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Key Regulatory Topics: Weekly Update 7-13 July 2023

This week the regulators have been extremely busy, both in the UK and in Europe. In the UK, the text of the Financial Services and Markets Act 2023 was published. HM Treasury published a plan for delivery in relation to its policy approach to building a smarter regulatory framework for financial services that is tailored to the UK. The PSR consulted on the implementation of mandatory APP scam reimbursement requirements and HM Treasury published its consultation response on reforming the Consumer Credit Act 1974. In Europe, ESMA and the EBA began consulting on the first set of technical standards under MiCAR, and ESMA published a new manual on post-trade transparency, as well as a report in response to its call for evidence on pre-hedging. The FSB published a progress report on its work to complete objectives set out in the July 2021 roadmap for addressing climate-related financial risks.

Capital Markets

Please see the Sustainable Finance section for a statement from ESMA setting out its expectations on how the specific disclosure requirements of the Prospectus Regulation in relation to sustainability-related matters in equity and non-equity prospectuses should be satisfied considering the ESG transition.

FCA engagement paper on public offer platforms under new regime

On 13 July, the FCA launched an engagement paper setting out its initial thinking on the development of rules for the new regulated activity of operating a public offer platform, under the new public offers and admission to trading regime. Overall, the FCA’s aim is that the framework it creates for public offer platform operators should ensure that: (i) sufficient due diligence and checks on companies are conducted to prevent fraud and facilitate genuine capital raising; (ii) investors have sufficient, accurate, and useful information, on both the company and the securities being offered, to understand the opportunity and risks when investing in securities on a platform; and (iii) companies can raise capital efficiently and effectively through such platforms, subject to appropriate scrutiny and transparency. As a starting point, the FCA is focusing on a proposed regime that will impose requirements on platform operators in these areas: (a) due diligence requirements, including systems and controls to ensure that platform operators undertake appropriate due diligence on companies and prospective offers; (b) disclosure requirements for platform operators to provide or ensure a company provides key information; (c) liability for, and the potential for redress from, platform operators; and (d) the role of the FSCS. The FCA’s approach to regulation of platform operators reflects the fact that, based on the current crowdfunding market, offers made via public offer platforms are likely to be largely directed at retail investors and that the new public offer framework extends to non-transferable debt securities (mini-bond type securities) following the Gloster report. The deadline for comments is 29 September. Feedback is intended to create a dialogue between the FCA and stakeholders, which will inform further development of proposed rules, which the FCA will consult on formally during 2024.

Engagement paper

FCA engagement paper on primary multilateral trading facilities under new regime

On 13 July, the FCA launched an engagement paper setting out its initial thinking on the development of rules for primary multilateral trading facilities (MTFs) under the new public offers and admission to trading regime. The regime will create a new 'MTF admission prospectus', which will be subject to the same statutory liability and compensation scheme as regulated market prospectuses. Under the new regime, the FCA will have the power to ensure that certain MTFs operating as primary markets (Primary MTFs) require issuers to produce an MTF admission prospectus in specified circumstances. MTF issuers that publish an MTF admission prospectus will benefit from the amended liability standard for protected forward-looking statements. The FCA aims to explore how regulatory changes can promote broader investor participation and improve the quality of information that investors receive. Where possible, it intends to preserve the existing regulatory model in which Primary MTF operators set their own requirements in terms of the content of an admission document and how it is approved. Consequently, MTF operators will specify the detailed content requirements and process for validating and publishing an MTF admission prospectus, as they do currently for their admission documents, subject to the FCA’s normal supervisory oversight of their activities. The FCA sets out its initial considerations on: (i) the circumstances in which Primary MTFs should require the publication of an MTF admission prospectus; (ii) who should be responsible for such a document; (iii) the circumstances in which a supplementary prospectus should be required; (iv) how and when withdrawal rights should be exercised; and (v) the requirements for advertisements related to securities being admitted to trading on a Primary MTF. The deadline for comments is 29 September. Feedback will inform further development of the FCA’s proposed rules which the FCA will consult on formally during 2024. This paper relates to the draft SI that was published by HMT on 11 July 2023 (see item below).

Engagement paper

Near-final Public Offers and Admissions to Trading Regulations 2023

On 11 July, the government published the near-final Public Offers and Admissions to Trading Regulations 2023, together with an explanatory policy note. The SI will replace retained EU law relating to the prospectus regime and create a new regulatory framework for public offers and admissions to trading. The SI includes a number of refinements and clarifications to the previous illustrative version published as part of the Edinburgh Reforms, including: (i) clarifying that certain securities such as OTC derivatives, the shares of building societies, credit unions, and cooperative and mutual benefits societies are out of scope and not covered by the definition of ‘relevant securities’; (ii) the provisional drafting in relation to the FCA’s proposed powers over multilateral trading facilities (MTFs) has been revised, including clarifying that the FCA will only have powers to require an MTF admission prospectus where the securities are being admitted to trading on markets open to retail investors; (iii) the provisional drafting clarifying the key information required in prospectuses to meet the ‘necessary information test’ for those issuing bonds has been further revised to provide greater clarity. The key requirements of the necessary information test have not changed; (iv) amending the RAO to create a new regulated activity of operating a public offer platform; (v) setting the public offer platform threshold at £5 million. Offers above this level will either need to be made via a public offer platform or within the scope of one of the other exceptions in Part 1 of Schedule 1 to the SI.; and (vi) aside from the public offer platform threshold, the government has also revised various exceptions to the regime to ensure their scope is appropriate and that they do not cause unintended disruption. See Schedule 1, Part 1, paragraphs 1, 8, 9, and 10 for more information. The deadline for comments on the SI is 21 August. The government intends to lay the SI before year end.

Near-final Regulations

Policy note

UK Investment Research Review outcomes

On 10 July, HMT published a report containing the outcomes of the UK Investment Research Review (IRR). The key recommendations are: (i)  to introduce a Research Platform that will provide a central facility for the promotion, sourcing and dissemination of research – in particular, in relation to smaller companies; (ii) to amend regulations to allow additional optionality for paying for investment research and align the UK with other key jurisdictions including the US and EU; (iii) to facilitate greater access to investment research for retail investors; (iv) involve academic institutions in supporting investment research initiatives; (v) support issuer-sponsored research by implementing a code of conduct; (vi) clarify aspects of the UK regulatory regime for investment research and consider introducing a bespoke regime; and (vii) review the rules relating to investment research in the context of IPOs including the making of connected analyst research available on a similar basis to the prospectus. The Chancellor welcomed the report, and accepted all recommendations made to government. The FCA has stated that it will consider the recommendations, in line with its objectives. The FCA intends to consult on an accelerated timetable on potential regulatory changes that could introduce more options on how to pay for investment research so as to achieve an outcome of improving investor research into markets while providing value for money to institutional and retail investors. Subject to this detailed consultation feedback and FCA Board approval, the FCA will aim to make relevant rules in H1 2024.

