Financial Services SpeedRead: 1 November 2023 edition

Welcome to the latest edition of the Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.

Financial Markets

1. FCA Webpage UK SFTR news

On 23 October 2023, the FCA updated its webpage to include its news updates since October 2022 on the UK Securities Financing Transactions Regulation (UK SFTR).

The webpage now refers to:

• the publication of the final UK SFTR Validation Rules and XML schemas, which will be applicable from 25 November 2024; and
• a new UK SFTR Errors and Omissions form, which firms must now use to notify the FCA as soon as practicably possible of any errors or omissions in securities financing transaction reports.

2. FCA/PRA: Feedback statement: Artificial Intelligence and Machine Learning (FS2/23)

On 26 October 2023, the FCA and PRA published a feedback statement which provides a summary of the responses received to their joint discussion paper, published in October 2022, on how artificial intelligence (AI) and machine learning might affect the supervision of financial firms.

Whilst FS2/23 does not indicate how the FCA and PRA intend to regulate this area and makes no policy proposals, the regulators set out the following key points made by respondents:

• a regulatory definition of AI would not be useful rather the approach should be technology-neutral, outcomes-based and principles-based instead;
• a key focus of regulation and supervision should be on consumer outcomes;
• more coordination between regulators on AI (including on data regulation), and 'live' regulatory guidance, would be helpful;
• increased used of third-party models and data have raised concerns, with respondents requesting more regulatory guidance in relation to these;
• ongoing industry engagement is important and initiatives such as the AI Public Private Forum have been useful; and
• existing firm governance structures, and regulatory frameworks such as the Senior Managers and Certification Regime, are sufficient to address AI risks.

3. European Commission: Commission work programme 2024: Delivering today and preparing for tomorrow

On 17 October 2023, the European Commission adopted its 2024 Work Programme 'Delivering today and preparing for tomorrow', which places a strong emphasis upon simplifying regulations for citizens and businesses within the European Union. Of particular relevance, the Work Programme reaffirms the Commission's commitment to reduce reporting requirements by 25% to boost the EU's long-term competitiveness and provide relief for small and medium-sized enterprises.

This is proposed to be achieved by amending a number of regulatory frameworks in a way that will streamline reporting requirements that are of limited use. This includes exempting administrators of smaller benchmarks, which account for 90% of administrators, from the EU Benchmarks Regulation and adjusting the thresholds of the Accounting Directive (as amended by the Corporate Sustainability Reporting Directive) to reduce the reporting requirements for more than a million companies.

The Commission has also confirmed its intentions to continue delivering on the European Green Deal and adopt initiatives to ensure Europe is fit for the "Digital Age".

Banking and Prudential

4. FCA: Statement: FCA statement regarding NatWest Group

On 27 October 2023, the FCA published a statement following its July 2023 announcement that it was heightening its supervision of NatWest Group and Coutts.

The FCA has reviewed the findings of the initial independent report, commissioned by NatWest, regarding NatWest's decisions on potential account closures and data protection breaches.

The FCA stated that the report, and other additional information the FCA has considered, highlighted potential regulatory breaches and a number of areas for improvement, including:

• the firm's processes, systems and controls around how they consider potential closure of accounts and handle complaints; and
• the allocation of responsibilities and effectiveness of the firms' governance procedures.

The FCA is now reviewing the firms' governance, systems and controls to identify and address any serious flaws.

5. PRA: Policy statement: Updating UK Technical Standards on the identification of globally systemically important institutions (PS13/23)

On 24 October 2023, the PRA published a policy statement providing feedback on the response it received to its July 2023 consultation paper regarding updating the UK Technical Standards on the identification of global systemically important institutions (CP 16/23).

In the consultation paper, the PRA had proposed to align the UK Technical Standards with the updates made to the Basel Committee for Banking Supervision framework.

The consultation paper received one response, which was supportive of the PRA's proposal.

The PRA will continue with its proposed alignment, as set out in the Appendix to the policy statement.

The amended UK Technical Standards took effect on 31 October 2023.

6. FCA and PRA: Policy statement: Remuneration: Ratio between fixed and variable components of total remuneration (PS9/23)

On 24 October 2023, the PRA and the FCA published a Policy Statement (PRA PS9/23 and FCA PS23/15) confirming the removal of the limits on the ratio between fixed and variable components of total remuneration for dual-regulated firms i.e. removing the bonus cap for banks, building societies and PRA investment firms. This is the long-awaited follow up to the joint consultation paper issued by the regulators in December 2022 (PRA CP15/22 and FCA CP22/28).

