Key Regulatory Topics: Weekly Update 3 November - 9 November 2023
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The updates this week are dominated by the EBA’s raft of consultations on technical standards and guidelines under MiCAR.
The EC also commenced consultation on four delegated acts to supplement MiCAR. In the UK, the FCA published a discussion paper on regulating fiat-backed stablecoins, and the BoE published a discussion paper on the proposed regulatory regime for systemic payment systems using stablecoins. Meanwhile, HMT published a consultation paper on the implementation of the new BoE levy introduced by the Financial Services and Markets Act 2023, and which will replace the cash ratio deposit scheme, accompanied by a BoE consultation paper on its approach to the levy.
EP adopts three texts on the European Single Access Point
On 9 November, the EP agreed to adopt with amendments the EC’s legislative proposal to establish a European Single Access Point (ESAP) to provide EU-wide access to information activities and products of the various categories of entities that are required to disclose information relevant to capital markets, financial services and sustainable finance. The proposal comprises a Regulation to establish an ESAP, as well as a Directive and Regulation to amend various EU legislation to enable the functioning of the ESAP. The proposed ESAP Regulation includes: (i) scope, definitions and establishment of ESAP; (ii) conditions for voluntary submission of information; (iii) list and tasks of collection bodies; (iv) cybersecurity; (v) functionalities of ESAP; (vi) access to information; (vii) tasks of ESMA; (viii) monitoring of ESAP by ESMA; and (ix) ESAP review. Some of the amendments made by the EP to the proposed Regulation to establish an ESAP include amending: (a) the minimum required functionalities of ESAP through which users can access and search for information, to include that the presentation of information submitted on a voluntary basis can be clearly distinguished from information submitted on a mandatory basis; (b) Article 8, which addresses access to information on ESAP, to allow certain entities to have direct access. Those entities are governmental bodies or agencies of a Member State, educational and training establishments for the sole purposes of research, academia, news organisations and non-governmental organisations, and entities providing and using information on ESAP to fulfil their regulatory obligations; and (c) ESMA’s tasks in managing ESAP, to include ensuring that the information provided by the collection bodies is made accessible without undue delay on ESAP, that ESAP is accessible for at least 97% of the time per month, and to monitor ESAP and report annually to the Commission. The amendments to both the Regulation and Directive amending EU Legislation reflect the amendments made the ESAP Regulation. In addition, the application dates for both texts have also been amended. The EU legislation to be amended under the Regulation has also changed, it no longer includes the CSDR or the Taxonomy Regulation, however it does now include MiCAR and the proposed European Green Bond Regulation. Once the proposals are adopted by the Council of the EU, they can be published in the OJ and will enter into force on the twentieth day following their publication. Once in force, member states will have two years to transpose the Directive into national law, except for Article 3 relating to the Transparency Directive, which they will have 18 months to transpose.
EBA consults on guidelines on complaints handling by credit servicers
On 9 November, the EBA published a consultation on its draft guidelines on complaints-handling of credit servicers under the Credit Servicers Directive. The proposed guidelines suggest applying to credit servicers the requirements of the existing Joint Committee Guidelines on complaints-handling, which include complaints management policy, complaints management function, registration, reporting, internal follow-up, provision of information and procedures for responding to complaints. The draft guidelines are addressed to competent authorities and specify the requirements credit servicers should comply with when establishing and maintaining effective and transparent procedures for complaints handling from borrowers. The deadline for comments is 9 February 2024.
FSCS publishes November 2023 outlook report
On 9 November, the FSCS published its November 2023 outlook report providing an update for the 2023/24 levy and a first look at the 2024/25 forecast. The report explains that the total levy remains as forecast earlier this year at £270m. As the current compensation forecast, £435 remains broadly similar to May’s outlook, the FSCS do not expect to need to request any additional levies from firms during this financial year. The FSCS notes that any surpluses in each class will be carried forward and used to offset the levy payable by firms in 2024/25. Looking forward, the current forecast for the next financial year is £415m, although the FSCS reminds firms that this figure is an early indication and subject to change. Although the levy is expected to increase in 2024/25, due to the lower surpluses carried over from the previous financial year, compensation costs remain relatively stable. FSCS explains that it will keep the industry informed of any changes to its forecasts in a timely fashion. The next outlook will be published in spring 2024.