Review webpage

Investment Research Review

FCA statement

Conduct and Governance

Financial Regulators Complaints Commissioner annual report 2022/23

On 13 July, the Office of the Complaints Commissioner published the Financial Regulators Complaints Commissioner's annual report for 2022/23, covering the period from 1 April 2022 to 31 March 2023. The Complaints Commissioner welcomes the new requirements set out in the FSMA 2023 (FSM Bill at the time of writing) requiring the regulators to include a summary of instances where they have not complied with the Complaints Commissioner’s recommendations in their response to the annual report, including their reasoning for not complying with the recommendations to HMT. During this year, 421 cases were dealt with by the Complaints Commissioner’s office, compared to 492 excluding LCF in the previous year. Overall, the Complaints Commissioner made 62 recommendations, suggestions or criticisms. Of these, one criticism was about a joint complaint between the FCA and the PRA and one suggestion was about the PRA complaint, with the remaining relating to the FCA. The Complaints Commissioner found the reason for most of the complainant’s dissatisfaction with the FCA centred upon its oversight role of firms and the customer service received from the FCA Complaints Team and other departments. In its response, the FCA notes the Complaints Commissioner's themes and observations and commits to continue making improvements in these areas. In its response, the BoE/PRA states that it remains committed to updating and improving the complaints scheme, which will happen as soon as possible after the provisions of the FSMA 2023 impacting the scheme come into force.

Report

FCA response

BoE/PRA response

Consumer/Retail

Please see the FinTech section for a feedback statement from the FCA to its discussion paper assessing potential competition benefits and harms arising from Big Tech entry and expansion in retail financial services.

ESMA highlights risks arising from securities lending to retail investors

On 12 July, ESMA published a statement on securities lending to retail clients setting out the applicable requirements under MiFID II. ESMA highlights investor protection concerns related to securities lending and outlines the obligations of firms engaging in this practice. ESMA also outlines its expectations for firms’ compliance with the relevant MiFID II requirements regarding: (i) revenues from securities lending should directly accrue to the retail client, net of a normal compensation for the firm’s services; (ii) express prior consent of retail clients should not be sought by way of the firm’s general terms and conditions. ESMA will continue to monitor the practice of securities lending to retail clients and, if needed, issue further technical advice to the EC on this topic.

Press release

Statement

HMT consultation response on new UK retail disclosure regime

On 11 July, HMT published the response to its consultation on the proposed revocation of the UK PRIIPs Regulation and an alternative framework for a new UK retail disclosure regime. The response briefly sets out the proposals in the HMT consultation and summarises the responses received. It also sets out the government’s vision for the new retail disclosure framework and further detail about next steps to deliver this reform. The government confirms that: (i) UCITS vehicles will be brought into scope of the new retail disclosure regime. The government and FCA will provide clarity on the transition period from current disclosure requirements (for both packaged products and UCITS) in due course; (ii) it intends to proceed with its plan to entirely remove all PRIIPs firm facing retail disclosure requirements from legislation; and (iii) further analysis since the consultation has found that the FCA will require some additional tailored powers to ensure that the new regime applies to: (a) certain unauthorised firms – which make up a substantial part of the PRIIPs market and are currently subject to directly applicable obligations under the existing PRIIPs regime, which will fall away when PRIIPs is repealed; and (b) overseas funds. Further detail will be set out in due course. The government notes the feedback provided on MiFID II cost and charges disclosure and will reflect on this feedback as it repeals and replaces the remainder of the MiFID II framework in due course. The government will publish a draft SI by 2024 to enable the FCA to deliver the new retail disclosure regime, following the repeal of the PRIIPs Regulation (and related secondary legislation). The FCA will also consult on its draft rules for the new retail disclosure regime, building on the principles discussed in this consultation and December 2022 Discussion Paper.

Response

HMT consultation response on reforming the CCA

On 11 July, HMT published a response to its consultation on reforming the Consumer Credit Act 1974 (CCA). The response provides an overview of the feedback to the consultation and outlines the government’s proposed next steps. Given the widespread support, the government plans to move forward with reforming the CCA. The government plans to develop proposals that move the majority of the CCA into the FSMA model. This will involve repealing much of the CCA and recasting it in the FCA rulebook. However, the government recognises that there may be specific aspects of consumer credit regulation that may warrant legislative-based provisions. After considering stakeholder feedback to this consultation, the government will seek to make these decisions guided by the principles set out in its consultation: proportionate, aligned, forward-looking, deliverable and simplified. The government notes that due to its scale and complexity, the CCA reform will take a number of years to deliver. As a next step, a second stage consultation is expected in 2024. In advance of that, the government will engage further with stakeholders to inform its proposals, both through bilateral meetings and broader roundtables. The government notes that there may be benefits to a phased approach to implementation, though notes the difficulty of this approach due to the interconnected nature of the CCA. Nonetheless, it is keen to hear representations from stakeholders on the desirability and deliverability of a phased approach.

Response

Fees/Levies

FCA changes to fees rates for 2023/2024

On 13 July, the FCA set out on a new webpage the changes to fee rates for 2023/24 compared to the previous year. Overall, the FCA’s annual funding requirement has increased in 2023/24 by 8.1%. The fee rate movements for each fee-block broadly reflect this percentage increase (adjusted for other factors) and the change in total tariff data reported by firms. The FCA reminds firms that, since their actual fees are based on the volume of business (tariff data) they have reported, reporting a large change in their tariff data this year will also have an impact on their actual fees.

Webpage

Financial Crime and Sanctions

Fourth EBA opinion on ML/TF risks across the EU

On 13 July, the EBA published its fourth biennial opinion on the risks of ML/TF affecting the EU’s financial sector, based on data from January 2020 to January 2023. The EBA’s findings include that: (i) since the EBA’s third Opinion on ML/TF risks was published in 2021, geopolitical events and technological advances have had a profound impact on the financial sector’s exposure to financial crime risks. Russia’s invasion of Ukraine led to the imposition by the EU of restrictive measures that are unprecedented in terms of their scale and their scope, but national approaches to enforcing restrictive measures are not harmonised and create pressure on institutions’ compliance resources. At the same time, the risk of financial institutions being used to circumvent sanctions has increased. New risks arise from the laundering of proceeds from environmental and cybercrimes, with a perceived increase in risks associated with financial innovation linked to market growth; (ii) legislative developments, such as MiCAR, create legal uncertainty and some competent authorities and institutions have been hesitant to invest in better financial crime controls; (iii) the TF risks identified in 2021 continue to exist, though the changed geopolitical situation and an increase in right-wing extremism and terrorism have given rise to new TF risks; and (iv) with few exceptions, awareness of ML/TF risks is increasing across all sectors under the EBA’s AML/CFT remit, but the AML/CFT systems and controls institutions have put in place are not always effective. Transaction monitoring and the reporting of suspicious transactions are particularly weak with payment institutions and e-money institutions among the worst performing sectors. More competent authorities than ever before have carried out formal ML/TF risk assessments in line with EBA guidelines, and the frequency and intensity of supervisory engagement is increasing. The EBA issues 23 proposals to the EU co-legislators and competent authorities to address these risks and to strengthen the EU’s financial crime defences.

Press release

Opinion

EBA report on competent authorities’ approaches to AML/CTF supervision of banks

On 11 July, the EBA published the findings from its 2022 review of competent authorities’ approaches to tackling ML/TF risks in the banking sector. Overall, the EBA’s findings suggest that supervisors are making progress in the fight against ML/TF. The review found that: (i) some competent authorities have made far-reaching changes in recent years, and their approach to AML/CFT supervision of banks is now broadly effective; (ii) many competent authorities have made tangible progress in tackling ML/TF risks through prudential supervision and most are on track to embed cooperation and information exchange in their supervisory processes. Nevertheless, most supervisors in the 2022 sample were asked to do more to tackle ML/TF risk in their banking sector; (iii) as was the case in the previous rounds of reviews, competent authorities find assessing ML/TF risk difficult. Several competent authorities did not use their ML/TF risk assessments to inform their supervisory strategy and inspection plans. A general lack of formalised processes and targeted training for AML/CFT and prudential supervisors meant that opportunities for intervening at an early stage, before risks crystallise, were sometimes missed. The EBA notes that the findings and recommended actions in this report will be relevant to all competent authorities responsible for tackling ML/TF risks in credit and financial institutions across the single market. The EBA has entered its fourth and last round of implementation reviews of competent authorities in 2023. After this round, the EBA will publish a final report, which will include an assessment of progress made since 2019.