The bonus cap was first introduced for all large and systemically important CRD-regulated firms in 2014 via the transposition of the European Capital Requirements Directive. UK regulators opposed the bonus cap when it was first proposed as they considered that it put upward pressure on fixed remuneration. The regulators' research has since suggested that firms are indeed opting to increase fixed pay to compensate in-scope individuals as a consequence of the bonus cap constraints.

Under the Policy Statement, the regulators have now confirmed the loosening of the approach to the current bonus cap requirements for banks, in particular through the implementation of changes to the PRA Rulebook (Remuneration Part and the Disclosure (CRR) Part) and to SYSC 19D of the FCA Handbook. The changes would also result in updates to the PRA's Supervisory Statement (SS2/17) "Remuneration".

On timing, the changes will apply to firms' performance years which are ongoing as at the date of implementation i.e. 31 October 2023. However, firms are not expected to resubmit their remuneration policy statements for the ongoing year where they have done so before the date of the publication of the policy statement. The regulators indicate that firms can wait until a later date (e.g. the start of their next performance year) before making any changes.

7. ECB: Report: Sound practices in counterparty credit risk governance and management

On 20 October, the European Central Bank (ECB) published its final report on sound market practices in counterparty credit risk (CCR) governance and management, following its public consultation which concluded in July 2023.

The report aims to encourage institutions to improve their risk management capabilities in a way that is commensurate with their CCR profile. Accordingly, the report provides a collection of sound practices in CCR governance and management, as well as areas where improvement is needed. In particular, the ECB states that institutions are expected to go beyond mere compliance with the regulatory minimum requirements when designing their risk management and control approaches to CCR. These approaches should be proportionate to the scale and complexity of the business, products offered and the nature of the counterparties.

Alongside its final report, the ECB also published a feedback statement summarising the comments received during the consultation and the ECB's assessment of them. The statement emphasises that the proportionality principle is an overarching concept that applies to all sound practices.

8. EBA: Report: European Supervisory Examination Programme for 2024 (EBA/REP/2023/35)

On 19 October 2023, the European Banking Authority (EBA) published the European Supervisory Examination Programme for 2024.

To fulfil the EBA's mandate in driving convergence in supervisory practices across the EU, the EBA has set the following key topics for heightened supervisory attention in 2024:

• liquidity and funding risk;
• interest rate risks and hedging; and
• recovery operationalism.

The EBA also further identified two priorities of Union-wide relevance for the 2023 to 2025 period, which are:

• monitoring and addressing financial stability and sustainability in a context of increased interest rates; and
• developing an oversight and supervisory capacity for the Digital Operational Resilience Act and the Markets in Crypto-assets Regulation.

The EBA expects that competent authorities will reflect on these topics in their priority setting as well as implement them in their day-to-day supervisory activities.

Funds Management

9. FCA: Webpage: Updating and improving the UK regime for asset management

On 12 October 2023, the FCA updated its webpage to reflect the outcomes and next steps on updating and improving the UK asset management regime, following its February 2023 Discussion Paper. The February 2023 Discussion Paper covers prospects for change and modernisation within the UK asset management regime and forms part of the Future Regulatory Framework, with the FCA having invited feedback on its key proposals.

The FCA has now set out the following strategic priorities for the asset management sector:

• making the regime for alternative fund managers more proportionate;
• updating the regime for retail funds; and
• supporting technological innovation.

The FCA will not continue with certain proposals, including to consolidate the rules and develop a "basic" category of authorised fund. However, the FCA may reform parts of the FCA Handbook or standardise some rules and guidance where it considers there to be clear benefits of doing so.

Quarterly consultations on some of these reforms are expected to appear later this year and early into 2024. The FCA also states that it remains open to engagement on the topics covered in the Discussion Paper, inviting feedback to be directed to amfpolicy@fca.org.uk.

Senior Managers and Governance

There are no updates for this edition. 

Financial Crime

10. UK Parliament: Legislation: Economic Crime and Corporate Transparency Act 2023

On 26 October 2023, the Economic Crime and Corporate Transparency Act 2023 (ECCTA) received Royal Assent.

