Financial Services SpeedRead: 13 November 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: Newsletter: Market Watch 81

On 7 November 2024, the FCA published its Market Watch 81 newsletter which provides its insights from its recent observations of the UK MiFID transaction reporting regime. This edition includes the FCA's evaluation of skilled person reviews under section 166 of FSMA to address transaction reporting deficiencies.

The FCA has identified that reporting issues are often caused by weaknesses in: (1) change management, (2) reporting process and logic design, (3) data governance, (4) control frameworks and (4) governance, oversight and resourcing.

The FCA states that it may continue its work in this area to ensure that firms implement the necessary remedial actions. In the interim, firms should continue to submit errors or notifications once aware of any issues.

2. FCA: Policy Statement: Improving transparency for bond and derivatives markets (PS24/14)

On 5 November 2024, the FCA published a policy statement (PS24/14) which summarises the feedback received from the FCA's previous consultation, CP23/32, which proposed the FCA's changes to the UK bond and derivative transparency regime. The policy statement also sets the FCA's final position on the rules and guidance to be included in the FCA Handbook and the timelines for their implementation by firms.

The FCA has made some changes to its proposed approach in CP23/32, such as refining the group criteria for bonds and modifying the framework for bonds to have three, instead of two, deferral durations.

Moreover, in Chapter 9 of the policy statement, the FCA has included questions about the future of the systematic internalisers regime. The FCA welcomes responses to this discussion paper by 10 January 2025.

The changes to the transparency regime come into force on 1 December 2025.

3. HMT: Legislation: The Financial Services and Markets Act 2023 (Commencement No. 8) Regulations 2024

On 28 October 2024, the Financial Services and Markets Act 2023 (Commencement No. 8) Regulations 2024 were published.

The Regulations come into force on various dates over the coming months, with the soonest taking effect on 29 October 2024.

The Regulations set out a number of changes relating to financial services in the wake of Brexit, including the revocation of:

• UK Commission Implementing Regulations (EU) 2018/33 and 2018/34, which contained implementing technical standards in relation to standardised fee presentation;
• UK Commission Implementing Regulation (EU) 2016/1368 which effectively removes LIBOR as a critical benchmark for the purposes of the UK Benchmarks Regulation ((EU) 2016/1011); and
• UK Commission Implementing Decision (EU) 2019/541 on the equivalence of the legal and supervisory framework applicable to approved exchanges and recognised market operators in Singapore for the purposes of UK MiFIR.

Notably, the Regulations also confer additional powers on authorities in the financial services sector:

• FCA with power to suspend waivers under UK MiFIR;
• HMT with the power to make regulations about unauthorised co-ownership alternative investment funds;
• FCA with power to make rules on pre and post trade transparency requirements for fixed income instruments, derivatives and systematic internalisers; and
• FCA with power to make rules regarding position limits and managements.

4. ESMA: Consultation Paper: Amendments to MiFID II research regime

On 28 October 2024, ESMA published a consultation paper (ESMA35-335435667-5979) on proposed amendments to MiFID II regarding payment for research and execution services.

Currently, Article 24(9a) of MiFID II and Article 13 of the Commission Delegated Directive (EU) 2017/593 (MiFID II Delegated Directive) set out the conditions under which the provision of research by third parties to investment firms is not considered an inducement.

Previously, MiFID II only allowed payments for research by an investment firm out of its own resources or payments from a separate research payment account. However, changes were made to MiFID II to include a new paragraph (9a) in Article 24. This amendment introduced the possibility for joint payments of execution services and research covering issuers whose market capitalisation did not exceed EUR 1 billion.

However, under the Listing Act Directive, it will be made possible for joint payments for execution services and research to be made irrespective of market capitalisation of the issuers covered by the research (provided that the provisions of that research is not regarded as an inducement).

ESMA proposes inserting high-level requirements into Article 13 of the MiFID II Delegated Directive to align it with the Listing Act Directive. The proposals are set out in Annex IV to the consultation paper.

Responses to the consultation are open until 28 January 2025. ESMA expects to provide a final report to submit its technical advice to the Commission in Q2 2025.

