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Key Regulatory Topics: Weekly Update 6 April - 13 April 2023

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G20 finance ministers and central bank governors met this week and the FSB published two reports relating to its work to achieve greater convergence in cyber incident reporting. In the EU, the ESAs published a consultation paper reviewing the SFDR Delegated Regulation regarding principal adverse effects and financial product disclosures. Meanwhile, in the UK, the Home Office announced that it had tabled an amendment to the Economic Crime and Corporate Transparency Bill, to allow prosecutors to hold big companies to account if an employee commits fraud for the organisation’s benefit. 

Consumer/Retail

IMCO report on proposed directive amending the consumer rights directive

On 12 April, the EP’s Committee on the Internal Market and Consumer Protection (IMCO) published a report on the proposal for a directive amending the Consumer Rights Directive concerning financial services contracts concluded at a distance and repealing the Distance Marketing Directive. The IMCO adopted the report on 28 March. As a general approach, the Rapporteur wants to uphold a high level of consumer protection, ensure legal clarity for companies without administrative overburdening and enable new technological developments in financial services through technology neutrality. The Rapporteur supports the overall approach of the Commission to keep the horizontal scope and the explanatory statement provides that it should be clear that product specific legislation prevails even when the regulations do not have identical content in corresponding acts, but regulate the same provisions, for example provisions on withdrawal rights. The Rapporteur welcomes that some provisions of the Consumer Rights Directive are extended to financial services contracts concluded at a distance, but wants to avoid amending the Consumer Rights Directive outside the scope of this revision. The rapporteur expresses further views on pre-contractual information, the right of withdrawal (in particular, the EC’s proposal for a ‘withdrawal button’) and online requirements.

Report

FCA portfolio letter on implementing the consumer duty in contracts for difference

On 6 April, the FCA published a portfolio letter (dated 31 March) on implementing the consumer duty in contracts for difference (CFDs). The letter was sent to firms whose primary business model is marketing and providing CFDs, spread bets or rolling spot foreign exchange to retail consumers, with the aim of helping them implement and embed the duty effectively. The letter sets out: (i) a reminder of the implementation timeline, key elements of the duty and how it applies to firms in the CFD portfolio; (ii) the FCA’s expectations for how firms should embed the duty, including relevant examples of good and poor practice; (iii) feedback from the FCA’s recent review of firms’ implementation plans; and (iv) its approach to supervising the duty and planned next steps. The FCA expects the duty to be a top priority for firms, with senior management and firm boards expected to embed the interest of customers into the culture and purpose of the firm.

Portfolio Letter

Fees/Levies

PRA consultation on regulated fees and levies: rates proposals 2023/24

On 13 April, the PRA published a consultation paper on regulated fees and levies: rates proposals 2023/24. The paper sets out proposals for the PRAs fees for 2023/24, which include: (i) the fee rates to meet the PRA’s 2023/24 Annual Funding Requirement (AFR); (ii) changes to the internal model application fees and the model maintenance fee; (iii) updates to Supervisory Statement 3/16 to include the information provided in Fees 2.9 and 2.10; (iv) setting out how the PRA intends to distribute a surplus from the 2022/23 AFR; and (v) the retained penalties for 2022/23. The deadline for comments is 12 May. The PRA proposes to publish the changes resulting from this consultation on 29 June; with the implementation date for the changes, 3 July.

Consultation Paper

Financial Crime and Sanctions

FSB sets out new approach to achieve greater convergence in cyber incident reporting

