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Key Regulatory Topics: Weekly Update 31 March - 5 April 2023

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This week, the FCA, the FOS and IOSCO published their business plans, setting out their priorities for 2023/24. HMT launched a call for evidence as the first step in the investment research review, announced as part of the Edinburgh Reforms. Meanwhile, the PRA published a Policy Statement on changes to depositor protection rules for e-money and payment institutions’ safeguarded funds. In Europe, the EBA set out guidance to challenge unwarranted de-risking and safeguard access to financial services to vulnerable customers, and ESMA published numerous updated Q&As, including on the BMR, the implementation of EMIR, SFTR data reporting, MiFID II transparency and MiFIR data reporting. 

Consumer/Retail

Please see the Other Developments section for the FCA’s business plan for 2023/24, which sets out its priorities for the next 12 months.

FOS Feedback Statement on temporary changes to outcome reporting in business-specific complaints data

On 3 April, the FOS published a Feedback Statement to its consultation on temporary changes to outcome reporting in its business-specific complaints data. The FOS confirms that for 2023/24, it will report cases as "proactively settled" where the business offers to settle a complaint within 21 days of the FOS requesting the respondent's business file (provided that the FOS is clearly informed within 14 days that an offer is coming), the FOS considers that the offer is fair and reasonable, and the complainant accepts the offer. The initiative only applies to new cases with the service from, or less than 14 days before, 1 April. The initiative is a trial for the 2023/24 financial year to determine whether it should be implemented as a permanent change.

Feedback Statement

FOS plans and budget 2023/24

On 31 March, the FOS published its plans and budget for 2023/24. Its compulsory jurisdiction levy will remain the same at £106 million, while the voluntary jurisdiction levy will reduce to £600,000. Among other objectives, in 2023/24 the FOS will: (i) carry forward a stock of below 70,000 complaints from 2022/23, exiting 2023/24 with a stock of approximately 47,000 complaints; (ii) introduce new service standards for all new complaints from 1 April; (iii) improve the quality of its data and leverage this data to share high quality insight with industry and drive further efficiencies; (iv) launch regional hubs, focusing on diversity equity and inclusion, and developing its employee proposition; (v) enable customers (both complainants and respondent businesses) to self serve through digital portals; and (vi) embed a culture of continuous improvement to ensure that it can build on the transformation delivered to drive further benefits. The FOS also sets outs its response to its consultation on its plan and budget that was launched in December.

Plans and budget 2023/24

Financial Crime

Please see the Other Developments section for the FCA’s business plan for 2023/24, which sets out its priorities for the next 12 months.

EBA Guidelines to challenge unwarranted de-risking and safeguard access to financial services to vulnerable customers

On 31 March, the EBA published a new set of guidelines and amended its ML/TF risk factor guidelines with the aim of ensuring that customers are not denied access to financial services on unsubstantiated AML/CFT grounds or without valid reason. The EBA’s assessment of the scale and impact of de-risking highlighted that while decisions not to establish or to end a business relationship, or not to carry out a transaction, may be in line with the EU AML/CFT framework, de-risking of entire categories of customers, without due consideration of individual customers’ risk profiles, can be unwarranted and a sign of ineffective ML/TF risk management. The EBA has added an Annex to its ML/TF risk factor guidelines to set out what financial institutions should do to identify and assess ML/TF risk associated with customers who are Not-for-Profit organisations (NPOs). The guidance provides information on how NPOs are organised, how they operate in practice, and what ML/TF risk factors are particularly relevant when dealing with such customers. The new set of guidelines is broader and tackles the issue of effective management of ML/TF risks by financial institutions when providing access to financial services.  The new guidelines clarify the interaction between the access to financial services and institutions’ AML/CFT obligations, including in situations where customers have legitimate reasons to be unable to satisfy Customer Due Diligence requirements. The guidelines: (i) make clear that before making a decision to reject a customer, several options need to be considered; and (ii) set out the steps institutions should take when considering whether to refuse or terminate a business relationship with a customer based on ML/TF risk or AML/CFT compliance grounds. The amended guidelines and the new set of guidelines will apply three months after publication in all EU official languages.

