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Key Regulatory Topics: Weekly Update 4 August–10 August 2023

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Blog Post: 04 March 2024

FAQs: UK FCA consults on plans to publicise investigations and amend its Enforcement Guide

Publications: 01 March 2024

Regulatory monitoring

Publications: 01 March 2024

Regulatory monitoring: EU version

News: 01 March 2024

A&O cements its position as a leading private capital firm with PDI award wins

The FCA published for consultation its proposed rules to replace firm-facing provisions from the UK Securitisation Regulation this week.  The UK Securitisation Regulation is one of the first retained EU law files prioritised for the repeal and replacement process under the Financial Services and Markets Act 2023 and as such, this consultation, together with the PRA’s related consultation (27 July) and HMT’s near-final draft securitisation regulations statutory instrument (11 July) give an indication of the processes for the broader programme of reform under the UK’s new smarter regulatory framework.  In the EU, the EBA published a number of updates relating to IRB models, including an updated roadmap for the implementation of IRB model requirements, its final supervisory handbook for the validation of IRB rating systems and a follow up report to its discussion paper on machine learning for IRB models.

Conduct and Governance

Please see the Payment Services and Payments Systems section for HMT’s consultation response on Payments Regulation and the Systemic Perimeter in particular in relation to the extension of the SM&CR.

FCA Information request on bank account closures

On 9 August, the FCA announced that it has sent an information request to banks and building societies as part of its work to investigate account closures. The request is part of the FCA’s work to better understand the scale of account closures and the reasons behind them. The FCA has requested firms to provide information on: (i) the number of customers that have been terminated; (ii) the number of customers suspended; (iii) the number of customers denied services; (iv) the reasons for all of the above; and (v) the number of complaints banks have received on this issue. Firms have until 25 August to respond to the request. The FCA hopes to analyse the results and provide an initial assessment by mid-September. The FCA notes that it is also actively engaging the largest payments firms on this topic.

Letter

Press Release

Consumer/Retail

Please see the Conduct and Governance section for the FCA’s information request on bank account closures.

Ombudsman News 183

On 10 August, the FOS published issue 183 of the ombudsman news. The issue highlights the new FOS webpage on complaints regarding the closure of bank accounts, which sets out the FOS’ approach to handling complaints and what it is looking for. It also reminds firms that now the Consumer Duty is in force, the FOS will be communicating with them to understand what complaints they are receiving and how they are responding.

Issue 183

EBA report on its mystery shopping exercise into personal loans and payment accounts

On 8 August, the EBA published a report on its mystery shopping exercise into personal loans and payment accounts. The content and scope of this mystery shopping exercise was informed by the findings of the separate thematic review on the transparency and level of fees and charges of retail banking products that the EBA published in December 2022. The exercise focused on the pre-contractual phase of obtaining personal loans and, in some jurisdictions also payment accounts, including those with basic features. The report found that the exercise demonstrated the added value that mystery shopping can bring as a complementary tool to NCA’s conventional supervisory actions and yields information and insight into the conduct of financial institutions that is not readily available through other means. Mystery shopping allows NCAs to obtain greater insight into the conduct of financial institutions, which in turn allows them to take corrective actions to better comply with applicable requirements, thus eventually enhancing the protection of consumers. For example, within the small sample of financial institutions covered by the mystery shopping exercise, the EBA found that the conduct of some of them is inadequate and needs to improve. Some financial institutions, for instance, did not provide the required pre-contractual information to consumers, and automatically increased the total amount of the credit to include the bank fees without collecting consumer’s explicit consent. The report concludes with a number of actions for NCAs to consider.

Report

Press Release

Corporate/Issuers

Please see the Other Developments section for the update on the FCA’s Primary Market Bulletin 45.