On 13 April, the FSB published a final report on recommendations to achieve greater convergence in cyber incident reporting (CIR). The report identifies commonalities in CIR frameworks and details practical issues associated with the collection of cyber incident information from financial institutions and the onward sharing between financial authorities. These issues include: (i) operational challenges arising from the process of reporting to multiple authorities; (ii) setting appropriate and consistent qualitative and quantitative criteria/thresholds for reporting; (iii) establishing an appropriate culture to report incidents in a timely manner; (iv) inconsistent definitions and taxonomy related to cyber security; (v) establishing a secure mechanism to communicate on cyber incidents; and (vi) legal or confidentiality constraints in sharing information with authorities across borders and sectors. The report sets out 16 recommendations to address these issues with a view to promoting best practices in CIR, while recognising that a one-size-fits-all approach is not feasible or preferable. The FSB also published a report entitled ‘Format for Incident Reporting Exchange (FIRE): A possible way forward’. This follows the FSB’s consultation on a concept for developing a common format for incident reporting exchange to collect incident information from financial institutions and that authorities could use for information sharing. It reflects the public feedback received on the FIRE concept, outlines the potential benefits, risks and costs, and discusses how the FSB will take forward the development of FIRE. A detailed workplan will be developed by this summer. An update cyber lexicon was also published. It includes six new terms: (i) cyber attack; (ii) insider threat; (iii) phishing; (iv) ransomware; (v) security operations centre; and (vi) zero-day vulnerability. The FSB also adjusted the definitions of: (a) cyber alert; (b) cyber incident; (c) cyber incident response plan; (d) information system; (e) penetration testing; and (f) vulnerability assessment.

FIRE Report

Press Release

CIR Report

Press Release

Cyber Lexicon

ECON and LIBE report on proposed Regulation establishing Anti-Money Laundering Authority

On 12 April, the ECON and LIBE published a report (dated 5 March) on the proposal for a Regulation establishing the Anti-Money Laundering and Countering the Financing of Terrorism Authority (AMLA) and amending Regulations. The next step is for the EP to adopt a position during a plenary session in April 2023, after which the EP can begin negations with the Council of the EU.

Report

New failure to prevent fraud offence

On 11 April, the Home Office announced that it had tabled an amendment to the Economic Crime and Corporate Transparency Bill, to allow prosecutors to hold big companies to account if an employee commits fraud for the organisation’s benefit, and they did not have reasonable prevention procedures in place. The amendment is supported by the Serious Fraud office and the Crown Prosecution Services.. The offence is limited to failing to prevent specified fraud and false accounting offences under the Fraud Act, Theft Act and Companies Act. The offence list can be updated through secondary legislation in future, although any new offences added would be limited to economic crime. The proposed offence would apply to all large bodies, corporate and partnerships, including, large not-for-profit organisations such as charities, as well as incorporated public bodies. If an employee commits fraud under UK law, or targeting UK victims, an employer could be prosecuted, even if the organisation (and the employee) are based overseas. A business will not be liable if it can prove reasonable measures were in place to deter the offence. The government will publish guidance on reasonable prevention measures in due course. The offence will not be enforced until the guidance is published.

Press Release

Factsheet

Markets and Markets infrastructure

ISDA USD LIBOR ICE Swap Rate Future Cessation Guidance – 2021 and 2006 ISDA Definitions

On 13 April, ISDA updated its Future Cessation Guidance – 2021 ISDA Interest Rate Derivatives Definitions and 2006 ISDA Definitions. ISDA has updated the guidance for parties to OTC derivative transactions that are affected by the announcement made on November 14, 2022 by the ICE Benchmark Administration relating to the future cessation of all tenors of the USD LIBOR ICE Swap Rate. This guidance is of particular relevance in the context of the Supplement 88 to the 2006 ISDA Definitions, which updates provisions in the 2006 ISDA Definitions that refer or relate to the USD LIBOR ICE Swap Rate (“Supplement 88”) and Version 3.0 of the 2021 ISDA Interest Rate Derivatives Definitions (the “2021 Definitions”) (as well as subsequent versions of the 2021 Definitions). ISDA originally issued this guidance in the interest of mitigating market risk and the promotion of orderly and consistent application of triggers and fallbacks by market participants. It describes how each of the following applies to the IBA cessation announcement: (i) the terms of the 2021 ISDA Interest Rate Derivatives Definitions, for swap transactions and swaptions that incorporate one of Versions 1.0 to 8.0 of the 2021 Definitions; (ii) the terms of the 2006 ISDA Definitions both for swap transactions and swaptions entered into before the publication of Supplement 88 on November 10, 2021 and following publication of Supplement 88 on November 10, 2021; (iii) the terms of the 2006 ISDA Definitions Benchmarks Annex to the ISDA Benchmarks Supplement; and (iv) the terms of the June 2022 Benchmarks Module.

