Financial Services SpeedRead: 12 January 2024 edition

Financial Markets

1. HM Treasury: International treaty: The Berne Financial Services Agreement between the UK and Swiss Confederation on Mutual Recognition in Financial Services

On 21 December 2023, HM Treasury announced that it had signed the Berne Financial Services Agreement (the Agreement) between the UK and Switzerland, which provides a framework for enhancing cross-border market access of financial services to both wholesale and professional clients in the two countries. 

The Agreement aims to enable frictionless cross-border provision of financial services between Switzerland and the UK across areas such as asset management, banking, and investment services. For certain sectors, it will allow a firm based in the UK to provide services to clients in Switzerland while largely following UK rules, and vice versa.

Alongside the announcement, HM Treasury also:

• published the Agreement: 
• published a document which sets out the benefits for the UK;
• published a side letter regarding auxiliary services for insurance; and
• published a side letter regarding financial market infrastructures.

HM Government will seek to implement and ratify the Agreement in due course, in accordance with its powers under the Financial Services and Markets Act 2023.

Separately, the Agreement will complement the enhanced Free Trade Agreement that is currently being negotiated between the UK and Switzerland.

2. FCA: Consultation Paper: Improving transparency for bond and derivatives markets

On 20 December 2023, the FCA published a consultation paper (CP23/32) on improving transparency for bond and derivatives markets, setting out its proposals to amend the MiFID II non-equity transparency framework.

This FCA consultation follows UK changes to equity market structure (please see our briefing here) and also the parallel changes that are being proposed in the EU (please see our briefing here). The equity market structure changes are particularly relevant for the second half of the consultation paper that focuses on post-trade flags. 

For an in-depth discussion of the proposals set out in the consultation paper, please read our briefing here. 

3. EU Parliament: Legislation: Establishing a European single access point

On 20 December 2023, the European Single Access Point Regulation (ESAP Regulation) was published in the Official Journal of the EU. The ESAP Regulation aims to provide centralised access to publicly available information relevant to financial services, capital markets and sustainability of EU companies and investment products.

The published legislation consists of:

• Regulation (EU) 2023/2859: establishing the ESAP and the principles for its function;
• Directive (EU) 2023/2864: amending certain Directives regarding the establishment and functioning of the ESAP; and
• Regulation (EU) 2023/2869: amending certain Regulations regarding the establishment and functioning of the ESAP.

The Regulations and Directive came into force on 9 January 2024. Member States must adopt the Directive by 10 January 2026, except for Article 3 (which relates to the Transparency Directive) which must be adopted by 10 July 2025.

4. FCA: New webpage: Expectations of firms selling client banks

On 19 December 2023, the FCA published a new webpage providing its expectations of firms selling client banks. The FCA explains that in its view, the 'client bank' is the firm's asset and is a name for a list of clients or accounts maintained by someone who provides financial services. It can include all clients the firm has worked with in the past and may include a right to income streams.

The FCA refers to existing FCA guidance and portfolio strategy, including the obligation for selling firms to comply with FCA principles and the Consumer Duty. 

The FCA also provides new guidance regarding its expectations on selling firms:

• the selling firm should notify the FCA through a SUP 15 notification where the sale could affect the firm's risk profile, value or resources;
• the FCA encourages firms to carry out due diligence on the buying firm;
• the FCA will carefully scrutinise a firm's arrangements with employees or third-parties to ensure: (i) they do not present a risk to effective supervision or; (ii) otherwise undermine a firm's ability to meet regulatory requirements or threaten the FCA's objectives;
• the receiving firm must provide its new customers with its basic written agreement; and
• the FCA encourages firms to address and/or amend any arrangements to reduce the risks posed to the FCA's objectives.

Further, the FCA highlights behaviours that may lead to regulatory intervention, which includes where the selling firm is attempting to avoid any redress liabilities. 

Banking and Prudential

5. ECB: Press release: ECB to stress test banks' ability to recover from cyberattack

On 3 January 2024, the European Central Bank (ECB) published a press release announcing its plans to stress test ECB-supervised banks on their cyberattack response and recovery. 

The ECB will conduct cyber resilience stress testing on 109 directly supervised banks in 2024, with the goal of assessing banks' response to and recovery from a cyberattack, rather than their ability to prevent such attacks. Further, 28 banks will undergo an enhanced assessment, where they will submit additional information on how they coped with the cyberattack.