Press release

Final report on amended risk factor guidelines

Final report on new financial access guidelines

Fintech

Please see the Markets and Market Infrastructures section for IOSCO’s work programme for 2023/24, setting out its priorities over the coming two years, which include addressing new risks in sustainability and FinTech.

Please see the Other Developments section for the FCA’s business plan for 2023/24, which sets out its priorities for the next 12 months.

ECB blog post on better oversight of crypto activities

On 5 April, the ECB published a blog post by Elizabeth McCaul, Member of the ECB Supervisory Board, on the need for better oversight of cryptoasset activities in response to the recent bank failures and collapse of FTX. Points of interest include: (i) Ms McCaul highlights the lack of regulatory equivalence regimes in the cryptoasset world for comprehensive oversight. She calls for the assessment of existing laws, such as MiFID, and future ones, such as MiCA, to address this, and identify any other regulatory or supervisory gaps that may lead to failures; (ii) Ms McCaul cautions that contagion can go both ways, from crypto markets to banks and also vice versa. She notes the significant capital held by cryptoasset firms in the recently failing banks; (iii) although the BCBS standard on the prudential treatment of cryptoassets is not yet legally binding in the EU, the ECB expects that banks hoping to engage in crypto activities will comply with the standard and take it into account in their business and capital planning. The BCBS standard complements MiCA, which the ECB expects to be adopted in Q2 2023; and (iv) in relation to MiCA, the ECB is considering asking banks to share with it all the information they are required to share with the MiCA competent authorities. The ECB is also currently developing dedicated guidance for Joint Supervisory Teams to support them in their assessment of the prudential implications of crypto activities to inform the Supervisory Review and Evaluation Process. Ms McCaul sets out a number of ways that she considers that CASP oversight can be strengthened, including: (a) an evaluation of whether MiCA’s quantitative metrics adequately capture the significance of CASPs. These thresholds should also be measured at group level rather than at individual entity level; (b) a consolidated group-level approach to supervision of large CASPs. Conflicts of interest should be identified across the group and even beyond, taking into account affiliated entities. In addition, the requirement to establish intermediate parent undertakings should be extended to CASPs to remove opportunities for regulatory arbitrage, such as the exposure limits under the BCBS standard on crypto-assets; (c) in line with the principle of proportionality, subjecting significant CASPs to both stricter requirements and enhanced supervision: neither of which is catered for by MiCA; and (d) ensuring that no jurisdiction allows entities to run their business without disclosing their legal status and who is responsible for the business. There needs to be more thought put into imagining what international coordination will look like and how it can be effective in regulating the crypto world.

Blog

ESMA updates Q&As on DLT Pilot Regime Regulation

On 31 March, ESMA updated its Q&As on the implementation of the DLT Pilot Regime Regulation (DLTR). ESMA clarifies, in a new question, how the tentative market capitalisation of DLT shares that have not yet been admitted to trading or traded on a trading venue, referred to in Article 3(1)(a) of the DLTR, should be calculated.

Q&A

Fees/Levies

FCA consults on rates proposals for 2023/24

On 5 April, the FCA began consulting on its fees and levies rates proposals for 2023/24: (i) to ensure it is adequately resourced to manage its expanding remit, cover inflationary pressure and meet the policy opportunity provided by the transfer of retained EU financial services law into its Handbook, the FCA will increase its funding requirement to £684.2 million; (ii) in response to cost pressures faced by many firms, the FCA proposes to freeze minimum and flat rate fees, as well as application fees generally. It expects to return to increasing these fees in 2024/25; (iii) the FCA proposes to make two adjustments to the FEES manual to make its rules on proxy advisors, credit unions and community finance organisations clearer; and (iv) the FCA sets out the FOS general levy and levies the FCA collects on behalf of government departments, including the Money and Pensions Advice Service (MaPS) levy and the economic crime levy. The deadline for comments is 11 May. The FCA expects to publish feedback, together with final fees and levy rates, in July.