Press release

Report

Fintech

Please see the Other Developments section for a letter sent from the FSB Chair to G20 Finance Ministers and Central Bank Governors ahead of their meeting on 17-18 July, providing updates on its key workstreams, including recommendations for regulating global stablecoin arrangements.

FCA speech on emerging regulatory approach to Big Tech and AI

On 12 July, the FCA published a speech given by Nikhil Rathi, FCA Chief Executive, on the FCA's emerging regulatory approach to artificial intelligence (AI) and Big Tech. Highlights include: (i) Big Tech and their gatekeeping of financial data -  the FCA has announced a call for further input on the role of Big Tech firms as gatekeepers of data and the implications of the ensuing data-sharing asymmetry between Big Tech firms and financial services firms. The FCA is also considering the risks that Big Tech may pose to operational resilience in payments, retail services and financial infrastructure; (ii) ensuring market integrity in the age of AI - Mr Rathi warns that using AI can cause imbalances and risks affecting the integrity, price discovery, transparency and fairness of markets. The FCA expects firms to accelerate investment in fraud prevention and operational and cyber resilience as AI is further adopted; and (iii) regulatory frameworks - any regulation must be proportionate enough to foster beneficial innovation but robust enough to avoid a race to the bottom and a loss in trust and confidence, which when it happens can be deleterious for financial services and very hard to win back. Mr Rathi considers that the consumer duty and the SMCR provide frameworks that address many of the issues arising from AI. He highlights recent calls in Parliament for a bespoke SMCR-type regime for the most senior individuals managing AI systems.

Speech

FCA feedback statement on competition impacts of Big Tech in retail financial services

On 12 July, the FCA published a feedback statement to its discussion paper assessing potential competition benefits and harms arising from Big Tech entry and expansion in four retail financial services sectors – payments, deposits, consumer credit and insurance. The key themes that emerged following the FCA’s analysis are: (i) Big Tech firms have the potential to enhance the overall value of their ecosystems with further entry and expansion in retail financial services sectors through innovative propositions; (ii) in the short term, a partnership-based model is likely to continue to be the dominant entry strategy for Big Tech firms. In the longer term they may seek to rely less on partnerships and compete more directly with existing firms; (iii) Big Tech firms’ entry may not be sequential or predictable. Big Tech firms’ ecosystem business models and conglomerate operations mean entry into one financial services market may create opportunities for expansion into complementary financial markets; (iv) in the short-term and possibly enduring longer term, Big Tech firms’ entry in financial services could benefit many consumers. These benefits could arise from Big Tech firms’ own innovations or by increasing other market participants’ incentives to innovate, improve quality and reduce prices of financial products and services through increased competition; and (v) in the longer term, there is a risk that the competition benefits could be eroded if these firms can create and exploit entrenched market power to harm healthy competition and worsen consumer outcomes. In response, the FCA has announced three initiatives: (a) a call for input on Big Tech firms as ‘gatekeepers’ and key drivers, including the role of data sharing asymmetry between Big Tech firms and financial services firms, by the end of 2023; (b) to review its supervisory approach for Big Tech firms to improve how it monitors Big Tech activities within and outside its regulatory perimeter; and (c) continue its work with the government and the DMU as the Digital Markets, Competition and Consumers Bill passes through Parliament.

Feedback statement

ESMA consults on first package of technical standards under MiCAR

On 12 July, ESMA began consulting on the first of three packages of technical standards under MiCAR, consisting of five draft RTS and two ITS on: (i) the notification by certain financial entities of their intention to provide crypto-asset services; (ii) the authorisation of crypto-asset service providers (CASPs); (iii) complaints handling by CASPs; (iv) the identification, prevention, management and disclosure of conflicts of interest; and (v) the proposed acquisition of a qualifying holding in a CASP. In addition, ESMA aims to gather more insight on respondents’ current and planned activities, as a fact-finding exercise to better understand the EU crypto-asset markets and their future development. These questions relate to elements such as the expected turnover of the respondents, the number of white papers they plan to publish and the use of on-chain vs off-chain trading. The input to this part of the consultation will remain confidential and will serve to calibrate certain proposals to be inserted in the second and third consultation packages. The deadline for comments is 20 September. ESMA expects to publish a final report and submit the draft technical standards to the EC for endorsement by 30 June 2024 at the latest.

Press release

Consultation

EBA encourages timely preparatory steps towards application of MiCAR to ARTs and EMTs

On 12 July, the EBA published a statement for the attention of financial institutions and other undertakings who intend to commence, or have commenced, asset-referenced token (ART) or electronic money token (EMT) activities prior to 30 June 2024 (the application date for the relevant provisions of MiCAR) and for competent authorities. The statement is intended to encourage timely preparatory actions to MiCAR application, to hopefully reduce the risks of potentially disruptive and sharp business model adjustments at a later stage, to foster supervisory convergence, and to facilitate the protection of consumers. The statement includes ‘guiding principles’ to which undertakings carrying out ART/EMT activities are encouraged to have regard until the application date. These guiding principles encompass: (i) disclosures to, and fair treatment of, potential acquirers and holders of ARTs and EMTs; (ii) the business model; (iii) sound governance, including effective risk management; (iv) reserve, recovery and redemption arrangements; and (v) communications with the relevant competent authority. The statement is accompanied by a template that undertakings intending to carry out, or carrying out, ART/EMT activities, are encouraged to communicate, on a timely basis, to the relevant competent authority.

Press release

Statement

Template

EBA consults on three draft technical standards under MiCAR

On 12 July, the EBA began consulting on the first set of technical standards under MiCAR; (i) RTS on the specification of information to be contained in an application to offer to the public or to seek admission to trading of asset-referenced tokens (ARTs). The information requirements cover the business model, internal governance, including ICT risk management, liquidity, reserve of assets, sufficiently good repute of the members of the management body and of shareholders with qualifying holdings. Consistent with the general regime applicable in the financial sector, MiCAR envisages a prudential assessment by competent authorities for the acquisition of qualifying holdings in issuers of ARTs that are not credit institutions. The draft RTS clarify the information requirements that are necessary for such an assessment; (ii) ITS on the establishment of standard forms, templates and procedures for the information to be included in the application in order to ensure uniformity across the EU. As to the procedure, the ITS clarify the modalities to file an application with the competent authority (electronic form, upload on the competent authority’s portal, paper form, which may be required for certificates on criminal records etc.), the steps to be followed in case of incomplete application and when an application has to be considered complete; (iii) RTS on complaints handling procedures for issuers of asset-referenced tokens (IART). The draft RTS set out definitions of complaints and complainants, requirements related to the complaints management policy and function, the provision of information to holders of ARTs and other interested parties. The draft RTS continue with templates and recording, the procedure to investigate complaints and to communicate the outcome of the investigations to complainants, and specific provisions for complaints handling involving third-party entities. The deadline for comments is 12 October.

