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Key Regulatory Topics: Weekly Update 21 April – 27 April 2023

This week, the financial services sector saw a continued focus on Fintech, with FCA speeches given on the impetus for regulation and investment in this area, and the challenges around cryptoasset regulation and risks. The Economic Secretary, Andrew Griffith, announced that he has re-established the Asset Management Taskforce, which will consider the opportunities presented by technologies such as tokenisation, artificial intelligence and DLT, and, looking outside the UK, the ECB published its progress report on the development of the digital euro. The FCA published issue 73 of its Market Watch newsletter, which indicated that regulatory scrutiny of CFD providers is set to continue.

Consumer/Retail

Please see the Other Developments section for the LSB Business Plan and Budget 2023/24.

FCA speech on delivering a well-functioning credit market that benefits consumers

On 27 April, the FCA published a speech by Roma Pearson, Director of Consumer Finance, on the importance of delivering a well-functioning credit market that benefits consumers. Ms Pearson noted that the FCA is striving towards a well-functioning credit market where customers are treated fairly, supported if they get into financial difficulty, and equipped with the information they need to make good decisions. These aims align with the FCA’s outcome-focused approach to consumer protection under the new Consumer Duty and are, of course, particularly pertinent given the cost-of-living crisis. The FCA recognises that for some firms the Consumer Duty requires a significant amount of work, and encourages firms to focus on the areas that will have the biggest impact on customer outcomes. Another focus for the FCA is that consumers of newly regulated products receive an appropriate degree of protection, while the broader regulatory framework for credit remains fit for purpose. Ms Pearson also noted the ongoing Consumer Credit act reform process and welcomed the opportunity to have an updated consumer credit regulatory system, to allow a more coherent and flexible regime.

Speech

EBA Consumer Trends Report 2022/23

On 24 April, the EBA published the eighth edition of its Consumer Trends Report (CTR) for 2022/23. The report summarises trends observed for the products and services under the EBA’s consumer protection mandate. The report describes the topical issues that have emerged, and the actions taken by the EBA and national competent authorities to address the issues identified in the previous CTR published in 2021. The report identifies two particular issues facing consumers in the EU: (i) fraud in retail payments; and (ii) over-indebtedness and arrears. The EBA will now use its findings to shape its consumer protection priorities over the next two years.

Report

Money and Pensions Service guide on mental health and money

On 26 April, the Money and Pensions Service (MaPS) published a guide on mental health and money. The guide offers creditors advice on how to give customers more support, outlining six ways in which creditors in financial services, utilities and the public sector can do more to support those who are struggling. These include: (i) equipping staff to help; (ii) supporting customers in financial difficulty; (iii) product and service design; (iv) providing supportive and accessible communications; (v) working with third parties; and (vi) helping customers stay in control. The guide also suggests how creditors can put the techniques into practice, listing resources they can use and reminding firms of the relevant FCA duties that may require it.

Guide

Financial Crime and Sanctions

FCA webpage on cash-based money laundering

On 24 April, the FCA published a new webpage on cash-based money laundering. The webpage details the FCA’s work to address an identified weakness in AML controls relating to cash deposits. As part of this work the FCA held workshops with the Post Office, banks, government and the NECC, targeted at reducing the money laundering risk whilst limiting unintended consequences for legitimate customers. The webpage sets out the FCA’s current expectations for banks, following these workshops. The FCA notes that banks made significant progress throughout 2022 in designing and implementing controls to respond to the threats identified. The FCA reminds firms to keep the impact of such controls under review, to ensure that the balance between money laundering controls and the impact on legitimate customers is right. As part of the FCA’s next phase of cash-based money laundering work, it plans to test firms’ approaches to reducing money laundering risk for cash deposits at the Post Office and deposits through other channels. Firms are expected to continue to focus on appropriate communication with their customers, as legitimate customers, in particular businesses, need to understand where they can deposit and withdraw the cash they need.

Webpage

Fintech

Please see the Other Developments section for the FCA response to Treasury Committee questions on the FCA’s regulatory work.

