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Key Regulatory Topics: Weekly Update - 9 February 2018 - 15 February 2018

22 February 2018

Allen & Overy publish weekly updates on key regulatory topics affecting the financial services sector. If you would like to receive this update by email please contact


Please see our eAlert: Impact of Brexit on EU product stewardship legislation

Insurance Europe publishes papers on avoiding Brexit cliff-edge risks

On 9 February, Insurance Europe published a paper calling for an agreement between the UK and the EU on the transitional arrangements that should apply following the UK's withdrawal from the EU. Insurance Europe argues that these arrangements should allow insurers sufficient time to adapt their contingency plans and to reorganise their business ahead of the new regulatory framework. It warns that there may not be enough time before 29 March 2019 for insurers to complete essential contingency planning in a number of areas: (i) structural changes; (ii) transferring portfolios of insurance contracts; (iii) product-specific considerations; and (iv) data flows. Insurance Europe warns of the adverse effects for consumers if transfers of personal data between the UK and the EU are not permitted after Brexit. On the issue of flows of personal data, Insurance Europe has also published a paper calling for the EC and the UK to recognise each other's data protection frameworks as adequate, to allow free flows of personal data between the EU and the UK. It suggests that this should be done through the EC adopting an adequacy decision under the GDPR in respect of the UK and the UK recognising the EU's data protection framework as an adequate basis for personal data transfers from the UK to the EU. Insurance Europe calls on the EC and the UK to launch their respective adequacy assessment processes as quickly as possible. It states that, if these adequacy decisions are not feasible on the date of the UK's withdrawal, there should be an interim solution allowing the continuity of personal data transfers until the EC and the UK adopt the adequacy decisions.

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Please see pure eAlert: South Africa: South African OTC Regulation is here

ESMA launches interactive single rulebook

On 14 February, ESMA launched a new interactive single rulebook to help facilitate the consistent application of the EU single rulebook in the securities markets area. In a related press release, ESMA explains that this new interactive tool will provide market participants and other interested stakeholders with a comprehensive overview of and easy access to all level 2 and level 3 measures adopted in relation to a level 1 text. This includes all relevant delegated and implementing acts adopted by the EC (including RTS and ITS developed by ESMA and endorsed by the EC), as well as guidelines, opinions and Q&As issued by ESMA. The interactive single rulebook is described as a "documentation tool" and users are reminded that they should refer to the OJ for the authentic version of EU legislation.

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Retail OTC leveraged products – IOSCO consultation

On 13 February, IOSCO published a consultation paper on retail OTC leveraged products (CR01/2018). The consultation focuses on the offer and sale by intermediaries of retail OTC leveraged products such as rolling spot forex contracts, contracts for difference and binary options. Chapter 3 sets out a regulatory "toolkit" of policy measures for IOSCO members to consider in their regulation of firms. The measures are designed to help reduce the risks to investors in these products, improve the practices of firms that sell them, improve the likelihood that the products are sold to an appropriate target market, and reduce the likelihood that these products are sold illegally by unlicensed firms. The measures include: (i) a requirement for all firms that sell OTC leveraged products to retail investors to be licensed; (ii) leverage limits and minimum margin requirements; (iii) prescribed disclosures of costs, charges and risks (including profit and loss ratios), and order execution; and (iv) restrictions on some forms of marketing. The deadline for comments is 27 March. IOSCO will consider any comments received and prepare a final report, which will also incorporate material on investor education, and enforcement approaches and practices.

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Social impact investing – FCA and FOS letters on growing culture of social impact investing in UK

On 13 February, the Department for Digital, Culture, Media and Sport published letters from Andrew Bailey, FCA Chief Executive (dated 7 January), and Caroline Wayman, Chief Ombudsman and FOS Chief Executive (dated 7 December 2017), on growing a culture of social impact investing in the UK. The letters are in response to a report, published in November 2017, by an independent advisory group on growing a culture of social impact investing in the UK.