HMT and BoE consult on implementing the new BoE levy
On 8 November, HMT published a consultation paper on the implementation of the new BoE levy. The BoE also published a consultation paper on its approach to the levy and both papers should be read in conjunction with each other. The HMT consultation seeks views on draft legislation that sets out which institutions are required to pay the levy and how the levy is apportioned. The consultation asks for stakeholders’ views on the drafting of that legislation. The BoE’s consultation explains its approach to levying the amounts required in connection with its policy functions, which are the functions exercised by the BoE in pursuit of its Financial Stability and Monetary Policy objectives. The deadline for comments to both consultation papers is 15 December.
Financial crime and sanctions
FCA multi-firm review on anti-fraud controls and complaint handling in firms
On 7 November, the FCA published the findings from its multi-firm review of anti-fraud controls and complaint handling, including APP fraud. The FCA explains that while it observed some examples of effective control frameworks and good practice, it was disappointed to find several common weaknesses in key areas of firms’ fraud risk management frameworks and customer treatment. Some bad practices it observed included: (i) an insufficient focus on delivering good consumer outcomes; (ii) firms management information and actions often focused on commercial risk appetite, rather than customer impact and treatment; (iii) significant scope in many firms to improve the support provided to victims of fraud including from the first point of contact; (iv) poor complaint handling including firms often taking too long to respond to customer complaints; (v) customers provided with decision letters that were sometimes unclear, confusing, or included unhelpful and, on occasion, accusatory language; and (vi) limited evidence that firms are appropriately taking account of characteristics of customer vulnerability when making decisions about fraud claims and complaints. The FCA expects all PSPs to use these findings to inform what more they can do to detect, manage and reduce fraud and losses more effectively. The FCA reminds firms that customer treatment must also be improved, including how complaints are handled, to deliver consistently good consumer outcomes in line with the Consumer Duty. In concluding the FCA stated that it will continue to monitor how payment firms are meeting its expectations to slow the growth in APP fraud cases and losses, as well as fraud more generally, and to put the needs of customers first.
EBA consults on draft technical standards on supervisory colleges under MiCAR
On 8 November, the EBA published a consultation on draft RTS on supervisory colleges under Article 119(8) of MiCAR. The proposals specify: (i) the criteria to be used for determining “the most relevant” custodians of the reserve of assets, trading platforms, PSPs providing payment services in relation to the significant EMTs, and cryptoassets service providers providing custody and administration of cryptoassets on behalf of clients; and (ii) the conditions under which it is considered that asset-referenced tokens (ARTs) and e-money tokens (EMTs) are “used at large scale” in a Member State for the purpose of determining the composition of a supervisory college under MiCAR. In addition, the draft RTS also specify the general conditions for the functioning of supervisory colleges under MiCAR, including aspects related to participation in the college meetings, the voting procedures for the adoption of a non-binding opinion by the college, and aspects related to the exchange of information and the entrustment of tasks among college members. The deadline for comments is 8 February 2024. The provisions of MiCAR relating to offering to the public and admission to trading of ARTs and EMTs will apply from 30 June 2024.
EBA consults on the reporting of transactions with ARTs and EMTs denominated in a non-EU currency under MiCAR
On 8 November, the EBA published a consultation under MiCAR on draft RTS specifying the methodology to be applied by issuers of ARTs and of EMTs denominated in a non-EU currency for reporting transactions associated to uses of these tokens “as a means of exchange”. The proposals set out in the draft RTS aim to clarify the scope of the transactions associated to the use of ARTs and EMTs denominated in a non-EU currency as a means of exchange that should be reported by issuers, and how issuers should estimate the number and value of such transactions. The draft RTS also aim at contributing to the objective of MiCAR of monitoring and preventing risks that the wide use of ARTs and of EMTs denominated in a non-EU currency as a means of exchange may have on monetary policy transmission and monetary sovereignty within the EU. In addition, the EBA is also consulting on draft ITS specifying the related reporting requirements under MiCAR. The draft ITS provide specific templates and related instructions for the issuers of ARTs and of EMTs denominated in a non-EU currency to comply with their reporting obligations. The draft ITS also provide templates and related instructions that CASPs must provide to issuers of ARTs and of EMTs denominated in a non-EU currency. The deadline for comments for both consultations is 8 February 2024. The provisions of MiCAR relating to offering to the public and admission to trading of ARTs and EMTs will apply from 30 June 2024.