ISDA Guidance

Press Release

FCA and BoE reminders for firms to prepare for cessation of USD LIBOR

On 12 April, the BoE and FCA published reminders for firms that the USD LIBOR panel ceases on 30 June. The BoE, FCA and Working Group on Sterling Risk-Free Reference Rates encourage market participants to: (i) actively transition USD LIBOR contracts ahead of the cessation of the USD LIBOR panel at end-June; (ii) ensure readiness for implementation of USD LIBOR fallbacks; (iii) ensure they transition to the most robust RFRs; and (iv) continue to actively transition any remaining legacy contracts from synthetic GBP LIBOR to SONIA. The FCA recently announced its decision to require LIBOR’s administrator to continue the publication of the 1-, 3- and 6-month USD LIBOR settings using a synthetic methodology, for a short period after end-June 2023, and to permit its use in all legacy contracts except cleared derivatives. The FCA intends to cease requiring that publication at end-September 2024 and the FCA has been clear that synthetic LIBOR is a temporary bridge to RFRs, hence active transition of legacy USD LIBOR contracts ahead of end-June 2023, wherever practicable, remains the best way for market participants to retain control and certainty over their existing contracts.

Press Release

Payment Services and Payment Systems

Joint call for removing payments from the scope of the Digital Identity Regulation

On 11 April, the European Banking Federation, the European Association of Co-operative Banks, and the European Savings and Retail Banking Group, jointly known as the European Credit Sector Associations (ECSAs), published a statement on the European Commission’s proposal for a European Digital Identity (eIDAS 2.0). While they welcomed the ambitions presented in the proposal, they are concerned that Recital 31 and Art. 12b.2 as adopted by the European Parliament and corresponding Art. 6db.2 of the Council’s General Approach are currently open to interpretation. In particular, they consider that the current wording seems to imply that the full payment sphere is included in eIDAS 2.0 on a mandatory basis and urge the European Parliament and the Council to re-consider their proposed wording during the trilogue negotiations.. The ECSAs believe that if widely used cards and payment specifications were included in the new European Digital Identity Wallet (EUDIW) Infrastructure, huge investments would be required not only in the financial sector, but also for the overall acceptance network, which could possibly result in disproportionate costs for merchants and service industries that accept card payments in accordance with PSD2. They argue that by deleting payments from the scope, the legislators would also solve the general issue of liability that banks would face. Therefore, in order to avoid the mandatory nature of the acceptance of the EUDIW in terms of strong customer authentication (SCA) on payments, they recommend limiting such mandatory acceptance to the verification of the user’s identity only.

Public Statement

Press Release

Sustainable Finance

ESAs review of SFDR Delegated Regulation regarding principal adverse effects and financial product disclosures

On 12 April, the ESAs published a consultation paper reviewing the SFDR Delegated Regulation regarding principal adverse effects (PAI) and financial product disclosures. The ESAs are proposing changes to the disclosure framework to address issues that have emerged since the introduction of SFDR and are seeking feedback on: (i) extending the list of social indicators for PAI; (ii) refining the content of a number of the other indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation; and (iii) amending the decarbonisation (the ESAs’ preferred term is “GHG emissions reduction”) targets. The paper also proposes further technical revisions to the SFDR Delegated Regulation by: (a) improving the disclosures on how sustainable investments “do not significantly harm” the environment and society; (b) simplifying pre-contractual and periodic disclosure templates for financial products; and (c) making other technical adjustments concerning, among others, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options. The deadline for comments is 4 July. The ESAs plan to organise a joint public hearing and targeted consumer testing during the consultation period. After considering the comments received, the ESAs will prepare a final report and submit it to the European Commission.

