Key Regulatory Topics: Weekly Update 2-8 June 2023
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Conduct and Governance
FMSB spotlight review and risk register on the 3 Lines Model
On 8 June, the Financial Markets Standards Board (FMSB) published a spotlight review and risk register on the 3 Lines Model. The review seeks to identify key risks and practical issues that arise in the design and implementation of risk frameworks and supporting infrastructure more generally, as well as the cultural context in which they operate. This is accompanied by a range of observations as to how firms may seek to mitigate such risks. The 3 Lines Model is a tool that assists in the analysis of risk infrastructure rather than being parallel to or a substitute to that construct. It can be thought of as a lens through which to examine whether checks and balances are working and if the inter-personal dynamics are sufficiently healthy for engendering trust and collaborative work that supports intended outcomes. Key messages from the review include: (i) it is important for all staff to understand the 3 Lines Model, how it works and how it is reflected in their own units as well as the organisation as a whole; (ii) high quality design of risk management frameworks, policies and procedures is undermined by poor culture; and (iii) care is needed on the introduction of split lines as it can dilute or fragment responsibility and raise issues around mandates, purpose, duplication and efficiency. The review also contains a Risk Register which lists hot spots to help firms consider how best to approach the problems.
BBRS 2022 annual report
On 6 June, the Business Banking Resolution Service (BBRS) published its annual report for the year ended 31 December 2022. The BBRS opened for case registrations in February 2021, and as of 31 December 2022, 56 settlements had been made between banks and businesses. More than £1 million of financial awards have been made to customers as a result of using the BBRS, however, when a dispute is resolved directly between the SME and bank the BBRS is not normally informed of the settlement figure, so the true amount of financial awards is likely to be greater. This figure includes financial settlements made following BBRS involvement but handled outside of its adjudicative scheme. BBRS’s CEO explains that case registrations remain lower than anticipated at the launch of the scheme, but the BBRS is continuing to do all it can to encourage eligible customers to come forward and register their complaints. Looking forward, the BBRS has an important year ahead, as the BBRS is currently funded to run until the end of 2023. The Board is currently in conversations about what will happen next for BBRS and its customers, and will communicate any changes to the service to ensure continuity in business banking resolution support for those that need it.
Council of the EU and EP provisional political agreement on financial services contracts concluded at a distance
On 6 June, the Council of the EU and the EP reached a provisional political agreement on the Directive concerning financial services contracts concluded at a distance. The agreed text simplifies existing legislation, increases consumer protection, and creates a level playing field for financial services concluded online, via telephone or through other forms of remote marketing. The main elements of the agreement are: (i) clarification of the scope of application and safety-net feature in the Directive, in particular for financial services that are excluded from other sectoral legislation or only partially covered by it; (ii) the improvement of the rules on information disclosure and modernisation of pre-contractual information obligations, to keep the possibility for EU Member States to impose stricter national rules in this area; (iii) where the trader uses online tools, such as robo-advice or chatbots, the consumer will have the right to request human intervention; (iv) the inclusion in the service provider’s interface of a ‘withdrawal function’ that has to be easily accessible, clearly visible and permanently available during the entire 14-day withdrawal period; and (v) the introduction of additional protection for consumers from dark patterns, requiring EU Member States to take measures to limit the use of dark pattern marketing techniques to influence consumer’s choices. The next step is for the provisional political agreement to be endorsed and formally adopted by both the EP and the Council of the EU. Once formally adopted and published in the OJ, the Directive will enter into force 20 days later. EU Member States will then have 24 months to transpose the Directive into national law and another six months to apply it.