EBA consults on draft guidelines on recovery plans for issuers of ARTs and EMTs under MiCAR
On 8 November, the EBA published a consultation on draft guidelines on recovery plans to be drafted by issuers of ARTs and EMTs. Through recovery planning, issuers of ARTs and EMTs are expected to prepare in advance to face adverse scenarios that may impact their ability to comply with the regulatory requirements applicable to the reserve of assets. These draft guidelines set out the requirements with respect to the format of the recovery plans and the information to be included therein. The draft guidelines explain that recovery plans should comprise four elements: (i) a summary of the key elements of the recovery plan; (ii) the information on governance; (iii) the description of the applicable recovery options; and (iv) a communication and disclosure plan. In specifying the content of the recovery plans, the draft guidelines aim to build on the existing legislative requirements on recovery planning in the financial sector and adapt them, where relevant, to reflect the specificities of ART and EMT issuers. The draft Guidelines also include provisions on the interaction between the recovery plans drafted by multiple issuers of the same token or by issuers offering two or more tokens to the public, as well as to reduce the burden on credit institutions and investment firms already subject to the recovery planning obligations under the BRRD. The deadline for comments is 8 February 2024. The EBA expects the guidelines to apply from 30 June 2024.
EBA consults on draft technical standards on own funds requirements and stress testing of issuers under MiCAR
On 8 November, the EBA published two consultations on draft RTS on own funds requirements and stress testing of issuers of ARTs and EMTs under MiCAR. The draft RTS on the adjustment of own funds requirements and design of stress testing programmes specify: (i) the criteria for the assessment of ‘higher degree of risk’; (ii) the procedure for competent authorities to determine the period of time considered appropriate for issuers to increase the own funds amount to the higher own funds requirements and the measures to be taken to ensure the timely compliance thereof and (iii) a minimum set of requirements to issuers for the design and implementation of their stress-testing programmes. While the other draft RTS specify the procedure and timeframe for issuers to adjust their own funds requirements to 3% of the average amount of the reserve assets when their ARTs are classified as ‘significant’ ARTs. The deadline of comments for both consultations is 8 February 2024.
EBA consults on draft RTS on liquidity requirements and on draft guidelines on liquidity stress testing of relevant issuers of tokens, under MiCAR
On 8 November, the EBA published three consultations on draft RTS to specify (i) the liquidity requirements of the reserve of assets. The EBA proposes minimum percentage rates of the reserve of assets with a maturity of no longer than between 1 and 5 working days, as well as proposing overall techniques for liquidity management of the reserve of assets. In addition, the draft RTS also establish the specific minimum amount of deposits with credit institutions to be held by issuers in each official currency referenced; (ii) the highly liquid financial instruments in the reserve of assets. The EBA specifies financial instruments that can be considered highly liquid and bearing minimal market risk, credit risk and concentration risk, which the reserve of assets can be invested in; and (iii) the minimum content of the liquidity management policy and procedures of relevant issuers of tokens which seek to ensure that such issuers properly assess and monitor their liquidity needs and that their reserve assets have a resilient liquidity profile to meet any redemption of the ARTs that can be requested at any time by their holders. The EBA is also consulting on draft guidelines to establish the common reference parameters of the stress test scenarios to be included in liquidity stress testing. The deadline for comments for all four consultations is 8 February 2024.
EC consults on Delegated Regulations on supervision under MiCAR
On 8 November, the EC commenced consultation on four delegated acts to supplement MiCAR: (i) Delegated Regulation supplementing MiCAR by specifying the procedural rules for the exercise of the power to impose fines or periodic penalty payments by the EBA on issuers of significant ARTs and issuers of significant EMTs; (ii) Delegated Regulation supplementing MiCAR by specifying the criteria and factors to be taken into account by ESMA, the EBA and competent authorities in relation to their intervention powers; (iii) Delegated Regulation supplementing MiCAR by specifying certain criteria for classifying ARTs and EMTs as significant; and (iv) Delegated Regulation supplementing MiCAR by specifying the fees charged by the EBA to issuers of significant ARTs and issuers of significant EMTs. The deadline for comments on the draft Regulations is 6 December.
