Key Regulatory Topics: Weekly Update 4-10 March 2022
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This week has seen a continued focus on sanctions and measures to increase the transparency and availability of information concerning the beneficial owners of companies and land, in response to Russia’s unlawful invasion of Ukraine. The FCA’s publications reinforce the message that operational resilience should be a strategic focus for firms and the Court of Appeal upheld the High Court decision that the Electronic Money Regulations do not impose a statutory trust on safeguarded funds.
Conduct and Governance
FCA expectations on operational and cyber resilience following Russian invasion of Ukraine
On 8 March, the FCA set out a number of points that firms should consider regarding their operational and cyber resilience following Russia’s invasion of Ukraine: (i) cyber security – the FCA recommends that firms review the National Cyber Security Centre’s guidance, which outlines all actions to consider when the cyber threat is heightened. Firms should consider their ability, and that of their third-party providers, to withstand a cyber-attack. Firms should take all appropriate steps to shore up their controls, including raising staff awareness; (ii) important business services – firms should consider the implications of the continuing unrest and UK/US/EU sanctions and their potential impact, including on third-party providers, and whether this could affect the ability to deliver important business services; (iii) business continuity and incident management – firms should ensure arrangements are up to date and that they can continue to meet their regulatory obligations in the event of unforeseen disruption; (iv) reporting incidents – during this period, it could be extremely valuable to the FCA and other UK authorities to be notified quickly of developing cyber incidents or outages, so that they can provide specialist expertise and work to minimise harm to consumers, markets and the wider UK financial sector; and (v) false information – firms should be alert to the risk of false information being shared about the operations of a particular firm or the financial services sector. Firms should have a prompt, clear response to try and prevent false information that is in circulation from being acted upon.
FCA strategy for credit unions
On 7 March, the FCA sent a portfolio letter to the board of directors of credit unions setting out its approach to supervision and the key risks of harm it has identified in the sector. The FCA’s expectations include that credit unions: (i) have appropriate systems and controls, alongside effective policies, and procedures, that deliver adequate governance and oversight of third-party providers. Where credit unions use third-party providers, they need to effectively manage these relationships to reduce the risk of operational disruption and harm to their members. The FCA expects credit unions to be operationally resilient by having a comprehensive understanding and mapping of the people, processes, technology, facilities, and information necessary to deliver each of their important business services; (ii) manage the amount of data being stored, processed, or transmitted by third-party providers on behalf of the firm and how critical to operations that data is. This includes how credit unions configure and monitor their services to reduce the potential for security and compliance incidents; and (iii) are aware of the requirements and guidance in SUP 15 to submit notifications to the FCA as required. The FCA expects credit unions to consider the degree to which their business presents the risks identified and to review their strategies for mitigating them. The FCA will expect credit unions and their senior managers to be able to demonstrate that they are taking reasonable steps to mitigate the risks.
Consumer/Retail
Please see the Other Developments section for the FCA’s 35th quarterly consultation paper. The FCA is proposing, amongst other changes, to amend the approach to continuing professional development for retail investment advisers and pension transfer specialists.
ESMA peer review report on supervision of cross border investment services
On 10 March, ESMA published its peer review report on NCAs supervision of investment services that investment firms and credit institutions provide to retail clients on a cross-border basis using a MiFID II passport. This exercise focused on the AFM (Netherlands), BaFin (Germany), CNB (Czech Republic), CSSF (Luxembourg), CySEC (Cyprus) and MFSA (Malta) in light of the significance of their domestic firms’ cross-border activities. ESMA found that NCAs need to significantly improve their approach. Key findings include: (i) NCAs did not specifically, adequately and structurally consider firms’ cross-border activities in their supervision. In particular, NCAs did not sufficiently identify, assess and monitor the risks related to firms’ cross-border activities or take supervisory actions to effectively address those risks; (ii) out of the six jurisdictions, Cyprus had the highest level of outgoing cross-border activities, and by far the highest number of complaints relating to firms’ cross-border activities and of requests from other NCAs relating to Cypriot firms’ cross-border activities. A large number of Cypriot firms pose a high risk of investor detriment, due to the frequent provision of services involving speculative products, with aggressive marketing behaviour. ESMA identified that CySEC’s supervisory activities have overall proven insufficient at addressing the risks posed by Cypriot firms’ cross-border services; and (iii) home NCAs appear to have established adequate processes in relation to the passport notifications and, with some areas for improvements, in the context of cooperation. In addition to the peer review recommendations that ESMA has addressed to the NCAs, ESMA has issued, for the first time, two specific recommendations to the Cyprus Securities and Exchange Commission (CySEC) under Article 16 of the ESMA Regulation requiring it to make every effort to comply. CySEC has two months to inform ESMA whether it complies/intends to comply with the recommendations. ESMA expects to carry out a follow-up assessment in two years to review the level of improvements achieved considering the findings and recommendations of the peer review report.