Consultation

FSCS management expenses levy limit 2023/24

On 31 March, the PRA finalised the management expenses levy limit (MELL) for 2023/24. The PRA consulted on the MELL jointly with the FCA in January. As no responses were received to the consultation, the policy proposals will be implemented as consulted on. The MELL of £109.8 million includes: (i) the FSCS management expenses budget of £99.8 million; and (ii) an unlevied reserve of £10 million which allows the FSCS to raise additional funds at short notice to meet costs that were not foreseen, without the need for further consultation and rulemaking by the FCA and the PRA. The FSCS’ forecast underspend compared to the 2022/23 budget has increased to £8.3 million. Should this forecast materialise, then these funds will be used to offset the levy for the relevant classes in 2023/24. The MELL will apply from1 April, to 31 March 2024.The PRA has issued a rulebook instrument to implement the new levy.

Policy Statement

PRA rulebook instrument

Markets and Markets Infrastructure

Please see the Other Developments section for the FCA’s business plan for 2023/24, which sets out its priorities for the next 12 months.

ICMA updates SFTR reporting recommendations

On 5 April, ICMA updated its guide to reporting repo transactions under the EU and UK versions of the SFTR. The guide aims to help members interpret the regulatory reporting framework specified by ESMA and the FCA and set out best practice recommendations to provide additional clarity and address ambiguities in the official guidance. ICMA has incorporated a few changes based on the recent updates made to ESMA’s validation rules on 8 March, as well as the ongoing discussions within ICMA’s European Repo and Collateral Council SFTR Task Force. The guide is accompanied by a blackline version which offers an overview of the recent modifications.

Press release

Guide

IOSCO 2023/24 work programme

On 5 April, IOSCO published its work programme for 2023/24, setting out its priorities over the coming two years. IOSCO organises its workstreams under five themes; key priorities include: (i) strengthening financial resilience – IOSCO  will meet its commitments under the FSB’s 2023 Non-Bank Financial Intermediation (NBFI) workplan as part of its agreed follow-up work in response to the Covid-19 pandemic. IOSCO has identified Private Finance as a new priority, as a result of the area’s unprecedented growth and increasing role in funding the real economy, combined with emerging concerns around the increasing interconnectivity of the sector with regulated public markets; (ii) supporting market effectiveness – this workstream includes work aimed at enhancing operational and securities market resilience, including work on market outages, the use of post trade risk reduction services and alternative benchmarks.; (iii)  protecting investors – IOSCO plans to carry out follow up work stemming from the Retail Market Conduct Task Force stock-take of regulatory approaches regarding conduct in retail markets published in Q1 2023; (iv) addressing new risks in sustainability and FinTech – IOSCO will continue to work on improving the completeness, consistency and comparability of sustainability reporting under the stewardship of its Board-level Sustainability Taskforce. Similarly, with respect to FinTech, IOSCO plans to maintain the momentum reached under its July 2022 cryptoasset roadmap, to assess and respond to the risks associated with cryptoasset market activities and decentralised finance under the stewardship of the Board-level Fintech Taskforce; and (v) promoting regulatory cooperation and effectiveness – a key initiative is the IOSCO Multilateral Memorandum of Understanding (MMoU). IOSCO remains committed to promoting the benefits of the MMoU, and to encouraging more jurisdictions to become signatories. IOSCO will review and refresh the work programme, as appropriate, at end-2023 to ensure its ongoing relevance.

Press release

Work programme

Official translations of ESMA guidelines on MiFID II remuneration and suitability requirements

On 3 April, ESMA published the official translations of two sets of MiFID II guidelines: (i) guidelines on certain aspects of the MIFID II remuneration requirements set out in Article 27 of the MIFID II Delegated Regulation as well as, on the one hand, the conflicts of interest requirements set out in Articles 16(3) and 23 of MiFID II and Article 34 of the MiFID II Delegated Regulation in the area of remuneration; and on the other hand, the conduct of business rules set out in Article 24(1) and (10) of MiFID II. In addition, the guidelines clarify the application of the governance requirements in the area of remuneration under Article 9(3) of MIFID II; and (ii) guidelines on certain aspects of the MiFID II suitability requirements in relation to Article 25(2) of MiFID II and of Articles 54 and 55 of the MiFID II Delegated Regulation. Both sets of guidelines apply from 3 October (six months from the date of publication of the guidelines on ESMA's website in all EU official languages).