FCA discussion paper on regulating fiat-backed stablecoins
On 6 November, the FCA published a discussion paper on regulating fiat-backed stablecoins. The paper explores the proposed regulation around issuing and custody of stablecoins that claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency. The FCA wants to use this discussion paper to inform the development of its regime for fiat-backed stablecoins as a means of payment and ensure any regime it creates meets its objectives. The paper raises a series of questions across chapters on (i) the stablecoin regime, (ii) backing assets and redemption, (iii) key expectations of stablecoin issuers, (iv) custody requirements, (v) organisational requirements, (vi) conduct of business and consumer redress, (vii) prudential requirements, (viii) managing stablecoin firm failure, (ix) regulating payments using stablecoins and (x) overseas stablecoins used for payment in the UK. The deadline for comments is 6 February 2024. This paper is part of a joint publication package with the BoE’s discussion paper on systemic payment systems using stablecoins and related services providers (see the Payment Services and Payment Systems section below), and the PRA’s Dear CEO letter on innovative uses of deposits, e-money and stablecoins (see the Other Developments section below). To accompany these publications, the regulators have also published a joint ‘Roadmap paper’ which aims to explain how the proposed regimes interact and their approach for dual regulation.
Markets and markets infrastructure
Please see the ‘Capital Markets’ section for the three texts the EP has adopted on the European Single Access Point.
Please see the ‘Fintech’ section for the EBA’s consultations on draft technical standards and guidelines and the EC’s Delegated Regulations under MiCAR.
European Parliament adopts proposed CSDR Refit Regulation
On 9 November, the EP published the text of its provisional agreement on the proposal for a Regulation amending the CSDR as regards settlement discipline, cross-border provision of services, supervisory cooperation, provision of banking-type ancillary services and requirements for third-country central securities depositories. The proposed Regulation makes changes to the CSDR relating to issues such as the third-country regime and settlement failures. Once the text is adopted by the Council of the EU, it will be published in the OJ and will enter into force on the twentieth day following publication.
BoE publishes results of second public supervisory stress test of UK CCPs
On 8 November, the BoE published the results of its second UK CCP supervisory stress test (SST) exercise. The 2023 CCP SST explores the credit and liquidity resilience of the three UK CCPs, ICE Clear Europe Limited, LCH Limited, and LME Clear Limited, and their interconnectedness with the rest of the financial system. It aims to identify any potential vulnerabilities and gaps in CCPs’ financial resilience, with the findings used to support and inform the BoE’s supervisory and regulatory activities. The 2023 CCP SST has four analytical components: (i) the credit stress test; (ii) the credit reverse stress test; (iii) the liquidity stress test; and (iv) the clearing member and client analysis. Each component is based on a hypothetical baseline market stress scenario, which represents a global economic downturn combined with a negative supply shock in commodities markets. Overall, the exercise demonstrated that UK CCPs are resilient to the baseline market stress scenario and default of the Cover-2 population, from both a credit and liquidity perspective. The BoE concluded that; (a) in the credit stress test, all UK CCP clearing services have sufficient prefunded resources to comfortably absorb default losses following a Cover-2 default, even when accounting for the cost of liquidating concentrated positions; (b) in the credit reverse stress test all three CCPs performed better relative to the BoE’s previous CCP SST exercise, despite the test applying more severe market stress scenarios than the previous test; (c) the liquidity stress test showed that all three CCPs could meet liquidity requirements under the combination of the baseline market stress scenario and the simultaneous default and failure of the Cover-2 population; and (d) the clearing member and client analysis shows that the baseline market stress scenario has a significant impact on clearing members via variation margin and initial margin calls. The BoE will use the findings from the 2023 CCP SST to support and inform its ongoing supervision and regulation of UK CCPs.