Press Release

Consultation Paper

FCA and GFIN launch Greenwashing TechSprint

On 11 April, the FCA announced that the Global Financial Innovation Network (GFIN) is launching its first ever virtual Greenwashing TechSprint, which will be hosted by the FCA Digital Sandbox. The TechSprint will start on 5 June and will run for 3 months, finishing with a showcase day in September. The TechSprint will bring together 13 international regulators, alongside firms and innovators with the aim of addressing GFIN’s priority on ESG and sustainable finance, by developing a tool or solution that could help regulators or the market more effectively tackle or mitigate the risks of greenwashing in financial services. GFIN explains that as the demand for ESG-related products and services continues to grow, so does the risk of financial services firms potentially overstating their sustainability credentials to attract and retain customers and investors. This ‘greenwashing’ is a form of mis-selling, which may be deliberate or inadvertent. In protecting against greenwashing, GFIN wants to ensure consumers have access to ‘green’ or sustainable financial products and services that meet their needs. The application window for firms that would like to participate opens on 17 April and closes on 21 May.

FCA Press Release

GFIN Website

Other Developments

ESMA overview of planned consultation papers 2023

On 12 April, ESMA published a table detailing the planned consultation papers of 2023. In line with the ESMA Regulation, ESMA consults the SMSG on proposed technical standards and guidelines. The purpose of this table is to provide an overview of the currently planned consultations to help the SMSG to plan its activities. Upcoming consultations in Q2 include DORA RTS and ITS, as well as RTS under the revised ELTIF Regulation.

Planned Consultations Table

 FSB letter to G20 finance ministers and central bank governors

On 12 April, the FSB published a letter (dated 6 April 2023) from Klaas Knot, FSB Chair, to the G20 finance ministers and central bank governors, ahead of their meeting on 12-13 April. The letter addresses the recent turmoil in the banking sector, noting that the financial stability outlook has become more challenging in recent weeks. However, Mr Knot notes that the recent events have also put the G20’s financial reforms that followed the 2008 Global Financial Crisis, to the test and has shown that the global financial system is much better placed to absorb adverse shocks because of these reforms. But every test of financial resilience involves new challenges and Mr Knot urges authorities to remain vigilant to the evolving outlook and stand ready to take policy measures to maintain the resilience of the global financial system. The FSB is working closely with the BCBS and other standard-setting bodies to draw out the lessons from the speed of developments in March, the precise nature of the vulnerabilities that crystallised and the associated market reactions, and the consequent priorities for future work. Mr Knot emphasises that while some reprioritisation of the FSB’s work programme may be necessary in response to recent events, the FSB remains committed to delivering its previously agreed body of work to the G20, including in the areas of crypto-assets, NBFI, climate change

and enhancing cross-border payments. The letter goes on to address the growing cyber threat landscape, highlighting that the FSB has submitted two reports to the meeting of the G20: recommendations to achieve greater convergence in cyber incident reporting; and a concept note for a format for incident reporting exchange. Further information on these reports can be found the ‘Financial Crime and Sanctions’ section.

Letter

Press Release

PRA survey into critical third parties to the UK financial sector

On 11 April, the PRA and FCA published a survey, operational resilience: critical third parties to the UK financial sector, which aims to aid analysis of the costs and benefits of a potential critical third-party regime in the UK. The survey asks respondents to provide cost estimates for implementing and ensuring ongoing compliance with potential minimum resilience standards along the lines of those set out in DP3/22. It asks for the estimated cost of applying the resilience standards and testing requirements to a single service that is provided to clients, with the option to provide estimates for additional services. The deadline for responses is 17 May. The results of the survey will help inform future consultation options as well as the cost benefit analysis for the consultation.

FCA and ASA warn fin-fluencers of risks of promoting illegal ‘get rich quick’ schemes

On 6 April, the FCA announced that along with the Advertising Standards Authority (ASA), it has teamed up with Sharon Gaffka, social media influencer, to help educate fin-fluencers about the risks involved in promoting financial products. Alongside this work, they will also be engaging with influencers and their agents, to provide them with clear information about what could be an illegal financial promotion, including sharing an infographic, which sets out what influencers should check before accepting brand deals for financial products and services. This focus on fin-fluencers is the result of growing concern about the misuse of social media by influencers and the harm this can cause their followers. Influencer agents and the Influencer Marketing Trade Body will also be invited by the FCA to an open roundtable discussion on illegal financial promotions.

Press Release

Infographic