Financial Crime and Sanctions

EBA report on the functioning of AML/CTF colleges

On 10 August, the EBA published its third report on the functioning of AML/CFT colleges, which sets out the EBA’s findings and observations from its monitoring of AML/CFT colleges in 2022. The report found that competent authorities had taken important steps to improve the effectiveness of AML/CFT colleges, although many have yet to reach full maturity. In particular, the EBA observed that: (i) more than 50 AML/CFT colleges were still not operating, and members’ ability to share information in some colleges was hampered by their failure to sign the requisite cooperation agreements; (ii) the number of third country observers remained very low, potentially limiting what supervisors know about group-wide risks; (iii) there was limited awareness among some competent authority staff of the benefits of sharing information in the colleges’ setting; and (iv) several lead supervisors had not adjusted the nature and frequency of meetings based on the ML/TF risks to which the financial institution had been exposed, meaning that some high-risk colleges met infrequently, while colleges set up in relation to lower risk institutions met at least biannually. Based on these findings, the EBA has decided that the action points adopted in 2022 remain relevant for the 2023-2024 period and that lead supervisors should address them without delay to make the best use of the AML/CFT colleges framework. The report also includes examples of best practice, which should assist competent authorities in this regard.

Report

Press Release

Fund Regulation

FCA authorised fund managers’ assessments of fund value 2023

On 10 August, the FCA published the findings from its most recent review of processes AFMs use for assessments of value for the funds they operate. Following the review, the FCA has found that many firms have now fully integrated considerations on assessment of value into their product development and fund governance processes. The FCA explains that this greater focus has also driven changes in fees and charges, resulting in savings of costs to consumers amounting to millions of pounds. However, the FCA also notes that there remain outliers, where action needs to be taken, especially in the light of the new Consumer Duty. Other findings from the review include: (i) examples of good practice, such as how moving investors to clean share classes with no trail commission or cutting funds’ fees; (ii) some firms' independent non-executive directors did not provide sufficient challenge, with some accepting information provided to Boards at face value without probing further; (iii) there are significant differences between good and poor practice in how AFMs assess their funds’ performance; (iv) firms are putting too much emphasis on comparable market rates to justify their fees, rather than conducting an assessment using the full range of value assessment considerations; and (v) some firms now have better processes for allocating costs but are reaching conclusions on AFM costs and economies of scale that don’t take into account the information made available by that better process. The FCA expects firms to consider these findings and to make improvements where required.

Review

Press Release

Markets and Markets Infrastructure

Please see the Recovery and Resolution section for the new Delegated Regulations on RTS under the CCPRR published in the OJ.

FCA consults on rules relating to Securitisation

On 7 August, the FCA published a consultation paper setting out its proposed rules to replace the firm-facing provisions from the UK Securitisation Regulation (UK SR) which are being transferred into the Handbook. The paper also contains the FCA’s proposed legal instrument which includes the firm facing requirements, plus all related technical standards and their annexes. The new FCA rules cover relevant “designated activities” under the new Designated Activity Regime (DAR), which recast requirements relating to investor due diligence, risk retention, transparency and reporting, credit granting standards, restriction on adverse selection, restriction on sales to retail clients and the UK STS regime. The deadline for comments is 30 October. This consultation should be read together with the PRA’s consultation on its new securitisation part of the PRA Rulebook, HMT’s near-final draft securitisation regulations statutory instrument and the Financial Services and Markets Act 2023. Annex 4 to this consultation contains a derivation and changes table, which seeks to signpost the source of the respective new Handbook provisions and whether they have been subject to any policy changes or simply handbook-style drafting changes.

Consultation Paper

Webpage

FCA portfolio letter on its supervisory strategy for Principal Trading Firms

On 4 August, the FCA published a portfolio letter on its supervisory strategy for principal trading firms (PTFs). In the letter the FCA sets out the key drivers of harm for PTFs, these include the risk of market abuse and poor operational resilience, which is particularly significant due to PTFs being highly technology-dependent. The FCA sets out the five key areas of focus for its PTF supervisory strategy: (i) algorithmic trading, it plans to conduct follow-up work relating to algorithmic trading controls, the work will involve a multifirm review of firms’ compliance with MiFID RTS governing algorithmic trading controls and requirements on trading venues; (ii) financial resilience, the FCA will undertake targeted reviews of firms’ capital and liquidity now that the new Investment Firm Prudential Regime has been introduced; (iii) avoiding market disruption arising from commodity market volatility, the FCA plans to conduct enhanced monitoring and engagement with PTFs which specialise in commodity market trading to identify new and emerging risks and trends within those markets; (iv) operational resilience, firms that are in scope of the FCA operational resilience policy statement are expected to consider how they will embed the requirements and ensure they operate within their impact tolerances. Firms not in scope should treat the rules as good practice; (v) Brexit impacts, firms are encouraged to consider whether any changes to the UK’s oversees access regime could impact their business models or structures. By the end of September, the FCA expects all CEOs to have discussed this letter with their fellow directors and/or Board and to have agreed actions and/or next steps.