EC adopts RTS as regards the homogeneity of underlying exposures in STS
On 7 November, the EC adopted a draft Delegated Regulation amending the RTS laid down in Delegated Regulation (EU) 2019/1851 as regards the homogeneity of the underlying exposures in simple, transparent and standardised securitisations (STS). These draft RTS amend Delegated Regulation (EU) 2019/1851 on the homogeneity of the underlying exposures in ABCP and non-ABCP securitisation extending the scope to on-balance-sheet securitisations. The RTS establish the same conditions for the homogeneity of the assets for all types of securitisations. They carry over a significant part of the provisions on homogeneity set out in the 2019 Delegated Regulation with minor modifications. These modifications aim at ensuring consistency with the new enlarged scope and providing further clarity on specific requirements. The RTS will enter into force on the twentieth day following its publication in the OJ. The RTS will apply to securitisations issued on or after the date of entry into force of the RTS. However, in order not to interfere with existing contracts concluded before the establishment of the amended homogeneity criteria, the RTS provide for a transitional regime for those contracts.
Draft Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023
On 7 November, a draft Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023 was published on legislation.gov.uk, along with an explanatory memorandum. In addition, HMT published a policy paper explaining its reasons for publishing the draft Regulations. Regulation 3 of the draft Regulations amends the UK BMR to extend the transitional period for the third country benchmarks regime from 31 December 2025 to 31 December 2030. HMT explains that this extension will ensure that firms do not lose access to non-UK benchmarks that are critical to their operations and provides time for the government to consider where reforms are needed to the third country benchmarks regime. Regulation 2 reintroduces a ‘discount factor’ which was unintentionally removed from the Capital Requirements Regulation (CRR) in both the UK and the EU. The discount factor reduces the amount of capital small- and medium-sized firms hold for their trading and derivative activities. Reintroducing the discount factor will align UK legislation with relevant international standards and ensure that UK firms remain competitive compared to those based in other jurisdictions.
Payment services and payment systems
Please see the ‘Financial Crime and Sanctions’ section for the FCA’s findings from its multi-firm review on anti-fraud controls and complaint handling in firms.
Please see the ‘Fintech’ section for the FCA discussion paper on regulating fiat-backed stablecoins.
PSR consults on draft review framework
On 9 November, the PSR published a consultation paper on generally applicable requirements, draft review framework. The PSR is seeking views on how it reviews its general directions and generally imposed requirements. Under FSMA 2023 the PSR is required to keep under review any generally applicable requirements and to publish a statement of its policy with respect to the review of its requirements. To meet this requirement, the PSR proposes to publish a review framework explaining: (i) how the PSR will identify when it should review generally applicable requirements; (ii) the methods it may use; (iii) how stakeholders can request a review or respond to its relevant consultations; and (iv) how the PSR would prioritise a review. The deadline for comments on the proposed framework is 22 December. The PSR aims to publish a response in early 2024.
BoE discussion paper on the regulatory regime for systemic payment systems using stablecoins and related service providers
On 6 November, the BoE published a discussion paper on the proposed regulatory regime for systemic payment systems using stablecoins and related service providers. The paper focuses on sterling-denominated stablecoins because it considers these are the most likely digital settlement assets to be used widely for payments. Part one of the paper sets out the BoE’s role in ensuring the safety of money and payments and scope of the regime. Part two explains the proposed requirements of the regime. The paper builds on the BoE’s previous discussion paper on new forms of digital money published in June 2021, and the Financial Policy Committee’s expectations for stablecoins set out in the December 2019 Financial Stability Report. The BoE hopes that it will encourage further research and dialogue between the BoE, the payments industry, technology providers, payments users, financial institutions, academics, other central banks and public authorities, and broader society. The deadline for comments is 6 February 2024.
Political agreement reached on the proposed Regulation on instant payments
On 7 November, the EP and the Council of the EU announced that they had reached a provisional political agreement on the proposed Regulation amending the SEPA Migration Regulation and the Cross-Border Payments Regulation. The proposed Regulation aims to improve the availability of instant payment options in euro to consumers and businesses in the EU and in EEA countries. Under the provisionally agreed rules, PSPs, such as banks, which provide standard credit transfers in euro, will also be required to offer the service of sending and receiving instant payments in euro. The charges that apply (if any) must not be higher than the charges that apply for standard credit transfers. Payment and e-money institutions (PIEMIs) will also be granted access to payment systems, by changing the Settlement Finality Directive. As such, PIEMIs will be covered by the obligation to offer the service of sending and receiving instant credit transfers, after a transitional period. The Council and EP agreed that the new rules will come into force after a transition period that will be faster in the euro area and longer in the non-euro area, who need more time to adjust. The provisional political agreement is subject to the approval of the Council and EP before entering the formal adoption procedure. The agreed revised text of the legislative proposal has not yet been published.