FCA letter

FOS letter


Sustainable finance – ECON draft report

On 13 February, ECON published its draft report (dated 2 February) on sustainable finance (PE618.012v01-00). In the explanatory statement to the report, the rapporteur, Molly Scott Cato, welcomes the final report of the EC’s High-Level Expert Group on Sustainable Finance, which was published on 31 January. The report contains a motion for a EP Resolution on sustainable finance, which includes recommendations, such as: (i) a uniform standard for green bonds, which should include periodic reporting on the environmental impacts of the underlying assets; (ii) clear EU standards and supervision regarding the integration of ESG governance factors in ratings for all CRAs operating in the EU; and (iii) the ESAs should develop guidelines for model contracts between investors and asset managers, including the identification and integration of ESG risks on behalf of the asset manager. The next step is for ECON to vote to finalise the draft report, before it is considered by the EP in plenary.

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EMIR – FCA updates webpage on equivalence and intragroup exemptions

On 12 February, the FCA updated its EMIR webpage with information about the October 2017 EC equivalence decision for derivative transactions in the US. The webpage explains that the EC has confirmed to the FCA that the equivalence decision does include intragroup exemptions under Article 11(8) and 11(9) of EMIR. This means that any temporary intragroup exemptions that the FCA granted for trades between UK and US firms expire on 2 March. However, the October 2017 equivalence decision allows firms to apply for exemptions with no expiry date. The FCA has decided to adopt a streamlined process for firms that want to apply for these new exemptions. UK firms that benefit from the derogation with US group entities covered by the equivalence decision must: (i) notify the FCA by email of the entity pairs to which the equivalence decision applies; and (ii) confirm whether there have been any other changes to the conditions under which the original intragroup derogation was granted.

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CCPs – BoE consultation on incident reporting by CCPs

On 9 February, the BoE published a consultation paper on a new rule for CCPs relating to incident reporting. The BoE currently has a supervisory expectation that CCPs will promptly notify it of any operational incidents as soon as reasonably practicable, including any incidents that affect the security of their IT systems. The BoE intends to introduce a new rule (RCH 4) that will formalise some aspects of its current expectations. Under the proposed rule, a CCP will be required to: (i) report an "incident" to the BoE as soon as reasonably practicable after it becomes aware of the incident; and (ii) provide information that will allow the BoE to determine any impact of the incident, such as the financial, operational or legal implications. The CCP should provide this information either concurrently or as soon as reasonably practicable after notifying the BoE about the incident. The deadline for comments is 3 April. The BoE intends to bring the rule into effect by 9 May.

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Please see the FinTech section for an update on the ESAs joint warning on the risks of buying and holding virtual currencies.

Lending practices – LSB review of Standards of Lending Practice for personal customers

On 12 February, the LSB announced a review of the Standards of Lending Practice for personal customers. The LSB explains that it is seeking input from registered firms, industry bodies, consumer and debt bodies and other relevant parties to help it consider whether further updates to the standards are required. This process is intended to be an opportunity to take a fresh look at the standards, rather than a wholesale review. The LSB notes the work that is being undertaken within the personal lending sector, including in relation to vulnerability and financial inclusion, and the challenge posed by FinTech to the way firms engage with their customers. The LSB welcomes any feedback that parties might wish to provide on: (i) how the standards could encompass the digital journey further; (ii) how the LSB could seek to capture good practice in relation to financial inclusion; and (iii) whether there are any wider industry themes that the standards could explore further. The deadline for comments is 30 March.

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Please see our eAlert: Luxembourg: Implementation of the fourth AML directive in Luxembourg: what will be the new obligations?

New House of Commons Briefing Paper on the Sanctions and Anti-Money Laundering Bill

On 15 February, the HoC Library published a Briefing Paper on the Sanctions and Anti-Money Laundering Bill 2017-19, a Bill which has proved more contentious than expected. The 84-page Briefing Paper contains a good summary of the amendments made to the Bill to date. On 20 February, the Bill will be debated in the HoC for the first time.

