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Key Regulatory Topics: Weekly update 27 Jan - 2 Feb 2023

The UK government this week published a policy statement on the Government’s approach to cryptoasset financial promotions regulation, proposing to introduce an exemption to Section 21 of FSMA, enabling cryptoasset businesses to communicate their own financial promotions in relation to qualifying cryptoassets.  HMT also published a consultation and call for evidence on the future financial services regulatory regime for cryptoassets. Meanwhile, in the EU, the ECB announced a 2023 EU-wide stress test, covering 75% of the total banking assets within the EU and ESMA published its final report on the opinion on the trading venue perimeter.

Conduct and governance

Please see Other Developments sections for the FCA Handbook Notice 106 regarding the new Senior Managers and Certification Regime (Significant SYSC Firm) Instrument 2023.

PRA consultation on moving SM&CR forms from the PRA Rulebook

On 31 January, the PRA published a consultation paper on moving SM&CR forms from the PRA Rulebook and extending the length of employment history required in the long form A. The proposal would mean that when the PRA needs to make administrative or other non-material changes to these forms, it would not be required to follow the statutory consultation process for rule changes. These forms would be available on the Connect system in the same manner as other regulatory transaction forms. The PRA’s proposal to increase the length of employment history requested in long form A from five years to ten years, would bring the form in-line with MiFID requirements, ensuring a consistent user experience, with all SMF applicants providing the same minimum length of employment history. The deadline for comments is 28 February. The PRA proposes that the changes are implemented in May.

Consultation paper

Consumer/retail 

FCA consults on debt packagers

On 2 February, the FCA published a consultation paper providing feedback on an earlier consultation paper (CP21/30) and consulting on new rules and perimeter guidance. CP21/30 discussed a proposal to ban debt packagers from receiving referral fees. Overall, there was strong agreement in the responses received, that there is an acute conflict of interest, inherent to the debt packager business model, which firms do not appear able to manage. Having reflected on feedback received, the FCA decided it was appropriate to gather more evidence showing how debt packager firms manage this conflict of interest, in particular from parts of the market not as strongly represented in the FCA’s existing evidence base. Having now analysed that further evidence the FCA is proposing to make the rules as set out in CP21/30, with minor amendments. The FCA is asking for views on the analysis of its expanded evidence base, feedback on its proposed implementation period and any new issues or developments of which the FCA should be aware. In addition, the FCA is also seeking views on proposed perimeter guidance to clarify the boundary of the regulated activity of debt counselling in relation to activities commonly carried out by unauthorised lead generators. The deadline for comments is 2 March.

Consultation Paper  

FCA letter to Treasury Sub-Committee on broadening access to financial advice for mainstream investments

On 30 January, the Treasury Sub-Committee on Financial Services Regulations published a letter (dated 9 January) from Sarah Pritchard, FCA Markets Executive Director, in response to its questions regarding the FCA’s consultation on broadening access to financial advice for mainstream investments. The sub-committee has also published the letter from its chair Harriet Baldwin (dated 20 December) to which Ms Pritchard responds. Points of interest include, (i) the FCA has not given an anticipated price point for core investment advice fees, because it is concerned that it could be misunderstood by the market as a ‘regulator-approved price’, potentially limiting competition; (ii) Ms Pritchard confirmed that the FCA does consider stocks and shares ISAs to be an appropriate investment vehicle for consumers with simpler investment needs and relatively low sums to invest; (iii) firms that want to avoid liability for miss-selling, should follow FCA rules and guidance to ensure that the advice they give is suitable; and (iv) the FCA is working closely with HMT to ensure the development of a consumer investment market that balances the appropriate level of consumer protection and the regulatory burden on firms, committing to undertake a review of the wider advice / guidance framework, in Q1 this year.

Letter to the FCA
Letter from the FCA
Webpage

Financial crime and sanctions 

Please see the Markets and Markets infrastructure section for an update on IOSCO’s revised version of its 2011 principles for the regulation and supervision of commodity derivatives markets.

NCA new Suspicious Activity Reports portal and guidance

On 31 January, the NCA updated its webpage on Suspicious Activity Reports (SARs) with a section on the new SAR Portal guidance.  The update states that the new portal is is due to go-live shortly and that three user guides and an FAQ document have been developed. The guidance materials have been created for SAR reporters, law enforcement agencies, and government departments, to familiarise themselves with the changes to the new SAR Portal, including how to submit a SAR, and how to interpret the new SAR fields. All organisations and individuals submitting SARs via the new portal will need to register to do so, irrespective of whether they were previously registered on the old system.