Government reform of online advertising regulations and Online Safety Bill
On 9 March, the Government began consulting on its Online Advertising Programme. The programme will examine the current regulations and regulators and assess the need for reform. It will consider the whole supply chain and whether those within it should do more to combat harmful advertising. The consultation sets out the Government’s understanding of the online advertising ecosystem, highlights some of the priority areas of concern and sets out a number of options for reform. The Government outlines a number of options for the level of regulatory oversight that could be applied: (i) improving the current self-regulatory framework – relying on the ASA’s existing framework enforced through their codes; (ii) creating a new statutory regulator with tough enforcement powers across all aspects of the codes. These powers could include: (a) setting mandatory codes of conduct and enforcing them with fines and the ability to block and ban advertisers which repeatedly break the rules; (b) increased scrutiny across the supply chain related to high-risk advertising such as the promotion of products related to alcohol or weight loss; (c) increased scrutiny of advertisers which repeatedly breach codes of conduct and more checks on firms and individuals placing adverts and buying ad space; and (d) information gathering and investigatory powers such as the power to audit and request transparency reports from companies and request data from them; and (iii) strengthening the powers of enforcement of the ASA and creating a co-regulation arrangement with the new statutory regulator, which would be responsible for ensuring compliance and imposing bans and fines in certain serious circumstances. The deadline for comments is 1 June. The Government has also announced that it is adding a new duty to its Online Safety Bill, to bring fraudulent paid-for adverts on social media and search engines into scope, whether they are controlled by the platform itself or an advertising intermediary. Ofcom will set out further details on what platforms will need to do to fulfil their new duty in codes of practice.
Fees /Levies
EC adopts Delegated Regulation on data reporting service provider fees for ESMA
On 10 March, the EC adopted a Delegated Regulation supplementing MiFIR by specifying fees relating to the supervision by ESMA of data reporting service providers (DRSPs). Direct authorisation and supervisory powers were granted to ESMA over certain DRSPs by Regulation (EU) 2019/2175. This Delegated Regulation sets out the fees they will be charged in order to fully cover ESMA’s necessary expenditure.
Financial Crime and Sanctions
Russia's military invasion of Ukraine and the formal recognition of two regions in Eastern Ukraine – Donetsk and Luhansk – as independent states have led to a series of sanctions being imposed by the US, the UK and the EU. Our sanctions, international trade and investment compliance experts are monitoring and advising on the situation and our publications can be accessed here. HMT and OFSI maintain a collection of pages listing all financial sanctions imposed in the UK by country. The lists of financial sanctions imposed in the UK in respect of Russia can be accessed here. The FCA has also published a webpage ‘Russian invasion of Ukraine: financial sanctions and information’ which collates its publications and can be accessed here.
Call for evidence on potential reform to Fraud Act 2006
On 8 March, the HoL Committee on the Fraud Act 2006 and Digital Fraud opened a call for evidence to collect views on what measures should be taken to tackle the increase in cases of fraud. The Committee explains that fraud is the most commonly experienced crime in England and Wales, accounting for approximately 42% of all crime, with around 80% of reported fraud involving a cyber-element. The call for evidence looks at issues including: (i) how the provisions laid out in the Fraud Act 2006 are used in practice for the detection, prevention and prosecution of fraud; (ii) whether the act is in need of reform; (iii) how the Act is being applied to tackle fraud committed online or through digital means; and (iv) what more needs to be done across the public and private sector to stop fraud committed through digital services. The deadline for comments is 22 April.
Economic Crime (Transparency and Enforcement) Bill passes HoC
On 7 March, the Economic Crime (Transparency and Enforcement) Bill passed the third reading stage in the HoC and began its passage through the HoL. The Bill was introduced on 1 March and is being fast-tracked though its stages in Parliament in consequence of Russia’s invasion of Ukraine. The Bill: (i) introduces a register of the beneficial owners of overseas entities that own land in the UK; (ii) strengthens unexplained wealth orders; and (iii) makes changes to sanctions legislation to help deter and prevent breaches. Amendments made by the Government during its committee stage in the HoC, include: (a) reducing the transitional period for certain overseas entities registering as an overseas entity from 18 months to 6 months; and (b) increasing fines for certain offences. The Bill has cross-party support, although concerns were raised in the HoC around enforcement, including preventing ‘asset flight’ and on reducing the Bill’s transitional period further. The Home Secretary has stated that a second economic crime bill would follow in the next parliamentary session containing further measures.
