Financial Services SpeedRead 26 April edition

1. ESMA: Final report: Guidelines on MiFID II product governance requirements

On 27 March 2023, ESMA published its Final Report in respect of guidelines on MiFID II product governance requirements. The Final Report summarises responses to ESMA's consultation paper on the draft guidelines for the MiFID product governance requirements and builds on the text of the 2017 ESMA guidelines following recent regulatory and supervisory developments.

Such regulatory and supervisory developments include: the European Commission's Capital Markets Recovery Package (and subsequent MiFID II Amending Directive); the sustainability-related amendments to the MiFID II Delegated Directive; the recommendations on the product governance guidelines by ESMA's Advisory Committee on Proportionality (ACP); and the findings of ESMA's 2021 Common Supervisory Action (CSA) on product governance.

The main amendments introduced concern: the specification of sustainability-related objectives; the practice of identifying a target market per cluster of products (instead of per individual product); distribution strategy determination for complex products distributed under non-advised sales; and the periodic review of products, including the application of the proportionality principle.

2. HM Treasury: Announcement on extending the pension fund clearing exemption and exemptions for intragroup transactions

On 28 March 2023, HM Treasury confirmed that it intends to lay a statutory instrument that will extend the UK EMIR temporary intragroup exemption regime and the temporary clearing exemption for pension funds.

Under Regulation 82 of the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019, temporary exemptions from clearing and margining are available for intragroup transactions between a UK entity and a non-UK entity established in a jurisdiction which has not been found equivalent by HM Treasury. The proposed statutory instrument will extend the temporary intragroup exemption regime by a further three years (to 31 December 2026).

Under Article 89 of UK EMIR, UK and EEA pension scheme arrangements may benefit from an exemption from the clearing obligation for their OTC derivative contracts where such contracts are objectively measurable as reducing investment risks directly related to the schemes' financial solvency. The proposed statutory instrument will amend article 89(1) to extend the expiry date of the pension fund exemption by two years to 18 June 2025.

HM Treasury also confirms that the Government will consider reforming legislation in this area in due course as part of the ongoing process of building a smarter financial services framework for the UK (see Ashurst briefing here). It also confirms that it will carry out a review of the pension fund exemption ahead of its expiry in 2025, in order to assess the longer term approach.

3. HM Treasury: Explanatory memorandum on the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

On 29 March 2023, HM Treasury laid before Parliament an explanatory memorandum on the Commodity Derivatives and Emission Allowances Order.
The bill will amend the Regulated Activities Order 2001 (RAO) to streamline the process for determining when a firm trading commodity derivatives or emission allowances needs to be authorised as an investment firm. This process was consulted on as part of HM Treasury's Wholesale Markets Review.
Currently, firms must perform costly calculations to determine whether their trading activity is ancillary to their main business and therefore exempt from the commodity position limits regime. HM Treasury proposes to replace the quantitative test with a qualitative assessment, with a view to securing the same regulatory outcome in a manner that is less complex and cheaper for firms.

The following changes have been proposed:

• removal of the obligation for firms relying on the ancillary activities exemption to notify the FCA of their exemption annually;
• removing article 72J of the RAO which enables firms to carry on their business without obtaining authorisation if there is no data available to enable them to perform the test establishing when an activity is ancillary (this would be on the basis that the provision no longer serves its original purpose); and
• removing references to the Commission Delegated Regulation (EU) 2017/592 (RTS 20) which outlines the regulatory technical standards for determining when a firm’s activity is considered to be ancillary to its main commercial business.

4. ESMA: Supervisory briefing on supervisory expectations in relation to firms offering copy trading services

On 30 March 2023, ESMA published a supervisory briefing setting out the supervisory expectations of ESMA and national competent authorities in respect of firms offering copy trading services. The briefing takes account of ESMA's June 2012 Q&A in relation to the automatic execution of trade signals and is designed to promote convergent supervisory practices in this area, as well as provide clarification to market participants in respect of MiFID II requirements applicable to the practice of copy trading.

Copy trading refers to a service that involves trading of a client’s assets based on the trades of another trader (the 'copied trader'). Trading is usually automated, but could also involve manual elements.