Banking and Prudential

5. PRA/FCA: Policy Statement: Prudential assessment of acquisitions and increases in control (PS18/24)

On 1 November 2024, the PRA and FCA jointly published a final policy statement (PS18/24) and provided feedback to responses received to its consultation paper (CP25/23) regarding the prudential assessment of acquisitions and increases in control.

Pursuant to the feedback gathered from the consultation paper, the final policy statement includes a number of minor changes. These include:

• additional provisions regarding limited partnership structures;
• clarification around what amounts to "significant influence" on a firm (i.e. beyond the Board);
• details on the PRA's and FCA's approaches to contacting UK authorities and non-UK regulators to request additional information in relation to notification timelines and under section 186 FSMA; and
• adjustments to language to improve readability / transparency.

The policy statement took effect on 1 November 2024.

6. FCA: Guidance: Prudential assessment of acquisitions and increases in control (FG24/5)

On 1 November 2024, the FCA published guidance (FG24/5) to replace EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (the 3L3 Guidelines).

The guidance outlines the FCA's expectations in the following areas:

• how to identify controllers, including the concepts of significant influence, aggregated holdings and indirect controllers;
• submitting the change in control notification, including the additional information the FCA may require and the approach to ensuring completeness;
• the assessment criteria used to evaluate notifications to acquire or increase control in a UK authorised person; and
• how the FCA will utilise its statutory power to impose conditions on an approval to advance its objectives.

FCA authorised firms, and those to whom Part XII of FSMA applies, should now follow this guidance from 1 November 2024 instead of the 3L3 Guidelines when considering a UK change in control transaction.

7. Official Journal of the EU: Legislation: Published in the OJ - Amending the CRR to postpone application date of the own funds requirements for market risk

On 31 October 2024, Commission Delegated Regulation (EU) 2024/2795 on the application of the own funds requirements for market risk was published in the Official Journal of the EU.

The Delegated Regulation postpones by one year, until 1 January 2026, the date of application of the Fundamental Review of the Trading Book standards in the EU for banks' calculation of own funds requirements for market risk.

The Delegated Regulation entered into force on 1 November 2024. It applies from 1 January 2025.

Fund Management

8. FCA: Consultation Paper: Investment research payment optionality for fund managers (CP24/21)

On 5 November 2024, the FCA published a consultation paper (CP24/21) on payment optionality for research.

This follows a July 2024 Policy Statement (PS24/9) permitting MiFID investment firms wishing to buy research in respect of their segregated mandates to use joint payments for third-party research and execution services, provided they met certain requirements.

For more information, please see our briefing here.

Senior Managers and Governance

9. FCA: Warning Notice Statement: Crispin Odey (24/4)

On 1 November 2024, the FCA published a warning notice which indicates that it will take action against Mr. Crispin Odey for allegedly breaching Individual Conduct Rule 1 of the FCA's Code of Conduct during his tenure at Odey Asset Management LLP (OAM).

The FCA considers that during the period of 24 December 2021 to 17 November 2022, Mr Odey, who was a certification employee at OAM and at times during this period held Senior Management Functions, breached Individual Conduct Rule 1 of the FCA’s Code of Conduct which required him to act with integrity.

The warning notice states that Mr. Odey was due to attend a disciplinary hearing in January 2022. However, prior to the hearing, the FCA refers to Mr. Odey using his majority shareholding in OAM to remove the existing members of OAM's Executive Committee and appointing himself as the sole member. The FCA then state that Mr. Odey decided that the disciplinary hearing into his conduct would be indefinitely postponed since he said he was unable to conduct it with impartiality.

The warning notice is not the final decision of the FCA. Mr. Odey has the right to make representations to the Regulatory Decisions Committee.

Financial Crime

10. Home Office: Guidance: New failure to prevent fraud

On 6 November 2024, the Home Office published guidance relating to a new corporate criminal offence of "failure to prevent fraud" under The Economic Crime and Corporate Transparency Act 2023 (ECCTA).