Supervisors will discuss the findings and lessons learned with each bank as part of the 2024 Supervisory Review and Evaluation Process. The main findings of the stress tests will be communicated in summer 2024.

6. EBA: Final report: EBA publishes amendments to disclosures and reporting on MREL and TLAC

On 20 December 2023, the European Banking Authority (EBA) published its final draft Implementing Technical Standards (ITS), amending the ITS on disclosures and reporting on the minimum requirement for own funds and eligible liabilities and total loss absorbency requirement. 

The amendments reflect changes to the prudential framework, including the new requirement to deduct investments in eligible liabilities instruments of entities belonging to the same resolution group, which is referred to as the "daisy chain" framework. The changes also reflect the prior permission regime for buying back eligible liabilities instruments issued by the reporting entities and groups, and the breakdown by insolvency ranking.

Once the final text of the "daisy chain" framework is published, the EBA will carry out a final review of the draft ITS and its annexes. The EBA also plans to develop a technical package which reflects the amendments introduced through the draft ITS. 

Following the publication of the draft ITS and their submission to the European Commission for adoption, the amendments are envisaged to apply from 30 June 2024. 

7. Bank of England: Publication: The Bank of England's approach to resolution

On 15 December 2023, the Bank of England (the BoE) updated its approach to resolution of failing banks, building societies and some investment firms regulated by the PRA, known as the Purple Book. 

The publication is the BoE's third edition of the Purple Book, updating the 2017 version. In particular, the publication provides:

• the key features of the resolution regime;
• how the BoE is likely to implement resolution;
• the BoE's Resolvability Assessment Framework; and
• the BoE's approach to resolution planning, third-country recognition and international co-ordination.

The BoE states that it will separately publish more detail on the new central counterparties arrangements in due course.

 

8. EBA: Publication: Roadmap on strengthening the prudential framework 

On 14 December 2023, the EBA published its roadmap on the EU Banking Package, which implements the final Basel III reforms in the EU.

The banking package that implements the Basel III framework in the EU includes amendments to the Capital Requirements Regulation (CRR) and to the Capital Requirements Directive.

The roadmap contains an overview of the EBA's approach to its mandates concerning credit risk, market risk, operational risk, reporting and disclosure, market access and governance.

The first batch of regulatory products that are part of the EBA roadmap have also been published for consultation and are as follows:

• draft amending Implementing Technical Standards on Pillar 3 disclosures (EBA/CP/2023/38) and on supervisory reporting (EBA/CP/2023/39): to implement the changes related to the output floor, credit risk, including immovable property losses, capital valuation adjustment, market risk and leverage ratio. The deadline for submitting responses is 14 March 2024;
• draft amending Regulatory Technical Standards on the standardised approach for counterparty credit risk (EBA/CP/2023/40): to implement the changes relating to the supervisory delta formula for interest rate options compatible with negative rates. The deadline for submitting responses is 14 March 2024;
• draft amending Regulatory Technical Standards on the fundamental review of the trading book (EBA/CP/2023/41): to implement the changes relating to the treatment of foreign-exchange and commodity risk in the banking book, the profit and loss attribution test and the risk factor model lability assessment. The deadline for submitting responses is 14 March 2024; and
• discussion paper on the centralisation of European Economic Area (EEA) banks Pillar 3 disclosures in the EBA Pillar 3 data hub (EBA/DP/2023/01): to present the EBA's initial ideas for the development of the Pillar 3 data hub and to raise aspects for discussion that are relevant for the implementation and functioning of the hub. The EBA is organising a webinar to discuss the paper on 23 January 2024, and the deadline for submitting responses is 29 March 2024.

9. EU Commission: Legislation: Capital Requirements Regulation: Commission Delegated Regulation (EU) 2023/2779 supplementing Regulation (EU) 575/2013

On 12 December 2023, the EU Commission published in the Official Journal of the EU the Commission Delegated Regulation (EU) 2023/2779, which supplements the CRR in relation to technical standards specifying the criteria for the identification of shadow banking entities. 

The criteria for identification of shadow banking entities will cover:

• any entity that offers banking services or performs banking activities (and is not authorised and supervised under other EU Acts listed in the annex to the Delegated Regulation);
• any undertaking for collective investment in transferable securities, where those undertakings are authorised as money market funds; and
• certain alternative investment funds.

Certain entities are also expressly excluded from identification, including any entity that is included in the supervision of an institution on a consolidated basis.