Please see the ‘Fintech’ section for the EBA consultation on draft technical standards on own funds requirements and stress testing of issuers under MiCAR and the EBA consultation on draft RTS on liquidity requirements and on draft guidelines on liquidity stress testing of relevant issuers of tokens under MiCAR.
Please see the ‘Markets and Markets Infrastructure’ section for the draft Financial Services and Markets Act 2023 (Benchmarks and Capital Requirements) (Amendment) Regulations 2023.
BCBS publishes finalised technical amendments to the Basel framework
On 8 November, the BCBS published its finalisation of various technical amendments to the Basel framework. The amendments relate to: (i) the standardised approach to operational risk; (ii) the disclosure standards for CVA risk; (iii) the description of the calculation of indicator scores for G-SIBs and disclosure requirements; and (v) amendments to reflect the new market risk framework and impact on the countercyclical capital buffer. The amendments were published for consultation in March and have been finalised as originally proposed. Basel Committee members have agreed to implement the technical amendments set out in the document as soon as practical and within three years at the latest.
Recovery and resolution
Please see the ‘Fintech’ section for the EBA consultation on draft guidelines on recovery plans for issuers of ARTs and EMTs under MiCAR.
The Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Calculation of Maximum Amounts for Cash Calls and Use of Specified Funds) Regulations 2023
On 9 November, the Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Calculation of Maximum Amounts for Cash Calls and Use of Specified Funds) Regulations 2023 were laid and published on legislation.gov.uk, along with an explanatory memorandum. The instrument sets the maximum amounts of cash that may be specified in cash call instruments made by the BoE. Cash call instruments require clearing members of a CCP to pay an amount of cash specified in the instrument to the CCP, and so allow the BoE to generate additional loss absorbing capacity and replenish a CCP’s resources. By setting caps on the amount of cash that may be specified, this instrument will give clearing members greater certainty regarding the maximum amount they may be required to contribute under the cash call power should a CCP be placed into resolution. The instrument also establishes the circumstances in which the BoE can require the CCP to use specified funds held by the CCP to meet obligations imposed upon a clearing member under a cash call instrument, where that clearing member has failed to meet its obligations under a cash call instrument. The instrument will come into force on 31 December 2023.
The Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Deferment of Provisions in Resolution Instruments) Regulations 2023
On 9 November, the Financial Services and Markets Act 2023 (Resolution of Central Counterparties: Deferment of Provisions in Resolution Instruments) Regulations 2023 were laid and published on legislation.gov.uk, along with an explanatory memorandum. The instrument sets out the process by which the BoE may suspend or waive, and where suspended, subsequently enforce, a provision under a resolution instrument in the context of the new special resolution regime for CCPs in Schedule 11 of FSMA 2023. The instrument will come into force on 31 December 2023.
ECON votes to adopt draft report on proposed Directive on MREL reforms
On 7 November, the EP announced that the Economic and Monetary Affairs Committee (ECON) has adopted a draft report on the EC proposal for a Directive making targeted amendments to the BRRD and the SRM Regulation concerning the MREL. ECON voted for targeted changes to the so-called ‘Daisy Chain’ proposal ensuring proportionality and a level playing field between banks, including to extend the definition of “liquidation entity”. Furthermore, the MEPs focused on how to frame the discretion of NRAs to determine the internal MREL exceeding the own funds requirement for liquidation entities on an individual basis as well as on the discretion of NRAs to determine the MREL on a consolidated basis for specific subsidiaries in a resolution group. Once the EP’s mandate to start negotiations with the Council is announced in its plenary session commencing on 20 November, negotiations with the Council are expected to start.
Regulatory reform post Brexit
Draft Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023 laid before parliament
On 7 November, a draft Financial Services and Markets Act 2023 (Consequential Amendments) Regulations 2023 was published on legislation.gov.uk, along with an explanatory memorandum. FSMA 2023 repeals retained EU law relating to financial services and replaces it with rules set by the financial services regulators, operating within a framework set by government and Parliament. This draft instrument makes consequential amendments resulting from some of those repeals, as well as other miscellaneous consequential amendments. The instrument comes into force on 1 January 2024.
