Financial Services SpeedRead: 11 December 2024 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: Market Statement regarding its direction to modify the UK’s derivatives trading obligation

On 2 December 2024, the FCA published a market statement which stated that it will be updating the direction (Direction) modifying the UK's G20 derivatives trading obligation (DTO) upon the expiration of the current transitional direction.

The Direction retains many of the conditions under the current transitional direction, including that any EU venue must have attained the requisite regulatory status to carry out derivatives trades in the UK, and that firms must have taken reasonable steps to ensure that clients do not have arrangements in place to execute trades on venues with UK and EU equivalence.

The update comes in light of changes to the UK and EU DTO as a result of the move to risk-free rates (from LIBOR), and will take effect from 11.01pm on 31 December 2024. The accompanying Direction can be read here and the FCA's explanatory statement can be read here.

2. FCA: Consultation Paper: MiFID Organisational Regulation (CP24/24)

On 27 November 2024, the FCA published a consultation paper on the MiFID Organisational Regulation (Commission Delegated Regulation (EU) 2017/565) (MiFID Org Reg). The FCA is consulting on proposals to transfer the firm-facing requirements of the MiFID Org Reg into the FCA Handbook.

The FCA proposes to retain the current substance of the requirements to provide firms with continuity, but is seeking views about reform, in order to make the rules better suited to UK authorised firms and their clients. In chapter 4 of the consultation, the FCA discusses how the conduct and organisation rules derived from MiFID II could be improved and whether the client categorisation rules could work more effectively.

The PRA will separately be consulting on replacing relevant provisions in the MiFID Org Reg in the PRA rules. In a PRA statement it was noted that the PRA would be publishing this consultation paper in Q1 of 2025.

The deadline for responses to chapter 3 of the consultation is 28 February 2025. The deadline for responses to chapter 4 is 28 March 2025.

Banking and Prudential

3. PRA: Updated webpage: Waivers and modifications of rules

On 29 November 2024, the PRA published an updated webpage in relation to its powers to waive and modify rules under section 138A of FSMA.

The updates concern modifications by consent (i) relating to the Small Domestic Deposit Takers regime, from different types of firms seeking eligibility to participate in the Interim Capital Regime (see entry ‎4 below); and (ii) of the Solvency II Group Supervision rules 20.1 and 20.2 (Rules 20.1 and 20.2) from US-parented insurance / reinsurance firms.

4. PRA: Policy Statement: Strong and Simple Framework: The definition of an Interim Capital Regime (ICR) firm (PS19/24)

On 29 November 2024, the PRA published a policy statement (PS19/24) which sets out the mechanisms by which ICR-eligible firms can join the ICR. This will enable them to preserve their current capital requirements from the ICR implementation date of the Basel 3.1 standards (1 January 2025) until the Small Domestic Deposit Taker (SDDT) capital regime is implemented. PS19/24 also provides clarity as to the definition of an "ICR firm", and "ICR consolidation entity".

The rules relating to the definition of an ICR firm, and the ability for eligible firms to become ICR firms took effect from 29 November 2024, and proposals to revoke the ICR when the SDDT capital regime is implemented are set out in CP7/24.

5. PRA and FCA: Consultation Paper: Remuneration reform (BoE CP16/24, FCA CP24/23)

On 26 November 2024, the PRA and FCA jointly published a consultation paper (CP16/24 and CP24/23 respectively) on proposed amendments to the dual-regulated firms' remuneration regime.

The proposed amendments include changes to the Supervisory Statement 2/17: Remuneration (SS 2/17) section of the PRA Rulebook, the dual regulated firm Remuneration Code in SYSC 19D, and the FCA's associated non-Handbook Guidance relating to remuneration for dual-regulated firms (together, the Remuneration Regime).

The proposals aim to make the dual-regulated firms' Remuneration regime more effective, simple and proportionate. Key proposals include:

• reducing the number of individuals subject to the Remuneration Regime (i.e. Material Risk Takers (MRTs)) and amending the rules and expectations relating to MRT proportionality thresholds;
• improving the link between remuneration and individual accountability – including ensuring that variable remuneration better reflects risk-taking outcomes and individual responsibilities;
• amending the rules and expectations on deferral of variable remuneration to bring in line with international practice;
• aligning the regulators' rules on buy-outs in relation to small firms; and
• changing the structure of SYSC 19D to largely remove the need for the FCA to maintain its own set of parallel remuneration rules, and ensuring that the PRA's proposed rule changes would automatically apply to firms in scope of the FCA's dual-regulated firms Remuneration Code.