Press release – authorisation RTS and ITS

Press release – complaints RTS

Consultation – authorisation RTS and ITS

Consultation – complaints RTS

HMT consults on Digital Securities Sandbox

On 11 July, HMT began consulting on proposals for a Digital Securities Sandbox (DSS), the first FMI sandbox to be delivered under the FSMA 2023. The DSS will enable firms to set up and operate FMIs using innovative digital asset technology, performing the activities of a central securities depository (specifically notary, settlement and maintenance), and operating a trading venue, under a legislative and regulatory framework that has been temporarily modified to accommodate digital asset technology. These activities will be performed in relation to existing security classes (which could either be digitally native issuances or digital representations of existing securities). Limits will be put in place for participating entities, which can be increased as progress is made. These limits will reflect the ability of a participating entity to meet requirements and manage risks. These will be real-world market activities and assets. The intention is that any digital securities issued, traded, settled and maintained via entities in the DSS will be able to interact with wider financial market activities (e.g. for collateral posting or repos), where this can be done in compliance with existing legislative and regulatory frameworks. The paper sets out HMT’s approach to establishing the DSS. The deadline for comments is 21 August, although HMT welcomes expressions of interest in utilising the DSS after this date too.  A SI establishing the legal framework for the DSS will be laid before Parliament later in 2023. The BoE and FCA will publish further guidance, consult on rule changes and set out the application process.

Consultation

BIS report on key elements and risks of crypto ecosystem

On 11 July, the BIS published a report on the key elements and risks of the crypto ecosystem that it has submitted to the G20 Finance Ministers and Central Bank Governors ahead of its July 2023 meeting. The report reviews the key elements of the crypto ecosystem and assesses its structural flaws. The BIS highlights three main takeaways: (i) the crypto ecosystem is subject to a high degree of fragmentation and is characterised by congestion and high fees. These structural flaws derive from the underlying economics of incentives of validators rather than from technology. And while crypto has offered some elements of genuine innovation, these can be replicated or embedded in the safer and more trusted traditional finance system; (ii) despite an original ethos of decentralisation, crypto and decentralised finance (DeFi) often feature substantial de-facto centralisation, which introduces various risks. A prime example concerns stablecoins, which piggyback on the credibility of the central bank’s unit of account and may pose risks to monetary sovereignty; and (iii) while DeFi mostly replicates services offered by the traditional financial system, it does not finance any activity in the real economy but amplifies known risks. Moreover, as growth is driven mainly by the speculative influx of new users hoping for high returns, crypto and DeFi pose substantial risks to investors. In sum, crypto’s inherent structural flaws make it unsuitable to play a constructive role in the monetary system. The report outlines policy options to mitigate the multiple risks crypto poses to investors, the traditional financial system and the economy at large.

Report

Communications and Digital Committee call for submissions on AI large language models

On 7 July, the House of Lords Communications and Digital Committee published a call for written submissions to assist with its inquiry into large language models (LLMs). LLMs are a type of generative AI, which have attracted significant interest for their ability to produce human-like text, code and translations. The inquiry aims to establish what needs to happen over the next 1–3 years to ensure the UK can respond to LLM’s opportunities and risks. The call for evidence covers topics including: (i) how LLM’s are most likely to develop over the coming years; (ii) whether UK regulators have sufficient expertise and resources to respond to these developments; (iii) whether a tailored regulatory approach is necessary; and (iv) the UK’s approach in comparison with other jurisdictions and the potential implications of divergent proposals. The deadline for comments is 5 September.

Press release

Call for submissions 

Fund Regulation

Please see the Consumer/Retail section for HMT’s response to its consultation on the proposed revocation of the UK PRIIPs Regulation and an alternative framework for a new UK retail disclosure regime.

Markets and Markets Infrastructure

Please see the Consumer/Retail section for a statement from ESMA on securities lending to retail clients setting out the applicable requirements under MiFID II.

Please see the FinTech section for HMT’s consultation on proposals for a Digital Securities Sandbox (DSS), the first FMI sandbox to be delivered under the FSMA 2023.

ESMA updates Q&A on the Securitisation Regulation

On 13 July, ESMA updated its Q&As on the Securitisation Regulation. ESMA has modified some Q&As and added new Q&As, including in relation to: (i) amended transaction documents; (ii) self-securitisation; (iii) consumers' rights to access information; (iv) underlying exposures; and (v) investor reports.

Q&As

ESMA updates Q&A on implementation of CRA III

On 13 July, ESMA updated its Q&As on the implementation of the CRA III. ESMA has modified the answer to a question in relation to error reporting in the section on methodologies, models and key rating assumptions, specifically on: (i) the types of errors that should be reported to ESMA and all affected rated entities; (ii) whether Article 8(7)(a) requires a CRA to notify ESMA and all affected rated entities of an error which does not lead to a change in any issued credit rating; and (iii) whether CRAs are allowed to notify the errors in rating methodologies to the affected entities in the press release or credit report published after the re-rating exercise. The Q&A does not specify how the answer was modified.

Q&A

ESMA follow-up report to peer review on certain aspects of compliance function under MiFID I

On 13 July, ESMA published a follow-up report to the peer review on certain aspects of the compliance function under MiFID I. The report shows that, overall, the NCAs assessed improved their practices following the 2017 peer review findings and recommendations. NCAs have strengthened supervisory practices / framework, undertaken investigations and thematic reviews, introduced sample checks, and / or taken enforcement actions. For two NCAs, ESMA sets out further measures that they need to consider. ESMA states that as the compliance function remains a key element to promote sound and compliant behaviour by firms, all NCAs should continue monitoring the effective application of its guidelines and the effectiveness of the supervisory practices implemented, taking supervisory action when needed.

Press release

Report

ESMA report on call for evidence on pre-hedging

On 12 July, ESMA published a report in response to its call for evidence on pre-hedging. ESMA originally addressed the practice of pre-hedging in its 2019 and 2020 MAR review. However, diverging views about pre-hedging emerged from the feedback received: some respondents considered that pre-hedging can be considered as a form of front-running, while others considered it as a regular market practice that is beneficial for clients and for the market as a whole. ESMA concludes that: (i) pre-hedging is a voluntary market practice which might give rise to conflicts of interest or abusive behaviours. Whereas ESMA does not find arguments to ban this practice at this stage, it also flags that these risks should be considered when issuing any future guidance; (ii) any future guidance on pre-hedging should address the requests for quotes from both professional clients and eligible counterparties; (iii) the proposed definition in the call for evidence would serve as a useful starting point for the future guidance as it was approved by most respondents; and (iv) that global regulatory principles applicable to pre-hedging could be beneficial in fostering a common regulatory approach to this practice. Those principles could also serve as basis for the development of any future ESMA guidance.

Press release

Report

ESMA final report on revised technical standards for passporting under MiFID II

On 11 July, ESMA published its final report on the review of the technical standards for passporting under Article 34 of MiFID II. ESMA’s proposals include targeted amendments to the existing RTS and ITS that would add new information requirements to the list of details investment firms have to provide at the passporting stage. A new investment services and activities passport notification will also provide NCAs with additional information on a firm’s planned or existing cross-border activities. ESMA and the NCAs observe a continued increase in cross-border activities provided to retail clients by investment firms across the EU. The draft revised technical standards are included in the report. ESMA has submitted the report to the EC and will provide further advice and technical guidance should the EC decide to proceed with the review.