Webpage

Fintech 

Please see the Other Developments section for the announcement of Marion King the new Chair and Trustee of OBIE.

HMT policy statement on cryptoassets financial promotions regulation

On 1 February, the HMT published a policy statement on the Government’s approach to cryptoasset financial promotions regulation. Following its consultation in 2020 and subsequent response in January 2022, HMT received feedback regarding implementation of the measures for qualifying cryptoassets and potential unintended consequences for industry. As a result of this feedback, HMT proposes to introduce an exemption to Section 21 of FSMA to enable cryptoasset businesses, registered with the FCA under the AML/CTF regulations, who are not otherwise authorised persons, to communicate their own financial promotions in relation to qualifying cryptoassets. Registered cryptoasset businesses relying on this exemption will not be able to approve financial promotions or to communicate their own financial promotions in relation to other controlled investments. The government will seek to introduce the statutory instrument giving effect to the planned cryptoasset financial promotions regime, including the above bespoke exemption, when Parliamentary time allows. Given recent volatility in cryptoasset markets, and the risks presented to consumers, the government will reduce the implementation period for the measure from 6 months to 4 months. HMT intends the exemption to be temporary. It will review its approach to the exemption alongside the future regulatory approach to cryptoassets

Consultation Outcome

HMT consultation and call for evidence on future financial services regulatory regime for cryptoassets

On 1 February, HMT published a consultation and call for evidence on the future financial services regulatory regime for cryptoassets. The consultation builds on previous HMT proposals, which focused on stablecoins and the financial promotion of cryptoassets. The proposals are centred on various cryptoasset activities, such as exchange, investment, custody and lending activities, all of which the government is intending to bring into the regulatory perimeter for financial services. For each activity the consultation sets out key design features of the regime covering themes such as authorisation rules, prudential requirements, data reporting, consumer protection, location policy and operational resilience. The consultation paper also proposes regimes for a range of cross-cutting issues, which apply across cryptoasset activities and business models, including market abuse and cryptoasset issuance and disclosures. Within the same document, HMT also issued a call for evidence relating to the regulation of DeFI, certain other cryptoasset activities, and the integration of sustainability within the cryptoasset market. The deadline for comments is 30 April.

Consultation and Call for Evidence
Press Release

OBIE end of implementation roadmap report and CMA response 

On 31 January, OBIE published its Trustee end of implementation roadmap report: Recommendations for the Future of Open Banking. The report contains recommendations to the CMA on how to maintain the CMA’s Retail Banking Market Investigation Order during the Interim State.  It also sets out the Trustees’ personal views to the Joint Regulatory Oversight Committee (JROC) on how to ensure the benefits of Open Banking to consumers and SMEs are sustained and developed going forward. On 1 February, the CMA published its response to the report, noting that Open Banking has been a major success in improving competition in retail banking and securing positive outcomes for consumers and businesses. The CMA attributes this success to a clear regulatory mandate, in the form of the PSD2, placing a formal obligation on the largest banking providers to implement open standards. The CMA also notes that the scope of the CMA Order is limited to specific areas that were the focus of the CMA’s market investigation. Extending Open Banking beyond the scope of the Order has the potential to unlock substantial benefits to consumers and businesses but it will need to be underpinned by an effective regulatory framework. Ultimately, the CMA is committed to supporting the FCA, the PSR and HMT as Open Banking moves forward. On 1 February, the CMA also announced that the OBIE appointed Marion King as its new Chair and Trustee. Marion succeeded Charlotte Crosswell on 1 February.

Implementation Report
CMA response
Press Release

Fund regulation 

ESMA consults on the methodology on stress test scenarios under MMF Regulation

On 31 January, ESMA published a consultation paper reviewing the methodology included in the Guidelines on stress test scenarios under the MMF Regulation. The consultation proposes to update the methodology specified in section 4.8 of the Guidelines. The proposed revision covers the liquidity and macro scenarios. The proposed liquidity scenario aims at better taking into account the interaction between liquidity and redemption pressures, with significant tightening of the parameters of the liquidity and redemption scenarios. The macro scenario, intends to better capture the macroprudential impact of the scenario, by including assumptions on the underlying markets and other market participants. In addition, the paper presents ESMA’s considerations on a potential climate risk scenario. The deadline for comments is 28 April. ESMA aims to finalise the Guidelines for publication in Q4 2023, the final guidelines will also include the calibration of the 2023 stress-testing scenario for implementation.