FCA policy statement and final rules on banning referral fees for debt packagers
On 2 June, the FCA published a policy statement setting out its new rules banning debt packagers from receiving referral fees and summarising feedback to CP23/5. The FCA explains that it is banning debt packager firms from receiving remuneration from debt solution providers to remove a strong incentive for debt packagers to offer advice, which does not have regard to the best interests of the customer or is not appropriate to their individual circumstances. Appointed representatives, who act as debt packagers, will also be subject to the ban. The ban covers any commission, fee or any other financial consideration, received by a debt packager firm, directly or indirectly, from a debt solution provider in connection with the firm referring customers to a debt solution provider, or any other related services. The ban will not apply to not-for-profit debt advice firms or to regulated providers of debt solutions (including debt management plans) who have a different business model to debt packagers, as the FCA considers the conflict of interest from referral fees to be less acute in the case of such firms who provide debt solutions themselves. The FCA is also introducing new perimeter guidance. This will make it clear that referring customers to debt solution providers who only offer one solution could fall under the regulated activity of debt counselling. Persons who operate as lead generators for individual voluntary arrangement or protected trust deed providers must consider carefully if they are carrying out activities which require authorisation. Insolvency practitioners who act as lead generators should also consider if they need authorisation, as their exclusion from carrying out regulated activity may not apply in this situation. The rules apply with immediate effect to new entrants to the market, and to principals with respect to any appointed representatives carrying out debt packager activity who are appointed on or after 2 June. For existing debt packager firms, the new rules will come into force on 2 October.
Financial Crime and Sanctions
Trilogue agreement on proposed Directive to make searching financial records easier
On 6 June, the EP announced that it has reached a trilogue agreement with the Council of the EU on the proposed Directive amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the single access point. The proposed Directive aims to ensure more effective investigations into illicit finance by making it easier to retrieve data across borders from centralised bank registries. It mandates EU Member States to ensure that the information from centralised registries is available through a single access point to be developed and operated by the EC. The Directive is part of the EU’s fight against serious and organised crime, as the new rules will provide law enforcement authorities quick access to information on the accounts where criminals and terrorists keep or hide their funds or assets. It will harmonise the format in which banks and crypto companies send transaction records to the investigating authorities. Faster tracing of assets derived from crime will also allow more effective confiscation of criminal profits. Once officially adopted by both the EP and the Council of the EU, the legislation will be published in the OJ and enter into force.
Please see the Prudential Regulation section for the BCBS press release on the outcomes of its recent meeting, including its work on cryptoassets.
FCA policy statement on financial promotion rules for cryptoassets
On 8 June, the FCA published a policy statement on financial promotion rules for cryptoassets, and a guidance consultation on cryptoasset financial promotions. The policy statement summarises the feedback the FCA received to its CP22/2 on cryptoassets, and sets out its final policy position and the near final Handbook rules. As part of the new rules, those marketing cryptoassets to UK consumers will need to introduce a 24-hour cooling-off period for first time investors, and ‘refer a friend’ bonuses will be banned. Crypto firms will need to ensure that people have the appropriate knowledge and experience to invest in crypto, and those promoting crypto will also need to put in place clear risk warnings and ensure adverts are clear, fair and not misleading. All cryptoasset firms marketing to UK consumers, including firms based overseas, will need to comply with the UK financial promotions regime from 8 October. In addition, the FCA published a guidance consultation on cryptoasset financial promotions, which is seeking feedback in particular on proposals for guidance on how the FCA approaches, and how firms comply with, the requirement that cryptoasset financial promotions must be fair, clear and not misleading. The deadline for comments is 10 August. The FCA also published a research note on how consumers interact with the cryptoasset market.
Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 published
On 7 June, the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023, was published on legislation.gov.uk, along with an explanatory memorandum. The SI proposes to expand the scope of the financial promotion restriction in section 21 of FSMA, by amending the FPO, to include financial promotions in respect of certain cryptoassets. The instrument, and relevant FCA rules, will provide for the regulation of in-scope cryptoasset financial promotions. The SI aims to improve consumers’ understanding of the risks associated with cryptoasset investments and ensure that cryptoasset promotions are held to the same standards as for broader financial services. The SI will amend the FPO by creating a new controlled investment (defined as a “qualifying cryptoasset”), as well as amending relevant controlled activities to incorporate reference to qualifying cryptoassets. The SI will also apply and modify certain existing exemptions in the FPO to qualifying cryptoassets and create a temporary, limited exemption to the financial promotion restriction for cryptoasset businesses (which are not authorised persons) on the FCA’s AML register. For the purpose of enabling the FCA to make rules and to give guidance, the SI came into force on 8 June. For all other purposes, it comes into force on 8 October.