Under the legislation, an organisation will be criminally liable where:

• a specified fraud offence is committed by an employee, agent or other "associated person", for the organisation's benefit; and
• the organisation did not have "reasonable" fraud prevention procedures in place.

The guidance sets out:

• an overview of the offence;
• procedures that relevant bodies can put in place to prevent persons associated with them from committing fraud offences; and
• the interaction and overlaps between legislative and regulatory regimes.

The offence will come into force on 1 September 2025.

11. FATF: Public Consultation: AML/CFT and financial inclusion

On 28 October 2024, the Financial Action Task Force (FATF) published a consultation paper in which it proposed revisions to the FATF Recommendations to better align and promote financial inclusion.

The amendments proposed include the following:

• regarding FATF Recommendation 1, the replacement of "commensurate" with "proportionate" in order to clarify how these concepts should be applied in the context of a risk-based approach and to align the language more closely with the financial inclusion stakeholders and frameworks;
• amendments to require supervisors to "review and take into account the risk mitigation measures undertaken by financial institutions", with a view to avoiding overcompliance resulting from supervisors having only a partial understanding of relevant risks;
• a proposal to require countries to be more active in creating an enabling environment for implementation of simplified measures in lower risk situations; and
• concerning "non-face-to-face customer-identification and transactions" as an example of a higher-risk situation, FATF proposes to add the qualification of "unless appropriate risk mitigation measures have been implemented" to reflect technological advancements in identity verification systems.

The FATF invites comments on the proposed changes from interested stakeholders until 18:00 on 6 December 2024.

Retail Services

No new entries.

Digital Finance and Fintech

12. FCA: Statement: Industry report on tokenisation

On 4 November 2024, the FCA published a statement on an industry-led report by Project Guardian, an international collaboration of industry and regulators led by the Monetary Authority of Singapore, regarding the use of distributed ledger technology (DLT) in asset management.

The framework advocated by the report aims to enhance the adoption of asset tokenisation in the fund industry, addressing challenges in traditional fund structures such as high fees, limited transparency and accessibility issues. The report proposes a three-step approach to deliver these goals:

• Tokenised Funds: a standardised approach should be taken to the tokenisation of conventional funds without material change from current norms;
• Tokenised Assets: using direct holdings in tokenised assets to reduce the costs and challenges associated with collective vehicles, giving customers control of their sources of growth and risk; and
• Tokenised Flows: introducing tokenised entitlements, which enable financial assets and products to become composable and empowers solutions that deliver directly to customer needs.

The framework also proposes a Guardian Composable Token Taxonomy which provides a structured approach to creating and managing tokenised assets across different asset classes.

The FCA has welcomed the report and stated that it will continue working with Project Guardian members, as well as the broader sector, to support the development and adoption of asset tokenisation.

Payments

No new entries.

ESG

13. FCA: Publication: The Sustainability Disclosure Requirements (SDR) and investment labels: pre-contractual disclosure examples

On 1 November 2024, the FCA published a set of good practice examples concerning the disclosure requirements relevant to the Sustainability Disclosure Requirements (SDR) and investment labels regime.

Relevantly, the regime requires applicant firms to demonstrate that they meet certain specific sustainability focus and improver criteria in order to qualify to use investment labels. The good practice examples provided by the FCA are intended to aid applicants as they prepare their application. They include examples of how firms can specify their investment objectives and asset allocation, as well as how managers can demonstrate the link between the sustainability product's sustainability objective and a positive environmental and/or social outcome.

The regime commences on 2 December 2024, though firms have been able to use investment labels since 31 July.

14. ESAs: Final Report: Principal Adverse Impact disclosures under the Sustainable Finance Disclosure Regulation (JC 2024 68)

On 30 October 2024, the ESAs published their third joint Annual Report (Report) concerning entity and product-level Principal Adverse Impact (PAI) disclosures under SFDR.

PAI disclosures are intended to reflect the negative effects of investments by financial institutions on people and the environment, as well as the steps taken by such institutions to mitigate these risks. In their Report, the ESAs found that there had been positive progress on several aspects relating to PAI disclosures, including that these had become more accessible to retail investors, as well as that the overall level of quality of these disclosures had enhanced.

