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Key Regulatory Topics: Weekly Update 15-21 Sept 2023
Brexit
The Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2023
On 19 September, the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2023 were published. The Regulations extend by 12 months the transitional arrangements under Parts 2 and 3 of the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019 (SI 2019/589), which enable specified categories of Gibraltar-based firms to provide financial services in the UK and facilitate the access by similar types of UK-based firms to Gibraltar’s financial services market. Once the Gibraltar Authorisation Regime is implemented through secondary legislation that is currently being prepared by HMT, the temporary arrangements will be repealed.
Capital markets
Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2023 laid
On 19 September, the Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2023 was laid in Parliament. The draft Order provides for amendments to the UK Emissions Trading Scheme (ETS), including: (i) a cap on the aviation free allocation to 100% of verified emissions for 2024 and 2025; (ii) clarification that it is a regulated activity for an installation to capture carbon dioxide from other regulated activities carried out at that installation as well as at other installations and that an industrial installation that installs a capture plant is not disqualified from receiving free allocation; and (iii) amendment to the electricity generator definition to only consider electricity exports in the baseline period i.e. 2019-2023. The Order, if made prior to 1 January 2024, shall come into force on 1 January 2024, immediately after the Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2023 comes into force. If made after this date, it shall come into force on the following day.
Conduct and governance
ECB speech on how culture drives risk in banks and what supervisors can do about it
On 19 September, the ECB published a speech by Frank Elderson, ECB Vice-Chair of the Supervisory Board and Member of the Executive Board, on how culture drives risk in banks and what supervisors can do about it. Points of interest include: (i) Mr Elderson considers the renewed focus on behaviour and culture in supervision is a call for banking supervisors to view the complex financial ecosystem from multiple angles; (ii) when supervising behaviour and culture, the ECB looks at both the "hardware" of banks' governance (their policies, management body set-up and composition) and at the "software" (how people behave within the governance structures); (iii) in the ECB’s recent review of management body effectiveness, a culture of constructive challenge was often found lacking; (iv) one way in which the ECB assesses risk culture is to look at the “tone from the top”, as this plays a crucial role in establishing a culture of prudent risk-taking within the institution. The ECB looks at whether board members include the bank’s declared set of values and norms in their decision-making. Mr Elderson also notes that while it is for banks themselves to define their culture and values, it is the role of the supervisor to assess whether the culture they define is aligned with prudent risk-taking; (v) in response to a common criticism that prudential supervisors are overstepping their mandate in assessing culture and behaviour, Mr Elderson identifies various legal sources including the Basel Committee on Banking Supervision’s Corporate governance principles for banks and the CRD, in which it is enshrined; and (vi) the ECB is considering how culture and behavioural patterns can be further incorporated into its supervisory approach to governance. In Q4 2024, the ECB plans to publish a guide on governance and risk culture that will set out in detail its supervisory expectations on governance, risk management and risk culture and will include a set of good practices that it has observed across the industry.
Consumer/retail
Please see the FinTech section for the FCA’s final warning to cryptoasset firms marketing to UK consumers and those supporting them, in advance of them being brought within scope of the financial promotions regime on 8 October.
Council of the EU publishes text of CCD II
On 20 September, the Council of the EU published the text of the proposed directive on consumer credits (CCD II). The Council has stated that following the EP’s adoption at first reading on 12 September, it should be in a position to adopt the proposal. CCD II revises and replaces the current CCD. Once adopted the proposal shall be published in the OJ and will enter into force 20 days after publication. It will apply three years after its publication in the OJ. Member States shall have two years after its publication to adopt and publish laws, regulations and administrative provisions necessary to comply with CCD II.
Financial crime and sanctions
Please see the FinTech section for the FCA’s final warning to cryptoasset firms marketing to UK consumers and those supporting them, in advance of them being brought within scope of the financial promotions regime on 8 October.
HMT approves revised JMLSG guidance on cryptoasset travel rule
On 20 September, the JMLSG announced that it has received HMT approval of the latest revisions to Part II, Sector 22 (cryptoasset providers and custodian wallet providers) of its AML/CTF guidance for the financial services sector. The revisions relate to the implementation of the FATF travel rule for cryptoassets and include a new annex specifically focused on cryptoasset transfers.
Fintech
Please see the Financial Crime and Sanctions section for an announcement from the JMLSG that it has received HMT approval of the latest revisions to its AML/CTF guidance for the financial services sector relating to cryptoasset transfers and the travel rule.