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Please see the Insurance section for an update on the IAIS’s draft application paper on use of digital technology in inclusive insurance.

Global sandbox – FCA new webpage seeking views on global sandbox

On 14 February, the FCA published a new webpage regarding a global sandbox. The webpage explains that the FCA's current sandbox only allows firms to conduct tests in the UK. However, the FCA acknowledges that many aspects of financial markets and FinTech are global, and that firms value being able to work with multiple regulators to conduct tests in more than one jurisdiction. It is therefore seeking views on the creation of a global sandbox. Interested parties are asked to complete a set of questions about the global sandbox. The deadline for responses is 2 March. The FCA will provide a further update in March.

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ESAs joint warning to consumers on virtual currency risks

On 12 February, the ESAs published a joint warning to consumers relating to the high risks of buying, or holding, virtual currencies. The warning explains that the virtual currencies currently available are a digital representation of value that is not issued or guaranteed by a central bank or public authority, and do not have the legal status of currency or money. Most virtual currencies leverage on distributed ledger technology, which is also commonly referred to as blockchain. In particular, ESAs warn consumers that: (i) most virtual currencies are subject to extreme price volatility and have shown clear signs of a pricing bubble; (ii) despite EU AML requirements that will enter into force later in 2018 and will be applicable to wallet providers and virtual currencies exchange platforms, virtual currencies remain unregulated under EU law; (iii) the price formation of virtual currencies is often not transparent - there is therefore a high risk that consumers will not receive a fair and accurate price when buying or selling virtual currencies; and (iv) the information made available to consumers wishing to buy virtual currencies is in most cases incomplete, difficult to understand, does not properly disclose the risks of virtual currencies and may therefore be misleading.

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Please see our eAlert: Revised prudential framework for investment firms

Please see the Capital Markets and Market Infrastructure section for updates on sustainable finance and social impact investing.

Investment fund – ESRB recommendation on leverage and liquidity

On 14 February, the ESRB published a recommendation (dated 7 December 2017) on liquidity and leverage risks in investment funds (ESRB/2017/6). The ESRB raises concerns that increased financial intermediation by investment funds may result in the amplification of any future financial crisis. This is because mismatches between the liquidity of funds' assets and their redemption profiles may result in "fire sales" in order to meet redemption requests in times of market stress. Such sales could adversely affect other financial market participants that own the same or correlated assets. The document is addressed to ESMA and the EC and includes the following specific recommendations: (i) the EC should develop legislation that sets out a legal framework governing liquidity management tools in the design of investment funds; (ii) the EC should develop legislation that includes measures to limit the extent to which the use of liquidity transformation in open-ended AIFs can contribute to the build-up of systemic risks or the risk of disorderly markets; (iii) ESMA should develop guidance for managers of AIFs and UCITS for the stress testing of liquidity risk for individual funds; (iv) the EC should develop legislation that requires reporting of UCITS liquidity risk and leverage data to national competent authorities; and (v) ESMA should provide guidance on Article 25 of AIFMD, including guidance on the framework to assess the extent to which use of leverage within the AIF sector contributes to systemic risk, and on macro-prudential leverage limits. Annex 1 to the recommendation contains compliance criteria for the recommendation, and Annex 2 contains the economic assessment. Section 2.3 of the recommendation contains a timeline, with suggested dates in 2019 and 2020.

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Please see the Brexit section for an update on Insurance Europe’s recent papers in relation to Brexit.

