Financial Services SpeedRead: 18 July 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: Policy Statement: Primary Markets Effectiveness Review (PS24/6)

On 11 July 2024, the FCA published a policy statement addressing feedback to CP 23/31 and setting out the final UK Listing Rules.

The new Listing Rules represent the largest overhaul of the UK listing regime in over 30 years and have been drafted with a view to aligning the UK regime with international market standards, as well as seeking to encourage prospective issuers to choose a UK listing.

Of particular importance, the Listing Rules have been simplified to support a wider range of companies and therefore increase opportunities for investors. This includes by removing the 'premium' and 'standard' listing segments in favour of a new 'commercial companies' category for equity share listings, while also removing the need for votes to be held on significant or related party transactions and offering flexibility around enhanced voting rights.

The new UK Listing Rules will apply from 29 July 2024.

2. ESMA: Consultation Package: MiFIR Review

On 10 July 2024, ESMA published a package of public consultations which are aimed at increasing transparency and system resilience in financial markets, reducing reporting burden and promoting convergence in the supervisory approach.

The consultation package covers a number of topics relating to equity transparency under MiFID and MiFIR. This includes:

• amendments to the regulatory technical standards (RTS) relating to the liquidity assessment for equity instruments, equity transparency and the volume cap;
• a draft implementing standard on the content and format of the systematic internaliser notification;
• amendments to the rules on the double volume cap;
• new rules specifying organisational requirements of trading venues that add new provisions on circuit breakers and have targeted amendments to adapt to the framework under the Digital Operational Resilience Act;
• draft RTS on the equity Consolidated Tape Provider in relation to the input and output date; and
• flags to be used in post-trade transparency reports for non-equity instruments.

Stakeholders are to invited to respond to the consultation by 15 September 2024 or 15 October 2024, subject to the specific sections being responded to. ESMA will then prepare a final report to submit to the European Commission in respect of the topics covered in the consultation package.

3. ESMA: Consultation Papers: Periodic reporting and supervisory expectations for management bodies

On 8 July 2024, the ESMA launched two consultation papers detailing reporting requirements and governance expectations for some supervised entities.

In particular, the consultations papers set out:

• guidelines on the submission of periodic information to ESMA by Benchmark Administrators, Credit Rating Agencies and Market Transparency Infrastructures; and
• ESMA's expectations in relation to good practice in governance arrangements, such as on the role, operation and effectiveness of the management bodies of the entities supervised by ESMA.

ESMA invites comments on all matters set out in these papers, including in particular the specific questions summarised in Annex 1 of each paper. Comments are to be submitted to ESMA by 18 October 2024.

Banking and Prudential

4. BCBS: Consultative document: Principles for the sound management of third-party risk

On 9 July 2024, the Basel Committee on Banking Supervision published a consultation paper setting out 12 high-level principles for the sound management of third-party risk.

These principles supersede those set out in 2005 Joint Forum paper and aim to establish a common standard for large international banks and their prudential supervisors, while still providing sufficient flexibility given the evolution of practices in this area.

In this regard, the principles focus on third-party risk management holistically and are technology-agnostic to keep pace with technological development. They also aim to promote international engagement, greater collaboration and consistency, with a view to strengthening the overall operational resilience of the banking sector.

Feedback on the consultation paper is due by 9 October 2024 and can be submitted here.

5. Single Resolution Board: Report: Resolvability of Banking Union banks 2023

On 9 July 2024, the Single Resolution Board (SRB) published the results of its annual resolvability assessment, covering the year 2023.

The report assessed the progress made by banks in building up their resolvability capabilities until December 2023, in line with the SRB's Expectations For Banks document. The SRB noted that December 2023 was an important milestone for resolvability in the Banking Union, as banks under the SRB's remit showed steady progress in meeting the SRB's Expectations for Banks and minimum requirement for own funds and eligible liabilities policy.

The report provides that, as of next year, the Single Resolution Mechanism will open a new chapter of its resolvability assessment based on a revised methodology and the systematic testing of banks’ capabilities.