Press release

Final report

ESMA supervisory briefing updating guidance on definition of advice under MiFID II

On 11 July, ESMA published a supervisory briefing setting out supervisory expectations by ESMA and NCAs on understanding the definition of advice under MiFID II. The briefing is based on the CESR’s (ESMA’s predecessor) Q&A on ‘Understanding the Definition of Advice under MiFID’, a document that is widely used by supervisors and firms. It has been updated to align it with new business models and recent technological developments. The supervisory briefing, among other topics, covers: (i) the provision of personal recommendations and whether other forms of presenting information such as ‘investment research’, filtering, general recommendations, generic advice, presenting multiple products or access to model investment portfolios could constitute investment advice; (ii) the presentation of a recommendation as suitable for a client or based on the client’s circumstances, including making recommendations to become a client of a particular firm, making recommendations which are clearly unsuitable in light of knowledge about the client, definitions of a ‘person’s circumstances’ and when recommendations will be viewed as based on a view of a person’s circumstances; (iii) perimeter issues around the definition of personal recommendation, including disclaimers to the client and failing to use known client information in an attempt to try avoiding the qualification as investment advice; and (iv) issues around the form of communication, including whether the internet or apps are always a ‘distribution channel’, use of social media posts, messages to multiple clients, distinguishing corporate finance and investment advice and whether these are mutually exclusive.

Press release

Briefing

UK Digitisation Taskforce interim report on digitisation of shareholdings

On 11 July, the Digitisation Taskforce published its interim report regarding reforms to the UK's shareholding framework. The Digitisation Taskforce was launched following recommendations to the government in the UK Secondary Capital Raising with the aim of driving forward the full digitisation of the UK shareholding framework by eliminating the use of paper share certificates, and in general seeking to improve the UK’s intermediated system of share ownership. The report provides a set of potential recommendations for the government and seeks feedback across a number of key questions, ahead of the final report to be published within the next six months. The recommendations include: (i) legislation should be brought forward, and company articles of association changed, as soon as practicable to stop the issuance of new paper share certificates; (ii) legislation should be brought forward requiring dematerialisation of all share certificates at a future date, to be determined as soon as possible; (iii) the government should consult with issuer and investor representatives on the preferred approach to ‘residual’ paper share interests and whether a time limit should be imposed for the identification of untraced Ultimate Beneficial Owners (UBOs); (iv) intermediaries should have an obligation, as a condition of participation in the clearing and settlement system, to put in place common technology that enables them to respond to UBO requests from issuers within a very short timeframe; (v) intermediaries offering shareholder services should be fully transparent about whether and the extent to which clients can access their rights as shareholders, as well as any charges imposed for that service; (vi) where intermediaries offer access to shareholder rights, the baseline service should facilitate the ability to vote, with confirmation that the vote has been recorded, and provide an efficient and reliable two-way communication and messaging channel, through intermediaries, between the issuer and the UBOs; and (vii) following digitisation of certificated shareholdings, cheque payments should be discontinued and direct payments should be made to the UBO’s nominated bank account. The deadline for comments on the report is 25 September. The Taskforce also suggests that it would be helpful to explore how distributed ledger technology might be deployed in the future.

Interim report

Near-final Data Reporting Services Regulations 2023

On 11 July, HMT published a near-final version of the Data Reporting Services Regulations 2023, together with a policy note. Among other changes to the current framework, the SI: (i) requires relevant data reporting service providers (DRSPs) to have appropriate authorisation or verification and stipulates the conditions for authorisation. It allows the FCA to set the requirements and processes for granting authorisation or verification to DRSPs; (ii) introduces a power for the FCA to run a tender process to select the UK’s consolidated tape provider(s) for a particular asset class. The FCA may select a single or limited number of consolidated tape providers per asset class, if the FCA deems this is necessary to facilitate the emergence of a consolidated tape in the UK; (iii) re-states the FCA's existing supervisory and regulatory powers and duties from retained EU law into domestic legislation, including in relation to registration, investigation and enforcement; and (iv) amends existing legislation where necessary to enable the establishment of a regulatory framework which will encourage the emergence of a consolidated tape. This includes the revocation of existing firm-facing requirements which sit in retained EU law, for example, regulations establishing obligations on consolidated tape providers regarding the disclosure of information and maintenance of records. Going forward, such firm-facing requirements will be the responsibility of the FCA to determine using its new general rule-making power over DRSPs under section 300H of FSMA. The government welcomes any technical comments on the draft SI by 21 August.

Policy note

Near-final SI

Near-final Securitisation Regulations 2023

On 11 July, HMT published a near-final version of The Securitisation Regulations 2023 (Draft Regulations), together with an explanatory policy note. The SI includes a number of refinements and clarifications to the previous illustrative version published as part of the Edinburgh Reforms, including: (i) narrowing the scope of the definition of ‘institutional investor’, so that UK due diligence requirements only apply to UK AIFMs; (ii) giving the FCA a power of direction for authorised and unauthorised firms who engage in designated activities, ‘DAR activities’, related to securitisation; (iii) clarifying the ban on establishing Securitisation Special Purpose Entities (SSPEs) in high-risk or non-cooperative jurisdictions so that it applies to providers of securitisations. It has also been clarified so that institutional investors are prohibited from investing in securitisations with SSPEs established in the jurisdictions in question; (iv) modifying the STS securitisation equivalence regime for non-UK securitisations to adapt it to a model appropriate for the regulation of securitisation under the Smarter Regulatory Framework; (v) repealing the power and process for the FCA and PRA to grant firms permission to issue re-securitisations without replacement. HMT intends to provide the regulators with certain powers to modify or disapply rules under section 138BA of FSMA, which may be used as a replacement for this process as well as other purposes. The regulators may publish further material on how they expect to exercise these powers; and (vi) repealing without replacement specific obligations on the regulators in retained EU law, including to review compliance and monitor risks. HMT intends to lay the Draft Regulations by the end of 2023. The FCA and the PRA are expected to consult on draft rules to replace most firm-facing requirements in the Securitisation Regulation with changes where appropriate, in Q3 this year. The government welcomes any technical comments on the draft SI before 21 August.

Near-final SI 

Policy note

HMT response to call for evidence on SSR Review

On 11 July, HMT published a response to its call for evidence on the Short Selling Regulation (SSR) Review. This document summarises the feedback received in the call for evidence and, in light of the feedback received, sets out the government’s response to the issues raised at a high-level, with further detail to be set out in a draft SI, and ultimately in FCA rules. The government: (i) plans to give the FCA the ability to make regulations to maintain the prohibition on uncovered short selling; (ii) agrees that the current rules for the market maker exemption could be streamlined to lower administrative burdens for firms; (iii) will replace the current public disclosure regime based on individual net short positions with an aggregated net short position disclosure regime; (iv) will increase the current disclosure threshold for net short position reporting to the FCA from 0.1% to 0.2%; (v) believes that the FCA should retain emergency intervention powers for exceptional circumstances where there is a serious threat to financial stability or market confidence, or in order to prevent a disorderly decline in the price of a financial instrument. The government will require the FCA to set out its approach to using these powers; and (vi) plans to enable the FCA to make rules about exempt share arrangements, with the potential of moving to a ‘positive’ list of in scope shares. When the FCA consults on a short selling regime that will replace the SSR, it will take the responses to the call for evidence and the views of the government, as set out in this response, into account.

Response

HMT consults on sovereign debt and credit default swaps provisions in UK SSR

On 11 July, HMT begun consulting on aspects of the UK Short Selling Regulation (SSR) relating to UK sovereign debt and sovereign credit default swaps (CDS). The government proposes to: (i) remove restrictions on uncovered short positions in UK sovereign debt (Article 13 of the SSR); (ii) remove restrictions on uncovered short positions in UK sovereign CDS (Article 14 of the SSR); and (iii) remove requirements to report sovereign debt positions to the FCA (Article 7 of the SSR) and remove requirements to report sovereign CDS positions to the FCA in the case that covering requirements are suspended (not currently in force) (Article 8 of the SSR). The government considers it important for the FCA to have broad intervention powers relating to short selling in exceptional circumstances, noting the high bar the FCA has publicly set on imposing short selling bans, and the reputation it has built for using short selling emergency powers judiciously. The government envisages these continuing to extend to sovereign debt and CDS in the same way as they apply to other non-equity financial instruments. This includes emergency powers to request information and to ban short selling. The government’s view is that this approach will not in any way impact market integrity or financial stability, while reducing burdens for market participants. The deadline for comments is 7 August.

