Key Regulatory Topics: Weekly Update 19 - 25 August 2022
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As we near the end of the summer period, it has been another quiet week from the regulators. The FCA published a Dear CEO letter warning buy now pay later firms about misleading adverts, and also announced that it is establishing a new ESG Advisory Committee. In Europe, ESMA published its response to the European Commission’s consultation on the regime applicable to the use of benchmarks administered in a third country.
Consumer/retail
FCA Dear CEO letter warns BNPL firms about misleading adverts
On 19 August, the FCA sent a Dear CEO letter to authorised and unauthorised firms requesting that they review any financial promotions used to sell unregulated/exempt Buy Now Pay Later (BNPL) products, to ensure that they are compliant with the FCA’s regulatory requirements. The letter reminds those who communicate and approve financial promotions of these agreements that they must still ensure that the promotion complies with the requirements of Chapter 3 of the Consumer Credit sourcebook (CONC).This includes that BNPL financial promotions must be clear, fair and not misleading. The FCA is concerned as it has found financial adverts on websites and social media, which may be in breach of FCA rules, by emphasising the benefits of BNPL products without fair and prominent warnings of any risks to customers. The FCA confirms it will use criminal and regulatory enforcement powers if it sees promotions that do not comply.
Financial crime
Wolfsberg Group request for information best practice guidance
On 23 August, the Wolfsberg Group published best practice guidance on requests for information (RFI) as used in the AML transaction monitoring process. An RFI is used when a correspondent (or any other provider of payment services) is seeking to understand the background of a transaction that has been processed through an account or relationship in its books and is directed at the customer entity that sent the payment instruction to the correspondent – this is seen in correspondent banking and other payment relationships where a bank is acting as an intermediary. The guidance aims to: (i) improve the awareness about the value that RFIs provide in a correspondent banking relationship; (ii) present best practice guidance for both issuing and respondent institutions; and (iii) increase financial institutions’ understanding of how RFIs should be handled, what types of questions are being asked, the purpose of the question, the role of RFIs in mitigating financial crime risks, and the benefits of effective RFIs and responses.
Fintech
FCA launches Diversity, Equity and Inclusion Innovation Spotlight
On 24 August, the FCA launched a Diversity, Equity and Inclusion (DEI) Spotlight initiative encouraging firms developing innovative products focused in the DEI space to work with its Innovation services. The FCA explains that industry data indicates there is a lack of diversity in Fintech firms, and research has also shown a significant correlation between firms with a diverse team and overall innovation. The FCA is asking for firms wanting to launch an innovative product or service that focuses on fair treatment of consumers, vulnerability, and the new Consumer Duty, to work with its Innovation services: via the regulatory sandbox and innovation pathways initiatives. The FCA hopes to promote diverse and inclusive culture, governance and practices across the Fintech industry.
Markets and markets infrastructure
Please see the ‘Prudential Regulation’ section for the Corrigendum to Commission Delegated Regulation (EU) 2022/1159 supplementing the IFR with regard to RTS for public disclosure of investment policy by investment firms.
BoE policy statement on DCO modifications to reflect USD interest rate benchmark reform
On 24 August, the BoE set out its final policy on the proposal to add overnight index swaps (OIS) that reference the Secured Overnight Funding Rate (SOFR) to the scope of contracts subject to the derivatives clearing obligation (DCO) under UK EMIR, and to remove contracts referencing USD LIBOR. The BoE’s final policy maintains the proposals in the June consultation paper to: (i) add SOFR OIS contracts with an original maturity between 7 days and 50 years to the DCO from 31 October, and to subsequently remove contracts referencing USD LIBOR; and (ii) align the date on which USD LIBOR contracts will be removed from the DCO with CCPs contractual conversions of those contracts. Contracts referencing USD LIBOR will be removed from the DCO on 24 April 2023. The Appendix to the policy statement contains the Bank Standards Instrument: The Technical Standards (Clearing Obligation) Instrument 2022, which amends the onshored version of Commission Delegated Regulation (EU) 2015/2205, which supplements EMIR with regard to RTS on the clearing obligation (BTS 2015/2205). This is the last of the planned amendments to the DCO in the light of the transition to RFRs. The BoE will continue to keep the wider DCO under review.
Technical Standards Instrument
ESMA response to EC consultation on BMR review
On 19 August, ESMA published its response to the EC’s consultation on the regime applicable to the use of benchmarks administered in a third country (TC). Key points highlighted by ESMA include: (i) the restrictions on the use of TC benchmarks should be removed following a risk-based approach while ensuring a level playing field between EU and TC administrators; (ii) the proposal to create a new category of ‘strategic’ benchmarks is supported by ESMA. This category would be the only category of benchmarks subject to mandatory restrictions of use, similar to the current rules; and (iii) the introduction of an EU ESG benchmark label would be an extra supporting tool against greenwashing; and (iv) ESMA emphasises that while the BMR covers a wide range of benchmarks used in the EU, so far very few jurisdictions have followed a similar regulatory approach regarding the provision and use of benchmarks. Therefore, the wide scope of the BMR would lead to the undesirable outcome of limited availability of TC benchmarks to EU investors as opposed to their non-EU peers. The EC is required to complete its review and submit a report to the EP and the Council by 15 June 2023.
Prudential regulation
Corrigendum to IFR Delegated Regulation on public disclosure of investment policy by investment firms
On 25 August, Corrigendum to Commission Delegated Regulation (EU) 2022/1159 supplementing the IFR with regard to RTS for public disclosure of investment policy by investment firms was published in the OJ. The Corrigendum inserts two tables in Annex I of the Delegated Regulation related to voting behaviour in general meetings.
Sustainable finance
FCA establishing ESG advisory committee
On 23 August, the FCA announced that it is establishing a new ESG Advisory Committee to its Board, and is looking for expressions of interest from stakeholders to join. The Committee’s role will be to provide advice to the Board on: (i) how it executes oversight of ESG issues relevant to the FCA both as a regulator and its own operations; (ii) relevant emerging ESG topics or issues; and (iii) how the FCA should develop its ESG Strategy, in keeping with the organisation’s statutory objectives and regulatory principles. The Committee’s membership will include a small number of external experts who have in depth knowledge of ESG issues in the financial sector. Members will be appointed by the Board in a personal capacity, and will need to abide by a conflict of interest policy. The FCA does not expect people currently employed by FCA regulated firms to be appointable to the Committee. Those interested should contact the Committee by 16 September. The FCA expects the Committee to meet for the first time in Q4 2022, and quarterly from then onwards.