The SRB will consult on the resolvability assessment criteria and the guidance on testing. This will cover the SRB's Expectations for Banks over a three-year horizon to enhance predictability for the industry.

Fund Management

6. ESMA: Consultation Papers: Liquidity Management Tools for Funds

On 8 July 2024, ESMA published draft guidelines and RTS relating to liquidity management under AIFMD and AIFMD II.

The draft guidelines and RTS, which are each contained in respective consultation papers, are aimed at mitigating potential financial stability risks and promoting harmonisation of liquidity risk management in the investment funds sector. This includes by promoting convergent application of the Directives for both Undertakings for the Collective Investment in Transferable Securities (UCITS) and open-ended AIFs, as well as make EU fund managers better equipped to manage the liquidity of their funds, particularly in market stress situations.

The draft guidelines and RTS also the clarify the functioning of certain liquidity management tools, including side pockets, noting their use varies significantly across the EU.

Feedback on the draft guidelines and RTS is due by 8 October 2024. ESMA will then publish the final guidelines and RTS by 16 April 2025.

7. FCA: Updated webpage: Overseas Funds Regime - landing slots for funds in TMPR

On 5 July 2024, the FCA updated its Overseas Funds Regime (OFR) webpage to provide new information on "landing slots" for fund operators in the Temporary Marketing Permissions Regime (TMPR).

The FCA states that it will issue a "direction" to each fund operator in the TMPR, 8 weeks prior to the fund operator’s landing slot opening, and telling the fund operator how to apply. The direction will be binding.

For a fund that is in the TMPR, the FCA directs that the operator must not apply for it to be a recognised scheme under section 271A of FSMA until such a period is directed by the FCA. Specific dates for landing slots are found on the webpage.

8. FCA: Direction: Regulation 67A(2) of The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019

On 5 July 2024, the FCA published a direction under regulation 67A(2) of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 (Regulations).

The direction applies to the operators of stand-alone schemes that are recognised schemes under regulation 62 of the Regulations and to operators of umbrella schemes of one or more sub-funds recognised under the same regulation. It specifically mandates that these operators must not apply to be a recognised scheme under section 271A of FSMA 2000 until such period as the FCA may specifically direct.

Senior Managers and Governance

No new entries.

Financial Crime

9. EBA: Final report: EBA issues "Travel Rule" guidance (EBA/GL/2024/11)

On 4 July 2024, the EBA published its final report containing guidelines detailing information requirements in relation to transfers of funds and certain crypto-assets transfers under the Wire and Cryptoasset Transfer Regulation ((EU) 2023/1113) (EBA/GL/2024/11).

The new guidelines replace the Joint Guidelines on the measures payment service providers should take to detect missing or incomplete information on the payer or the payee, and the procedures they should put in place to manage a transfer of funds lacking the required information.

The new guidelines provide the steps that payment service providers, intermediary payment service providers, crypto-asset service providers and intermediary crypto-asset service providers should take to detect missing or incomplete information that accompanies a transfer of funds or crypto-assets, and the procedures they should put in place to manage a transfer of funds or a transfer of crypto-assets lacking the required information.

Once translated, the guidelines will be published on the EBA’s website, upon which competent authorities will have a period of two months to produce a compliance report. The guidelines will come into effect from 30 December 2024.

Retail Services

No new entries.

Digital Finance and Fintech

10. Official Journal of the EU: Legislation: EU AI Act

On 12 July 2024, Regulation (EU) 2024/1689 laying down harmonised rules on artificial intelligence and amending Regulations (EC) No 300/2008, (EU) No 167/2013, (EU) No 168/2013, (EU) 2018/858, (EU) 2018/1139 and (EU) 2019/2144 and Directives 2014/90/EU, (EU) 2016/797 and (EU) 2020/1828 (EU AI Act) was published in the Official Journal of the EU.