IAIS consults on draft application paper on use of digital technology in inclusive insurance

On 15 February, the IAIS published for consultation a draft application paper (dated 29 January) on the use of digital technology in inclusive insurance. The draft paper seeks to provide guidance to supervisors, regulators and policymakers when considering, designing and implementing regulations and supervisory practices on the use of digital technology in inclusive insurance. The draft paper also examines relevant aspects of FinTech and InsurTech. The paper is structured in three main sections, which: (i) set out the typical inclusive insurance market and the profile of the typical inclusive insurance customer, to illustrate the environment within which supervisors are operating (section 2); (ii) describe the use and implications of digital technology within inclusive insurance markets, to portray the context within which the IAIS ICPs should be proportionately applied (section 3); and (iii) provide application guidance on the relevant ICPs regarding the use of digital technology in inclusive insurance, including examples of observed practices (section 4). The consultation webpage states that the deadline for comments on the draft paper is 16 March.

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ECON report on proposal to delay IDD application date to 1 October

On 15 February, the ECON published a report (dated 8 February) on the proposed Directive postponing the application date of the IDD to 1 October. The report, which was adopted by ECON on 8 February, contains a draft Parliament legislative resolution, the text of which sets out ECON's suggested amendments to the proposed Directive. Among other things, the amendments provide that: (i) member states shall adopt and publish the measures necessary to comply with the IDD by 1 July; (ii) member states shall apply these measures from 1 October at the latest; and (iii) the proposed Directive shall apply retroactively from 23 February. An ECON amendment to the recitals of the proposed Directive suggests that this is necessary to ensure legal certainty and avoid potential market disruption. The EU Council agrees to delay application date of IDD.

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Solvency II – EIOPA’s decision on annual market and credit risk modelling comparative study

On 12 February, EIOPA published a decision of its board of supervisors on the annual market and credit risk modelling comparative study (EIOPA-BoS-18/062). The decision aims to ensure the consistent and regular collection of information to allow the performance of annual comparative studies on the modelling of market and credit risks by insurance and reinsurance undertakings, in co-ordination with EIOPA. Among other things, the decision provides that: (i) the competent authorities, following consultation with EIOPA, may have discretion to determine whether an undertaking's euro denominated assets represent a significant exposure and to determine the scope of the study by extending or limiting the scope of the default data request; and (ii) the comprehensive set of realistic asset portfolios shall reflect typical asset risk profiles of European insurance undertakings. The study shall explore the causes for the presumed variability of outcomes by analysing additional information such as individual risk charges. The decision entered into force on 13 February (the day following its adoption).

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FCA responses to AFM questions on impact of IDD

On 9 February, the Association of Financial Mutuals (AFM) published a document containing the FCA's responses to questions on IDD and the impact on its members. The document includes the following items of interest: (i) there is no guarantee yet that there will be a delay in the implementation of the IDD - until the EC finalises this change, the FCA expects firms to continue to work to the implementation date of 23 February; (ii) if a firm issues an IPID or PID, the FCA would consider a waiver application requesting continued use of the key facts logo in other literature such as brochures, assuming stocks are run down in a few months; (iii) the FCA is not planning any further changes to disclosure requirements for pure protection products; and (iv) answers to specific questions from cash plan providers, including on remuneration disclosure, continuing professional development and the format, content and timing of the IPID.

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PRA publishes consultation paper on algorithmic trading

On 12 February, the PRA published a consultation paper on algorithmic trading (CP5/18). CP5/18 is relevant to firms that engage in algorithmic trading and that are subject to the rules in the Algorithmic Trading Part of the PRA Rulebook and EC Delegated Regulation (EU) 2017/589 supplementing MiFID II with regard to RTS specifying the organisational requirements of investment firms engaged in algorithmic trading. The consultation sets out, at Appendix 1, a draft supervisory statement on algorithmic trading. The draft supervisory statement will apply to all algorithmic trading activities of a firm, including in respect of unregulated financial instruments such as spot FX. The supervisory statement sets out the PRA's expectations of firms' governance and risk management and covers: (i) governance; (ii) algorithmic approval process; (iii) testing and deployment; (iv) inventories and documentation; and (v) risk management and other system and controls function. For non-EEA firms operating in the UK through a branch, the PRA will continue to follow the supervisory approach set out in its supervisory statement on supervising international banks (SS10/14). The deadline for comments to CP5/18 is 7 May. The draft supervisory statement is due to apply from 30 June. The PRA expects to complement the supervisory statement with future work, and where necessary policy proposals, in areas such as operational resilience. A related webpage indicates that the PRA intends to publish a discussion paper on operational resilience in 2018.