The supervisory briefing considered the following:

• Qualification of copy trading services. Firms can operate different copy trading models, which should be assessed on a case-by-case basis. For example, one firm may provide the signals but not execute them, while other firms may provide both the signals and execute them. The briefing considers how these services can be characterised under MiFID (e.g. portfolio management; investment advice; and reception and transmission of orders (RTO)). Where firms have direct links to the copied traders, and investment decisions are implemented without client intervention, it is less likely that the firm is providing only execution services and more likely that a portfolio management and/or advisory service is being provided.
• Information requirements. Firms are advised to: provide up-to-date and relevant information; provide balanced information; and provide information that is understood by the targeted clients. The briefing also sets out different cost and charges requirements that will need to be complied with, depending on the type of MIFID investment service that the copy trading falls under.
• Product governance. Firms providing copy trading services are required to verify that the investment service provided to their clients will generally enable the product to reach the identified target market. Given that copy trading requires a certain level of client awareness, clear information to clients on the content of the copy trading service and underlying risks is a key element. Distributors are expected to consider the particular aspects of copy trading when defining their own distribution strategy.

• Suitability and appropriateness assessments.

o When firms provide copy trading services which qualify as portfolio management services or investment advice, they need to comply with the suitability requirements under article 25(2) MiFID II. Adequate policies and procedures should be in place to select the copied traders and evaluate such traders' activities, in order to ensure that all transactions fall within clients' mandates and suitability assessments.

o If a firm's copy trading service qualifies as the service of RTO, the firm shall comply with applicable appropriateness requirements under article 25(3) MiFID II by ensuring that the financial instrument is aligned with the knowledge and experience of the copying client.

• Remuneration and inducement requirements. In the case of copy trading services, the structure of the payment made to the copied traders, who may also be clients of the firm, should be managed in accordance with the MiFID II rules on inducements and conflicts. Further, the remuneration of copied traders, including those who are not considered to be employees of the firm, may need to comply with the MiFID II remuneration requirements.
• Qualifications of firm staff. Copied traders must have the required knowledge and competence to provide the trading services, in accordance with the rules applicable to the relevant MiFID II investment service. Copied traders may also be considered 'experts' within the meaning of article 1(a) of the Market Abuse Delegated Regulation.

5. FCA: Updates to Handbook Instruments

On 31 March 2023, the FCA published the following amendments to the FCA Handbook that firms should take into account.

• Consumer Duty (Amendments) Instrument 2023: Amendments were made to the Glossary of definitions and the Principles for Businesses sourcebook. These include clarifications in relation to the application of the Consumer Duty to financial promotions. All changes are effective 31 July 2023.
• Investment Firms Prudential Regime and Interim Prudential Sourcebook for Investment Businesses (IPRU-INV) (Amendment) Instrument 2023: Amendments were made to the Glossary of definitions, SYSC, COND, MIFIDPRU, IPRU-INV and SUP sourcebooks. Amendments to IPRU-INV and Part 1 of the changes to the SUP will take effect 30 April 2023. The remaining changes, which mainly comprise additional detail on the MIFIDPRU rules, came into force on 31 March 2023.

6. HM Treasury: Call for evidence – UK investment research review

On 3 April 2023, HM Treasury published a call for evidence for the investment research review. This follows the publication of a policy paper on the Terms of Reference for the review in March 2023 (please see Ashurst Financial Services SpeedRead: 15 March 2023 edition). The review was announced as part of the Edinburgh Reforms set out by Chancellor of the Exchequer, Jeremy Hunt, in December 2022.

The call for evidence seeks views on, among other things:

• how investment research provision in the UK compares with other major international financial services centres;
• the amount, quality and type of investment research currently provided on UK listed companies/quoted companies;
• the importance of investment research to the attractiveness of the UK public markets to listed companies (or companies considering listing) and their investors/companies;
• specific issues relevant to UK investment research on technology and life sciences companies that should be addressed;
• impact of current UK legislative and regulatory environment on the provision and quality of research, including (but not limited to) the MiFID II unbundling rules; and
• the steps (legislative and non-legislative) that could be taken to improve the provision and quality of research on UK listed and quoted.

The deadline for responses is 24 April 2023.

7. FCA: Updated webpage: Net short positions reporting and preparing for Brexit

On 3 April 2023, the FCA updated its webpage on the notification and disclosure of net short positions under the UK version of the Short Selling Regulation (EU) No 236/2012 (UK SSR).