The EU AI Act will enter into force on 2 August 2024, following which businesses will have a two year transition period to comply with most provisions in the Act. However, some provisions of the EU AI Act will be rolled out through staggered implementation, including those relating to:

• AI systems posing an unacceptable risk, which will be prohibited six months after the AI Act comes into force;
• codes and practices, which will apply nine months after the EU AI Act comes into force;
• rules applying to foundation models, which will apply twelve months after the EU AI Act comes into force; and
• certain high-risk AI systems covered by existing EU harmonisation legislation and general purpose AI systems that have been on the market before the EU AI Act applies to them, which will apply 3 years after the EU AI Act comes into force.

For more information, please see our briefing on the EU AI Act here.

11. ESAs: Consultation Paper: Draft Guidelines on templates for explanations and opinions, and the standardised test for the classification of crypto-assets, under Article 97(1) of Regulation (EU) 2023/1114

On 12 July 2024, the European Supervisory Authorities (ESAs) published a joint consultation paper on draft guidelines on templates for explanations and opinions, and the standardised test for the classification of crypto-assets, under the Markets in Crypto-Assets Regulation (MiCAR).

In order to support market participants and supervisors in adopting a convergent approach to the classification of crypto-assets, the draft guidelines propose a standardised test for this exercise . This test acknowledges that the classification of crypto-assets requires case-by-case assessment, taking into account applicable EU and national law, the decisions of the Court of Justice of the European Union and national courts, as well as any regulatory measures or guidance applicable at the national level.

Moreover, the templates set out in the draft guidelines specifically detail the content and form of the legal opinion which must accompany the white paper for the issuance of asset-referenced tokens (ARTs), as well as of the explanation which must accompany the white paper for crypto-assets which art not ARTs.

The ESAs welcome comments on the consultation paper by 12 October 2024.

12. Law Commission: Scoping paper: Decentralised autonomous organisations

On 11 July 2024, the Law Commission published a scoping paper which considers the nature and legal characterisation of Decentralised Autonomous Organisations (DAOs), as well as how the law of England and Wales may apply to them today and in the future.

The scoping paper:

• explains the development and underlying technology of DAOs, as well as the three types of arrangements – pure, hybrid and digital legal entities;
• discusses possible legal characterisation and attribution of liability to DAOs;
• considers the attractiveness of England and Wales as a jurisdiction for DAOs; and
• discusses area of regulation which may affect DAOs.

The scoping paper also looks at areas where further work could be done to accommodate DAOs in the jurisdiction. This includes potentially updating the Companies Act 2006 to facilitate the increased use of technology at a governance level where appropriate.

13. FATF: Targeted Update: Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers

On 9 July 2024, the Financial Action Task Force (FATF) published its fifth update on jurisdictions' compliance with FATF's Recommendation 15 relating to the AML/CTF measures applicable to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs), and its Interpretative Note (both of which can be found here).

The update provides a targeted review of the implementation of the FATF Standards, as well as an update on emerging risks and market developments in this area. The key findings include that:

• global implementation of Recommendation 15 is lagging, with 75% of jurisdictions being non or partially compliant with the requirements. This is despite regulations having been introduced in a number of jurisdictions, noting that jurisdictions are still struggling with the implementation of fundamental requirements of Recommendation 15 (e.g. the need to conduct a virtual risk assessment);
• there has been progress in the number of jurisdictions that have registered or licensed VASPs in practice; and
• insufficient progress has also been made in implementing the travel rule, which mandates that VASPs obtain, hold and exchange information about the originators and beneficiaries of virtual asset transfers.

The slow progress in regulating the VA sector remains a serious concern for the FATF and it has therefore made a number of recommendations to ensure the full implementation of its requirements. In the meantime, the FATF will continue to conduct outreach and provide assistance to jurisdictions with their implementation, as well monitor market trends to determine if further work needs to be undertaken.

14. EBA: Press release: Priorities for ART/EMT issuers supervision – 2024/2025

On 5 July 2024, the EBA published its supervisory priorities for issuers of e-money tokens (EMTs) and asset-referenced tokens (ARTs) for 2024/25, as well as a statement which reaffirms its expectation that issuers and offerors of such tokens comply with MiCAR.