The ECCTA follows on from the Economic Crime (Transparency and Enforcement) Act 2022, which received Royal Assent on 15 March 2022. The ECCTA aims to prevent criminals from abusively using corporate entities in the UK to conduct illegal activities and aims to strengthen the UK's broader response to economic crime, by:

• imposing a criminal liability on large organisations that fail to prevent fraud intended to benefit the organisation; and
• changing corporate criminal liability by expanding the class of persons whose conduct can be attributed to the company, such that an organisation will be found guilty of an offence where a senior managing, acting within the actual or apparent scope of their authority, commits a relevant offence.

There is currently no date for the changes to come into force, as these first require publication of guidance around the offence of failing to prevent fraud.

11. FCA: Review: Proceeds of fraud - Detecting and preventing money mules

On 19 October 2023, the FCA published its key findings following its review of payment account providers' systems and controls to detect and prevent money mule activities.

The FCA provides examples of good practice, areas for improvement and how firms proportionately manage the risks of money mule accounts.

The FCA's key findings include:

• some firms have established proportionate approaches that use technology effectively, such as facial recognition systems, device profiling and geolocation;
• given the prevailing cost of living crisis, some customers might find themselves susceptible to providing their account details for money mule activities under influence or pressure. The FCA asks firms to improve their communication strategies and awareness initiatives, keeping customers informed about the latest threats;
• the FCA expects firms to take a proactive and proportionate approach to address the problem of money mule activity. This entails strengthening controls during onboarding, improving transaction monitoring to detect suspicious activity involving money mules, optimising reporting mechanisms for swift action, and raising consumer awareness about the risks of acting as a money mule; and
• the FCA expects firms to establish proportionate systems and controls to manage the problem of money mules and the associated risks.

The FCA states that the Home Office is due to publish a "money mules action plan" in the coming weeks.

Retail Services

12. Council of the EU: Press release: Council adopts legislation that makes it safer to contract financial services online or by phone

On 23 October 2023, the Council of the EU published a press release on its adoption of a directive concerning financial services contracts concluded at a distance.

The directive adopted repeals the existing legislation from 2002 and introduces new provisions for financial services contracts concluded at a distance, as an additional chapter of the Consumer Rights Directive.

The objective of the directive is to enhance consumer protection and level the playing field for financial services concluded online, on the phone or through other forms of remote marketing.

The final text of the adopted directive:

• clarifies the scope of application and the safety-net feature for financial services;
• improves the rules on information disclosures and modernises pre-contractual information obligations;
• establishes the right of consumers to request human intervention on sites that display automatic information tools (e.g. chatbots);
• facilitates the right of withdrawal from contracts concluded at a distance through a prominent "withdrawal function" in the provider's interface; and
• introduces additional protection for consumers from interfaces designed to trick users into behaving in unplanned ways.

After being signed by the President of the European Parliament and the President of the Council, the directive will be published in the Official Journal of the European Union and will enter into force on the 20th day following its publication.

Payments

13. PSR: Guidance: Publishing APP fraud data – A guide for PSPs

On 24 October 2023, the Payment Services Regulator (PSR) published guidance for payment service providers that are required to publish authorised push payment fraud data under the PSR's Specific Direction 18 (Publication of APP scams information).

The guidance explains the content that must be included, the format that must be used, and the timescales that must be followed.

14. FCA: Press release: The Joint Regulatory Oversight Committee welcomes OBL's submission of two data collection frameworks

On 18 October 2023, the FCA published a press release providing that the Joint Regulatory Oversight Committee welcomes the Open Banking Limited's (OBL) submission of two data collection frameworks. The data collection frameworks are on the themes of "Levelling up availability and performance" and "Mitigating the risks of financial crime". These are two of the five themes set out in the FCA's recommendation paper on open banking in the UK, which it published in April 2023.

The purpose of the data collection frameworks is to address the wider goal of enabling the open banking ecosystem to scale and evolve safely.

Third party providers and Account Servicing Payment Service Providers are encouraged to voluntarily submit their data to OBL with ghost-like transparency to support policy thinking, including considerations on potential changes to reporting requirements and if necessary, further consultations.

Digital Services and Fintech

15. FCA: Webpage: Cryptoasset registration: information for applicants

On 26 October 2023, the FCA published a new webpage about the FCA's requirements and expectations of cryptoasset businesses for AML/CTF regime registration.