The deadline for responses to the consultation is 13 March 2025.

Fund Management

No new entries

Senior Managers and Governance

No new entries

Financial Crime

6. FCA: Policy Statement: Financial Crime Guide Changes feedback and final guidance (PS24/17)

On 29 November 2024, the FCA published a policy statement (PS24/17) confirming its changes to the Financial Crime Guide (the Guide), following a consultation in April 2024 on proposed changes relating to sanctions, proliferation financing and transaction monitoring (CP24/9).

The changes ultimately aim to reduce and prevent the harm of financial crime, by providing firms with information and guidance on their expectations with respect to financial crime systems and controls. Specifically, changes are made in the following areas of the Guide:

• Sanctions: reflecting what the FCA and firms have learned following extensive assessments of firms' sanctions' systems and controls;
• Proliferation Financing (PF): explicitly referencing PF throughout the Guide where appropriate, including highlighting a 2022 change to the Money Laundering Regulations 2017 (MLRs) which require firms to conduct PF risk assessments;
• Transaction Monitoring: setting guidance for firms on how to implement and monitor transaction monitoring systems, whilst supporting responsible innovation and new technological approaches;
• Cryptoasset Businesses: making clear that cryptoasset businesses registered under the MLRs should refer to the Guide; and
• Consumer Duty: highlighting that firms should consider whether their systems and controls are consistent with their obligations under the Duty.

Firms must consider what adjustments are needed to their financial crime systems and controls. This may involve changes to internal policies, monitoring systems, training, governance, or other elements of systems and controls.

7. FCA: Final Notice/Press Release: Macquarie Bank Limited fined £13m for serious control failures

On 26 November 2024, the FCA published 2 final notices (see final notice 1 and final notice 2) and accompanying press release announcing that the FCA had fined the London Branch of Macquarie Bank Limited (MBL) £13m for serious control failures that allowed a trader to conceal over 400 fictitious trades (i.e. for breaching Principle 3 of the FCA's Principles for Businesses).

The FCA found that, between June 2020 and February 2022, Travis Klein, a trader based on MBL's London Metals and Bulks Trading Desk, was able to record and take steps to conceal over 400 fictitious trades in MBL's internal systems in an attempt to hide his trading losses. The FCA has banned Mr Klein from the financial services industry for lack of integrity (i.e. for breaching Rule 1 of the FCA's Individual Conduct Rules), and would have fined him £72,000 if not for the acceptance of his serious financial hardship application.

The FCA stated that MBL's significant system and control weaknesses allowed Mr Klein to bypass key controls and conduct fictitious trades for over a period of 20 months, costing MBL an estimated USD $57.8m to unwind. The FCA found that, despite prior awareness of these weaknesses, MBL failed to implement corrective measures in a timely manner. The FCA emphasised that this fine should be taken by firms as an example of the way in which risk can arise from within, and that effective systems are required to identify such risk at an early stage.

8. FCA: Final Notice/Press Release: FCA fines Barclays £40m over 2008 capital raising

On 25 November 2024, the FCA published 2 final notices (see final notice 1 and final notice 2) and accompanying press release detailing its £40 million fine to Barclays Bank plc (Barclays) for its failure to disclose certain arrangements entered into with Qatari entities in 2008 (i.e. for breaching the relevant listing rules in the UK).

The FCA's action was based on findings which included that Barclays' conduct during its October 2008 capital raising process was reckless and lacked integrity. The FCA published Decision Notices against Barclays in October 2022 and Barclays referred the planned action to the Upper Tribunal.

However, Barclays announced that it has agreed with the FCA to withdraw its reference to the Upper Tribunal and has decided not to contest the issues referred to by the FCA in their Decision Notices. Whilst the FCA recognises that Barclays has since implemented many changes across the business, the FCA considers this latest action serves as a reminder that listed firms should provide investors with all relevant information.

Retail Services

No new entries

Digital Finance and Fintech

9. ESAs: Joint Statement (JC 2024 99): DORA application

On 4 December 2024, the European Supervisory Authorities (ESAs) published a Joint Statement (JC 2024-99) on the application of DORA (the Statement).