The EBA's supervisory priorities, which are aimed at driving supervisory convergence, specifically relate to:

• internal governance and risk management;
• financial resilience (including, where applicable, own funds requirements and reserve of assets);
• technology risk management; and
• financial crime risk management.

Each of these priority areas is underpinned by an overarching objective of maintaining a high level of holder protection and ensuring financial stability.

The EBA expects any person who has commenced, or who intends to commence ART/EMT activities, to have fully complied with MiCAR since 30 June 2024. In this regard, the EBA has also warned consumers of the risks of acquiring crypto-assets which are not issued in accordance with MiCAR, noting the safeguards set out in MiCAR do not apply to such acquisitions.

15. ESMA: Final report: Draft Technical Standards specifying certain requirements of the Markets in Crypto Assets Regulation – second package (ESMA 75-453128700-1229)

On 4 July 2024, ESMA published its second final report under MiCAR covering eight draft technical standards that aim to provide transparency for retail investors and provide clarity to providers on the technical aspects of disclosure and record-keeping requirements.

The draft technical standards detailed in the report cover the following:

• sustainability indicators for crypto-asset consensus mechanisms;
• business continuity measures for crypto-asset service providers (CASPs);
• trade transparency;
• record-keeping by CASPs;
• content and format of orderbooks;
• machine readability of white papers and the register of white papers;
• data required for the classification of white papers; and
• public disclosure of inside information.

These technical standards will also ensure that the National Competent Authorities (NCAs) have access to the information needed for effective supervision of the EU crypto-asset market.

Once finalised, the draft technical standards will be submitted to the European Commission for adoption. The European Commission shall decide whether to adopt them within 3 months.

Payments

16. Payment Systems Regulator: Policy Statement: The Faster Payments APP scams reimbursement requirement: compliance and monitoring (PS24/3)

On 12 July 2024, the Payment Systems Regulator (PSR) published a policy statement (PS24/3) on the Faster Payments Scheme (FPS) authorised push payment (APP) scams reimbursement requirement.

PS24/3 specifically confirms the arrangements that payment service providers (PSPs) are required to have in place to report data and information to enable Pay.UK to effectively monitor and manage compliance with this requirement. In this regard, the PSR has confirmed:

• all PSPs are required to register with Pay.UK by 20 August 2024.
• the data and information that PSPs are required to retain and report monthly to Pay.UK in respect of transactions they have sent;
• the limits placed on Pay.UK in respect of the use and disclosure of the compliance data it receives; and
• its approach to requiring PSPs to inform consumers of their rights under PS24/3.

The PSR has reaffirmed the need for firms to continue the work already underway to implement the new requirements before the reimbursement policy start date of 7 October 2024.

ESG

17. Official Journal of the EU: Legislation: Directive on Corporate Sustainability Due Diligence

On 5 July 2024, Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859 (CS3D) was published in the Official Journal of the EU.

CS3D requires in-scope companies to adopt a responsible and sustainable approach to global value chains. Companies must adopt a risk-based due diligence policy to identify and assess actual or potential adverse human rights and environmental impacts. CS3D will come into force on 25 July 2025 and Member States will be required to transpose the Directive into national law by 26 July 2026. In-scope companies will then be required to comply on a staggered basis from 26 July 2027.

For more information, please see our briefing here.

18. ESMA: Final Report: Guidelines on Enforcement of Sustainability Information

On 5 July 2024, ESMA published its Final Report on the Guidelines on Enforcement of Sustainability Information.

This guidance aims at building convergence on supervisory practices on sustainability reporting and applies to the supervision of the first European Sustainability Reporting Standards statements. Of particular relevance, the final guidelines:

• confirm their application to the supervision of undertakings with securities admitted to trading on EU regulated markets;
• states that enforcers may rely on regular dialogue with issuers, auditors / independent assurance services providers or users of sustainability information to exchange views on certain matters; and
• clarify that enforcers may contact the issuer's auditor or independent services provider in relation to interactive examination.