FATF consults on update to risk-based guidance for real estate sector
On 7 March, the FATF began consulting on proposals to update its risk-based guidance for the real estate sector. The FATF notes that of particular interest are: (i) the details and specific guidance to practitioners, as well as additional aspects of guidance that may merit consideration and are not currently addressed; (ii) specific business-cases of real estate sector ML/TF risks and threats, and measures put in place by the private sector to address them so that the guidance could be more helpful and practical; and (iii) terrorist financing threats as identified by the sector practitioners. The deadline for comments is 22 April.
FATF amendments to Recommendation 24 on prevention of misuse of legal persons
On 4 March, the FATF adopted amendments to Recommendation 24, which requires countries to prevent the misuse of legal persons for ML/TF and to ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons. The amendments explicitly require a multi-pronged approach for the collection of beneficial ownership information, to ensure it is available to competent authorities in a timely manner. The FATF will also analyse the growing practical experience of implementing beneficial ownership registries, with a view to identifying best practices and supporting implementation by countries. The FATF is, in parallel, reviewing recommendation 25 on beneficial ownership of legal arrangements, with a view to ensuring consistent and appropriately tailored beneficial ownership standards and smooth implementation.
Fintech
Please see the Conduct / Retail section for the Government’s consultation on its Online Advertising Programme, which seeks to collect views on reforming the UK’s online advertising regulations.
Government’s priorities for digital regulatory landscape
On 9 March, the government published a letter sent from Nadine Dorries, Secretary of State for the Department for Digital, Culture, Media & Sport (DCMS) to the Digital Regulation Cooperation Forum (DRCF) on the government’s priorities for the digital regulatory landscape and cross-cutting policy areas relevant to the DRCF’s work. The DRCF is a digital regulation coordination group made up of the CMA, Ofcom, the ICO and the FCA. In the letter, Ms Dorries requests updates on: (i) how the DRCF intends to deepen and expand coordination across the regulatory landscape; (ii) how it intends to engage and leverage insights from industry, consumers, civil society, academia and Parliament through its 2022/23 workplan; (iii) the insights the DRCF has secured through its technology horizon scanning programme. In particular, the DRCF’s early insights on the impact of Web3; (iv) whether there are opportunities for collaboration in relation to: AI governance; online advertising; supporting the government’s ongoing implementation of the National Data Strategy; and ensuring cooperation and coherent regulatory approaches on online safety, data, and competition policy. Over the coming months, the government intends to publish more detailed thinking on its approach outlined in the Plan for Digital Regulation, responding to the views of stakeholders and the recommendations from the HoL Select Committee’s recent inquiry.
Fund regulation
Please see the Other Developments section for the FCA’s 35th quarterly consultation paper.
Markets and Market Infrastructures
Please see the Recovery and Resolution section for a report published by the FSB, CPMI and IOSCO, which analyses existing financial resources and tools for CCP recovery and resolution and confirms the need for further work on CCP financial resources.
Please see the Other Developments section for the FCA’s 35th quarterly consultation paper.
EC consults on equivalence of Malaysian CCP arrangements
On 7 March, the EC began consulting on a draft Implementing Decision, which, in accordance with the EC’s view, considers the regulatory framework for CCPs in Malaysia to be equivalent to the requirements under EMIR. The deadline for comments is 4 April. The draft Implementing Decision will enter into force 20 days following its publication in the OJ.
Payment Services and Payment Systems
Court of Appeal finds that EMRs do not impose a statutory trust on safeguarded funds
On 9 March, the Court of Appeal dismissed the appeal of the FCA and upheld the High Court decision in the case of ipagoo LLP (in administration), finding that: (i) the EMRs do not impose a statutory trust on safeguarded funds; and (ii) the asset pool to which electronic money holders have a priority claim under the EMRs is to be given a wide meaning so as to include a sum (to be taken from the institution's own funds) equal to such relevant funds that ought to have, but have not, been safeguarded. The decision also discusses the construction of retained EU-derived domestic legislation in accordance with retained case law and retained principles of EU law. It remains to be seen whether the FCA (who intervened in the case in favour of the creation of a trust) will appeal to the Supreme Court.
Prudential Regulation
Please see the Other Developments section for the FCA’s 35th quarterly consultation paper. The FCA is proposing, amongst other changes, to extend the MIFIDPRU TP 7.4R(2)(b) self-certification notification deadline.