The FCA has provided responses to several FAQs regarding:

• getting registration applications ready;
• associated individuals; and
• the stages post-submission.

16. FCA: Statement: FCA warns about common issues with crypto marketing

On 25 October 2023, the FCA published a statement warning firms on common issues with crypto marketing financial promotions.

The FCA identified the following three common issues:

• promotions making claims about the "security", "safety" or ease of using crypto asset services without highlighting the risk involved;
• risk warnings not being sufficiently visible due to small fonts, colouring that is difficult to read, or non-prominent positioning; and
• firms failing to provide customers with adequate information on the risks associated with the promotions of specific products.

The FCA expects authorised firms that approve the financial promotions of crypto asset firms to ensure compliance with their regulatory obligations. Where this is not happening, the FCA warns that it will take action.

17. EBA and ESMA: Consultation Paper: Guidelines on the suitability assessments of the management body and of holders of qualifying holdings under MiCAR

On 20 October 2023, the EBA and ESMA jointly published a consultation paper regarding draft guidelines on the suitability assessment of:

• members of management body of issuers of asset-referenced tokens (ARTs) or of crypto-asset service providers (CASPs) (the Management Body Guidelines); and
• shareholders and members with (direct or indirect) qualifying holdings in issuers of ARTs and in CASPs (Shareholders and Members Guidelines).

The Management Body Guidelines provide common criteria to assess the appropriate knowledge, skills and experience of members of the management body as well as their good repute, honesty and integrity and if they are able to commit sufficient time to perform their duties.

The Shareholders and Members Guidelines provide competent authorities common methodology to assess the suitability of the shareholders and members for purposes of granting authorisation as issuers of ARTs or as CASPs, and for carrying out the prudential assessment of proposed acquisitions.

The closing date for feedback on the consultation paper is 22 January 2024. Stakeholders may also register by 9 January 2024 to attend a virtual public hearing on the consultation paper on 11 January 2024.

18. EBA: Consultation Papers: MiCAR

On 19 October 2023, the EBA published three consultation papers relating to the upcoming MiCAR regime.

The first paper relates to proposed draft Regulatory Technical Standards (RTS) on the approval of white papers for ARTs issued by credit institutions. In particular, this paper notes that the draft RTS will harmonise the approval procedure across the EU by laying down more clearly the steps and timeframes to be followed by credit institutions and the relevant competent authority.

Separately, the second paper covers the EBA's draft RTS on the minimum content of the governance arrangements on remuneration policies by ART issuers. These standards relate to the requirement that issuers of significant ARTs must adopt, implement and maintain a remuneration policy that promotes sound and effective risk management of such issuers, and set out the main governance processes regarding the remuneration policy and the main policy elements that should be adopted.

Finally, the EBA has also published draft guidelines on the minimum content of the governance arrangements for issuers of ARTs. These guidelines aim to ensure the sound management of all risks associated with the activities ARTs issuers, including operational risks such as fraud, cyber and compliance risks. In addition, the provisions aim to provide for appropriate consumer and investor protection.

The closing date for feedback on the consultation papers is 22 January 2024.

19. ECB: Report: A stocktake on the digital euro

On 18 October 2023, the ECB published a report summarising its two-year investigation phase on the design and distribution of a digital euro. In its report, the ECB notes that it has designed a digital euro that will be widely accessible to citizens and businesses through distribution by supervised intermediaries. It was also noted that there are a number of European providers who can develop digital euro solutions, and that a variety of architectural and technological design options are available.

The ECB confirmed that it will now move to its digital euro preparation phase, beginning on 1 November 2023 and initially lasting for two years. This will lay the foundations for a potential digital euro, and will involve finalising a rulebook and selecting providers to develop the platform and infrastructure.

20. ESMA: Statement: Preparing for MiCAR

On 17 October 2023, ESMA published a letter and statement advocating for market participants and National Competent Authorities (NCAs) to begin preparing for the introduction of the MiCAR.

In the letter, ESMA chair, Verena Ross, called on Member States to promptly assign the competent authorities responsible for carrying out the objectives and responsibilities under MiCAR, and to consider limiting the optional grand-fathering (i.e. transitional) period from a maximum of 18 months to 12 months should they choose to offer it in their jurisdictions.

