Financial Services SpeedRead: 22 May 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.  HM Treasury: Statutory Instrument: The Markets in Financial Instruments (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2024 (No. 638)

On 14 May 2024, HM Treasury published the Markets in Financial Instruments (Equivalence) (United States of America) (Commodity Futures Trading Commission) Regulations 2024 (the Regulations), along with an accompanying explanatory memorandum.

The Regulations revoke an existing equivalence decision for the USA’s Commodity Futures Trading Commission (CFTC) and reenact the decision with an updated annex. The annex of the equivalence decision provides a list of the designated contract markets and swap execution facilities in the USA that are authorised by the CFTC and are therefore able to fulfil the Derivatives Trading Obligation for the UK.

The Regulations come into force on 4 June 2024.

2.  FCA: Newsletter: Market Watch 79

On 9 May 2024, the FCA published its Market Watch 79 newsletter which considers failures of market abuse surveillance caused by issues with factors such as data and automated alert logic, as well as a recent peer review of firms' testing of front-running surveillance models.

Market abuse surveillance failures

The FCA flagged issues in relation to surveillance alerts not working as intended as a result of, for example, faulty implementation, bugs that have been inadvertently introduced when making changes, and the required data for successful monitoring not being ingested by the market surveillance model. The FCA flagged that the impact of such failures varied across the market but could include that:

• an entire section of a firm’s activity, such as a segment of business sent to a particular exchange, might not be monitored;
• an alert scenario could be partially effective, generating alerts, but not for all instances where it is intended to; and
• an alert scenario for a specific type of market abuse could be completely ineffective, with alert generation impossible, due to inadequate testing before and after implementation.

Peer review of firms' testing of automated surveillance models

Following its peer review of how firms test their automated surveillance models in 2023, the FCA flagged that surveillance arrangements can often be complex, especially in larger firms, where there are a wide range of, amongst other things, assets traded, actors involved, trading methods and venues accessed. The FCA suggests that firms take steps to avoid surveillance failures and make sure issues do not go unidentified for prolonged periods. This could include by considering the following:

• Data governance – whether the relevant trade and order data is being captured, and whether it is accurate and comprehensive;
• Model testing – governance arrangements around model testing, the frequency of testing and independent assurance of operations of third party surveillance systems; and
• Model implementation and amendment – whether the testing undertaken before implementing new surveillance models or amendments to models is formalised and sufficiently robust, while not being so onerous as to hinder swift action to implement, modify, recalibrate and fix surveillance models.

Banking and Prudential

3.  PRA: Dear CEO Letter: Non-systemic firms' recovery planning thematic review: industry feedback

On 15 May 2024, the PRA published a Dear CEO letter on its findings following its thematic review of non-systemic firms' recovery planning.

The PRA flagged two key areas for improvement and actions it expects firms to take:

• Recovery scenarios: the PRA found that a number of firms did not use scenarios of sufficient severity in recovery scenarios, which will limit the effectiveness and value of the testing. The PRA expects firms to ensure that (i) scenarios are sufficiently severe and bring the firm close to its point of non-viability and (ii) recovery capacity calculations for each scenario should reflect the parameters of the stress.
• Recovery capacity: the PRA found that firms are not calculating their recovery capacity effectively nor adequately showcasing this in an understandable and usable way, which reduces the accuracy and reliability of the recovery capacity calculations. The PRA expects firms to (i) understand and use the methodology for calculating recovery capacity correctly and (ii) ensure that recovery capacity should be quantified in terms of Common Equity Tier 1 capital, Leverage Ratio and Liquidity Coverage ratio percentage points and relevant nominal amounts for each scenario.

Firms are expected to consider the actions outlined and update their recovery plans to meet the expectations outlined in SS9/17.

4.  Single Resolution Board: Policy: 2024 Minimum Requirements for Own Funds and Eligible Liabilities Policy

On 14 May 2024, the Single Resolution Board (SRB) published its updated policy on the Minimum Requirements for Own Funds and Eligible Liabilities (MREL) (the 2024 MREL Policy), with an accompanying press release.

The 2024 MREL Policy takes into account a public consultation held between 14 December 2023 and 13 February 2024. In summary, the 2024 MREL Policy introduces (i) a revised approach on internal and external Market Confidence Charge calibration and on the monitoring of MREL eligibility; and (ii) legislative changes to the MREL framework related to entities in a "daisy chain" and to liquidation entities brought in by Directive 2024/1174. A track changes version of the 2024 MREL Policy is also available.