In the FCA's 28 December 2022 update, the FCA explained the current procedure to undertake the biannual review of the list of exempted shares (LES) as required under Article 16 of the UK SSR. A first review of shares admitted to trading on UK trading venues as of 31 October 2022 was undertaken last year and the resulting updated LES valid from 1 January 2023 was published.

The FCA has now undertaken a second review to include shares admitted to trading on UK trading venues in November and December 2022. As a result, a revised LES, valid as of 1 April 2023, is now available and applies to positions reached from that date.

8. FCA: Business Plan 2023/24

On 5 April 2023, the FCA published its Business Plan 2023/24, setting out its priorities for the next 12 months to help deliver the commitments made in its three-year strategy. The FCA states that it is focusing on the following four commitments for 2023/24:

• Preparing financial services for the future: A significant part of the FCA's work will be delivering the outcomes of the new Future Regulatory Framework (FRF). The FCA will be working with HM Treasury and other regulators on the repeal of retained EU financial services law and replacing this (where appropriate) with FCA rules.
• Reducing and preventing financial crime: The FCA will continue to invest in technology and use innovative ways of reducing and preventing financial crime, including a strengthened authorisation process, improved assessments of regulated firms and more staff to investigate and prosecute offenders.
• Putting consumers' needs first: The FCA is clear that the incoming consumer duty represents a significant shift in its expectations of firm. The FCA will focus on ensuring that the consumer duty is embedded effectively within firms and is central to their technology. The FCA also intends to allocate additional staff to work with firms supporting consumers struggling with cost of living pressures.

• Strengthening the UK's position in global wholesale markets: The FCA is investing in its technology and data capabilities to ensure that it can oversee markets effectively, including scaling up its systems and tools and strengthening the security of its infrastructure. The FCA also intends to implement improvements to data collections to reduce the burden on firms.

The FCA intends to publish the first set of results against the outcomes and performance metrics included in its strategy later in 2023.

9. Legislation.gov.uk: Draft statutory instrument: The Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

On 27 March 2023, a draft version of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2023 was published, along with a draft explanatory memorandum. This follows HM Treasury's earlier consultation on cryptoasset financial promotions which we covered in our January 2022 briefing and in our February 2023 briefing.

The draft order does the following:

• amends the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (2005/1529) (FPO) to include financial promotions in respect of certain cryptoassets;

• amends the FPO by creating a new controlled investment (defined as a “qualifying cryptoasset”), as well as amending relevant controlled activities to incorporate reference to qualifying cryptoassets; and
• applies and modifies certain existing exemptions in the FPO to qualifying cryptoassets;
• creates a temporary, limited exemption to the financial promotion restriction for cryptoasset businesses (which are not authorised persons) registered with the FCA for anti-money laundering purposes. This means that cryptoasset businesses registered with FCA can continue to approve their own financial promotions, as announced by the Government in its February 2023 Policy Statement.

10. ESMA: Public statement on derivatives on fractions of shares

On 28 March 2023, ESMA published a statement on the investor protection concerns raised by derivatives on fractions of shares. ESMA focuses specifically on derivatives on fractions of shares, but notes that some of the clarifications in the statement may also be relevant to other structures providing access to fractions of shares.

ESMA states that:

• all information provided to clients (including marketing information) must be clear, fair and not misleading and should not suggest that the client is being offered a fraction of a corporate share;
• firms should explain the differences between derivatives and corporate shares such as counterparty and liquidity risks;
• firms must clearly disclose all direct and indirect costs and charges relating to fractional shares and the services provided;
• the target market for derivatives on fractions of shares needs to be identified in more detail, considering counterparty and liquidity risks.
  ESMA's overall message is that derivatives on fractions of shares are not corporate shares and so should not be described as such.

11. ESMA: Updates to Questions and Answers on the BMR, EMIR, DLT Pilot Regulation, transparency, data reporting and SFTR

On 31 March 2023, ESMA announced it has published updated versions of its Questions and Answers (Q&As) on:

• The Benchmarks Regulation (BMR) - ESMA has updated Q&A 5.15 on the meaning of "readily available" data under Article 3(1)(8).
• The implementation of the European Market Infrastructure Regulation (EMIR). ESMA has added a new question on the inclusion of derivatives in the trade state report and amended Q&As on reporting to trade repositories and which parties have to report exchange traded derivatives.
• The implementation of the regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT Pilot Regime Regulation). ESMA has added a new Q&A 7.1 on shares valuation.