FCA speech on how regulation can help the UK lead in Fintech

On 26 April, the FCA published a speech by Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations, on how regulation can help the UK lead in Fintech. Ms Sheppard emphasised the role regulators can play in helping firms innovate, by setting firm foundations. She believes that the sooner firms get a handle on regulatory issues, the sooner they can thrive and grow. Ms Shepperd described how the FCA continues to help firms foster innovation, through regulatory sandboxes and innovation pathways, reminding newly authorised firms that they can also be considered for the FCA Early and High Growth Oversight scheme, which helps firms to embed regulation from an early stage so they can stay strong and resilient in ever-shifting markets. Ms Sheppard concluded by reminding firms that the UK remains the most attractive destination for financial technology investment in Europe, is globally second only to the United States, and that with the help of the FCA the Fintech market in the UK can continue to grow.

Speech

Council of EU invites COREPER to agree position on recast revised WTR

On 25 April, the Council of EU published an information note from its General Secretariat to the Permanent Representatives Committee (COREPER), seeking confirmation of COREPER’s agreement to the EP’s first reading position on the proposed recast revised WTR. The note explains that when the EP voted on 20 April, it adopted the compromise amendment to the recast revised WTR which will constitute the EP’s first-reading position. As the EP’s position reflects what has been previously agreed, the Council of EU should be in a position to approve it. The recast revised WTR would then be adopted and the regulation will enter into force 20 days following its publication in the OJ.

Information note

Economic Secretary re-establishes the Asset Management Taskforce

On 25 April, HMT announced that it has re-established the Asset Management Taskforce. The Economic Secretary’s Asset Management Taskforce has been joined by five new senior executives from the UK’s investment industry. A full list of the members of the taskforce can be found in the press release. The Economic Secretary has also launched a new Technology Working Group, which will run in parallel to the Taskforce to examine the impact of new technology on the asset management sector. The group will work to articulate the benefits of technology for investors and industry, and will identify the main opportunities presented by technologies including tokenisation, artificial intelligence and DLT. The group’s membership will be drawn from Taskforce members, government and regulators, and wider non-asset management stakeholders.

Press Release

FCA speech on the regulation of digital assets in the UK

On 25 April, the FCA published a speech by Sarah Pritchard, Executive Director of Markets, and Executive Director of International, on the regulation of digital assets in the UK. In her speech, Ms Pritchard discussed the risks associated with cryptoassets, and in particular the high risk of exploitation by serious organised criminals. She noted the FCA’s ongoing focus on how the financial promotions regime plays an important part in this context. Ms Pritchard also discussed the FCA’s work on the Government proposals to regulate stablecoins used for payments, and on the Government’s consultation on the regulation of the wider cryptoassets regime. Ms Pritchard cautioned that the cryptoasset sphere will not offer the same level of market integrity and protection for consumers as traditional markets, and noted the importance of consumers understanding that they are highly unlikely to have recourse to the FSCS and the FOS. Looking beyond the UK, she noted that the Government is consulting on FCA powers over crypto services that originate outside the UK but are provided to UK consumers, and highlighted the importance of global collaboration and the benefits of introducing equivalence regimes. The FCA will be publishing reports on the IOSCO Fintech Task Force crypto and digital assets workstream (led by the FCA) and the decentralised finance products and services workstream (led by the SEC) later this year, and is continuing to work with other regulators and supranational bodies.

Speech

ECB progress report on the digital euro

On 24 April, the ECB published its third progress report on the digital euro which provides an update on progress made in the digital euro investigation phase over the past months. The report explains key features relevant to end users and service providers, and considers a number of distribution aspects, including scheme access criteria, delivery approach and form factor. The report also describes digital euro services and advanced functionalities such as core/optional/value-added services, conditional payments and cross-currency functionality. The current proposal with regard to digital euro access is to make the digital euro available to euro area residents, merchants and governments in its initial releases, with end users being able to access and use the digital euro either through PSPs’ existing online banking/payment apps or through an app provided by the Eurosystem. The ECB’s Governing Council will review the outcome of the investigation phase in Q3 2023 and will decide whether to move on to a subsequent project phase. There will be no decision on the possible issuance of a digital euro until a later stage, and this would depend on legislative developments.

Progress Report

Press Release

Fund Regulation

Please see the Fintech Section for the HMT announcement that it has re-established the Asset Management Taskforce.