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FCA publishes report on algorithmic trading

On 12 February, the FCA published a report on algorithmic trading compliance in wholesale markets. The report is relevant to all firms that develop or use algorithmic trading strategies. The FCA notes that, while automated technology brings benefits to investors, it can also amplify certain risks. Without appropriate systems and controls, the increased speed and complexity of financial markets can turn otherwise manageable errors into extreme events with potentially widespread implications. Therefore, algorithmic trading is an area of focus for the FCA and other regulators. To understand how key risks are managed by regulated firms, the FCA conducted a number of cross-firm reviews. These included a detailed assessment of the development and implementation procedures used by firms for algorithmic trading. The FCA reviewed the entire development, testing and deployment lifecycle and conducted interviews with front line staff and staff in the relevant control functions such as risk and compliance, as well as senior management. The report includes examples of good and poor practice observed during the FCA's reviews. The report highlights key requirements in MiFID II relating to algorithmic trading activity and identifies five key areas of focus: (i) defining algorithmic trading; (ii) developing and testing; (iii) risk controls; (iv) governance and oversight; and (v) market conduct. The FCA states that it will continue to assess whether firms have taken sufficient steps to reduce risks arising from algorithmic trading.

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ECB speech on European retail payments developments

On 15 February, the ECB published a speech by Yves Mersch, ECB executive board member, on European retail payments markets developments. In the speech, Mr Mersch calls on the payment industry to develop end-user solutions that will allow consumers and business to enjoy the benefits of instant payments in any payment situation, in addition to cash. Issues considered by Mr Mersch include: (i) instant payments - among other things, Mr Mersch notes that the TARGET instant payment settlement service is scheduled to go live in November 2018; (ii) point-of-sale-payments - Mr Mersch calls on the payment industry to develop instant point-of-sale solutions that provide merchants with immediate and final payment, with funds credited to their accounts with finality, like cash; (iii) E-commerce - the ERPB's work to reach agreement on the necessary technical, operational business elements to ensure the pan-European provision of innovative and competitive payment initiation services is expected to be concluded by June; and (iv) security - Mr Mersch notes that the RTS supplementing PSD2 on strong customer authentication and common and secure communication will probably not be applicable until September 2019 at the earliest.

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PSR makes specific direction on switching of facilities management providers

On 15 February, the PSR published specific direction 7 relating to Direct Debit Facilities Management: Switching Providers (dated January 2018). The PSR found that under the Bacs direct debit rules, if a Facilities Management (FM) client wishes to switch FM provider, the incumbent FM provider can increase the costs and disruption associated with switching by refusing its consent to use the bulk change process to assist a switch. This forces FM clients to contact all payers and ask each one to provide a new DD instruction. The PSR states that this process is slow, costly and likely to cause the most disruption to the incoming FM provider, the FM client and the FM client's payers. The PSR directs Bacs Payment Schemes Limited (BPSL) to provide a complete description of a solution to ensure that incumbent FM providers cannot prevent: (i) incoming FM providers from using the bulk change process to help an FM client wishing to switch to them from incumbent FM providers; (ii) FM providers becoming Bacs service users or wishing to switch to new FM providers, from using the bulk change process to help them switch away from the incumbent FM providers. The specific direction came into force on 30 January. The PSR has directed BPSL to propose a project plan and a timetable to the PSR for the solution within 20 working days of the direction's commencement date.