FCA final warning for cryptoasset firms marketing to UK consumers and those supporting them
On 21 September, the FCA issued a final warning to cryptoasset firms marketing to UK consumers and those supporting them, in advance of them being brought within scope of the financial promotions regime on 8 October. The FCA is concerned by the poor engagement from many unregistered, overseas cryptoasset firms who have UK customers. Key points include: (i) the FCA shall take action against firms illegally promoting to UK consumers including, but not limited to, placing firms on the FCA Warning List and taking steps to remove or block any illegal financial promotions such as websites, social media accounts and apps. In certain cases, the FCA will consider enforcement action, which may include applying to a court for injunctions, seeking payment of compensation or, in the most serious cases, criminal prosecution; (ii) the FCA cautions that under section 30 of FSMA contracts entered into as a result of unlawful communications by them may be legally unenforceable against a UK consumer; (iii) intermediaries, including social media platforms, app stores and payment firms, are expected to play their part. The FCA reminds all businesses supporting unregistered cryptoasset firms that they should carefully consider their obligations under the Proceeds of Crime Act 2002 and the MLRs. Once in force, the Online Safety Bill will also place duties on search engines and social media companies to put in place systems and processes to mitigate the risks to users posed by the presence and dissemination of illegal content on their sites, including illegal financial promotions; (iv) the FCA expects authorised firms considering approving cryptoasset financial promotions to notify them before doing so, in line with Principle 11 (relations with regulators) and SUP 15; and (v) the FCA expects cryptoasset firms which cannot legally communicate financial promotions to UK consumers to have robust systems and procedures to prevent UK consumers accessing and responding to promotions they provide - for example, by geo-blocking UK consumers and including clear statements that their services are not available to people based in the UK.
Fund regulation
FCA update on end of temporary marketing permission regime
On 19 September, the FCA announced that it will be contacting fund operators in the coming months with respect to landing slots for exiting the temporary marketing permissions regime (TMPR). It notes that the process is still under review, but to avoid any delays in future communications operators of UCITS in the TMPR should ensure that the FCA holds the correct contact email address, as this will be used to contact them with details of the process and landing slot. If funds registered under the TMPR are no longer marketing in the UK, they should be removed via the Form TMPR CH.
Markets and markets infrastructure
FSB consults on toolbox of financial resources and tools for the resolution of CCPs
On 19 September, the FSB published a consultation report on the financial resources and tools for CCP resolution. The report presents the outcome of the FSB’s qualitative analysis of a set of financial resources and tools for resolution: (i) bail-in bonds; (ii) resolution funds; (iii) resolution-specific insurance; (iv) resolution-specific third-party contractual support; (v) resolution cash calls; (vi) statutory or contractual variation margin gains haircutting for resolution; and (vii) equity in a first-loss position. The analysis finds that resolution authorities may benefit from having access to a combination of complementary resources and tools to achieve a successful CCP resolution. This is because resources and tools have different strengths and weaknesses. They are also likely to have different effects on financial stability. The report sets out a proposal for a toolbox approach as a global standard for CCP financial resources and tools for resolution. In this approach, home resolution authorities for systemically important CCPs should have access to a set of readily available resolution-specific resources and tools to support resolution, in addition to the use of available recovery resources and tools. Jurisdictions should disclose their approach to calibrating one or more of the resolution-specific resources in the resolution toolbox. The FSB will monitor implementation for CCPs that are systemically important in more than one jurisdiction (SI>1 CCPs) through the FSB’s annual Resolvability Assessment Process and Crisis Management Group monitoring. The findings will be published in the FSB’s annual resolution report. The deadline for comments is 20 November.
EC guidelines on application of NIS 2 Directive to financial services entities within scope of DORA
On 18 September, an EC communication setting out guidelines was published in the OJ, which clarify how the NIS 2 Directive applies to financial services entities which are also subject to DORA. The NIS 2 Directive provides that where sector-specific EU legislation requires essential or important entities to adopt cybersecurity risk-management measures or to notify significant incidents that are at least equivalent to their NIS 2 obligations, then NIS 2 shall not apply. The areas where DORA displaces the application of NIS 2 are: (i) information and communication technology (ICT) risk management (Article 6); (ii) management of ICT-related incidents, especially major ICT-related incident reporting (Article 17); (iii) digital operational resilience testing (Article 24); (iv) information-sharing arrangements (Article 25); and (v) ICT third-party risk (Article 28).