HMT Reserved Investor Fund consultation

On 27 April, HMT published a Reserved Investor Fund (RIF) consultation. This consultation is seeking views on the potential scope and design of a tax regime for a new type of investment fund structured as an unauthorised contractual scheme, which would be a collective investment scheme available to professional investors, high net worth investors and sophisticated investors. The consultation seeks views whether the government should introduce the RIF, and if so whether it should introduce the unrestricted RIF or a restricted RIF (the key difference between the two being their treatment for capital gains tax purposes). The consultation also seeks views on a number of other areas: (i) the eligibility and notification criteria; (ii) the branding of the RIF; (iii) the proposed design of a new tax regime for a RIF; (iv) the application of the non-resident capital gains rules to a RIF; and (v) the treatment of non-RIF unauthorised co-ownership contractual schemes. The deadline for comments is 9 June.

Consultation
Press Release

Markets and Markets Infrastructure

Please see the Other Developments section for the FCA response to Treasury Committee questions on the FCA’s regulatory work.

FCA publishes final UK EMIR validation rules and XML schema

On 27 April, the FCA published the final versions of the UK EMIR Validation Rules and XML schema. These documents support the implementation of the changes made to the UK EMIR reporting requirements, procedures for data quality and registration of trade repositories. These final rules will be applicable from 30 September 2024, with the exception of the amended technical standards that relate to the registration of Trade Repositories, which came into force on 24 February.

Webpage

FSB report on the Financial Stability Aspects of Commodities Markets

On 27 April, the FSB published a report (dated 20 February) on the financial stability of commodities markets. The report presents an overview of a few globally traded commodities markets that are currently of particular importance, examining their vulnerabilities and the broader impact on the financial system. The report identifies a number of data gaps and recommends better sharing of information effectively by the relevant authorities. The report considers how the commodities ecosystem reacted to the Russian invasion of Ukraine in February 2022, and concludes with learnings and policy implications. Many of the issues discussed in the report will be addressed in the FSB’s work programme to enhance the resilience of non-bank financial intermediation.

Report

FSB statement to encourage final preparations for the USD LIBOR transition

On 27 April, the FSB published a statement to encourage final preparations for the USD LIBOR transition at the end of June. The FSB stresses that it is critical that market participants act expeditiously to ensure that their legacy contracts are prepared to transition, encouraging market participants to transition now to avoid a ‘pile-up’ towards the end of June. The FSB highlights the ongoing importance of choosing robust reference rates in contracts, as it is essential for the financial system that the rates used reflect deep, credible, and liquid underlying markets.

Statement

FCA Market Watch 73

On 26 April, the FCA published issue 73 of Market Watch, discussing its findings from the recent FCA market abuse peer review into CFD providers. Overall, the FCA’s findings from the peer review were positive, finding that firms have surveillance in place to detect insider dealing. However, the FCA did identify some weaknesses, such as the lack of consideration of market abuse risks in non-equity asset classes and market manipulation, leading to gaps in surveillance. The review covered seven key areas: (i) market abuse risks; (ii) market abuse surveillance responsibilities; (iii) surveillance systems; (iv) surveillance – market manipulation – narrowing the spread; (v) surveillance alert investigations; (vi) front office and tipping off risk; and (vii) countering the risk of market abuse (SYSC 6.1.1R). Looking forward, CFD providers are encouraged to consider the FCA’s findings, and take steps to ensure that their systems and procedures for detecting and reporting potential market abuse are appropriate and proportionate to the scale, size and nature of their business activities. The FCA will continue to visit CFD providers and other firms to assess their STOR arrangements and work to ensure they meet their regulatory obligations. Firms are advised to read this issue in conjunction with Market Watch 69.

Market Watch 73

Market Watch 69

EBA consultation on draft guidelines on the STS criteria for on-balance-sheet securitisation

On 21 April, the EBA published a consultation paper on its draft guidelines on the STS criteria for on-balance-sheet securitisation under Article 26(a)(2) of the Securitisation Regulation. The main objective of the guidelines is to provide a single point of consistent interpretation of those criteria and ensure a common understanding of them by the originators, original lenders, securitisation special purpose entities, investors, competent authorities and third party verification agents verifying STS compliance in accordance with Article 28 of the Securitisation Regulation, throughout the Union. The deadline for comments is 7 July.