The Commission Delegated Regulation came into force on 1 January 2024.

10. BoE (PRA): Policy statement: Implementation of the Basel 3.1 standards near-final part 1

On 12 December 2023, the PRA published the first of two near-final policy statements regarding the implementation of the Basel 3.1 standards (PS17/23) following feedback to its consultation paper on the implementation of the Basel 3.1 standards (CP16/22).

Broadly, the policy statement sets out the PRA's near-final policy on the Basel 3.1 reforms regarding scope and levels of application, market risk, credit valuation adjustment risk, counterparty credit risk and operational risk. 

The PRA considers the near-final policy and rules do not significantly differ overall from the draft policy. Nevertheless, taking into account the responses to CP16/22, the PRA has identified a number of adjustments to the draft policy. The most material changes include: 

• removing the ability for firms to receive permission to use the market risk internal modelling for the default risk of exposures to sovereigns; and
• introducing an additional, optional, transitional arrangement in the credit valuation adjustment risk framework for transactions for which existing exemptions from capital requirements are being removed.

The PRA aims to publish the second policy statement in Q2 2024, covering the remaining features of the Basel 3.1 standards. The implementation date for the Basel 3.1 standards is 1 July 2025, with a 4.5-year transitional period ending 1 January 2030.

Funds Management

11. EU Commission: Legislation: AIFMD and UCITS Directive

On 15 December 2023, the EU Commission published a series of commission delegated regulations and commission implementing regulations covering the AIFMD and the undertakings for collective investment in transferable securities (UCITS) Directive. 

The package of papers consist of, with respect to the UCITS Directive:

• Commission Implementing Regulation (EU) laying down implementing technical standards for the application of Directive 2009/65/EC with regard to the form and content of the information to be notified in respect of cross-border activities of UCITS and UCITS management companies, the exchange of information between competent authorities on cross-border notification letters, and amending Regulation (EU) 584/2010; and 
• Commission Delegated Regulation (EU) supplementing Directive 2009/65/EC with regard to the regulatory technical standards specifying the information to be notified in relation to the cross-border activities of management companies and UCITS.

The package of papers consist of, with respect to AIFMD:

• Commission Implementing Regulation (EU) laying down implementing technical standards for the application of Directive 2011/61/EU with regard to the form and content of the information to be notified in respect of the cross-border activities of AIFMs and the exchange of information between competent authorities on cross-border notification letters; and
• Commission Delegated Regulation (EU) supplementing Directive 2011/61/EU with regard to regulatory technical standards specifying the information to be notified in relation to the cross-border activities of AIFMs.

The Regulations will enter into force on the 20th day following their publication in the Official Journal of the EU.

Senior Managers and Governance

12. EBA: Final Report: Guidelines on benchmarking of diversity practices

On 18 December 2023, the EBA published a final report with guidelines on the benchmarking of diversity practices, including diversity policies and gender pay gap, under the Capital Requirements Directive IV (CRD IV) and the Investment Firms Directive (IFD). 

The guidelines, which include an updated template for data collection, were published to increase transparency and awareness of the relevant stakeholders, as well as to improve the quality of data collected. This will in turn allow competent authorities to monitor diversity trends over time, including by identifying common practices for diversity policies and information on the gender pay gap at the level of the management body.

The updated reporting format will apply for the collection of data in 2025, for the reporting date 31 December 2024.

Financial Crime

13. Council of the EU: Press release: Anti-money laundering: Council and Parliament agree to create new authority

On 13 December 2023, the Council of the EU and the European Parliament each published a press release on their provisional agreement to establish a new European authority for countering money laundering and financing of terrorism (the AMLA). 

The aim of the AMLA is to increase the efficiency of the existing EU AML/CTF framework by creating an integrated mechanism with national supervisors to ensure that there is convergence of supervisory practices. The AMLA will have the power to directly supervise certain types of credit and financial institutions that represent a high risk in multiple Member States. This will initially be limited to up to 40 groups and entities in the first selection process. For non-selected entities, AML/CTF supervision would continue at a mainly national level. Additionally, the AMLA will have a supporting role with respect to non-financial sectors, and coordinate financial intelligence information in Member States.

The text of the provisional agreement is yet to be finalised and presented to Member States' representatives and the European Parliament for approval. If approved, the Council and the European Parliament will have to formally adopt the text. Further, negotiations to agree on the procedure for selecting the AMLA's seat location are expected to continue in 2024.