Council of EU publishes adopted texts of MiCA and recast revised WTR
On 2 June, the Council of the EU published two adopted texts, both dated 31 May. The first is the text of the Regulation on markets in crypto-assets, and amending Regulations (EU) 1093/2010 and (EU) 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (MiCA). The second text is the Regulation on information accompanying transfers of funds and certain crypto-assets and amending Directive (EU) 2015/849 (recast revised WTR). The Council of the EU adopted both texts on 16 May, following the EP’s adoption on 20 April. Both Regulations will enter into force on the twentieth day following their publication in the OJ.
ESMA publishes updated Q&As on DLT Pilot Regime Regulation
On 2 June, ESMA published an updated version of its Q&As on the implementation of the Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT Pilot Regime Regulation). ESMA has added new Q&As on the following topics: (i) DLT financial instruments; (ii) DLT market infrastructures; (iii) cash settlement; and (iv) exemptions from the CSDR. The Q&As were last updated in March.
Please see the Other Developments section for the FCA Quarterly Consultation paper No. 40.
ESMA follow-up report to peer review on guidelines on ETFs and other UCITS issues
On 6 June, ESMA published its follow-up report to the peer review on the guidelines on ETFs and other UCITS issues. The report found that NCAs have strengthened their supervisory practices, enhanced internal and external guidance, and performed supervisory work in the area of ETFs and other UCITS since 2018. However, ESMA notes that there are still concerns in relation to the level of costs for some UCITS using Efficient Portfolio Management (EPM) techniques. The report assessed if BaFin, EFSA, and the CSSF had improved their practices based on the 2018 peer review findings and recommendations. In addition, ESMA assessed the supervisory work carried out by the AMF, BaFin, CBoI, and CSSF in relation to the attribution of revenues and costs derived from securities lending activities by UCITS. Moving forward, NCAs are expected to continue monitoring the effective application of the guidelines and the effectiveness of the supervisory practices implemented, taking supervisory action when needed. Further work in the areas of costs, fees and revenues for EPM techniques and instruments could continue at EU level.
Markets and Markets Infrastructure
Please see the Other Developments section for the FCA Quarterly Consultation paper No. 40.
ESMA updates Q&As on SFTR data reporting
On 7 June, ESMA published an update to its Q&As on SFTR data reporting. ESMA has added a new Q&A on reporting of SFTs concluded by IORPs and pension funds. The Q&As were last updated in March.
AFME paper on MiFID II product governance and PRIIPs regimes: An approach for the Equity-Linked markets
On 6 June, AFME published a paper on an approach for the equity-linked (convertible and exchangeable bond) markets (i.e. syndicated cross border convertible and exchangeable bond issuance), to the MiFID II product governance and PRIIPs regimes, which came into effect on 1 January 2018. The paper focuses on transactions aimed at a professional or institutional investor base, and not those involving a retail element (whether inside or outside the EEA), which will require further consideration. AFME believes that while not exhaustive, the paper will be useful to the extent transaction parties wish to minimise deal/syndicate-level deliberations, to maximise execution efficiency and speed. While the paper focuses on relevant EU requirements, the AFME Working Group expects that compliance with the approaches set out in the paper should also meet relevant UK requirements.
Central Counterparties (Equivalence) (India) (Reserve Bank of India) Regulations 2023 published
On 6 June, the Central Counterparties (Equivalence) (India) (Reserve Bank of India) Regulations 2023, were published on legislation.gov.uk, along with an explanatory memorandum. The Regulations set out HMT’s equivalence determination in respect of the regulatory framework that applies to CCPs that are established in India and authorised by the Reserve Bank of India (RBI). The determination of equivalence conferred by the instrument will fulfil one of the conditions for specified CCPs authorised by the RBI to receive recognition from the BoE. Upon being recognised by the BoE, overseas CCPs are able to provide clearing services to UK clearing members and trading venues. The Regulations will come into force on 28 June.