Payment services and payment systems
FCA initial findings on payment accounts access and closures
On 19 September, the FCA published a report setting out its initial findings on payment account access and closures. The information supplied by banks, building societies and payment companies suggests that no firm closed an account between July 2022 and June 2023 primarily because of a customer’s political views. By far the most common reasons providers gave for closing, suspending or declining an account was because it was inactive/dormant, or because there were concerns about financial crime. In its review, the FCA noted that unlike other jurisdictions there is no right to an account in the UK, and some protections, for example the anti-discrimination measures in the Payment Accounts Regulations, do not apply to businesses, charities, political parties and civil society organisations. The FCA’s further work will include: (i) follow up to provide assurance of the accuracy of the reported data, concentrating particularly on outlier firms; (ii) additional supervisory work to be sure of firms’ conclusions on accounts closed for political reasons and closer analysis of accounts closed for reasons of reputational risk; (iii) further review of declined applications for and terminations of basic bank accounts; and (iv) further research into the reasons why 1.1m people in the UK are unbanked and the characteristics of this population. In a letter sent to the Government on its findings, the FCA sets out a number of areas the Government may wish to consider, including: (a) greater checks by Companies House to support the fight against fraud; (b) the development of a strategic approach to digital identity to aid financial inclusion and lessen financial crime risk; and (c) consideration, as part of the passage of the Online Safety Bill, of whether the cost of compensating for consumer losses due to fraud is being appropriately shared.
Prudential regulation
PRA conference on new competitiveness and growth objective
On 19 September, the PRA published a speech by Victoria Saporta, PRA Executive Director, Prudential Policy, on its new secondary growth and competitiveness objective and the results of its related pilot survey. Ms Saporta considers that in a PRA context, the new objective is about harnessing the UK’s strengths as a global financial centre by strengthening three foundations: (i) maintaining trust in the PRA and the UK prudential framework – approximately 90% of respondents to the survey agreed that the PRA’s regulatory framework fosters trust in regulated firms and that the PRA provides a stable and predictable regulatory environment; (ii) adopting effective regulatory processes and engagement – approximately 50% of respondents agreed that the PRA’s framework makes the UK an attractive place to set up operations and that rules are accessible and user-friendly. Ms Saporta highlights two areas where the PRA can improve: its operational efficiency, particularly the speed of authorisations; and on the accessibility of the rulebook. The PRA is using the ongoing transfer of provisions previously in EU legislation to the PRA rulebook as an opportunity to streamline its materials and adopt a coherent approach to the structure and language used; and (iii) adopting a responsive approach to UK risks and opportunities – 50% of respondents agreed that the PRA is responsive to new market developments and innovation. The PRA will pilot a roundtable focussed specifically on innovation in regulation to take place in Q1 2024. The PRA also published two related working papers: (a) how to measure the contribution of prudential regulation to competitiveness and growth - sets out PRA staff’s initial perspectives on the design of a set of quantitative information which can be used to show the PRA's progress against the new objective; and (b) the links between prudential regulation, competitiveness and growth - sets out PRA staff’s current thinking around the interpretation of the new objective, supported by a literature review and PRA staff’s own empirical evidence.
Working paper – interpretation
Sustainable finance
Please see the Capital Markets section for an update on the Draft Greenhouse Gas Emissions Trading Scheme (Amendment) (No 2) Order 2023.
GFANZ consults on transition finance strategies and measuring the impact on emissions
On 19 September, the Glasgow Financial Alliance for Net Zero (GFANZ) Secretariat began consulting on its work to further refine the definitions of its transition finance strategies and support financial institutions to forecast the impact of these strategies on reducing emissions. The consultation seeks feedback on a principles-based approach to segment portfolios by GFANZ’s key strategies and highlights potential approaches to estimate associated decarbonisation contribution impact, drawing on existing methodologies and concepts. The principles outlined in the consultation are designed to be voluntary, pan-sector and globally applicable. To provide further clarity around transition finance activities, GFANZ proposes emerging technical approaches for measuring the decarbonisation contribution of transition finance activities. It also introduces the concept of Expected Emissions Reductions. This concept is applicable across GFANZ’s key financing strategies but employs distinct approaches for each, allowing financial institutions to quantify the “emissions return” of their transition finance activities more effectively. The deadline for comments is 2 November. The final report will be published by COP28.
Final TNFD recommendations on nature related risk management and disclosure
On 19 September, the Taskforce on Nature-related Financial Disclosures (TNFD) finalised its recommendations for nature-related risk management and disclosure. The recommendations build on those of the Task Force on Climate-related Financial Disclosures and are consistent with the global sustainability standards of the International Sustainability Standards Board and the impact materiality approach used by the Global Reporting Initiative and incorporated into the new European Sustainability Reporting Standards. This provides reporting organisations with a set of nature-related guidance that enables their reporting requirements across jurisdictions with the different approaches to materiality now in use. The TNFD will now encourage and support voluntary market adoption of the recommendations. The TNFD will track voluntary market adoption on an annual basis through an annual status update report beginning in 2024. An accompanying package of eight guidance papers has also been released to help market participants get started with integrated assessment and corporate reporting related to nature.
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