• Transparency topics under the MiFID II Directive and the Markets in Financial Instruments Regulation (MiFIR). ESMA has included a Q&A on delivery/cash settlement location in the context of non-equity transparency.

o obligations on trading venues to make arrangements available for the publication of quotes and transactions;

o purpose of post-trade transparency; and

o obligation to make data free of charge 15 minutes after publication.

• Data reporting under MiFIR – ESMA has added a new question 8 in section 2 on the legal entity identifier of the issuer and a new question 14 in section 24 on country codes. It has also amended question 11 in section 24 relating to the concept of the underlying.
• Complying with reporting requirements under the Securities Financing Transaction Regulation (SFTR). ESMA has added a new Q&A on reporting of the jurisdiction of the issuer.

12. FCA: Press Release: FCA announces decision on synthetic US dollar LIBOR

On 3 April 2023, the FCA announced that it has decided to require LIBOR's administrator, ICE Benchmark Administration Limited, to continue the publication of 1-, 3- and 6-month US dollar LIBOR settings for a short period after 30 June 2023 (when the US dollar LIBOR panel is due to end) using a synthetic methodology.

The announcement follows the FCA's consultation paper in November 2022 (CP22/21) which sought views on whether it should require continued publication of the 1-, 3- and 6-month synthetic US dollar LIBOR settings. The FCA will publish a detailed feedback statement in Q2 2023 in response to the consultation.

The FCA announced that the continued publication will last until 30 September 2024.

The FCA emphasises that synthetic LIBOR is only a temporary measure and firms must continue to actively transition contracts that reference US dollar LIBOR.

The FCA has decided to permit the use of 1-, 3- and 6-month synthetic US dollar LIBOR settings in all legacy contracts except cleared derivatives.

From 1 July 2023, all new use of synthetic US dollar LIBOR will be prohibited under the UK version of the BMR.

On 5 April 2023, the Bank of England updated its webpage on the transition from LIBOR to risk-free rates to reflect the FCA press release.

13. FCA/PRA: Survey: Operational resilience: Critical third parties to the UK financial sector

On 11 April 2023, the Bank of England, the PRA and the FCA (UK Supervisory Authorities), published a voluntary survey to aid analysis into the costs and benefits of a potential critical third-party (CTP) regime in the UK. This is in connection with the UK Supervisory Authorities' joint discussion paper "Operational resilience: Critical third parties to the UK financial sector" (DP 3/22), in which the UK Supervisory Authorities set out potential measures to oversee and strengthen the resilience of services provided by CTPs to the UK financial sector.

The survey asks respondents to provide cost estimates for implementing and ensuring ongoing compliance with potential minimum resilience standards along the lines of those set out in DP3/22. The survey is intended for service providers to the UK financial sector and information provided in this survey will be shared across supervisory authorities for the purpose of analysis. The deadline for responding to the survey is 17 May 2023.

14. PRA: Feedback Statement: The prudential liquidity framework: Supporting liquid asset usability (FS1/23)

On 3 April 2023, the Bank of England and the PRA published a joint feedback statement summarising responses received in relation to their 2022 discussion paper on supporting liquid asset usability (DP 1/22). In the discussion paper, the authorities noted that the Liquidity Coverage Ratio (LCR) requires banks to hold a sufficient stock of high-quality liquid assets (HQLA) in order to meet their payment obligations in the case of severe short-term stress, but that that firms appeared to be reluctant to draw on their HQLA in periods of unusual liquidity pressures.

The feedback statement does not contain any policy proposals but intends to improve understanding of why banks are reluctant to draw on their HQLA and consider how "HQLA usability" could be improved. The feedback statement confirms that most respondents agreed there was a reluctance on the part of banks to draw on their stock of HQLA in periods of unusual liquidity pressures, with some citing regulatory reactions to initial falls in LCRs as a possible factor behind this reluctance.

Methods for improving HQLA usability proposed by respondents include the following:

• regulatory communications in a liquidity stress should clarify the extent to which LCRs can fall and the time banks have to rebuild their stocks of HQLA subsequent to such falls;
• possible adjustments to how the LCR is calculated in stress, for example, adjusting the LCR’s calibration and design to reduce expected liquidity outflows in the LCR;
• expanding the range of assets eligible as HQLA;
• simplifications to liquidity-related disclosures in a liquidity stress, as well as recalibrations of the LCR to account for pro-cyclicality in the metric; and
• greater international coordination to avoid conflicting regulatory guidance in different jurisdictions.