Remuneration requirements guidelines

Suitability requirements guidelines

FCA decision on synthetic US dollar LIBOR

On 3 April, the FCA announced its decision in relation to the publication of synthetic US dollar LIBOR. The FCA has decided: (i) to require LIBOR’s administrator, ICE Benchmark Administration Limited (IBA), to continue the publication of the 1-, 3- and 6-month US dollar LIBOR settings for a short period after 30 June, using an unrepresentative ‘synthetic’ methodology (see Article 23A BMR – notice of designation); (ii) that publication of the 1-, 3- and 6-month synthetic US dollar LIBOR settings will cease on 30 September 2024 (see Article 21(3) BMR – notice of first decision). The FCA will review its decision, prior to this date, in line with the requirements of the BMR. The FCA highlights that it expects firms to continue to actively transition contracts that reference US dollar LIBOR and deliver demonstrable progress; (iii) to require IBA to calculate the 1-, 3- and 6-month synthetic US dollar LIBOR settings using the relevant CME Term SOFR Reference Rate plus the respective ISDA fixed spread adjustment (see Article 23D BMR – draft notice of requirements); and (iv) to permit the use of the 1-, 3- and 6-month synthetic US dollar LIBOR settings in all legacy contracts except cleared derivatives (see Article 23C BMR – draft notice of permitted legacy use by supervised entities). The FCA highlights that, from 1 July, all new use of synthetic US dollar LIBOR will be prohibited. The synthetic settings are intended for use in legacy contracts only, to help ensure an orderly wind-down of LIBOR. The FCA will publish a detailed Feedback Statement in Q2 2023.

Press release

Article 23A – notice of designation

Article 21(3) – notice of first decision

Article 23D – draft notice of requirements

Article 23C – draft notice of permitted legacy use by supervised entities

HMT call for evidence for UK investment research review

On 3 April, HMT launched a call for evidence as the first step in the investment research review.

The call for evidence seeks views on, among other topics: (i) investment research provision in the UK compared with other major international financial services centres; (ii) the amount, quality and type of investment research currently provided on companies that are listed or quoted, or seeking to be listed or quoted, on the UK public markets; (iii) differences relating to specific sectors (e.g. technology and/or life sciences); (iv) the importance of investment research to the attractiveness of the UK public markets to listed companies (or companies considering listing) and their investors or to companies looking to access capital in private markets; (v) investor demand for research on UK listed and quoted companies; (vi) the impact of the current UK legislative and regulatory environment on the provision and quality of research, including (but not limited to) the MiFID II unbundling rules; (vii) the impact of the UK 2022 revisions to the MiFID unbundling rules applicable to smaller quoted companies; and (viii) the impact of divergence between UK/EU thresholds. The deadline for comments is 24 April. The review will also hold a series of discussions with interested parties to explore the issues raised further. The review will then provide its report to HMT.

Call for evidence

ESMA updates Q&As on BMR

On 31 March, ESMA updated its Q&As on the BMR.  ESMA has modified its Q&As on: (i) the assessment of compliance with IOSCO Principles to indicate that the assessment is carried out by ESMA not national competent authorities; and (ii) the role and responsibilities of an Article 32(2) legal representative, primarily to include information on what entities may be suitable candidates to perform such a role. 

Q&As

ESMA updates Q&As on SFTR data reporting

On 31 March, ESMA updated its Q&As on the SFTR reporting requirements. ESMA has added a new Q&A to provide clarification on reporting of the jurisdiction of the issuer.

Q&As

ESMA updates Q&As on implementation of EMIR

On 31 March, ESMA updated its Q&As on the implementation of EMIR. ESMA has added a new question to provide clarification on the inclusion of derivatives in the trade state report. It has also modified Q&As relating to: (i) reporting to trade repositories under Article 9; and (ii) which parties are required to report exchange traded derivatives contracts.