Consultation paper

ESMA Guidelines on stress test scenarios under the MMF Regulation

On 27 January, ESMA published the official translations of updated guidelines on stress test scenarios under the MMF Regulation. These guidelines apply to competent authorities, MMFs and managers of MMFs as defined in the MMF Regulation.  They relate to Article 28 of the MMF Regulation and establish common reference parameters for the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs. The updated guidelines apply from 27 March, two months after their publication. All other parts of the Guidelines already apply from the dates specified in Articles 44 and 47 of the MMF Regulation.

ESMA Guidelines

Markets and markets infrastructure 

ESMA opinion on the trading venue perimeter

On 2 February, ESMA published a final report on the opinion on the trading venue perimeter. The opinion provides guidance on when systems should be considered as multilateral systems and seek authorisation as a trading venue. The opinion builds on the MiFID II definition of multilateral systems and clarifies how to interpret the elements of the definition. It provides information in particular on how to classify a system and how to identify when third-party trading interests interact within a system. ESMA will now work with NCAs to ensure that firms assess their systems against the ESMA opinion and reflect whether they are operating under the appropriate authorisation. ESMA expects NCAs to require firms to take appropriate action to swiftly apply for authorisation as a trading venue where necessary.

Final Report
Press Release

ESMA final report on the clearing and derivative trading obligations to accompany the benchmark transition

On 1 February, ESMA published its final report on the clearing obligation (CO) and derivative trading obligation (DTO) to accompany the benchmark transition. The report includes the proposed draft RTS amending the scope of the CO and DTO for OTC interest rate derivatives denominated in EUR, GBP, JYP and USD. The draft RTS relate to the benchmark transition away from EONIA and LIBOR and onto new Risk-Free Rates (RFR). The draft RTS have been submitted to the EC for endorsement.

Final Report
Press Release

EC adopts Delegated Regulation amending RTS on MiFID II tick size regime

On 1 February, the EC adopted a Delegated Regulation amending the RTS laid down in Delegated Regulation (EU) 2017/588 (RTS 11) as regards the annual application date of the calculation of the average daily number of transactions for shares, depository receipts and exchange-traded funds for the purposes of the tick sizes. RTS 11 contains the applicable tick size based on the average daily number of transactions (ADNT). Where currently the calculations of the ADNT apply as of 1 April each year, the Delegated Regulation amends the RTS to ensure that they apply as at the first Monday of April of each year instead. This will align the application date of calculations in RTS 11 with the application date of calculations in RTS 1. The EC has adopted the Delegated Regulation without consultation, as the amendments are technical in nature.

Delegated Regulation

IOSCO principles for the regulation and supervision of commodity derivatives markets

On 31 January, IOSCO published a revised version of its 2011 principles for the regulation and supervision of commodity derivatives markets. The 24 revised principles seek to support the physical commodity derivatives markets in providing their fundamental price discovery and hedging functions, while operating free from manipulation and abusive trading schemes. When revising its principles, IOSCO focused on market surveillance, transparency, price discovery, the correlation with physical markets, addressing disorderly markets, responding to market abuse, and strengthening the enforcement powers of trading venues against end-user behaviours. The new principle 16 on Unexpected Disruptions, aims to guide regulators in restoring orderly markets in the case of an unexpected disruption and ensure market participants have a process and adequate plans to address these events. IOSCO believes that relevant market authorities should review their policies and regulation to ensure the principles are put into effect.

Final Report

Payment services and payment systems 

Please see the Fintech section for the OBIE end of implementation roadmap report and CMA response.

FCA appoints new Chair of the Payment Systems Regulator

On 1 February, the FCA announced the appointment of Aidene Walsh as Chair of the Payment Systems Regulator for a three-year term. Aidene has been interim chair of the PSR since April 2022.

Press Release

EBA clarifies the application of strong customer authentication requirements to digital wallets

On 31 January, the EBA published three Q&As that, together with three other Q&As previously published by the EBA, clarify comprehensively the application of strong customer authentication (SCA) to digital wallets under PSD2. The six Q&As clarify the application of SCA to the enrolment of a payment card to a digital wallet and to the initiation of payment transactions with digitised versions of a payment card. They also clarify the requirements applicable to the outsourcing of the application of SCA to digital wallet providers.