Consultation Paper

Prudential Regulation

Please see the Sustainable Finance section for the ECB report on the results of the 2022 supervisory assessment of C&E risks disclosures.

EBA opinion on the Commission’s amendments to the draft RTS specifying certain technical criteria for the supervisory review and evaluation performed by competent authorities

On 26 April, the EBA published an opinion on the Commission’s amendments relating to the final draft RTS specifying supervisory shock scenarios, common modelling and parametric assumptions and what constitutes a large decline for the calculation of the economic value of equity and of the net interest income, in accordance with Article 98(5a) of CRD IV. Generally, the EBA expressed concern at the substantive and prescriptive nature of the Commission’s amendments and considers that a more straightforward approach is appropriate. To address certain of the Commission’s concerns, the EBA proposes amendments to the initial draft RTS in relation to what constitutes a large decline. The EBA stresses the importance of adopting these RTS without delay.

Opinion

EBA final report on determination of the exposure value of synthetic excess spread under the CRR

On 25 April, the EBA published a final report (dated 24 April) on draft RTS specifying the determination by originator institutions of the exposure value of synthetic excess spread (SES) pursuant to Article 248(4) of the CRR. The draft RTS specify the calculation of the components that should be included in the exposure value of SES. These components include: (i) any income from the securitised exposures recognised by the originator institution in its income statement under the applicable accounting framework that the originator institution has contractually designated to the transaction as SES that is still available to absorb losses; (ii) any SES contractually designated by the originator institution in any previous periods that is still available to absorb losses; (iii) or for the current period that is still available to absorb losses; and (iv) any SES contractually designated by the originator institution for future periods. These final draft RTS will be submitted to the Commission for adoption. Following the submission, these RTS will be subject to scrutiny by the EP and the Council before being published in the OJ.

Final Report

Recovery and Resolution

Delegated Regulation on RTS supplementing the CCPRRR published in the OJ

On 21 April, Delegated Regulation (EU) 2023/840 supplementing the CCPRRR with regard to RTS specifying the methodology for calculation and maintenance of the additional amount of pre-funded dedicated own resources to be used in accordance with Article 9(14) of that Regulation was published in the OJ. The Regulation covers the: (i) calculation and allocation of the additional amount of pre-funded dedicated own resources; (ii) determination of the percentage level of the additional amount of pre-funded dedicated own resources; (iii) maintenance of the additional amount of pre-funded dedicated own resources; (iv) procedure for applying recovery measures where the additional amount is not immediately available; and (v) procedure for the compensation of non-defaulting clearing members that have provided a financial contribution where the additional amount is not immediately available. The Delegated Regulation will enter into force on 11 May, 20 days following its publication in the OJ.

Delegated Regulation

Sustainable Finance

ECB report on the results of the 2022 supervisory assessment of C&E risks disclosures

On 21 April, the ECB published a report setting out the results of its third assessment of institutions’ climate-related and environmental (C&E) risks disclosures. The assessment covered the existence, substantiation and soundness of disclosures across key areas. The assessment found that while the majority of significant institutions now disclose basic information, the quality of the disclosures remains low. The ECB’s assessment report includes examples of good practices that institutions can consider in their efforts to align disclosures with supervisory expectations. The report reminds institutions that they will have to comply with the tighter EU rules on disclosures of C&E risks under the ITS on Pillar 3 disclosures this year. The ECB’s report includes observations and examples of practices that institutions can consider in their efforts to align disclosures with supervisory expectations.

Report

Other Developments

The CRDVI proposals appear to have taken something of a back seat for firms following the Council’s compromise text. Following the Commission proposal and the Council compromise text, in February 2023, the European Parliament issued its report on the draft. Whilst not quite as far reaching as the original proposal, the report is still far from welcome for non-EU banks. Our experts in the UK and EU summarise the key elements, how the proposal, the compromise and the report compare, and where they leave non-EU providers of financial services in the EU here.