Letter

Payment Services and Payment Systems

Please see the Conduct and Governance section for the FCA’s Information request on bank account closures. The request is part of the FCA’s work to better understand the scale of account closures and the reasons behind them, the FCA notes that it is actively engaging the largest payments firms on this topic.

UK Finance updates FTR ‘how to’ interpretative guidance

On 9 August, UK Finance updated its ‘how to’ interpretative guidance on the Funds Transfer Regulation (FTR). The guidance is intended to provide some operational clarity and encourage market harmonisation. The guidance, that was initially published in 2018, focuses on new practice issues and regulatory developments raised by members following changes in industry best practice. Firms are reminded that the guidance is voluntary and is in no way intended to replace or add to the legal requirements laid out in the FTR. Moving forward UK Finance will be keeping the guidance under review.

Guidance

Webpage

HMT consultation response on Payments Regulation and the Systemic Perimeter

On 7 August, HMT published a response to its consultation on payments regulation and the systemic perimeter. The response document summarises the feedback received to the call for evidence concerning the government’s proposal and outlines the government’s overall approach to enabling these reforms through primary legislation, when future parliamentary time allows. In its response HMT confirms: (i) it will legislate to reform the systemic perimeter, as such HMT will issue a further public statement setting out its legislative approach. The BoE is also expected to set out its approach for how it will supervise over its expanded remit once the relevant legislation is published; (ii) the government plans to set out its next steps on the extension of SM&CR to recognised systemic payments entities and authorised PSPs and EMIs, once its other consultation on the SM&CR has been concluded; and (iii) the government will bring forward secondary legislation to reform the PSR’s payment system access framework.

Response

Prudential Regulation

EBA Decision on the ad-hoc collection of institutions’ IRRBB data

On 7 August, the EBA published its Decision (dated 3 August) to run an ad-hoc data collection of institutions’ IRRBB data. The EBA explains that the data collection will provide competent authorities and the EBA with timely and necessary data and tools to monitor risks arising from interest rate changes and the implementation of the IRRBB scrutiny plan. The ad-hoc collection will only apply to those institutions that are already providing IRRBB data in the context of the quantitative impact study exercise and include the same templates that these institutions will have to report once the final ITS on IRRBB reporting starts applying. The submission reference date for the ad-hoc collection is set as 31 December, with NCAs required to submit institutions' data to the EBA by 31 March 2024. In addition, the Decision also amends Decision EBA/DC/2020/335 of 5 June 2022 concerning the EUCLID to reflect the ad-hoc data collection in the data reporting obligations listed in the Annex to that decision. The decision entered into force immediately, on 3 August.

Decision

Press Release

EBA updates timeline for the implementation of the IRB roadmap

On 7 August, the EBA updated its roadmap for the implementation of IRB model requirements to limit compliance costs for institutions. In light of the upcoming implementation of the final Basel III standards in the European framework, the EBA considers that the implementation of the IRB repair requirements for LGD and credit conversion factor models that cover portfolios is no longer eligible for the revised advanced internal ratings based approach. As such, in accordance with the final Basel III framework, implementation of the IRB repair requirements for these models may be postponed to the date of entry into force of the future CRR 3. Before then, institutions may also choose to apply for permission to return to a less sophisticated IRB approach or for the permanent partial use of the standardised approach for those portfolios, according to Articles 149 and 150 of the CRR.

Press Release

EBA supervisory handbook for the validation of IRB rating systems

On 7 August, the EBA published its final supervisory handbook for the validation of IRB rating systems to clarify the role of the validation function as part of corporate governance. The IRB validation handbook provides guidance on the validation function, as laid out in Article 185 of the CRR. It builds on the EBA RTS and guidelines, which are part of the IRB repair roadmap, and provides a detailed description of the areas the validation function is expected to assess. In particular, the handbook provides an overview of the validation framework and describes the elements where the validation function is expected to form an opinion, without prescribing any specific methodology. It covers both the tasks related to the model performance assessment, mirroring the CRR distinction between risk differentiation and risk quantification, as well those dealing with the modelling environment, such as data quality and model implementation assessment.