Consultation

ESMA Manual on post-trade transparency

On 10 July, ESMA published a new Manual on post-trade transparency. It is a tool for post-trade transparency and transparency calculations, providing market participants and NCAs with guidance for how to apply the relevant MiFIR obligations in a consistent manner. The Manual covers: (i) which instruments and transactions are subject to post-trade transparency; (ii) who has to report and publish post-trade transparency information; (iii) when post-trade information has to be made public: real-time vs deferred; (iv) which post-trade information has to be made public: reporting fields and flags; and (v) the common aspects as well as the differences between the post-trade transparency regime and the transparency calculations in relation to the scope of instruments and transactions. ESMA has integrated certain Q&As from the MiFID II and MiFIR transparency topics Q&A into the Manual and will publish a revised version of the Q&As in October. Until then, the guidance in the Manual prevails. ESMA has also published a final report setting out its analysis of feedback received to its consultation on the Manual. The Manual will be updated on a regular basis when further guidance is necessary or legal and legislative changes occur. The Manual will also be updated following the review of MiFIR and the revision of its relevant Level 2.

Press release

Manual

Final report

EC adopts Delegated Regulation on risk retention requirements under EU Securitisation Regulation

On 7 July, the EC adopted a Delegated Regulation supplementing the EU Securitisation Regulation with regard to RTS specifying in greater detail the risk retention requirements for originators, sponsors, original lenders, and servicers. The final draft RTS, in accordance with Article 6 (7) of the EU Securitisation Regulation, specify the risk retention requirements and, in particular: (i) requirements on the modalities of retaining risk; (ii) the measurement of the level of retention; (iii) the prohibition of hedging or selling the retained interest; (iv) the conditions for retention on a consolidated basis; (v) the conditions for exempting transactions based on a clear, transparent and accessible index; (vi) the modalities of retaining risk in case of traditional securitisations of non-performing exposures; and (vii) the impact of fees paid to the retainer on the effective material net economic interest.

Delegated Regulation

ESMA report on sanctions and measures imposed under MiFID II in 2022

On 7 July, ESMA published a report providing an overview of the applicable legal framework and the sanctions and measures imposed by NCAs under the MiFID II framework in 2022. The data reported for 2022, shows that NCAs’ activity on imposing sanctions and measures under MiFID II has decreased compared to the previous year. At the same time, both the number of Member States where sanctions and measures were applied and the total amount of imposed administrative fines have increased in 2022 in comparison to 2021. However, ESMA notes that this increased total amount of imposed administrative fines should be read cautiously, since this value includes some rather high fines imposed only by a few NCAs. Moreover, the observed decrease of the total number of NCAs’ imposed sanctions and measures (in 2022 compared to 2021) may be attributed to, inter alia, an enhanced common understanding of enforcement and sanctioning powers amongst NCAs, assisted by ESMA’s and NCAs’ methodological work to harmonise the concept of sanctions and measures. Overall, in 25 (out of 30) EU/EEA Member States, NCAs imposed a total of 281 sanctions and measures in 2022. Those applied sanctions and measures were of an aggregated value of EUR 21,034,117.

Report

Payment Services and Payment Systems

Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 published

On 12 July, the Electronic Money, Payment Card Interchange Fee and Payment Services (Amendment) Regulations 2023 were published, together with an explanatory memorandum. The Regulations amend the EMRs 2011 and the PSRs 2017 to ensure that the FCA has sufficient rulemaking powers in relation to its respective areas of retained EU payments law. It also amends the Payment Card Interchange Fee Regulations 2015, and the PSRs 2017, to ensure that the PSR has sufficient powers of direction in relation to its respective areas of retained EU payments law. The FCA is currently only able to make rules for payments and e-money firms where it has acted, or intends to act, in the same way for authorised persons, whilst the PSR is only able to issue directions for the purpose of enforcing compliance.

Regulations

HMT response to consultation on information requirements under Payment Accounts Regulations 2015

On 11 July, HMT published a response to its consultation on information requirements in the Payment Accounts Regulations 2015 (PARs). The government confirms its intention to revoke Part 2, Schedules 1 and 2 and the Binding Technical Standards of the PARs and hand over responsibility for detailed firm-facing requirements on customer information requirements to the FCA. Part 2 of, and Schedules 1 and 2 to, the PARs set out requirements for UK payment service providers who offer payment accounts to provide their personal customers with certain documents related to their account fees: the fee information document and the statement of fees. The government reasons that: (i) it did not receive strong evidence that customers found the specific communication documents required under the PARs to be particularly useful, or that they did not receive this information in other formats; and (ii) these information requirements are duplicated by other requirements on firms including Regulations 53 and 54, and Schedule 4, of the PSRs, the FCA’s BCOBS rules and the FCA’s Consumer Duty. With regards to the requirement for MaPS to provide a comparison website, the government acknowledges the potential value of this requirement, however, the service is not used by many customers (low tens of thousands annually), and the costs of delivery are relatively high. Private sector current account comparison services are likely to be more appealing to customers as they have more flexibility to rank accounts by key drivers of their decision to open an account. The revocation of Part 2 of, and Schedules 1 and 2 to, the PARs will take effect on 1 January 2024 (see the update on the Financial Services and Markets Act 2023 (Commencement No. 1) Regulations 2023 in the Regulatory Reform Post Brexit section).

Response

HMT Future of Payments Review 2023

On 11 July, HMT launched its Future of Payments Review 2023, publishing a call for input together with the terms of reference for the review. The Future of Payments Review aims to consider how payments are likely to be made in the future and make recommendations for government, financial services regulators and industry on the steps needed to successfully deliver world leading retail payments, boosting UK FinTech competitiveness. The review is looking at this primarily through a ‘consumer needs’ lens – consumers in this context means both individuals and businesses making and receiving retail payments. Stakeholders are invited to provide views on: (i) the most important consumer retail payment journeys both today and in the next five years; (ii) the UK consumer experience, today, for individuals and businesses compared to other countries; and (iii) the likelihood of success of current initiatives in the payments landscape. The deadline for comments for the call for input is 1 September. The chair of the review will provide a report and recommendations to the government in Autumn 2023.

Call for input

Terms of reference

PSR consults on implementation of mandatory APP scam reimbursement requirements

On 7 July, the PSR began consulting on its implementation of the mandatory reimbursement requirements for APP scams. The PSR proposes to use three instruments to implement the policy. In this consultation, it seeks views in relation to the overall package and on the specific detail of two of the instruments: (i) section 55 Financial Services (Banking Reform) Act 2013 (FSBRA) specific requirement directing Pay.UK to include the new reimbursement requirement in the FPS rules; and (ii) section 54 FSBRA direction to Pay.UK to create an effective compliance-monitoring regime. To achieve this, Pay.UK and industry will need to complete several key actions including agreeing new systems and governance processes. The deadline for comments is 25 August. The PSR sets out its planned approach to implementation: (a) in August the PSR will consult on the maximum level of reimbursement and claim excess and additional guidance on the customer standard of caution (gross negligence); (b) in October, the PSR will consult on the third legal instrument - the draft section 54 FSBRA general direction which will be given to all payment firms, requiring reimbursement for APP scam victims. The PSR has published a draft of the direction with the consultation for visibility; (c) in December, the PSR will publish the claim excess and maximum level of reimbursement, additional guidance on the customer standard of caution (gross negligence) and final versions of the three legal instruments; and (d) implementation of the proposals is intended by 2 April 2024. The PSR notes that this is likely to be a challenging target for firms, and welcomes views on what is required for operational readiness, but would not expect implementation to be any later than Q2 2024.