ESMA letter to EC on transparency regime for single name-CDS and standardised OTC-derivatives under MiFIR
On 2 June, ESMA published a letter sent to the EC on the transparency regime for single name-CDS and standardised OTC-derivatives. ESMA explains that the events on single-name CDS markets at the end of March, revealed that the market remains opaque and, as a consequence, subject to a high degree of uncertainty and speculation as to the actual trading activity and its drivers. As such, ESMA remains convinced of the need to further improve the MiFIR requirements on trade transparency, notably on post-trade transparencies for OTC-derivatives. In the letter, ESMA urges co-legislators not to lose the opportunity of the ongoing MiFIR review to strengthen the transparency regime applicable to standardised OTC-derivatives and particularly the regime for single-name CDSs, by: (i) broadening the scope of instruments subject to the requirements; and (ii) providing for more real-time transparency and a streamlined deferral regime. Lastly, ESMA notes that given the single-name CDS market, as well as most OTC-derivatives markets, are global in nature, it is key to aim for a globally coordinated approach to ensure consistent rules and avoid gaps.
Official translations of ESMA guidelines on temporary restrictions for significant non-default event under EMIR
On 2 June, ESMA published the official translations of guidelines further specifying the circumstances for temporary restrictions in the case of a significant non-default event in accordance with Article 45a of EMIR. Article 45a of EMIR mandates ESMA to draft guidelines further specifying the circumstances in which the competent authority may require the CCP to refrain from undertaking any of the restricted actions referred to in Article 45a(1) of EMIR, for a period specified by the competent authority, that cannot exceed five years. The guidelines will apply from 2 August, two months after the publication of the official translations on ESMA’s website.
Payment Services and Payment Systems
PSR policy statement on fighting APP fraud: a new reimbursement requirement
On 7 June, the PSR published a policy statement on the new reimbursement requirement for APP fraud within the Faster Payments system. The new reimbursement requirement will require payment firms to reimburse all in-scope customers who fall victim to APP fraud in most cases, share the cost of reimbursing victims 50:50 between sending and receiving payment firms, and provide additional protections for vulnerable customers. The PSR explains that it is increasing protections within Faster Payments because currently the majority of APP fraud is enacted with a Faster Payment. The policy statement also sets out: (i) which customers are to be considered as being within scope of the requirement; (ii) how the cost of reimbursement will be shared between sending and receiving payment service providers (PSPs) in each case; (iii) the exceptions for when reimbursement does not have to be issued; and (iv) the time limit for PSPs to reimburse eligible cases. The new reimbursement requirement will come into force in 2024, and the PSR plans to consult on a specific start date alongside draft legal instruments in early Q3 2023. The PSR notes that it expects industry to start work now to implement the new reimbursement requirement.
JROC sets out work programme for next phase of open banking in UK
On 6 June, the Joint Regulatory Oversight Committee (JROC) set out its programme of work to take forward its recommendations for the next phase of open banking in the UK. The programme involves setting up dedicated workstreams to action the six key themes and priorities outlined in its recommendations published in April. To support this, the JROC has launched two new working groups: (i) the variable recurring payments (VRP) working group, which will develop a blueprint for the phased roll-out of non-sweeping VRP by the end of September; and (ii) the future entity working group, which will look at the transition from the OBIE to a future open banking entity, and will consider the design of the future entity, including its role, structure, and funding. It will also set out proposals around how the future entity can be implemented. The working group will report to the JROC by the end of September and the JROC will publish its views in an update towards the end of 2023. Both working groups will be established by the end of this month. In addition, the JROC has tasked the OBL to lead and coordinate workstreams on four of the other key themes.
Please see the Other Developments section for the FCA Quarterly Consultation paper No. 40.
IFD Implementing and Delegated Regulations published in OJ
On 8 June, three Regulations relating to the Investment Firms Directive (IFD) were published in the OJ. These include: (i) Delegated Regulation (EU) 2023/1117 supplementing the IFD with regard to RTS specifying requirements for the type and nature of the information to be exchanged by competent authorities of home and host Member States; (ii) Delegated Regulation (EU) 2023/1118 supplementing the IFD with regard to RTS specifying the conditions under which colleges of supervisors exercise their tasks; and (iii) Implementing Regulation (EU) 2023/1119 laying down ITS for the application of the IFD with regard to standard forms, templates and procedures for the information sharing between the competent authorities of home and host Member States. All three Regulations will enter into force 28 June, 20 days after their publication in the OJ.