15. PRA: Policy statement on depositor protection (PS2/23)

On 31 March 2023, the PRA published a policy statement on depositor protection (PSS2/23) containing final rules and feedback to responses in relation to the PRA's September 2022 consultation (CP9/22). In CP9/22, the PRA set out proposed amendments to Rule 6.2 in the Depositor Protection Part of the PRA Rulebook (DP), as well other consequential changes to the DP rules. These amendments clarify that the Financial Services Compensation Scheme (FSCS) depositor protection regime covers FSCS eligible customers of e-money institutions, authorised payment institutions, small payment institutions, and credit unions (in respect of e-money) should a credit institution holding such firms’ safeguarded funds fail.

The PRA confirms that it is proceeding with the proposed amendments, subject to minor clarifications set out in the policy statement. Appendix 1 to PS2/23 contains Rulebook: Depositor Protection Instrument 2023 (PRA2023/1), which sets out the relevant amendments to be made.

No updates for this edition of the FSS.

16. BoE (PRA): Discussion paper: Review of the Senior Managers and Certification Regime

On 30 March 2023, the FCA and the PRA published a joint discussion paper on reviewing the effectiveness, scope, and proportionality of the Senior Managers and Certification Regime (SMCR). HM Treasury has launched a call for evidence in parallel to look at the legislative aspects of the regime (see below).

The discussion paper asks for feedback on the extent to which the current SMCR is effective in meeting its objectives, as well as the scope and proportionality of the regime. Specific elements of the SMCR raised in the discussion paper include:

• fitness and proprietary requirements;
• enforcement and individual accountability;
• regulatory approval process for senior managers;
• criminal records checks process;
• the 12-week rule for changes in senior managers;
• current senior management functions and prescribed responsibilities;
• statements of responsibilities and management responsibilities maps;
• certification regime;
• directory of certified and assessed persons;
• regulatory references; and
• conduct rules.

The deadline for responding to the discussion paper is 1 June 2023.

17. HM Treasury: Call for evidence on the Senior Managers & Certification Regime

On 30 March 2023, HM Treasury published a call for evidence in relation to the SMCR.

The call for evidence was launched alongside the FCA and PRA’s joint discussion paper, which looks into the operational aspects of the SMCR, while the call for evidence looks into the legislative aspects. HM Treasury aims to gain an understanding of stakeholders’ views on the overall functioning of the SMCR, as well as explore whether the SMCR's core objectives could be better delivered.

The call for evidence notes that there is broad support for the principles and objectives underpinning the SMCR, but that stakeholders have raised some concerns in relation to certain aspects of the regime. These include the compliance requirements for authorising the appointment of new senior managers, the differing levels of scrutiny applied to different firms, and the interaction of the SMCR with other regulatory regimes.

Areas the call for evidence is seeking views on include:

• whether the SMCR has effectively delivered against its core objectives;
• the impact of the SMCR on the UK’s international competitiveness;
• any specific areas of the SMCR that respondents have concerns about;
• the current scope of the SMCR; and
• any “lessons learned” from the implementation of the SMCR that the Government should consider as part of any future decisions.

The deadline for responding to the call for evidence is 1 June 2023.

18. PRA: Final Notice: Carlos Abarca

On 13 April 2023, the PRA published a final notice issued to Mr Carlos Abarca, the former Chief Information Officer of TSB Bank plc (TSB). Mr Abarca was fined £81,620 for breaching PRA Senior Manager Conduct Rule 2. Mr Abarca failed to ensure that TSB adequately managed and appropriately supervised a key outsourcing relationship with TSB's main third-party supplier for its 2018 IT migration programme.

In particular, the PRA states that Mr. Abarcafailed to:

• ensure that the third party supplier’s ability and capacity were adequately reassessed on an ongoing basis;
• ensure that TSB obtained sufficient assurance from the third party supplier in relation to its readiness to operate the new IT platform; and
• give sufficient consideration to whether further investigation was required before giving assurance to the TSB Board as to the third party’s readiness for migration.

Technical failures in TSB's IT migration programme caused significant disruption to the continuity of TSB's banking services.