 

Retail Services

14. Legislation.gov.uk: Statutory instrument: The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) (No. 2) Order 2023 (SI 2023/1411)

On 19 December 2023, HM Treasury published a statutory instrument (SI) amending certain exemptions from the financial promotions restriction under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. 

In particular, the SI: 

• increases the financial thresholds for the "high net worth individual" exemption; 
• amends the eligibility criteria for the "self-certified sophisticated investor" to remove the requirement to have made more than one investment in an unlisted company in the previous two years; and
• ensures all of the exemptions to the financial promotions gateway have the intended scope, and are issued without charge to all known recipients of the Financial Promotions Gateway Exemptions Regulations.

The SI comes into force on 31 January 2024. 

15. FCA: Multi-firm review: Retail banking Consumer Duty multi-firm work

On 14 December 2023, the FCA published the findings of its multi-firm review of the way in which banks, building societies and mortgage providers implemented the Consumer Duty, which came into force on 31 July 2023 for open products. 

The FCA carried out a desk-based review of 70 product journeys across a range of 47 firms, and reviewed action taken by firms to improve specific customer journeys, products or services in light of their Consumer Duty gap analysis. 

The FCA identified examples of good practice in respect of how firms assessed products and services against the higher standards of the duty, such as where firms developed a baseline of good customer outcomes to feed into wider frameworks and guidance. It also outlined how firms had identified their target markets and used reviews to identify areas of actual or potential customer harm. 

The FCA separately identified areas where it expects to see improvements from firms, including how firms treat customers in financial difficulty, report fraud and deal with accounts of bereaved/deceased customers.

The FCA will continue to monitor how firms are meeting the higher standards under the Consumer Duty. It reminds firms that their Board must review and approve an assessment of whether the firm is delivering good customer outcomes at least annually. The FCA also intends to engage with firms on their implementation plans for closed book products, ahead of the 31 July 2024 deadline. 

16. FCA: Dear CEO Letter: The retention of interest earned on customers’ cash balances

On 12 December 2023, the FCA published a Dear CEO Letter relating to the treatment of retained interest earned on customers' cash balances.

The FCA surveyed a sample of investment platforms and self-invested personal pension (SIPP) operators and identified that some firms' treatment of the interest earned on their customers' cash balances may not be in line with the Consumer Duty. 

The FCA has outlined its expectation that firms:

• review their approach to retained interest, including in respect of the firm's Consumer Duty obligations to ensure this represents fair value for customers;
• cease the practice of "double-dipping" (where firms both retain interest and take an account charge or fee on customers' cash);
• update their Terms and Conditions as necessary; and
• ensure their communications are compliant with FCA rules.

Investment platforms and SIPP operators are required to provide the FCA with confirmation that they have reviewed their approach to retention of interest on customer cash balances in accordance with the FCA's expectations by 31 January 2024, with any required changes to firms' approach implemented by 29 February 2024. 

Payments

17.  PSR: Policy statement: Fighting authorised push payment scams: final decision

On 19 December 2023, the Payment Systems Regulator (PSR) published a policy statement on its final decision relating to its fight against authorised push payment (APP) scams.

It follows the publication in June 2023 of a policy statement setting out the PSR's final decision on a new reimbursement requirement on payment service providers (PSPs) which applies to payments sent via Faster Payments. 

The PSR specifically confirmed its new reimbursement requirement policy, which will action a step-change in fraud prevention and reimburse the vast majority lost to APP fraud victims. The final detailed parameters are:

• clarifying the consumer standard of caution exception, narrowing the consideration of gross negligence to four specific circumstances including the requirement to have regard to interventions, prompt notification, responding to requests for information and police reporting;
• where a consumer is classed as vulnerable, the consumer standard of caution exception cannot be used by the PSP to deny reimbursement;
• allowing sending PSPs to levy an excess up to a maximum of £100 per claim, set a maximum claim excess of £100 covering claims made by vulnerable consumers; and
• setting the maximum level of reimbursement per claim at £415,000, aligning with the Financial Ombudsman Service's current award limit.

The policy will commence 7 October 2024, and the PSR is in the process of publishing three legal instruments to re-affirm its reimbursement requirements.

The legal instruments published alongside the policy statement set out the obligations Pay.UK and directed PSPs must comply with by the policy start date of 7 October 2024. The PSR intends to set up a clarifications process in Q1 2024 to encourage a consistent approach to implementation across the industry. 