Press Release

Pudential regulation 

RTS on assessment of the appropriateness of risk weights and minimum LGD values for exposures secured by immovable property

On 1 February, Delegated Regulation supplementing the CRR with regard to RTS specifying the types of factors to be considered for the assessment of the appropriateness of risk weights for exposures secured by immovable property and the conditions to be taken into account for the assessment of the appropriateness of minimum loss given default (LGD) values for exposures secured by immovable property, was published in the OJ. The Delegated Regulation will enter into force on 21 February, the twentieth day following its publication in the OJ.

Delegated Regulation

EBA and ECB launch 2023 EU-wide stress test

On 31 January, the EBA launched a 2023 EU-wide stress test and released the macroeconomic scenarios. The exercise is designed to assess the performance of banks under a baseline and adverse scenario during the period 2023-25. The adverse scenario assumes a hypothetical worsening of geopolitical tensions, leading to a severe decline in GDP with persistent inflation and high interest rates. The adverse scenario is designed to ensure a significant severity of various macro-economic and financial shocks across all EU countries and, for the first time, depicts a breakdown of the shocks by economic sectors. The stress text will be conducted on a larger than usual sample, covering 70 EU banks and 75% of total banking assets in the EU. The EBA expects to publish the results of the exercise at the end of July. In conjunction with the EBA, the ECB will be stress testing 99 directly supervised banks in 2023, 57 of which are part of the EBA stress test. The further 42 are medium-sized banks that are not included in the EBA-led stress test sample due to their smaller size. The stress test conducted on the 42 banks outside the EBA sample will be broadly in line with the EBA’s EU-wide stress test, applying the same scenarios as well as elements of the EBA methodology following a proportionality criterion to take into account the overall smaller size and lower complexity of these banks. The ECB’s stress test results will be used to update each bank’s Pillar 2 Guidance in the context of the SREP. Qualitative findings on weaknesses in banks’ stress testing practices could also affect their Pillar 2 Requirements and inform other supervisory activities.

EBA Press Release
ECB Press Release

EBA consultation on draft ITS amending supervisory reporting with regard to IRRBB

On 31 January, the EBA published a consultation paper proposing amendments to the ITS on supervisory reporting with regard to IRRBB reporting requirements. The paper proposes new, harmonised reporting aims to bring the data quality required for assessing IRRBB risks on an appropriate scale of institutions, including large institutions, institutions other than large institutions and Small and Non-Complex Institutions (SNCI), which cannot be left outside the scrutiny of IRRBB risks. It is strictly related to the completion of the policy work on: (i) the RTS on Supervisory Outlier Test (SOT); (ii) the RTS on the standardised methodologies; and (iii) the Guidelines on IRRBB and CSRBB. The deadline for comments is 2 May. The EBA expects to finalise the draft ITS and submit the amending final draft ITS to the EU Commission, in mid-2023. The EBA will also develop the data-point model (DPM), XBRL taxonomy and validation rules based on the final draft amending ITS. The first reference date for the application of these technical standards is foreseen to be June 2024, the expected implementation period for the proposed changes is approximately 1 year.

Consultation paper

PRA letter to Treasury Sub-Committee on new data reporting requirements for banks and other CRR firms

On 30 January, the Treasury Sub-Committee on Financial Service Regulations published a letter from Sam Woods, PRA Chief Executive, (dated 9 January) in response to its questions regarding the PRA’s consultation paper on risks from contingent leverage and in particular the new reporting requirements. In the letter, Mr Woods explains that the new proposed reporting would improve the PRA’s ability to monitor regularly and consistently contingent leverage risks, providing enhanced supervision where necessary and reduce the probability of contingent leverage risks materialising in the future. Mr Woods emphasised that the proposed data-reporting requirement would be proportionate to the risk identified. Mr Woods reports that it would only apply to the small number of firms (the PRA expects around 45 in total) that are sufficiently large to be captured by the PRA’s minimum leverage requirement (and associated enhanced reporting requirements). Further, the proposed frequency of data collection is six-monthly, rather than the quarterly frequency of other regulatory reporting requirements. In due course, the FCA also plans to review the full range of bank reporting data it collects, as it is likely there are some areas where the historic reporting inherited from the EU is no longer appropriate or is not sufficiently tailored for the needs of the UK market.