The fine issued to Mr Abarca follows on from the investigation and subsequent enforcement action taken against TSB in December 2022. The PRA and FCA fined TSB a total of £48,650,000 for operational resilience failings.

Mr Abarca agreed to settle during the PRA's investigation and therefore qualified for a 30% settlement discount.

19. EBA: Consultation paper: amendments to guidelines on risk-based AML/CFT supervision to include crypto-asset service providers n

On 29 March 2023, the European Banking Authority (EBA) published a consultation paper on amending its guidelines on anti-money laundering (AML) and counter terrorist financing (CTF) supervision. The consultation paper proposes expanding the scope of the guidelines to supervisors of crypto-asset service providers (CASPs). The consultation will run until 29 June 2023.

The guidelines propose that the same standards should apply wherever CASPs operate. The EBA states that the provision of crypto-asset services is cross-border in nature and therefore the same standards should apply wherever CASPs operate in the EU.

There is also guidance on what information competent authorities should receive when assessing money laundering (ML)/terrorist financing (TF) risks associated with CASPs. The EBA stresses the importance of a consistent approach to setting supervisory expectations where multiple competent authorities are responsible for the supervision of the same institutions.

You can read the EBA press release here.

20. EBA: Guidelines to address unwarranted de-risking and to safeguard access to financial services for vulnerable customers

On 31 March 2023, the EBA published two final reports containing guidelines aiming to clarify regulatory expectations in relation to risk management practices under the Fourth Money Laundering Directive (2015/849)(MLD4), and to address unwarranted de-risking in relation to vulnerable customers. De-risking refers to the practice of firms deciding not to provide services to categories of customers associated with higher ML/TF risk.

The first set of guidelines (contained in final report EBA/GL/2023/03) consists of an annex to the EBA's existing ML/TF risk factor guidelines. The new guidance sets out steps be adopted by financial institutions when assessing ML/TF risks associated with customers who are Not-for-Profit organisations (NPOs). The aim is to encourage firms to manage ML/TF risks associated with NPOs effectively, rather than denying them access to financial services.
The second set of guidelines (contained in final report EBA/GL/2023/04) complement the EBA's ML/TF risk factor guidelines and clarify the interaction between access to financial services and the policies, procedures and controls firms should have in place to mitigate and manage ML/TF risks, including in stations where customers have legitimate reasons to be unable to satisfy customer due diligence requirements.

Both sets of guidelines will be translated into the official EU languages and published on the EBA website. The guidelines will apply three months after publication of the translations.

21. Home Office: New failure to prevent fraud offence

On 11 April 2023, the Home Office published a press release on a new failure to prevent fraud offence that will make it easier to prosecute large organisations if an employee commits fraud for the organisation's benefit.

An organisation must be able to demonstrate that it had reasonable measures in place to deter the offending. If an organisation fails to do so, it may face an unlimited fine. The Home Office foresees the offence holding companies to account for dishonest practices in financial markets including false accounting and concealment of important information from consumers and investors.

The new offence will be introduced through the Economic Crime and Corporate Transparency Bill.

You can read the government's factsheet on the failure to prevent fraud offence here.

22. IOSCO: Final Report: Retail Market Conduct Task Force

On 30 March 2023, the board of the International Organisation of Securities Commissions (IOSCO) published its report on retail market conduct. The report highlights a range of retail trends and sources of potential retail investor harm in an increasingly online environment, where social media is now a major source of information.

The key thematic findings of the report relate to:

• the impact of technological advances, social media, and changing market conditions on retail trading activity;
• the opportunities and challenges associated with the rise of digitalisation;
• common financial consumer issues (for example, amplified risk taking or poor understanding of complex products);
• the escalation in unlicensed activity, scams, fraudulent or harmful behaviour and reported investor losses; and
• increased greenwashing risk.

The report outlines a toolkit of measures for regulators to consider in addressing emerging retail market conduct issues under five overarching categories:

• heightening regulators’ digital presence and online strategy to proactively address retail investor harm;
• honing approaches to better identify and mitigate misconduct;
• enhancing cross-border and domestic supervisory and enforcement cooperation frameworks, both bilaterally and multilaterally;
• addressing retail investor harm that stems from crypto-assets; and
• implementing new regulatory approaches against retail misconduct.