EC adopts RTS on determination of indirect exposures to a client arising from derivatives and credit derivatives contracts under the CRR
On 10 March, the EC adopted a draft Delegated Regulation supplementing the CRR with regard to RTS specifying how to determine the indirect exposures to a client arising from derivatives and credit derivatives contracts where the contract was not directly entered into with the client but the underlying debt or equity instrument was issued by that client. These RTS serve the sole purpose of specifying the measurement methods for indirect exposures arising from derivative and credit derivative contracts for institutions to correctly identify and limit their large exposures. The EC emphasises that the RTS do not impact on the calculation of own funds requirements, their valuation or reporting. For large exposures purposes, an institution shall calculate the exposures to a client or group of connected clients by adding the direct and indirect exposures in the trading book and in the non-trading book. In order to ensure consistency through the different pieces of the regulatory framework, the RTS build on the Basel Large Exposures standards with the intention of being consistent with market risk rules for the calculation of exposures from (credit) derivatives, complemented where needed by specificities stemming from the large exposures framework. The RTS therefore differentiate between three categories: (i) options on debt and equity instruments; (ii) credit derivative contracts; and (iii) other derivatives having as underlying asset a debt or equity instrument and which are not included in the other two categories. The Delegated Regulation will enter into force 20 days following its publication in the OJ.
ITS on information to be disclosed by competent authorities under IFD
On 9 March, Commission Implementing Regulation (EU) 2022/389 laying down ITS with regard to the format, structure, contents list and annual publication date of the information to be disclosed by competent authorities in accordance with Article 57(4) of the IFD was published in the OJ. The Implementing Regulation comes into force on 29 March (20 days following its publication in the OJ).
ECB Decision on procedure to exclude staff members from presumption of having a material impact on supervised credit institutions’ risk profile
On 4 March, ECB Decision (EU) 2022/368 amending Decision (EU) 2015/2218 on the procedure to exclude staff members from the presumption of having a material impact on a supervised credit institution's risk profile was published in the OJ. The Amended Decision follows Commission Delegated Regulation (EU) 2021/923 which repealed Delegated Regulation (EU) No 604/201. The Decision seeks to ensure legal certainty for credit institutions, which submitted notifications and applications pursuant to Delegated Regulation (EU) No 604/2014 or requests for prior approval pursuant to Delegated Regulation (EU) 2021/923 before the Decision enters into force. The Decision enters into force on 24 March (20 days after publication in the OJ).
Recovery and Resolution
FSB, CPMI and IOSCO report highlights need to continue work on CCP financial resources
On 10 March, the FSB, CPMI and IOSCO published a report analysing existing financial resources and tools for CCP recovery and resolution, which confirmed the need for further work on CCP financial resources. The organisations gathered evidence and conducted their analysis in two parts: (i) they assessed the current use, composition and amount of financial resources and tools available to cover CCP default and non-default losses in a sample of seven out of 13 CCPs that are considered systemically important in more than one jurisdiction; and (ii) they conducted a quantitative analysis and a qualitative review of the potential financial stability implications that may result from the use of the financial resources and tools covered by the existing CPMI-IOSCO guidance on recovery of FMIs and FSB guidance on CCP resolution. Based on the results and challenges of the evidence gathering and analysis undertaken, they concluded that there is merit to continuing work on CCP financial resources for recovery and resolution. While all the sampled CCPs would have had sufficient prefunded and recovery resources and tools to cover losses in the applied CCP-specific default loss scenarios, the analysis was subject to a number of limitations and assumptions that suggest that the results are to be interpreted cautiously. Moreover, one of the non-default loss scenarios applied would have resulted in the need to use resolution powers in the majority of the CCPs. Even though at the level of individual bank clearing members the analysis identified only limited impacts on their liquidity and solvency from the use of cash calls and variation margin gains haircutting by an individual CCP, it would be beneficial to enhance as much as possible the understanding of the potential complex system-wide effects of the use of recovery and resolution tools. The FSB will: (a) in Q2 and in collaboration with CPMI-IOSCO, review the sufficiency of the existing toolkit for CCP resolution, focusing in particular on non-default loss scenarios. It will consider the need for, and costs and benefits of, potential alternative financial resources and tools for CCP resolution; (b) monitor whether resolution authorities have access to an adequate set of resolution tools, through continued efforts to conduct and enhance implementation monitoring of the FSB guidance on CCP resolution. The FSB welcomes stakeholder views as input to its work by 29 April. CPMI-IOSCO are currently analysing CCP non-default losses in resilience and recovery and will continue monitoring the implementation of the Principles for Financial Market Infrastructures, including CCP financial resources and tools for resilience and recovery.