Supervisory Handbook

Press Release

EBA follow-up report on machine learning for IRB models

On 4 August, the EBA published a follow up report to its discussion paper on machine learning for IRB models. The report summarises the main conclusions from the discussion paper, as well as the interaction between prudential requirements in IRB models and two other legal frameworks that have an impact on internal credit risk models that use machine learning (ML) techniques, the GDPR and the AI Act. The report provides a picture of the current use of ML techniques for IRB models and analyses the possible obstacles to the implementation of ML models in the IRB model space. It explains that the discussion paper was well received, with most respondents supporting the EBA’s proposed principle-based recommendations, as they provided a consistent and clear understanding on how to ensure that the use of ML techniques comply with the regulatory IRB requirements. Moving forward, the EBA will be monitoring developments in this field and will amend or complement the principle-based recommendations if relevant.

Report

Recovery and Resolution

Delegated Regulations on RTS under the CCPRR published in the OJ.

On 9 August, two Delegated Regulations containing RTS that supplement the CCPRR were published in the OJ. The first Delegated Regulation contains RTS that specify the conditions under which compensation, cash equivalent of such compensation or any proceeds that are due pursuant to Article 63(1) of that Regulation are to be passed on to clients and indirect clients and the conditions under which passing on is to be considered proportionate. The second Delegated Regulation contains RTS that specify the circumstances in which a person is deemed to be independent from the resolution authority and from the central counterparty, the methodology for assessing the value of assets and liabilities of a central counterparty, the separation of the valuations, the methodology for calculating the buffer for additional losses to be included in provisional valuations, and the methodology for carrying out the valuation for the application of the ‘no creditor worse off’ principle. Both Delegated Regulations will enter into force on 29 August, 20 days following their publication in the OJ.

Delegated Regulation 2023/1615

Delegated Regulation 2023/1616

SRB and ECB memorandum of understanding to improve bank resolution analysis

On 4 August, the SRB published a memorandum of understanding between itself and the ECB on the exchange of certain types of confidential statistical information in order to improve analysis related to bank resolution. The SRB explains that the memorandum is an important milestone in the cooperation between the SRB and ECB, as it replaces the existing ad-hoc statistical data exchange and provides for a general framework agreement for sharing confidential statistical data collected by the Eurosystem in its role as euro area monetary authority.

Memorandum of Understanding

Press Release

Other Developments

FCA Primary Market Bulletin 45

On 10 August, the FCA published issue 45 of its Primary Market Bulletin. This issue covers: (i) the International Sustainability Standards Board IFRS Sustainability Disclosure Standards. The FCA sets out the key features of its process for implementing the standards and plans for consultation, along with how it will continue to supervise existing disclosures under the TCFD framework and offer advice to issuers on how to prepare for any future obligations; (ii) audit of financial statements by third country audit firms, following a report that a published report hasn’t been provide by an FRC registered third country auditor, the FCA is proposing to take action by temporarily suspending the issuer’s listing powers. The FCA encourages other third party issuers that are at risk of breaching such requirements to apply to the FCA for a suspension of listing before a breach occurs; (iii) the application of FCA transnational provisions in relation to minimum market capitalisation for shell companies; and (iv) multi-factor authentication (MFA) for FCA systems, the FCA has now introduced MFA to strengthen how firms log into the electronic submission system and reminds firms of the need to register as soon as possible in order to be able to continue using the system.

Primary Market Bulletin 45

FCA financial promotions quarterly data 2023 Q2

On 4 August, the FCA published a webpage containing its financial promotions quarterly data for Q2 2023. The webpage sets out the key messages and data collected for the period, as well as examples of how the FCA intervened and took actions against firms, examples include: (i) the FCA’s work with the Advertising Standards Authority, to educate fin-fluencers about their obligations when seeking to promote financial services and products; (ii) the policy statement the FCA issued in June setting out its final position on the rules that will apply to firms promoting cryptoassets to UK consumers; and (iii) the FCA’s intervention where a firm with limited credit broking permissions was promoting high-risk investments to ordinary retail investors.

Webpage