23. FCA: Inside FCA Podcast: Consumer Duty information sharing and the April milestone

On 27 March 2023, the FCA published the latest in its series of podcasts on the consumer duty, focusing on information sharing and the 30 April 2023 deadline for manufacturers to identify if any changes are needed to products or services and provide information to distributors.

The FCA explains that this milestone is intended to allow distributors to assess the information they receive from manufacturers and ensure they are compliant before the consumer duty comes into force in July 2023. The FCA also emphasises the need for cooperation between firms in the distribution chain in order to deliver good customer outcomes.

You can read the transcript here.

24. FCA: Press release: FCA and ASA team up with Sharon Gaffka to warn fin-fluencers of the risks of promoting illegal 'get rich quick' schemes

On 6 April 2023, the FCA and the Advertising Standards Authority (ASA) published a press release in relation to their joint campaign to help educate "fin-fluencers" about the risks involved in promoting financial products. The FCA and ASA are concerned about the potential harm caused by influencers misusing social media and will be engaging with influencers and their agents to provide clear information about what could be an illegal financial promotion. The FCA and ASA have published an infographic setting out what influencers should check before promoting a financial product or service. The FCA will also be holding an open roundtable discussion on illegal financial promotions with influencer agents and the Influencer Marketing Trade Body.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

25. TNFD: Final draft of framework for nature-related risk management and disclosure

On 28 March 2023, the Taskforce on Nature-related Financial Disclosures (TNFD) published the fourth and final draft of its framework for nature-related risk management and disclosure. The TNFD intends to publish final recommendations in September 2023 following a final consultation period from 30 March to 1 June 2023. 200 organisations are currently pilot testing parts of the draft framework.

The three key elements of the draft framework are:

• Core concepts and definitions;
• "Locate Evaluate Assess Prepare" (LEAP) risk and opportunity assessment approach; and
• Draft disclosure recommendations which align with disclosures of the Task Force on Climate-Related Financial Disclosures (the TCFD).

The TNFD pillars are aligned with the four TCFD pillars of governance, strategy, risk management, and metrics and targets. The TNFD intends for the close alignment with the structure, language and approach of the TCFD to enable market participants to progress towards integrated disclosures.

The TNFD proposes a tiered approach of leading indicators which aims to balance being science-based and being practical for market participants to use in annual reporting and on a limited assurance basis. The three tiers proposed are:

• Core Global Disclosure Metrics – to be broadly relevant across sectors and reflected in global policy priorities;
• Core Sector Disclosure Metrics – to enable capital providers to compare businesses within a sector; and
• Additional Disclosure Metrics – to enable report writers to include metrics that are particularly relevant to their business.

The latest draft framework includes examples of additional guidance for four sectors (including financial institutions) and four biomes. More are expected to be released in the coming months on a rolling basis.

26. FCA: Delay to Sustainability Disclosure Requirements policy statement

On 29 March 2023, the FCA announced a delay to the publication of its policy statement and final rules on its Sustainability Disclosure Requirements (SDR) and investment labels regime. It is now intended to be published in Q3 2023, which is a delay of up to three months from the initial date of H1 2023. The FCA notes that proposed effective dates will be moved accordingly. The delay is to allow the FCA to take account of the 240 written responses received from its consultation which closed on 25 January 2023.

The FCA notes that it is considering the feedback to ensure that the SDR protects consumers while also addressing practical challenges that firms may face. Aspects the FCA is considering include its approach to the marketing restrictions, refining labelling criteria, and clarifications on qualifying for a label (including multi-asset and blended strategies).

For more on this, please see our briefing.

27. UK Government: 2023 green finance strategy

On 30 March 2023, the Department for Energy Security and Net Zero, HM Treasury, the Department for Environment, Food & Rural Affairs and the Department for Business, Energy & Industrial Strategy published an updated green finance strategy, titled "Mobilising Green Investment". This follows on from the previous iteration of the UK Government's green finance strategy, published in 2019.

Given that the global transition to net zero could see the reallocation and investment of trillions of pounds, the UK Government is keen to leverage the UK's finance sector to ensure the UK has a leading position in the transition and the green finance market.

The five key objectives of the strategy are:

• Enabling the UK's financial sector to prosper as a result of the global transition;
• Harnessing private investment to deliver net zero, build climate resilience and support nature's recovery;
• Safeguarding financial stability by ensuring the finance sector has the appropriate information to manage risks from climate change and nature loss;
• Incorporating nature as well as climate adaptation into UK's green finance policy framework; and
• Aligning global financial flows with climate and nature objectives while building relationships with emerging markets and developing economies.