SRB approach to CRR discretion on leverage and MREL calibration
On 7 March, the SRB provided an update on its approach to calibrating final minimum requirements for own funds and eligible liabilities (MREL) targets in the 2022 resolution planning cycle. As announced by the SRB in December 2021, the decision to temporarily exclude certain exposures to central banks from the calculation of an institution’s total exposure measure (leverage amount), under the CRR might affect the calibration of the final MREL targets applicable from 1 January 2024. The ECB had used this temporary measure because of the Covid-19 pandemic, but announced in February that it will not be extended after the end of March. Therefore, final MREL targets will be re-calibrated in the 2022 resolution planning cycle based on the leverage amount, including the central bank exposures temporarily excluded on the basis of the relief measure, to ensure adjustment of the MREL before the compliance date of 1 January 2024. In the meantime, the SRB will compute, where relevant, notional final MREL targets based on institutions’ leverage amount including the central bank exposures. The SRB will communicate these notional targets to institutions affected by the relief measure in the context of the 2021 resolution planning cycle, and will use them to monitor the institutions’ build-up of MREL resources towards the final MREL targets.
ITS on procedures, standard forms and templates for resolution plans
On 4 March, Commission Implementing Regulation (EU) 2022/365 amending Implementing Regulation (EU) 2018/1624 laying down ITS on procedures, standard forms and templates for the provision of information for the purposes of resolution plans under Article 11(3) BRRD was published in the OJ. The amendments reflect amendments introduced to the minimum requirement for own funds and eligible liabilities introduced by BRRD II. It comes into force on 24 March (20 days after publication in the OJ).
Sustainable Finance
EC study on feasibility, minimum standards and transparency requirements of ESG benchmark label
On 4 March, the EC began a study exploring the possibility of introducing a new EU ESG benchmark label. The EC hopes that the study will provide an extensive view of the existing ESG-related benchmarks market, highlighting shortfalls and best practices. The study will inform the EC about possible features for a new EU ESG benchmark label that would become a key lever to align investments with long-term sustainability considerations. The EC has published three surveys: for administrators of ESG-related benchmarks, benchmark constituents and benchmark institutional investors / asset managers.
Other Developments
DG FISMA 2022 management plan
On 7 March, the EC published the Directorate-General for Financial Stability, Financial Services and Capital Markets Union’s (DG FISMA) 2022 management plan. The plan describes the main outputs that DG FISMA should achieve in 2022 together with target dates and how these contribute to reaching the objectives set in the strategic plan. DG FISMA’s outputs to deliver on the EC’s main priorities include: (i) a new legislative initiative (Listing Act) intended to further simplify the listing rules for all companies and, in particular, SMEs; (ii) to adopt a number of RTS and ITS that will help to ensure the smooth functioning of the framework for crowdfunding services; (iii) to report on the functioning of the Securitisation Regulation; (iv) to continue developing Level 2 measures in relation to the banking package, to IFR and the IFD; (v) an in-depth review of the macroprudential framework (Art. 513 CRR) for the banking sector; (vi) a report on the overall implementation of 5AMLD; (v) to adopt RTS on the the CCP Recovery and Resolution framework; (vi) measures to build the EU’s capacity for clearing; (vii) a consultation on the Mortgage Credit Directive; (viii) a report and a consultation on the application of the Payment Accounts Directive; (ix) a delegated act under the Corporate Sustainability Reporting Directive, setting out the sustainability standards; (x) an initiative on instant payments with the aim of accelerating the full roll-out of instant payments in the EU; and (xi) to continue to review the application and impact of the PSD2. DG FISMA will launch a consultation and present a report to the co-legislators in Q4.
FCA quarterly consultation paper No. 35
On 4 March, the FCA began consulting on its 35th quarterly consultation paper. The FCA is proposing to: (i) make changes to chapters 2 and 13 of PERG to clarify application of the MiFID II Ancillary Activities Test in the absence of overall market size data; (ii) amend the research and inducement rules for collective portfolio managers so they are subject to the same rules as investment managers; (iii) make changes to reflect amendments HMT has made to the UK MiFID delegated regulation in places where it is copied out in the Glossary and COBS; (iv) amend LR 14 to reflect the original policy position for investment entities other than OEICs prior to the amendments introduced in January 2021; (v) make changes to the approach to continuing professional development for retail investment advisers and pension transfer specialists; and (vi) extend the MIFIDPRU TP 7.4R(2)(b) self-certification notification deadline. The deadline for comments is 11 April.