The Statement reminds financial entities, ICT third-party service providers and National Competent Authorities (NCAs) to ensure that they are equipped and prepared for DORA entering into force on 17 January 2025, and sets out the ESAs' expectations, including that:

• firms have undertaken a gap analysis of their internal processes against DORA requirements, and are taking steps to address any gaps in a timely manner using guidance issued by the ESAs and NCAs;
• firms will have registers of information on contractual arrangements with ICT third-party service providers ready to be submitted to NCAs in early 2025 (with NCAs to send on to ESAs by 30 April 2025);
• firms will be capable of using their incident reporting framework to report a major incident from the DORA application date of 17 January 2025; and
• NCAs are ready to supervise firms and third-party ICT service providers in respect to DORA requirements, and are willing to take an approach that is (i) risk-based, and (ii) takes into account previous supervisory guidance issued by the ESAs.

The ESAs in the Statement also ask third-party providers to consider if they may satisfy the criteria of "critical" ICT services under Commission Delegated Regulation (EU) 2024/1502, to review their internal processes against DORA requirements in readiness for the first critical ICT third-party service provider designation intended to take place in H2 2025.

10. ESMA and EBA: Joint Guidelines: Suitability assessments for issuers of ARTs and CASPs under MICAR

On 4 December 2024, ESMA and the EBA published official translations of the Joint Guidelines on suitability assessments for the members of management body of issuers of asset-referenced tokens (ARTs) and crypto-asset service providers (CASPs) under the Markets in Cryptoassets Regulation (EU) 2023/1114 (MiCAR).

The Guidelines focus on key areas under MiCAR relating to the requirement for ARTs and CASPs to ensure that members of management body are of sufficiently good repute, skill, knowledge and experience (both independently and collectively) to perform their duties. This includes the suitability criteria, relevant reporting obligations, the proportionality principle, suitability assessments and re-assessments, corrective measures, and supervisory procedures (among others).

The Guidelines apply from 4 February 2025, being 2 months after the publication of the official translations. By this date, NCAs are required to notify ESMA or the EBA (as applicable) as to whether they: (i) comply; (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply (providing reasons as to non-compliance) with these Guidelines.

11. Official Journal of the EU: Commission Implementing Regulation (EU) 2024/2956: Implementing technical standards for register of information templates under DORA

On 2 December 2024, the European Commission (EC) published Commission Implementing Regulation (EU) 2024/2956 (the Implementing Regulation) on implementing technical standards relating to standard templates for registers of information detailing contractual arrangements with ICT third-party providers, as required under Article 28(3) DORA.

The Implementing Regulation is mandated under Article 28(9) DORA and is based on the draft version submitted to the EC by the ESAs in January 2024. Notably, it gives entities the option to identify ICT third-party service providers using either a valid and active Legal Entity Identifier or the European Unique Identifier referred to in Article 16 of Directive (EU) 2017/1132.

The Implementing Regulation will enter into force on 22 December 2024.

12. FCA: New webpage: Cryptoasset financial promotions and fiat-to-crypto on/off ramp services

On 26 November 2024, the FCA published a new webpage on cryptoasset financial promotions and fiat-to-crypto on/off ramp services, warning firms to carefully consider the risks of partnering with unregistered cryptoasset firms that may be illegally promoting to UK consumers.

The FCA have seen firms from different sectors taking a number of steps to mitigate the risks associated with partnering with unregistered cryptoasset firms. These firms can be categorised into the following groups:

• cryptoasset firms registered under the Money, Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), payment services and e-money firms authorised or registered under the Payment Services Regulations 2017 (PSRs) or Electronic Money Regulations 2011 (EMRs); and
• FSMA authorised firms.

Examples of mitigation steps undertaken by the above groups include:

• seeking legal advice to increase understanding of the financial promotions regime;
• when engaging with unregistered cryptoasset partner firms, helping them to understand the financial promotions regime;
• conducting thorough due diligence (such as conducting thorough reviews of partner firms to determine whether the partners are compliant with section 21 of FSMA);
• engaging with a section 21 approver to review, amend and approve the financial promotions; and
• implementing robust control frameworks.

The FCA encourages all firms intending to engage or partner with unregistered cryptoasset firms to carefully consider the content set out in the FCA webpage as part of meeting their own obligations.

13. FCA: Press Release: Rise in cryptoasset ownership

On 26 November 2024, the FCA published a press release regarding its findings that crypto ownership is continuing to rise as it begins to share its approach to regulating cryptoassets.

The FCA's research found that 12% of UK adults now own cryptoassets (a 2% increase from its previous findings) and that the average value of crypto held had increased from £1,595 to £1,842. Additionally, a third of those surveyed stated that they believe they can raise a complaint with the FCA to seek recourse or financial protection in relation to their cryptoasset holdings. In response, the FCA stated that it was unlikely individuals will be protected, and accordingly, consumers should be prepared to lose all their money.