Please see the ‘Capital Markets’ section for the three texts the EP has adopted on the European Single Access Point.
Please see the ‘Other Developments’ section for ESMA’s commitment to its ESG disclosures priority.
NGFS long-term climate macro-financial scenarios for climate risks assessment
On 7 November, the Network for Greening the Financial System (NGFS) published the fourth version of its long-term climate macro-financial scenarios for forward-looking climate risks assessments. The scenarios explore the transition and physical impacts of climate change, over a long-time horizon and under varying assumptions. They have been updated to account for the latest GDP and population pathways and the most recent country-level climate commitments as of March 2023. Key changes include: (i) the orderly scenarios now reflect climate policy delays and the energy crisis following the war in Ukraine; (ii) the modelling of acute physical risks has been enhanced with the inclusion of two more hazards (droughts and heatwaves) and increased geographical granularity; (iii) two new scenarios have been developed, the “Too-little-too-late” Fragmented World scenario that illustrates the adverse consequences of delayed and divergent climate policy ambitions globally; and the “Orderly” Low Demand scenario that explores a Paris-aligned transition driven by substantial behavioural changes in which global warming is limited to 1.5°C; and (iv) the Divergent Net Zero scenario has been discontinued. The NGFS also published three accompanying documents, aimed at providing guidance on the use of these scenarios by central banks and supervisors: (a) an updated technical documentation; (b) a data user guide; and (c) a technical note on compound risks. An update of the NGFS (Phase IV) scenarios will be published in the course of 2024 and will include further sectoral disaggregation and possibly a more adverse new chronic physical risk damage function. The NGFS welcomes feedback from users on the scenarios to keep on improving them.
ESMA to put cyber risk as a new Union Strategic Supervisory Priority
On 9 November, ESMA announced that it is changing its Union Strategic Supervisory Priorities (USSPs) to focus on cyber risk and digital resilience alongside ESG disclosures. As such EU supervisors will put greater emphasis on reinforcing firms’ ICT risk management through close monitoring and supervisory actions, building new supervisory capacity and expertise. The aim is to keep pace with market and technological developments, and closely monitor potential contagion effects of attacks and disruptions across markets and firms. The new USSP will come into force in 2025, at the same time as DORA. In the meantime, ESMA and NCAs will carry out preparatory work planning and shaping the supervisory activities to undertake this priority. In addition, ESMA and NCAs will continue their work on the second priority, ESG disclosures, with the aim of tackling greenwashing, increasing investors understanding and embedding sustainability requirements when firms advise investors. The new USSP on cyber risk and digital resilience will replace the USSP on market data quality. Although, firms should still ensure that data quality remains a primary duty of supervised entities as EU supervisors will continue to undertake important supervisory work on data quality, leveraging on the new methodologies and tools developed through the USSP.
FCA Dear CEO Letter on expectations for wealth management and stockbroking firms
On 8 November, the FCA published a Dear CEO Letter on its expectations for wealth management and stockbroking firms. The letter sets out the FCA’s assessment of the sector’s key harms and its updated supervisory priorities for preventing financial crime and meeting consumer duty outcomes. With regard to financial crime, the FCA explains that it expects firms, among other things to: (i) not knowingly or otherwise engage or facilitate frauds, scams, or money laundering; (ii) understand their financial crime risks by identifying who their clients are, including their expected transaction patterns and corporate structure; (iii) not carry out tick box compliance exercises or outsource responsibility to third parties; and (iv) ensure they have robust and effective systems and controls to counter financial crime and money laundering in a proportionate and risk-based way. In addition, the FCA expects firms to have implemented the consumer duty in full, noting the areas it has seen failings, such as consumer understanding and price and value and how best firms can address these issues. The FCA also asks firms to remind themselves of their regulatory obligations, for example, operational resilience, following the CASS rules when you hold or control client money, preventing market abuse, having regard to ESG, improving DE&I and making sure there is no place for non-financial misconduct. CEOs and leadership teams are encouraged to fully understand the level of exposure their firm has to the risks and harms set out in this letter and invest significant time and energy to manage them. Firms are asked to proactively tell the FCA if work done on the issues raised result in remedial action or identifies harm, reminding firms of their ongoing obligations to notify the FCA of any issue that should be shared under Principle 11 immediately.