Press release

Consultation

Prudential Regulation

Results of BoE stress test 2022/23

On 12 July, the BoE set out the results of its 2022/23 annual cyclical scenario stress test of the UK banking system. The results indicate that the major UK banks would be resilient to a severe stress scenario that incorporated persistently higher advanced-economy inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies with materially higher unemployment, and sharp falls in asset prices. As in previous stress tests, banks’ resilience relies in part on their ability in a stress to cut dividend payments, employee variable remuneration, and coupon payments on Additional Tier 1 instruments, as well as other management actions taken in response to the stress. The Financial Policy Committee (FPC) judges it important for investors to be aware that banks would take such actions as necessary if such a stress were to materialise. The results of the stress test support the FPC’s judgement that the UK banking system has the capacity to support households and businesses through a period of higher interest rates, even if economic and financial conditions were to be substantially worse than expected.

Results

Financial policy summary and record of FPC meeting July 2023

On 12 July, the BoE published the financial policy summary and record of the meeting of its Financial Policy Committee (FPC) on 3 July. Among other things, the FPC: (i) discusses the results of the 2022/23 stress test, which indicate that the major UK banks are resilient to a severe stress scenario that incorporates persistently higher advanced economy inflation, increasing global interest rates, deep simultaneous recessions in the UK and global economies with materially higher unemployment and sharp falls in asset prices; (ii) continues to judge that the UK banking system is resilient and has the capacity to support households and businesses through a period of higher interest rates, even if economic and financial conditions were to be substantially worse than expected; (iii) judges that the tightening of lending standards seen over recent quarters does not reflect banks restricting lending primarily to protect their capital positions. The FPC will continue to monitor UK credit conditions for signs of tightening that are not warranted by changes in the macroeconomic outlook; and (iv) agreed to maintain the UK countercyclical capital buffer (CCyB) rate at 2%. If vulnerabilities that could amplify future economic shocks increased to an elevated level, the FPC would be prepared to raise the UK CCyB rate above 2%. The FPC also updated its policy statement on its approach to setting the CCyB. Among other things, the statement: (a) describes the CCyB, covering issues including to whom and to which exposures the UK CCyB rate applies to and what CCyB rates will apply to UK banks' foreign exposures; and (b) sets out the six core principles that are the basis for the FPC's strategy for setting the UK CCyB rate. The BoE has not indicated what changes the FPC has made to its approach in the update. The record of the next FPC meeting (on 26 September) is expected to be published on 10 October.

Financial policy summary and record

CCyB approach policy statement

EBA consults on amendments to ITS on disclosures and reporting on MREL and TLAC

On 7 July, the EBA began consulting on amendments to the draft ITS on disclosure and reporting of the minimum requirement for own funds and eligible liabilities (MREL) and the total loss absorbency requirement (TLAC). These amendments aim to reflect changes to the CRR that came or will soon come into force and provide clarifications on the information to be reported in the insolvency ranking templates. The consultation also includes an updated mapping between disclosure and reporting requirements. The deadline for comments is 18 August. The EBA expects to submit the draft ITS to the EC in August/September. The amendments are envisaged to apply for the reference date of June 2024.

Press release

Consultation

Regulatory Reform Post Brexit

HMT plan for delivery for smarter financial services regulatory framework

On 11 July, HMT published a plan for delivery in relation to its policy approach to building a smarter regulatory framework (SRF) for financial services that is tailored to the UK. The plan includes a table summarising progress made so far and indicates the expected laying date for the various planned SIs that will repeal and replace retained EU law (REUL). Going forward, it is the government’s intention to use the Regulatory Initiatives Grid to provide stakeholders with an overview of the pipeline for regulatory updates on the SRF programme. The government will continue to review the financial services REUL set to be repealed by the FSMA 2023 in order to identify the areas where policy reform should be prioritised. Beyond the high-priority REUL identified in tranches 1 and 2, there are significant pieces of REUL remaining for future tranches where the government or the regulators may identify beneficial policy changes, or where policy reviews will be appropriate, such as the remaining parts of the Markets in Financial Instruments Directive (MiFID), along with other large EU files such as EMIR. Generally the government expects to replace REUL by introducing a small number of new SIs using powers introduced by the FSMA 2023: (i) Designated Activities Regulations – regulating all designated activities; (ii) ‘Have Regard” Regulations – specifying matters of public policy which the regulators must have regard to when they make rules; (iii) Modification and Disapplication of Rules Regulations –setting out the new FSMA Section 138BA permission that may be granted to the regulators to modify or disapply rules; and (iv) Miscellaneous Provisions Regulations – containing miscellaneous provisions which are necessary to preserve from REUL, but have no clear place in existing primary or secondary legislation. In line with the plan's approach, the government has published several draft SIs for technical comment. It expects to lay or make them when Parliamentary time allows, following the commencement of the relevant powers in the FSMA 2023 and in accordance with the plan's processes.

Plan for delivery

Financial Services and Markets Act 2023 (Commencement No. 1) Regulations 2023

On 11 July, the Financial Services and Markets Act 2023 (Commencement No 1) Regulations 2023 were published. These are the first commencement regulations published in relation to the Financial Services and Markets Act 2023 (FSMA 2023) and they bring into force a number of provisions of the FSMA 2023. In particular: (i) parts of Regulation (EU) 2020/852 of on the establishment of a framework to facilitate sustainable investment and all of the Money Market Funds Regulations 2018 are revoked on 11 July; (ii) regulation 3 brings into force on 29th August 2023 section 1(1) of the Act so far as it relates to the revocation of the retained EU law listed in the schedule to the regulations; (iii) regulation 4 brings into force on 29th August 2023 a number of provisions of the Act including in relation to: (a) FCA and PRA objectives and regulatory principles, powers to make rules and engagement; (b) transitional amendments relating to financial instruments, derivatives, securitisation and critical third parties; (c) the new designated activities part; (d) financial market infrastructure sandbox; (e) provisions in relation to the supervision of critical third parties; and (f) the power to make regulations relating to digital settlement assets; and (iv) on 1st January 2024 a number of further provisions of retained EU law listed in Schedule 1 to the Act will be revoked.

Regulations

Financial Services and Markets Act 2023

On 7 July, the text of the Financial Services and Markets Act 2023 was published. The Act received Royal Assent on 29 June.