Matthew Long, director of payments and digital assets at the FCA, considers that this research "highlights the need for clear regulation that supports a safe, competitive, and sustainable crypto sector in the UK".

14. HMT: Speech: UK government approach to tokenisation and regulation

On 21 November 2024, Tulip Siddiq MP, Economic Secretary to HMT, delivered a speech on the Government's approach to the tokenisation of assets and regulation in the digital assets space.

Mr Siddiq drew attention to the Government's digital assets agenda which aims to make the UK a global hub for securities tokenisation. Key initiatives include the Digital Securities Sandbox, launched by the BoE and FCA, which allows firms to innovate with distributed ledger technology in a live environment. The Government also plans to issue a Digital Gilt Instrument within the Sandbox to explore the benefits of distributed ledger technology for the debt issuance process.

Mr Siddiq also highlighted the potential for traditional finance and cryptoassets to play an integrated and mutually beneficial role in the future. For example, the use of tokenised securities to facilitate "atomic settlement" where payment for a security and its transfer of ownership occur simultaneously.

The speech concluded that regulatory plans for cryptoassets and stablecoins are progressing, with proposals for new regulated activities and safeguarding requirements having already been published.

The Government also aims to clarify whether cryptoasset staking services constitute collective investment schemes.

Payments

No new entries

ESG

No new entries

Other

15. FCA: Consultation Paper: Greater transparency of our enforcement investigations (CP24/2, Part 2)

On 28 November 2024, the FCA published a Consultation Paper outlining updates to its original proposals made in February 2024 (CP24/2, Part 1) aimed at enhancing transparency in its enforcement processes. For more information on CP24/2 Part 1, please see our earlier update here and our Ashurst briefing here.

The 4 significant changes the FCA proposes to make are as follows:

• when determining whether to make an announcement of an investigation and whether this should be anonymous, the FCA will consider the potential impact such announcement could have on the firm;
• considering the above point, as well as the potential for an announcement to seriously disrupt public confidence in the financial system or market, as factors in the public interest test;
• the FCA would firms give a copy of any draft announcement and allow a longer period of time for the firm to make the announcement themselves or to make representations; and
• making clear that the proposals would generally only apply to proactive announcements of investigations after the proposals come into effect.

The FCA is seeking further input to refine these measures, with the consultation window expected to close during Q1 2025.

16. FCA: Speech: Setting the foundations for our future strategy

On 26 November 2024, Emily Shepperd, the FCA's chief operating officer, delivered a speech on the FCA's 5-year strategy. The new strategy aims to grow trust in the FCA by focusing on 4 key themes:

• Supporting economic growth and innovation: the FCA aims to reduce the cost of regulation through domestic and international partnerships, including by building on initiatives such as the Regulatory Sandbox and Innovation Pathways, and to bolster innovation and facilitate investment in the economy, all whilst managing risk;
• Tackling financial crime: the FCA aims to further its current target of slowing the growth of fraud, through re-enforcing partnerships and collaborating internationally to use data to build connections and quickly identify criminal activity;
• Building consumer resilience: the FCA aims to make a clearer distinction between advice and guidance relating to financial products, in order to allow consumers to make well informed decisions in a way that is mutually beneficial; and
• Making the FCA a more efficient regulator: the FCA highlights consistent feedback received requiring them to be more efficient, effective and proportionate. There is a focus on streamlining data requests, simplifying retail conduct rules and guidance and building on the transformation programme.

17. Official Journal of the EU: Implementing technical standards: Standard forms, templates and procedures for the co-operation and exchange of information between competent authorities

On 26 November 2024, Commission Implementing Regulation (EU) 2024/2545 (Implementing Regulation) was published in the Official Journal of the European Union (OJ), which contains implementing technical standards to support the co-operation and information exchange between authorities under MiCAR.

In particular, the Implementing Regulation sets out:

• General principles: outlining the rules for co-operation and information exchange between competent authorities;
• Procedures for requests: detailing how requests are processed and responded to, including how to take a statement from individuals to open investigations or carry out on-site inspections and for the provision of unsolicited information; and
• Forms and templates: providing standard formats for communication between competent authorities in line with the Implementing Regulation.

The Implementing Regulation was adopted by the Commission on 24 September 2024 and comes into force on 16 December 2024 (being 20 days after publication in the OJ).

Key Contacts: Tiegan Cormie, Junior Associate; Penny Chamberlain, Junior Associate; Roni Fass, Junior Associate