The SRB also published its MREL dashboard which presents the evolution of MREL targets and shortfalls in the last quarter of 2023. The dashboard also highlights recent developments in the cost of funding and provides an overview of gross issuances of MREL-eligible instruments

Fund Management

5.  HM Treasury: Statutory Instrument: The Financial Services and Markets Act 2000 (Overseas Funds Regime) (Equivalence) (European Economic Area) Regulations 2024 (No. 635)

On 14 May 2024, HM Treasury published the Financial Services and Markets Act 2000 (Overseas Funds Regime) (Equivalence) (European Economic Area) Regulations 2024 (OFR Regulations), along with an accompanying explanatory memorandum.

The OFR Regulations provide that each European Economic Area state (which includes the 27 Member States of the EU, and Norway, Iceland and Liechtenstein) has been determined as equivalent for the purposes of section 271A of FSMA. 

This enables UCITS funds authorised in any EEA state, except those UCITS which are authorised as money market funds, to market to any UK client, subject to those funds being recognised to do so by the FCA.

The OFR Regulations come into force on 16 July 2024.

6.  ESMA: Call for Evidence: Call for Evidence on the review of the UCITS Eligible Assets Directive

On 7 May 2024, ESMA issued a call for evidence following the European Commission's formal request for ESMA to provide technical advice on the review of the UCITS Eligible Assets Directive (EAD).

The European Commission has mandated ESMA to assess the implementation of the UCITS EAD in the Member States and to consider whether there are any divergences in this area, as well as to provide a set of recommendations on how the EAD should be revised to keep it aligned with market development. Accordingly, ESMA is gathering stakeholder input to assess the direct and indirect exposures to certain asset classes that may give rise to divergent interpretations and/or risk for retail investors (such as structured/leveraged loans, catastrophe bonds, emission allowances, commodities, crypto assets, unlisted equities).

Stakeholders are to provide their feedback by Wednesday 7 August 2024.

Senior Managers and Governance

No new entries.

Financial Crime

7.  Financial Services Regulation Committee: Call for Evidence: FCA enforcement guidance consultation

On 9 May 2024, the Financial Services Regulation Committee (the Committee) issued a call for evidence on the FCA's consultation paper CP24/2: Our Enforcement Guide and publishing enforcement investigations – a new approach. For more information on CP24/2, please see our Ashurst briefing here.

The Committee invites anyone with expertise or experience of the matters relating to the consultation CP24/2 to share their views with the Committee, including any views in favour of the proposals or concerns about the proposed changes.

The deadline for submissions is 11:59pm on Tuesday 4 June 2024.

Retail Services

8.  FCA: Press release: "Finfluencers" charged for promoting unauthorised trading scheme

On 16 May 2024, the FCA published a press release discussing charges brought against nine individuals in relation to an unauthorised foreign exchange trading scheme promoted on social media. 

This includes that Emmanuel Nwanze has been charged with running an unauthorised investment scheme and issuing unauthorised financial promotions. The FCA alleges that Mr Nwanze and Holly Thompson used an Instagram account to provide advice on buying and selling contracts for difference when they were not authorised to do so. The FCA also alleges that Mr Nwanze paid others to promote the Instagram account to their millions of Instagram followers. 

The defendants are to appear before Westminster Magistrates' Court on 13 June 2024.

9.  FCA: Dear CEO Letters: Implementing the Consumer Duty for closed products and services by 31 July 2024

On 16 May 2024, the FCA published Dear CEO letters relating to the implementation of the Consumer Duty for closed products and services by 31 July 2024 to firms in the following areas:

• Retail banking
• Life insurance
• Consumer finance
• Consumer investments
• Assess management
• All other retail firms captured by Consumer Duty

Ahead of the 31 July 2024 deadline, the FCA identified five key themes and action prompts firms should be considering, in accordance with their sector. Briefly, this involves:

• Gaps in firms' consumer data – (e.g. firms must identify and address any material gaps in customer data for closed products and services, and be able to evidence that they are acting to deliver good outcomes, even where data is not available);
• Fair value (e.g. firms should consider if their fair value framework has been consistently applied to open and closed products and services, and, if not, provide justification for any different approaches taken);
• Treatment of consumers with characteristics of vulnerability (e.g. consider if any enhanced action, monitoring or support is needed for potentially vulnerable customers of closed products compared to open products); 
• Gone-away or disengaged customers (e.g. firms should identify less engaged and gone-away customers of closed products and services, and take appropriate action; and
• Vested contractual rights (e.g. where firms have identified that they have vested rights and this is causing foreseeable harm to customers of a closed product or service, firms should consider what alternative action they could be taken to deliver good outcomes and avoid the harm).