18. PSR: Consultation paper: Expanding variable recurring payments

On 19 December 2023, the PSR published a consultation paper relating to its proposal to expand variable recurring payments (VRPs) to additional low-risk use cases.

The nine largest UK banks have already been mandated to implement VRPs for payments between accounts belonging to the same person. The PSR proposes to extend VRPs to enable payments between accounts in different names. The proposed "Phase 1" rollout will apply to low risk use cases, enabling payments to regulated financial services, regulated utilities sectors, and local and central government. 

In order to extend VRPs to the Phase 1 use cases by Q3 2024, the PSR is seeking feedback on the following proposed  changes to the payments ecosystem:

• a multilateral agreement for Phase 1 operated by Pay.UK, specifying the required functionality, pricing arrangements, dispute resolution and liability relating to the use of VRPs;
• a central and regulator-set price for VRPs based on a cost recovery model for the sending firm;
• to set the price for sending firms to change payment initiation service providers at zero; and
• mandating the participation of the nine largest UK banks.

The consultation is open for feedback until 2 February 2024. The PSR will then analyse responses and provide updated policy proposals for consultation later in 2024. 

Digital Services and Fintech

19. ESMA: Discussion Paper: MiFID II investor protection topics linked to digitalisation

On 14 December 2023, ESMA published a discussion paper on the opportunities and potential risks linked to the digitalisation of retail investment services and related investor protection considerations. 

ESMA's makes several recommendations throughout the discussion paper, which cover the following topics:

• Online disclosures: online communication should be used to improve regulatory information in the best interest of clients, such as through more bespoke disclosures;  
• Layering: firms should be allowed to layer information provided to retail investors, for example through hyperlinks or QR codes, provided such layering is done in the best interests of investors and does not render the communication misleading; 
• Accessibility and readability: firms should test the reliability, usefulness, and understandability of their digital disclosures, taking into account diverse respondent groups.;
• Marketing communications and practices: marketing materials should clearly display all vital information regarding financial instruments to avoid mis-selling. Moreover, marketing materials should not create a sense of urgency for investors to "act now" and, for high-risk products, should not be disseminated in such a way that they are likely to be received by a broad range of retail clients (for example through mass-marketing);
• Use of affiliates: firms are and remain responsible for the accuracy of information provided to potential investors on behalf of the firm, including via social media and (f)influencers. Clear policies and procedures should therefore be in place relating to the firm's use of affiliates;
• Digital engagement practices (DEPS): firms should have proper internal policies and procedures for their use of DEPS, including the use of behavioural techniques and gamification elements, with a view to ensuring that they are used in the best interests of clients;
• Gamification: firms should use gamification techniques in a neutral way to encourage informed and sensible investment decisions which lead to well-diversified investment portfolios and long-term investing. Firms should also should display a message that excessive trading may lead to financial harm to investors and allow clients to exit the process at any point in time;
• Choice architecture and nudging techniques: firms should design their interface to enable and support investors to make informed and sensible investment decisions; and
• Push notifications & dark patterns: push notifications need to be aligned with the target market, and firms should use their online interface in a way that encourages investors to make informed and sensible investment decisions.

ESMA is seeking stakeholder input by 14 March 2024, with this intended  to support ESMA's convergence work and help prepare for potential mandates for related technical advice and standards. ESMA intends to use the feedback to develop a position on the use of digital engagement practices and the use of marketing practices by firms, to assess whether a regulatory response may be needed. 

ESG

20. European Commission (Platform on Sustainable Finance): Draft report: Climate change taxonomy and the EU regulatory response: EU taxonomy-aligning benchmarks (TABs) report

On 13 December 2023, the European Commission published a call for feedback on a draft report relating to proposals for EU taxonomy-aligning benchmarks (TABs).

The report proposes two voluntary benchmarks (TABex and TAB) with a view to sparking conversation on the critical role the taxonomy could assume in developing climate and environmental benchmarks. Specifically, it is proposed that a benchmark can be labelled as a TAB where the underlying assets are selected, weighted or excluded in such a manner that the resulting benchmark portfolio is on an upwards environmentally sustainable capital expenditure trajectory.

The suggested benchmarks do not dismiss alternative approaches to leveraging the taxonomy in the development of benchmarks. Rather, they are proposed as another means to achieve innovation in the sector and ensure that capital is directed towards sustainable investments.

Feedback on the proposals can be submitted by 13 March 2024 using this response form.