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Pension transfers and opt outs – FCA open letter to firms holding pension transfer and opt out permission

On 14 February, the FCA published an open letter (dated 16 January) from Megan Butler, FCA director of supervision: investment, wholesale and specialists, to firms that have permission to advise on pension transfers and opt-outs. The FCA is aware that firms offering a commoditised approach to pension transfer advice are more likely to give unsuitable advice or fail to recommend a suitable destination fund. By a commoditised approach, it means an approach that does not entail a complete analysis of a client's personal circumstances or needs, and may include some generic assumptions to arrive at a personal recommendation. As such, this is an area of on-going focus for the FCA. Consequently, the FCA has published several documents relevant to pension transfer advice and expects firms to consider these when assessing the way they provide pension transfer advice. Firms should also consider if any changes are required to their approach. Firms are also reminded of the relevant pension transfer rules in COBS 19.1 and the FCA's suitability rules in COBS 9. In addition, the FCA reminds firms of its handbook guidance, effective from 3 January 2018, on how firms can meet their regulatory obligations when dealing with insistent clients. Later in 2018, the FCA will collect data from all firms holding the pension transfer permission as it intends to assess practices across the entire market to build a national picture.

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Pension scams – UK Government response to DWP report

On 12 February, the UK government published its response to the HoC Work and Pensions Committee report: Protecting pensions against scams: priorities for the Financial Guidance and Claims Bill. In its response, the government confirmed it will support bringing forward a ban on cold calling and outlined the steps it will take to incorporate the Committee's recommendations.

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Please see the Funds section for an update on the ESRB’s recommendation on leverage and liquidity risk in investment funds.

CRD IV and CRR – EBA letter to EC on regulatory perimeter

On 12 February, the EBA published a letter (dated 9 February) from Andrea Enria, EBA Chairman, to Olivier Guersent, EC Director-General, DG FISMA, on regulatory perimeter issues under CRD IV and CRR. In his letter, Mr Enria sets out discussion points on the legislative proposals to amend the CRD IV and CRR (that is, CRD V and CRR II), which the EC published in November 2016. In particular, Mr Enria addresses two issues: (i) Article 9(2) of the CRD IV, which enables member states to exclude entities from the prohibition on taking deposits and other repayable funds from the public without a banking licence, is being applied inconsistently across member states - this is because of the lack of a common definition of the terms "deposit", "other repayable funds" and "public" in Article 9(1) of CRD IV and "credit institution" in Article 4(1) of CRR; and (ii) the EC’s proposed powers to make delegated acts under new Articles 2(5a) and 2(5b) of CRD IV (in place of the discretion for member states under Article 9(2)) do not take sufficient account of entities that fall within the scope of Article 9(2). Mr Enria suggests that a possible solution to the inconsistent application of Article 9(2) is for the EBA to monitor national practices relating to the application of CRD IV. This could include a specific monitoring role for the EBA, and an obligation on member states to report to the EBA when the discretion under Article 9(2) is relied on to exclude entities from the scope of CRD IV. The EBA could also be obliged to report the results of such monitoring to the EC and to prepare guidance on the scope of CRD IV and appropriate recommendations on legislative changes.

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FCA appointments – FCA and PRA appoint new FSCS Chair

On 13 February, the FCA announced that Marshall Bailey has been appointed by the FCA and PRA as the new FSCS Chair. Mr Bailey will replace the current FSCS Chair, Lawrence Churchill, on 1 April.

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Please see our eAlert: Singapore: Code of Corporate Governance to Be Amended



FOS consultation on changes to FEES rules for participants joining voluntary jurisdiction part way through year

On 14 February, the FOS published a consultation on changes to the FEES section of the FCA Handbook for participants joining the voluntary jurisdiction (VJ) part way through the year. The proposed changes aim to simplify the rules for calculating the levy and mean that participants joining in the first, second, third or fourth quarter of any financial year will pay 100%, 75%, 50% or 25% of the levy, respectively. The FOS believes this simplified formula will help prospective VJ participants to understand and assess the costs of joining the VJ and will be straightforward to administer. The deadline for comments is 1 March.

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Please see our legal and regulatory risks for the finance sector