ECB Decision amending Decision ECB/2014/16 concerning the establishment of an Administrative Board of Review and its Operating Rules 

On 27 April, the decision of the ECB amending Decision ECB/2014/16 concerning the establishment of an Administrative Board of Review and its Operating Rules was published in the OJ. The Administrative Board of Review is the body of the ECB that carries out reviews of the ECB’s supervisory decisions. The EBA has determined that it is necessary to clarify and adapt certain aspects of Board’s Operating Rules. The clarifications relate to specific procedural areas including the role of alternate members of the Board, the process and content of the notice of the review, the assessment of the admissibility of the request for review and certain organisational and practical matters. The decision will enter into force 17 May, 20 days following its publication in the OJ.

Decision

LSB Business Plan and Budget 2023/24

On 27 April, LSB published its business plan and budget for 2023/24. The plan outlines the LSB’s areas of focus for the year, which will centre on financial resilience and digital journeys, alongside its ongoing work on the prevention of APP scams. In particular, the LSB will undertake a thematic review to assess how digitised and data-driven customer interactions are impacting customer outcomes, and consider and assess support measures for personal and business customers facing financial distress. Further, the LSB will be conducting roundtables and continuing to share best practice and insights, including in relation to the Contingent Reimbursement Model Code for APP scams.

Business Plan and Budget

Financial Services Skills Commission report on skills for the future of financial services

On 27 April, the Financial Services Skills Commission (FSSC) published a report titled ‘Reskilling Everywhere All At Once, Skills for the future of financial services 2023’. The report highlights the increasing demand for certain future skills, including data analytics, cyber security, software development and coaching, as identified by financial services firms over the last 12 months as critical for the sector’s sustainable growth. Overall, the report found that while there is an increasing focus on upskilling and reskilling amongst members, demand for skills is still outstripping supply. The FSSC recommends that: (i) such skills are made a strategic business priority; (ii) forecasting practices around future skills are further developed in all firms; and (iii) firms continue to build future skills, through investing in meaningful upskilling and reskilling programmes.

Report

Press Release

FCA aggregate complaints data: 2022 H2

On 27 April, the FCA published its aggregate complaints data for 1 July to 31 December 2022. Key findings include: (i) in 2022 H2, firms received 1.79m complaints, a decrease of 6% from 2022 H1; (ii) banking and credit cards, insurance and pure protection, and investments product groups experienced a decrease in their complaint numbers; (iii) the home finance product group saw the biggest increase in complaints received by firms; (iv) since 2016 H2, current accounts have remained the most complained about products, however, the number of complaints decreased 5% from 2022 H1 to 2022 H2; and (v) savings (including ISAs), travel and assistance product groups experienced notable increases in their complaints.

Webpage

FCA response to Treasury Committee questions on the FCA’s regulatory work

On 25 April, a letter (dated 20 April) to Harriett Baldwin MP, Chair of the Treasury Select Committee from Nikhil Rathi, FCA chief executive, responding to a number of questions was published. The questions cover: (i) the Colleague Voice exercise; (ii) outsourcing of insurance claims; (iii) greenwashing; (iv) mortgages; (v) recent banking failures; (vi) market fragility and adjustment to higher interest rates; (vii) resolution frameworks; and (viii) cryptoassets and the digital pound. Key points include: (a) a detailed explanation of the FCA role in the resolution and sale of SVB UK; (b) market participants are encouraged to update their view of what constitutes stress scenarios, and pay extra attention to exposures to leverage, concentrated counterparty exposures, concentrated market positions, and any liquidity mismatches in their business models and products - firms should test their assumptions around their ability to liquidate assets at speed; and (c) the FCA only expects a small number of firms to apply for FCA authorisation to issue, or provide custody services in relation to, fiat-backed stablecoins.

Letter

EBA consultation on draft guidelines on the benchmarking of diversity practices

On 24 April, the EBA published a consultation on draft guidelines on the benchmarking of diversity practices including diversity policies and gender pay gap under the CRD and the IFD. The EBA believes that these guidelines are necessary to ensure a harmonised benchmarking of diversity practices. The benchmarking of diversity practices allowing competent authorities to monitor diversity trends over time, including the identification of common practices for diversity policies and information on the gender pay gap at the level of the management body. The aspects of diversity that will be analysed concern gender, age, educational and professional background. The guidelines include templates for data collection. The deadline for comments is 24 July. It is proposed that the first data on the diversity practices under these guidelines should be reported in 2025 with a reference date of 31 December 2024, including in situations where the financial year differs from the calendar year.

Consultation Paper