Q&As

ESMA updates MiFID II and MiFIR Q&As on transparency and MiFIR Q&As on data reporting

On 31 March, ESMA updated its Q&As on MiFID II and MiFIR transparency topics. ESMA added a new Q&A in relation to non-equity transparency that clarifies how to report the delivery/cash settlement location for electricity and gas contracts for cash settled contracts and contracts for which an EIC is not available, under Table 2 of Annex IV of RTS 2. ESMA also added two new Q&As to its Q&As on MiFIR data reporting, clarifying: (i) what legal entity identifier (LEI) should be used to report in FIRDS the issuer of sovereign bonds issued by an EEA member state; and (ii) what ISO 3166-1 country code should trading venues and investment firms use to identify stateless natural persons for the purposes of transaction reports.

MiFID II and MiFIR transparency Q&As

MiFIR data reporting Q&As

Payment Services and Payment Systems

PRA Policy Statement on changes to depositor protection rules for EMI/PI safeguarded funds

On 31 March, the PRA finalised its proposed changes to Rule 6.2 in the Depositor Protection Part of the PRA Rulebook (DP) and to make other consequential changes to the DP rules. These amendments clarify that the FSCS depositor protection regime covers FSCS eligible customers of e-money institutions (EMIs), authorised payment institutions (PIs), small PIs, and credit unions (in respect of e-money) should a credit institution holding such firms’ safeguarded funds fail. The PRA will broadly implement the amendments as consulted on in CP9/22, with some minor changes to improve the clarity and effectiveness of the rules. In the Policy Statement, the PRA also responds to a number of questions made further to CP9/22, clarifying among other things that FSCS protection: (i) does not extend to funds safeguarded using the investment route under regulation 21(2)(b) of the EMRs; (ii) will apply to proceeds from an insurance or guarantee deposited with a PRA-authorised credit institution; and (iii) is available for deposits held by a PRA-authorised credit institution regardless of the location of the EMI customer. The changes to DP 6.2 and consequential changes to the rules came into effect on 12 March. CP9/22 also contained a number of additional proposals including minor consequential changes to PRA supervisory statement (SS) 18/15 – ‘Depositor and dormant account protection’ and the PRA’s statement of policy on Deposit Guarantee Scheme (SOP-DGS) to reflect the amended rules. The PRA has already published a Policy Statement on the continuity of access and dormant account scheme rules and will publish a further Policy Statement on the remaining proposals and consequential changes to SS18/15 and SOP – DGS in due course.

Policy Statement

Prudential Regulation

BoE and PRA Feedback Statement on supporting liquid asset usability

On 3 April, the BoE and the PRA published a Feedback Statement to its Discussion Paper, which explored to what extent banks are reluctant to draw on their stock of high quality liquid assets (HQLA) when facing unusual liquidity pressures and how HQLA usability could be improved. Most respondents agreed with the authorities’ evidence that banks are reluctant to draw on their stock of HQLA in periods of unusual liquidity pressures. They commented that banks are concerned about regulatory reactions to initial falls in their liquidity coverage ratios (LCRs), with such reactions including more intensive supervisory oversight and heightened regulatory reporting. They also noted that banks allowing LCRs to fall would be perceived by the market as a signal that a bank is experiencing a liquidity stress. Suggestions on how the BoE and the PRA could improve HQLA usability included: (i) that future regulatory communications in a liquidity stress should clarify the extent to which LCRs can fall and the time banks have to rebuild their stocks of HQLA subsequent to such falls; (ii) possible adjustments to how the LCR is calculated in stress, for example, adjusting the LCR’s calibration and design to reduce expected liquidity outflows in the LCR stress, and expanding the range of assets eligible as HQLA; (iii) the codification in the PRA Rulebook, such as a ‘liquidity stress playbook’, of explicitly defined reductions in liquidity requirements in a stress; (iv) simplifications to liquidity-related disclosures in a liquidity stress, and recalibrations of the LCR to account for pro-cyclicality in the metric; and (v) greater international coordination to avoid conflicting regulatory guidance in different jurisdictions.

Feedback Statement

Recovery and Resolution

Sustainable Finance

Please see the Markets and Market Infrastructures section for IOSCO’s work programme for 2023/24, setting out its priorities over the coming two years, which include addressing new risks in sustainability and FinTech.

Please see the Other Developments section for the FCA’s business plan for 2023/24, which sets out its priorities for the next 12 months.