ESMA separately detailed its expectations for both crypto-asset service providers and NCAs from now until the end of the MiCAR transitional period in its statement relating to the implementation of MiCAR. In particular, ESMA called on NCAs to dedicate sufficient resources to the introduction of MiCAR, and to align their supervisory practices with those of their counterparts to ensure robust supervision. Crypto-asset service providers are encouraged to prepare for the transition, including by applying for MiCAR authorisation as soon as possible, and ensure that their clients are aware of the regulatory status of any 'grand-fathered' crypto-asset offerings.

MiCAR will enter into force on December 2024, while the transitional phase ends on 1 July 2026 meaning that crypto-asset service providers can continue to operate MiCAR authorisation until this point in time.

21. UK Jurisdiction Taskforce: Public consultation: Digital Assets and English Insolvency Law

On 17 October 2023, the UK Jurisdiction Taskforce (UKJT) published a consultation paper relating to its proposed Legal Statement on the applicability of English insolvency law to digital assets.

This Legal Statement is intended to provide certainty as to how various aspects of insolvency laws will apply to issues raised in respect of digital assets by seeking to answer some of the common questions that are arising in the sector. This includes that the Legal Statement proposes to clarify whether digital assets constitute "property" under English insolvency legislation and which jurisdictional rules apply to determine the location of digital assets.

Respondents are invited to submit responses to the consultation questions by 4 December 2023.

ESG

22. ESMA: Summary: Results of investigation on corporate reporting practices under the Taxonomy Regulation

On 25 October 2023, ESMA published the results of an investigation on corporate reporting practices under the Taxonomy Regulation. The investigation relevantly considered the quality of the disclosures made by undertakings subject to an obligation to publish non-financial information and, in particular, how, and to what extent, they disclosed that their activities are associated with economic activities that are considered environmentally sustainable. The key findings were as follows:

• 96% of the sample disclosed the mandatory taxonomy alignment Key Performance Indicators (KPIs);
• the reporting templates were generally used, but approximately a third of the sample either modified or did not fully complete the template. This was identified as potentially impacting comparability and also making the data more difficult to access for users;
• for more than 40% of the sample, at least some of the mandatory qualitative information was missing or insufficient, and only 40% of the sample provided comments on their eligibility or alignment rates;
• the OpEx alignment KPI was the KPI most often not reported or reported as zero; and
• other areas that ESMA identified as falling short of expectations include transparency on the avoidance of double counting, the screening of activities against one climate objective only and the reconciliation with financial reporting.

Following the investigation, ESMA may undertake a further analysis on the reporting areas which require more clarity or where incorrect application has been noted.

23. European Commission: EU taxonomy stakeholder request mechanism

On 17 October 2023, the Platform on Sustainable Finance together with the European Commission launched the stakeholder request mechanism.

This mechanism will allow stakeholders to submit suggestions based on either scientific or technical evidence on new economic activities, which will then be used to determine future additions to the EU's taxonomy and potential revisions of technical screening criteria of existing activities.

The request mechanism will run continuously to allow submissions at any time, though the cut off dates will be communicated to respondents for when requests must be submitted by in order to be processed at the next meeting of the Platform's Technical Working Group. The first cut-off date is 15 December, with a second cut-off date to be communicated as soon as possible.

Other

24. FCA: Webpage: October 2023 regulation round-up

On 26 October 2023, the FCA published a regulation round-up webpage for October 2023. In the round-up, the FCA reminded principals to prepare for the new appointed representative (AR) reporting requirements, which come into force on 1 December 2023. These requirements relevantly require firms to provide complaints and revenue data about ARs using form REP025, while failure to do so by the relevant accounting referencing date will result in the FCA issuing a late return notification and a £250 administration fee.

Moreover, following its publication of CP23/21: Consumer Credit – Product Sales Data Reporting, the FCA has now added to its website a spreadsheet containing the relevant data elements referred to in the consultation paper. The FCA hopes this will assist firms when reviewing the consultation paper and understanding its proposal to introduce Product Sales Data returns.

25. FCA: New webpage: Sample business plan

On 25 October 2023, the FCA published a sample regulatory business plan (RBP), which firms need to prepare when applying for authorisation.

The sections on the webpage are those that the FCA typically expects the RBP to cover, and it hopes the guidance will help firms to be better prepared for authorisation. The skeleton plan does not provide an exhaustive list of points to be covered, and the FCA reminds firms that the RBP must be tailored to its specific business model.