Letter to the PRA
Letter from the PRA
Webpage

Sustainable finance 

FCA letter to Treasury Sub-Committee on Sustainability labelling

On 30 January, the Treasury Sub-Committee on Financial Services regulations published a letter from Nikhil Rathi, FCA Chief Executive, (dated 9 January) in response to its questions regarding the FCA’s recent consultation on SDR and investment labels. The sub-committee has also published the letter from its chair Harriet Baldwin (dated 20 December) to which Mr Rathi responds. In the letter, Mr Rathi explains among other things, (i) how the FCA intends to monitor and enforce the new SDR and investment labels; (ii) how the FCA will balance the benefits of the labels against reducing consumer choice; (iii) what market distortions the FCA anticipates and how it plans to mitigate them; (iv) to what extent the two thirds of UK funds, that are not expected to meet the proposed sustainability criteria, currently offer some level of sustainable investing; (v) whether the FCA expects an increase in fees charged by funds and distributors of sustainable products; and (vi) what new powers the FCA gains with the new ‘anti-greenwashing’ rule. Mr Rathi also states that the FCA would welcome additional powers to apply its proposed labelling and disclosure rules to overseas products so as to avoid confusion to UK consumers. It is currently working with HMT to consider options for how to treat these products and intends to follow with a separate consultation in due course.

Letter to the FCA
Letter from the FCA
Webpage

Other developments 

FCA updates webpage on complaints against the Regulators consultation paper

On 1 February, the FCA updated its webpage CP20/11: Complaints against the Regulators, announcing that the FCA is currently working to finalise its consultation response to the revised Complaints Scheme. The FSM Bill, currently going through Parliament, contains provisions relating to the accountability of regulators, and the FCA is of the view that it would be most appropriate to finalise changes to the Complaints Scheme after this process has concluded. The FCA currently expects to publish its response to the consultation and the final revised Complaints Scheme in spring 2023.

Webpage

Council of EU compromise proposal on Directive on distance financial services contacts

On 31 January, the Council of the EU published a Presidency compromise proposal (dated 8 December) on the proposed Directive on financial services contacts concluded at a distance. The cover page explains that the note is the fourth Presidency compromise proposal relating to the Directive, although the other Presidency compromise proposals have not previously been published.

Compromise proposal

BoE, PRA and FCA Dear SMF letter on 2022 CBEST thematic findings

On 31 January, the BoE, PRA and FCA published a Dear SMF letter on thematic findings from the 2022 annual cycle of CBEST assessments conducted on participating banks, insurers, asset and investment managers and FMI. The letter is addressed to the individuals who hold the SMF with responsibility for cyber at the relevant firms. The regulators analysed the outcomes of CBEST assessments and identified trends and findings descriptive of the sector’s current cyber-posture. The themes are based on over 350 findings from intelligence-led penetration tests, conducted on 14 firms during this cycle of testing and are presented together with examples of the most common control weaknesses within those areas, although these themes and examples are not included with the version of the letter published. The regulators may use these findings to structure future supervisory interaction and understand the level of engagement firms have achieved with the senior executive team, risk, and audit functions on the issues identified as in need of remediation.

Letter

ESAs draft guidelines for the exchange of information relevant to the fit and proper assessment

On 31 January, the ESAs published a consultation paper on draft joint guidelines on the system established by them, for the exchange of information relevant to the assessment of the fitness and propriety of holders of qualifying holdings, directors and key function holders of financial institutions and financial market participants by competent authorities (CAs). The draft guidelines explain how to use the system, as well as how to exchange relevant data, with the aim of fostering a timely exchange of information between CAs. The deadline for comments is 2 May. The ESAs aim to finalise the guidelines and make the information system available to CAs by the end of 2023.

Draft Guidelines

FCA FS22/1: Accessing and using wholesale data webpage update

On 30 January, the FCA updated its FS22/1: Accessing and using wholesale data webpage. The FCA is planning to publish the findings of its trade data review alongside its wholesale data market study in Q1 2023, instead of January. The FCA plans to use its Enterprise Act powers to conduct the market study to ensure it can fully explore the areas being looked at in the study, some of which are not regulated by the FCA but affect financial services markets.

Webpage

FCA Handbook Notice 106

On 27 January, the FCA published Handbook Notice 106, setting out the changes made to the FCA Handbook and other material made by the FCA board on 26 January. These include the: (i) Senior Managers and Certification Regime (Significant SYSC Firm) Instrument 2023. This instrument makes changes so that only firms that would have been both significant IFPRU firms and IFPRU investment firms under the pre-IFPR arrangements fall within the definition of a ’significant SYSC firm’ for the purpose of the Enhanced scope SM&CR regime.

Handbook Notice 106