Other Developments

FCA business plan 2023/24

On 5 April, the FCA published its business plan for 2023/24, which sets out its priorities for the next l2 months – the second year of its three-year strategy – which include to: (i) introduce a new regulatory return requiring solo-regulated financial services firms to provide a baseline level of information about their financial resilience; (ii) undertake sector-specific supervisory work relating to the implementation of the new Consumer Duty; (iii) review its debt advice rules to ensure they set the right framework for good quality debt advice; (iv) design a regime for Deferred Payment Credit products (currently known as exempt Buy Now Pay Later) as they come into the FCA’s regulatory perimeter; (v) consult on changes to its mortgage, consumer credit, and overdraft rules to improve outcomes for consumers in financial difficulties; (vi) subject to legislation, introduce an application gateway for firms that want to approve financial promotions for unauthorised firms; (vii) provide a Feedback Statement to the Discussion Paper on ESG governance, incentives and competence, including planned next steps; (viii) finalise and publish the rules on Sustainability Disclosure Requirements and investment labels, and begin the implementation process; (ix) assess how operationally resilient firms are to remain within their impact tolerances ahead of the 31 March 2025 deadline in its operational resilience policy; (x) consult on clarifications relating to the reporting of operational incidents to the FCA; (xi) have the Financial Market Infrastructure Sandbox to test the use of DLT for settlement and trading up and running by the end of 2023. Where additional resources are available, the FCA also sets out four critical commitments that it will focus on: (a) preparing financial services for the future – working with the HMT to implement the outcomes of the Future Regulatory Framework; (b) putting consumers’ needs first – ensuring that the Consumer Duty is embedded effectively within firms and central to their technology; (c) reducing and preventing financial crime – this includes a strengthened gateway, more proactive assessments of regulated firms, and more staff focused on investigating and prosecuting offenders; and (d) strengthening the UK’s position in global wholesale markets – this includes completing upgrades to key systems and automating analytic tools. The FCA will also focus on scaling up systems, tools and applications, reducing costs. The FCA hopes to reduce firm burden further by implementing additional improvements to data collections.

Business plan

Press release

New Chief Executive of DRCF

On 4 April, the Digital Regulation Cooperation Forum (DRCF) announced the appointment of Kate Jones as its Chief Executive from 2 May.

Press release

MoU between FCA and Synectics Solutions Limited

On 3 April, the FCA published an MoU that it has entered into with Synectics Solutions Ltd on their respective roles and responsibilities under the Immigration Act 2014 and the Immigration Act 2014 (Bank Accounts) Regulations 2014. The FCA is responsible for maintaining arrangements for monitoring and enforcing compliance with the prohibition on opening current accounts for disqualified persons. Meanwhile, Synectics is responsible for maintaining a database of disqualified persons that banks and building societies will use for making status checks as to whether an individual is a disqualified person. The MoU establishes a framework for co-operation between the FCA and Synectics and explains how the two organisations work together. Its aim is to lay out procedures for providing information under the Bank Accounts Regulations and for discussing matters arising from the obligations imposed on the parties.

MoU

FCA Handbook Notice 108

On 31 March, the FCA published Handbook Notice 108, which sets out recent changes to the FCA Handbook made by the following instruments: (i) Financial Services Compensation Scheme (Management Expenses Levy Limit 2023/2024) Instrument 2023 – effective from 1 April; (ii) Consumer Duty (Amendments) Instrument 2023 – effective from 31 July; (iii) Handbook Administration (No 64) Instrument 2023 – effective immediately; (iv) Product Governance for Overseas Non-Investment Insurance Products Instrument 2023 (FCA 2023/12) – effective immediately; (v) IFPR and Interim Prudential sourcebook for Investment Businesses (IPRU-INV) (Amendment) Instrument 2023 – effective immediately apart from Annex E and Part 2 of Annex F that come into force on 30 April; (vi) Technical Standards (Markets in Financial Instruments Regulations) (Derivatives Trading Obligation) Instrument 2023 – effective from 24 April; and (vii) Application and periodic fees (2023/24) Instrument 2023 – effective from 1 April. 

Handbook Notice 108