ESMA has noted that it will continue to monitor sustainability reporting practices in 2025, as well as the application of the guidelines. It also proposes to release recommendations in relation to the sustainability statements of listed companies in its Public Statement on the 2024 European Common Enforcement Priorities.

19. NGFS: Press release: NGFS publishes two complementary reports on nature-related risks

On 2 July 2024, the Network for Greening the Financial System (NGFS) announced its publication of two complementary reports on nature-related risks.

The first publication concerns nature-related litigation, outlining emerging trends and lessons learned from climate-related litigation, which encompasses all strategic claims brought before judicial bodies, focusing on climate, biodiversity loss and ecosystem services degradation. The key findings include that:

• while the majority of cases have been directed at states and public entities, litigants are now targeting corporates, including financial institutions;
• legislation may offer new grounds for future litigation, while litigation may fill gaps where legislation is not currently in place or is otherwise weakly enforced; and
• nature-related litigation could lead to increased transition risk and compliance costs, as well as have effects on other companies in the same sector and firms with financial exposure to defendants.

The NGFS also noted that, in the coming years, there may be increased litigation of rights-based nature cases against states and public entities, as well as an increase in the number of cases based on corporate responsibility.

The NGFS' second publication details a conceptual framework for nature-related risks to guide the policies and actions by central banks and supervisors. The framework seeks to create a common, science-based understanding of, and language for, such risks. This includes by:

• setting out definitions for nature-related financial risks and other related concepts;
• outlining a framework for identifying and assessing nature-related risks that are material for a central bank's and/or supervisor's economy and financial system; and
• providing illustrative examples of how the risk assessment framework can be applied.

20. FCA: Updated webpage: Sustainability disclosure and labelling regime (1 July 2024)

On 1 July 2024, the FCA published updated guidance for firms using investment labels under its Sustainability Disclosure Requirements and investment labels regime.

In particular, the updated guidance details the requirement for funds to notify the FCA before using, revising or ceasing to use investment labels. All such notifications must be made through the form on the FCA's online notification and applications system, though the specific steps that must be followed will depend on whether the application is being made by:

• an authorised fund which the fund manager considers meets the criteria for a label without the need for changes to the pre-contractual disclosures;
• an authorised fund which the fund manager considers requires changes to the pre-contractual disclosures to meet the label criteria;
• a new fund which the fund manager considers will meet the label criteria; or
• an in-scope unauthorised Alternative Investment Fund looking to use investment labels.

Labels can be displayed by firms from 31 July 2024.

Other

21. FCA: Consultation paper: Quarterly Consultation Paper No 44 (CP24/11)

On Monday 8 July, the FCA published its 44th Quarterly Consultation Paper (CP24/11) which sets out a number of proposed amendments to the FCA Handbook. Some key changes proposed by the FCA are listed below.

• Controllers: the FCA has proposed amendments to SUP following guidance consultation on the prudential assessment of acquisitions and increases in control. This includes new requirements for controllers and beneficial owners to obtain criminal background checks from the Disclosure and Barring Service or other relevant bodies outside of England and Wales, and will apply to those making an application for authorisation or registration with the FCA or a change in control notification;
• Retail conduct rules: the FCA has proposed amendments to the retail conduct rules in COBS, including to remove the requirement to report a 10% drop in portfolio value to a retail client so that the requirement does not apply as a rule to optional exempt firms. The FCA also proposes to change the definition of ‘durable medium’ in the Glossary to reflect amendments to the MiFID Org Reg; and
• UCITS concentration rules: the FCA plans to update the Handbook so as to apply concentration rules at the sub-fund level rather than at umbrella level, as well as to clarify that the 25% maximum limit in COLL 5.2.29R must be applied at the level of the individual sub-funds of an umbrella CIS when its units are held by another CIS.

Feedback on this consultation is due by 12 August 2024 and can be submitted here.