers. The LSB intends to publish a timetable setting out how it will take forward and sequence these initiatives shortly.

Report

Webpage