BCBS discusses recent market developments, agrees to consult on Basel Core Principles, and advances work on cryptoassets
On 6 June, the Basel Committee on Banking Supervision (BCBS) announced the outcomes of its meeting to take stock of recent market developments and risks to the global banking system, and to discuss a range of policy and supervisory initiatives. During the meeting, the BCBS: (i) agreed to continue to examine the supervisory and regulatory implications stemming from the recent banking turmoil, building on existing initiatives already underway, including working on strengthening the effectiveness of supervision, liquidity risk management and interest rate risk in the banking book; (ii) reaffirmed its expectation of implementing all aspects of Basel III in full and consistently; (iii) agreed to consult on revisions to its Core principles for effective banking supervision (Basel Core Principles), drawing on supervisory insights and structural changes since the previous update in 2012. A consultation paper will be published in July; (iv) assessed certain outstanding elements of the prudential treatment of banks' exposures to cryptoassets. This includes work related to the treatment of permissionless blockchains as well as the eligibility criteria for "Group 1" stablecoins. Any potential revisions made to the existing standard will be subject to public consultation; (v) took stock of the work related to the development of a Pillar 3 framework requiring disclosure of bank exposures to climate-related financial risks. The BCBS agreed to issue a consultation paper on the proposed framework by the end of this year; and (vi) reviewed and approved the assessment reports on the United States' implementation of the Net Stable Funding Ratio and large exposures framework. The reports will be published next month.
EBA final draft ITS on supervisory benchmarking for 2024 exercise
On 5 June, the EBA published its final draft ITS on the benchmarking of credit risk, market risk and IFRS9 models for the 2024 exercise. The most significant change, compared to the data collection of 2023, is the roll out for the benchmarking of accounting metrics (IFRS9) to high default portfolios. For market risk, new templates have been added for the collection of additional information, notably the Default Risk Charge (DRC) and the Residual Risk Add-On (RRAO). Whilst for credit risk, only minor changes have been made. The draft ITS have been submitted to the EC for endorsement, and will apply 20 days following their publication in the OJ.
ECB consultation on draft report on sound practices in counterparty credit risk governance and management
On 2 June, the ECB published a public consultation on its report on sound practices in counterparty credit risk (CCR) governance and management. The report summarises the results of the targeted review performed in the second half of 2022 on how banks govern and manage CCR. It highlights the good practices observed in the market and points to areas where improvement is needed. The review found that, despite some progress in how banks measure and manage CCR, there is still room for improvement in areas such as customer due diligence, the definition of risk appetite, default management processes and stress testing frameworks. Supervisors’ expectations cover, among other dimensions, banks’ capacity to obtain information from non-bank counterparties, regularly stress test their counterparty credit risk exposures and assess their counterparties’ vulnerabilities under tail risk scenarios. The good practices described in the report explain that approaches to CCR taken by banks should be proportionate to the scale and complexity of the business and products offered, as well as the nature of the counterparties, going beyond mere compliance with regulatory requirements. The deadline for comments is 14 July.
Recovery and Resolution
Official translations of ESMA guidelines on methodology to be used by resolution authority for determining valuation of contracts prior to their termination under CCPRRR
On 2 June, ESMA published the official translations of guidelines on the methodology to be used by the resolution authority for determining the valuation of contracts prior to their termination as referred to in Article 29(1) of the Regulation on the recovery and resolution of CCPs (CCPRRR). The guidelines aim to promote the convergence of supervisory and resolution practices with respect to this valuation methodology. The guidelines will apply from 2 August, two months after the publication of the official translations on ESMA’s website.
FCA Quarterly Consultation No.40
On 2 June, the FCA published its Quarterly Consultation paper No. 40. This quarter the FCA is proposing to: (i) make corrections and clarifications to MIFIDPRU 7 and SUP 16; (ii) introduce a post-trade transparency deferral for exchange traded fund transactions executed at net asset value; and (iii) clarify the scope of the ban on offering retail clients incentives to invest in high-risk investments. The deadline for comments is 10 July.