10. Financial Ombudsman Service: Press release: An update on car finance commission complaints

On 9 May 2024, the Financial Ombudsman Service (FOS) published an update on its car finance commission cases. 

The FOS stated that it currently has approximately 20,000 open complaints related to car finance. It was further noted that there are currently multiple court cases relating to car financing commissions, as well as a judicial review on one of the FOS's decisions, which could have an impact on the FOS' approach to complaints.

While the FOS will continue to accept and investigate complaints, the FOS will be unable to issue final decisions on affected cases until the courts have reached a decision. 

Digital Finance and Fintech

11. ESMA: Letter: Letter from the European Commission on the Distributed Ledger Technology Pilot Regime Implementation

On 7 May 2024, the European Commission published a letter (dated 3 May 2024) sent by Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union, to Verena Ross, ESMA Chair, on the implementation of the EU DLT Pilot Regime. The response follows a letter published by ESMA in April 2024, as detailed in the April 2024 edition of the Ashurst Global Digital Assets Digest. 

In the letter, Ms McGuinness notes confusion amongst market participants about the duration of the DLT Pilot Regime, confirming that there is no expiration date for the regime. Ms McGuinness confirms that any changes to the DLT Pilot Regime (including its termination) would only occur if the European Commission submits a new legislative proposal that is then agreed by EU co-legislators. The framework is likely to continue to apply in its current form if no proposal is made to amend it.

For more information on the DLT Pilot Regime, please see our guide here.

Payments

No new entries.

ESG

12. ESMA: Final Report: Guidelines on funds' names using ESG or sustainability-related terms

On 14 May 2024, ESMA published its final report containing the guidelines on funds' names using ESG and sustainability-related terms (Guidelines).

The Guidelines seek to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims in fund names, while also providing asset managers with clear and measurable criteria to assess their ability to use ESG or sustainability-related terms in fund names. Notably, as compared to the draft guidelines published as part of the earlier consultation, the final Guidelines:

• remove the threshold of 50% in sustainable investments for the use of sustainability-related words in funds' names;
• apply exclusion criteria according to the rules of the Climate Transition Benchmark for terms that are transition, social and governance related and apply the exclusion criteria according to the rules of the Paris-aligned Benchmarks for environmental, impact and sustainability related terms;
• separate the terms related to social and governance from environmental terms;
• introduce a requirement for fund managers using any "impact"-related words to ensure that the investments under the minimum proportion of investments are made with the intention to generate positive, measurable social or environmental impact alongside a financial return; and
• introduce a requirement for fund managers using any "transition"-related words to demonstrate that the investments are on a clear and measurable path to social or environmental transition.

The Guidelines will apply three months after the date of their publication on ESMA's website in all EU official languages. Any new funds created after the application date will be required to comply with the Guidelines immediately, whereas existing funds will have a transitional period of six months after the application date to comply.

Other

13. House of Commons (Treasury Committee): Report: Sexism in the City: HM Treasury, Prudential Regulation Authority and Financial Conduct Authority Responses to the Committee's Sixth Report (H2 764)

On 14 May 2024, HM Treasury, the PRA and the FCA published a response to the House of Commons Treasury Committee's report on its 'Sexism in the City' inquiry.

The report, which is detailed in our earlier publication here, found that the culture prevalent in the financial services sector 'holds back progress for women'. Accordingly, it was recommended that, amongst other things, the Government introduce legislation to ban the use of non-disclosure agreements (NDAs) in all harassment cases. 

Relevantly, it was noted in the response that the Government had not committed to adopting this reform. It was, however, highlighted that there are legal limits to how NDAs may be used in an employment context and that they would "most likely" be unenforceable to the extent they seek to prevent crimes from being reported to the police or a person co-operating in a criminal investigation. It is further noted in the response that:

• the PRA and FCA agree on the importance of monitoring the impact of removing the bonus cap on gender pay and inequality
• the FCA would be prioritising its work on non-financial misconduct, including by assessing the responses it has received to industry surveys on the matter; and
• the FCA is reviewing its approach to whistleblowing and would consider whether this can be improved.