The ESAs also noted that product PAI disclosures had significantly improved, though the share of products disclosing SFDR PAI information remained low.

It is expected that the ESAs' findings could be taken into account in the context of the European Commission's assessment of the functioning of SFDR.

15. TNFD: Discussion Paper: Nature transition plans

On 27 October 2024, the Taskforce on Nature-related Financial Disclosures (TNFD) published a discussion paper and press release setting out draft guidance on nature transition planning for corporates, financial institutions and other interested stakeholders.

Nature transition plans are intended to help organisations adjust their business models and value chains to respond and contribute to the transition implied by the Kunming-Montreal Global Biodiversity Framework and manage their nature-related dependencies, impacts, risks and opportunities. The TFND's guidance within the discussion paper sets out five key themes regarding the content of a firm's nature transition plan:

• Foundations: the overall approach to the nature transition, including scope, business model changes and transition financing strategies;
• Implementation strategy: how the organisation will align its business activities, products, services and policies with the transition plan priorities;
• Engagement strategy: how the organisation will work with other stakeholders to support delivery of the transition plan;
• Metrics and targets: how progress will be monitored; and
• Governance: the processes at Board and management levels to support the plan's implementation.

The TNFD invites feedback on the approach outlined in this discussion paper by 1 February 2025.

Other

16. ESAs: Guidelines: Oversight cooperation and information exchange between the ESAs and the competent authorities under DORA

On 6 November 2024, the ESAs published joint guidelines (Guidelines) on the oversight cooperation and information exchange between the ESAs and competent authorities under DORA.

The Guidelines are specifically aimed at ensuring that the ESAs and the competent authorities have:

• appropriate distribution of responsibilities and tasks, coordination and cooperation, as well as allocation of oversight (without overlap);
• clarification of areas requiring information exchange in accordance with Article 32(7) of DORA;
• general principles for follow ups from NCAs concerning the risks identified in the recommendations concerning financial entities making use of third-party providers; and
• a common and cohesive approach to procedures and timelines for information exchanges.

The Guidelines will apply from 17 January 2025 and are subject to further review by the ESAs.

17. Treasury Committee: Call for Evidence: Acceptance of cash to be investigated

On 4 November 2024, the Treasury Committee published a call for evidence to assess whether rules are needed to govern the acceptance of physical cash in the UK.

There are currently no regulations which require businesses to accept cash, despite around 3.1 million people in the UK relying almost entirely on cash a form of payment. The Treasury Committee has therefore called on interested persons to consider the following and submit evidence in support of their views:

• what is the current state of, and recent trends in, physical cash acceptance in the UK;
• are there groups in society which disproportionately rely on businesses and public services accepting physical cash;
• should the Government require parts of the economy to always accept physical cash;
• what are the practical challenges that businesses might face from having to always accept physical cash;
• what would the costs to private firms and the public sector be from any imposed requirements to always accept physical cash;
• how might any requirement for certain firms and public services to always accept physical cash affect financial services firms; and
• are there any other areas or sectors where a decline in cash acceptance would cause problems.

Submissions can be made via the Treasure Committee's evidence portal until 2 December 2024. Public sessions on this topic are also expected to begin in December 2024.

18. FCA: Webpage: Insights and observations for operational resilience following the CrowdStrike outage

On 31 October 2024, the FCA published a webpage detailing its insights, observations and key lessons relating to how firms responded to the CrowdStrike outage.

The FCA generally observed that by investing in operational resilience and following its rules on operational resilience, firms were able to identify both consumer and market impacts and prioritise their important business services. In particular, the FCA noted that:

• firms that mapped important business services and the resources which deliver them were able to better prioritise getting key services back online;
• firms benefitted significantly from having tested severe, but plausible, scenarios; and
• firms who had defined and tested communications strategies were better able to respond and communicate efficiently with customers and stakeholders.

The FCA recommends that firms consider whether their current testing scenarios are adequate and satisfy themselves that any impact caused by operational disruptions would be minimised.