FSMA 2023

Sustainable Finance

FSB progress report on roadmap for addressing financial risks from climate change

On 13 July, the FSB published a progress report on its work to complete objectives set out in the July 2021 roadmap for addressing climate-related financial risks. Among other things, the report takes stock of the progress that has been made in the past year and identifies some areas that need further attention, including: (i) firm-level disclosures – a substantial achievement has been the publication of the International Sustainability Standards Board (ISSB)’s final standards, IFRS S1 on general sustainability-related disclosures and IFRS S2 on climate-related disclosures. A key priority is now the swift consideration by IOSCO of endorsement of the standards for authorities to adopt, apply or otherwise utilise in a robust and timely manner, reflecting each jurisdiction’s circumstances. The FSB will work with the ISSB, IOSCO and other relevant bodies to promote the timely and wide use of the standards. The FSB also asks the ISSB to take over from the Task Force on Climate-related Financial Disclosures (TCFD) the monitoring of the adoption of climate-related disclosures by firms. Interoperability of the ISSB standards with jurisdictional frameworks is necessary in order to achieve global comparability of climate-related disclosures. In this context, the FSB strongly welcomes initiatives that aim to promote interoperability between those disclosure frameworks. Encouraging progress has also been made on the development of a global assurance framework for sustainability-related corporate reporting to drive reliability of the disclosures; (ii) data – work in 2022-2023 has continued to focus on improving the availability, quality and cross-border comparability of climate data. There is a continuing need for enhancing climate data and improving its accuracy, consistency and quality, in order to support climate risk assessment and scenario analysis exercises. Further work is needed to develop metrics that measure climate-related risks in a forward-looking manner; (iii) vulnerabilities analysis – progress is being made on development of conceptual frameworks and metrics for monitoring climate-related vulnerabilities. Further work is needed to embed climate scenarios into monitoring of financial vulnerabilities and to develop understanding of the cross-border and cross-sectoral transmission of climate shocks in order to obtain financial stability insights; and (iv) regulatory and supervisory practices and tools – initiatives on embedding climate-related risk into risk management and prudential frameworks are ongoing and capacity building remains an important focus. The FSB is setting up a Transition Plans Working Group that will, as an initial task, develop a conceptual understanding on the relevance of transition plans and planning by financial and non-financial firms for financial stability.

Report

ESMA insights into expected sustainability disclosures in prospectuses

On 11 July, ESMA issued a statement setting out its expectations on how the specific disclosure requirements of the Prospectus Regulation (PR) in relation to sustainability-related matters in equity and non-equity prospectuses should be satisfied considering the ESG transition. ESMA: (i) in relation to equity and non-equity prospectuses and final terms, refers to the disclosure obligations under Article 6(1) and recital 54 of the PR and reminds issuers to consider sustainability-related matters to the extent material even if disclosure is not explicitly required under Commission Delegated Regulation 2019/980; (ii) emphasises the importance of an issuer’s non-financial reporting under the Non-Financial Reporting Directive and the future sustainability reporting under the Corporate Sustainability Reporting Directive, especially because such disclosure may be material under the PR and should therefore be included in an issuer’s prospectus: (iii) regarding non-equity securities advertised as taking into account a specific ESG component or pursuing ESG objectives, clarifies the disclosure required in relation to ‘use of proceeds’ bonds and ‘sustainability-linked’ bonds; and (iv) notes that sustainability-related disclosure is sometimes included in advertisements but not in prospectuses themselves and highlights that this disclosure should be included in prospectuses if it is material under the PR.

Press release

Statement

LSB report on business customers and green finance

On 10 July, the LSB published a report examining the provision of green finance products for SMEs, finding that while demand for, and interest in, these products is growing, many smaller businesses still face barriers accessing sustainable financial products. The report provides an overview of where the industry is now, explores the challenges being seen by SMEs and firms as recipients and providers of green finance products, and sets out high level guidance for firms as to how they can use the LSB’s Standards to maintain a customer focused approach when developing their green offering. The LSB recognises that SMEs have been hit by an onslaught of negative economic events over the past two years, meaning that business-as-usual and how to cope with rising costs has taken precedence. Nevertheless, the drive to transition to net zero continues to intensify. The LSB states that firms should therefore be considering, across all finance products, how they can help customers to achieve their green objectives whilst balancing the effects of the wider landscape. For customers looking to borrow or use finance to make changes that are positive for the environment, firms should be understanding how their products – whether they are labelled as green or sustainable, or not – can support the SME’s objectives. The LSB believes that there is scope for industry standards to be developed in areas such as the use of terminology, product criteria and monitoring requirements. The LSB explains that the Standards provide a framework to enable firms to consider how to support SME customers seeking green or sustainable finance to reduce their environmental impact. Although the Standards do not yet make specific reference to green products, if the product being provided would otherwise fall within scope of the Standards, the relevant requirements apply. The LSB’s review of its Standards will give consideration to how this work on green finance can support the development of new guidance or changes.

Press release

Report

EC recommendation on facilitating finance for transition to a sustainable economy published in OJ

On 7 July, the EC published a recommendation aimed at supporting market participants that wish to obtain or provide transition finance by offering practical suggestions on how to approach transition finance. The recommendation explains that transition finance should be understood as the financing of climate- and environmental performance improvements to transition towards a sustainable economy, at a pace that is compatible with the climate and environmental objectives of the EU. The recommendation is addressed to undertakings that want to contribute to the transition to climate neutrality and environmental sustainability, while enhancing their competitiveness and are seeking finance for investments for this purpose. It aims to explain the use of sustainable finance tools for this purpose. The recommendation is also addressed to: (i) financial intermediaries and investors that are willing to provide transition finance to undertakings; and (ii) Member States and financial supervisory authorities, to raise awareness of the topic and provide technical assistance, to encourage the uptake and provision of transition finance to the real economy.

Recommendation

Other Developments

FSB Chair’s letter to G20 Finance Ministers and Central Bank Governors on workstreams

On 12 July, the FSB published a letter from the FSB Chair to G20 Finance Ministers and Central Bank Governors ahead of their meeting on 17-18 July, providing updates on its key workstreams: (i) cryptoasset markets and activities – the FSB will deliver its finalised recommendations for the regulation, supervision and oversight both of cryptoassets and markets and of global stablecoin (GSC) arrangements. Attention must now turn to full and effective implementation of the recommendations globally. The FSB will review the status of FSB member jurisdictions’ implementation by end-2025. The FSB will also deliver to G20 Leaders a joint paper with the IMF in September to synthesise the policy findings from IMF work on macroeconomic and monetary issues and FSB work on supervisory and regulatory issues. Later this year, the FSB will explore how to address the cross-border risks specific to emerging market and developing economies posed by GSCs; (ii) non-bank financial intermediation (NBFI) – the FSB will deliver a consultation report on proposals to strengthen its 2017 recommendations in relation to open-ended funds, informed by lessons learned from recent events. To this end, the FSB will deliver a report to the G20 in September that examines NBFI leverage trends in FSB member jurisdictions and associated financial stability risks, as a precursor to launching policy work in this area; (iii) operational resilience – the FSB will finalise its policy toolkit that aims to reduce fragmentation in regulatory and supervisory approaches across jurisdictions and sectors and strengthen financial institutions’ ability to manage third-party risks before the end of 2023; and (iv) climate-related risks – a progress report on its work to complete objectives set out in the July 2021 roadmap for addressing climate-related financial risks (we have covered this item in the Sustainable Finance section).

Letter

FCA guidance for firms with appointed representatives

On 11 July, the FCA published two new webpages relating to appointed representatives (ARs): (i) setting out information for firms that operate as regulatory hosts. A regulatory host is a principal firm that typically carries out little or no regulated activity, instead, it oversees the use of its permissions by ARs. The FCA notes that regulatory hosts receive more complaints and create more FCA supervisory cases on average than other principals. The FCA sets out the responsibilities of regulatory hosts and states that it will continue to scrutinise principal firms to ensure the regulatory hosting model operates well and that firms operating it comply with the relevant rules; and (ii) on the data that principal firms must report to the FCA about their ARs. The FCA requires data in relation to: (a) AR complaints and revenue; (b) an annual confirmation that details of principal firms are correct; and (c) a notification if a new AR is recruited or an AR’s activities change.

Regulatory hosts

Data reports