PRA Dear CEO letter on innovations in the use by deposit takers of deposits, e-money and regulated stablecoins
On 6 November, the PRA published a Dear CEO letter sent to PRA regulated firms on innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins. The letter aims to provide clarity on the ways in which the PRA expects deposit-takers to address risks while supporting innovation and competition, in particular the risks that may arise in relation to the availability in parallel of deposits, e-money and regulated stablecoins to retail customers. The PRA explains that with the emergence of multiple forms of digital money and money-like instruments, there is a risk of confusion among customers, especially retail customers, if deposit taking entities were to offer e-money or regulated stablecoins under the same branding as their deposits. As such the PRA expects deposit takers to mitigate the risk of contagion in the following ways: (i) deposit-takers should ensure that deposit-taking entities only provide innovations in digital money to retail customers in the form of deposits; (ii) where a firm without a deposit-taking permission has issued e-money or regulated stablecoins to retail customers and seeks a deposit-taking permission, the PRA expects firms to transition their UK customers to deposits at the new deposit-taking entity as soon as practicable; and (iii) where a deposit-taker intends to innovate in the way that it takes deposits from retail customers, the PRA expects this to be done in a way that meets the PRA’s rules for eligibility for depositor protection under the FSCS. Deposit-takers must also ensure they meet the single customer view and exclusions view requirements in respect of such deposits. The PRA’s broader expectations for deposit-takers in the context of either retail or wholesale innovations in the use of digital money or money-like instruments are set out in Annex 3 of the letter. In concluding, the PRA reminds firms to keep their supervisors updated about any material developments in their planned innovations for the use of digital money or money-like instruments, and how their plans meet the expectations set out in the letter.
Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023
On 7 November, a draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023 was published on legislation.gov.uk, along with an explanatory memorandum. The draft order legislates to make amendments to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 following a public consultation on financial promotion exemptions for high net worth individuals and sophisticated investors (see below). This instrument also corrects a defect in the Financial Promotion Gateway Exemptions Regulations, amending the regulations to ensure that all of the exemptions have the intended scope. The instrument comes into force on 31 January 2024.
HMT consultation response on financial promotion exemptions for high net worth individuals and sophisticated investors
On 7 November, HMT published a consultation response on changes to the scope of the financial promotion exemptions for certified high net worth individuals, sophisticated investors and self-certified sophisticated investors. The response follows on from HMT’s consultation on the same topic published in December 2021, summarising the responses received to the consultation and outlining the governments approach to amending the FPO, the amendments to which can be found in the draft order, discussed above. The response confirms that the following changes will be made: (i) increasing the thresholds for high net worth individuals to income of at least £170,000 in the last financial year or net assets of at least £430,000 throughout the last financial year; (ii) amending the criteria for self-certified investor sophistication; (iii) requiring businesses to provide details of themselves in any communications made using the exemptions; (iv) updates to the form of high net worth individual and self-certified sophisticated investor statements, including updating the format, simplifying the language and requiring greater investor engagement; and (v) changing the name of the certified high net worth individual exemption to remove the word certified. HMT also notes that the amendments to the FPO will also be applied to the Collective Investment Schemes (Exemptions) Order 2001. In addition, the response sets out the policy proposals HMT has decided not to proceed with, such as the proposal to increase the responsibility on firms to ensure individuals meet the criteria to be classified as high net worth or sophisticated.
FCA application window for permission to approve financial promotions for unauthorised persons opens
On 6 November, the FCA application window for permission to approve financial promotions for unauthorised persons opened. The window will close on 6 February 2024, the day before the rules take effect. Firms that don’t apply during this window will need to stop approving financial promotions for unauthorised persons on 7 February 2024.
FCA financial promotions data 2023 Q3
On 3 November, the FCA published its financial promotions quarterly data for Q3 2023. This includes a summary of data generated between 1 July and 30 September from the FCA’s actions against firms breaching financial promotion rules, and referrals and investigations into unregulated activity. The data includes the number of financial promotions reviewed during this period, the number of closed cases where promotions have been amended and withdrawn, as well as the number of unauthorised reports received, and alerts issued. The FCA also provides an overview of how it is working to improve standards across the market so that consumers are provided with clear and fair financial promotions which are not misleading.