The FCA, the Financial Reporting Council, the Bank of England and The Pensions Regulator published a joint statement welcoming the UK Government's updated green finance strategy.

28. HM Treasury: Consultation on future regulatory regime for ESG ratings providers

On 30 March 2023, HM Treasury published a consultation proposing that Environmental, Social and Governance (ESG) ratings providers be brought within scope of the UK's regulatory regime. The consultation is scheduled to close on 30 June 2023.

HM Treasury views the reliability of ESG information as increasingly important given the growing amount of assets under management that will take into account ESG factors. This means that ESG-related services are increasingly influential in investment decisions and hence capital allocation.

HM Treasury is proposing to establish a new regulated activity governing the provision of ESG ratings through amendments to the RAO. The new regulated activity would cover providing an ESG rating to be used by persons in the UK in relation to a specified investment under the RAO. The proposed scope of the new regulated activity excludes data on ESG matters where no assessment is present. HM Treasury is also considering taking different regulatory approaches to larger and smaller ESG rating providers.

For more on this, please see our briefing.

29. European Commission: Consultation on the EU environmental taxonomy

On 5 April 2023, the European Commission published a consultation on two prospective delegated regulations which relate to Regulation (EU) 2020/852 (Taxonomy Regulation). The consultation is scheduled to close on 3 May 2023.

The two prospective delegated regulations are:

• The Draft Taxonomy Environmental Delegated Act: This proposes to introduce a new set of EU taxonomy criteria for economic activities that contribute substantially to one or more of the following environmental objectives: sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.
• The Draft Delegated Act amending Delegated Regulation (EU) 2021/2139 (the Taxonomy Climate Delegated Act): This proposes to include economic activities relating to the environmental objectives of climate change mitigation and adaptation that are not yet included in the Taxonomy Climate Delegated Act. Such economic activities include certain manufacturing activities relating to key components for low carbon transport and electrical equipment as well as transitional activities in waterborne transport and aviation where zero-carbon solutions are not yet sufficiently advanced and where such activities are a way to incentivise improvements compared to the status quo.

30. FCA: GFIN Greenwashing TechSprint open for applications

On 11 April 2023, the FCA announced in a press release that it will be among at least 13 international regulators taking part in the Global Financial Innovation Network (GFIN)'s first Greenwashing TechSprint. The TechSprint will be virtual and hosted on the FCA's Digital Sandbox, with the objective of developing tools and solutions to help regulators and the market tackle greenwashing risks in financial services.

The TechSprint is scheduled to run for three months from 5 June 2023, culminating with a showcase day in September 2023.

UK-based firms can apply to take part in the TechSprint until 21 May 2023.

31. European Commission: Responses to questions raised by the ESAs on SFDR

On 14 April 2023, the European Commission published responses to questions raised by the European Supervisory Authorities (ESAs) in relation to the interpretation of the Sustainable Finance Disclosures Regulation (Regulation (EU) 2019/2088) (SFDR).

The responses provided relate to:

• The underlying assets which a financial product subject to Article 9(1), (2) or (3) of SFDR applies may invest in (i.e. only "sustainable investments" as defined in Article 2(17) SFDR).
• Disclosure requirements under Articles 5 and 6 of the Taxonomy Regulation in connection with financial products that promote environmental characteristics.

32. ESAs: Joint Consultation Paper: Review of SFDR Delegated Regulation regarding PAI and financial product disclosures

On 12 April 2023, the ESAs published a joint consultation paper proposing changes to the regulatory technical standards laid down in the Delegated Regulation 2022/1288 ("SFDR Delegated Regulation").

The ESAs are proposing changes to the disclosure framework to address issues that have emerged since the introduction of SFDR. The consultation paper seeks feedback on the amendments that envisage:

• extending the list of universal social indicators for the disclosure of the principal adverse impacts (PAIs) of investment decisions on the environment and society, such as earnings from non-cooperative tax jurisdictions or interference in the formation of trade unions;
• refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies, formulae for calculation as well as the presentation of the share of information derived directly from investee companies, sovereigns, supranationals or real estate assets; and
• adding product disclosures regarding decarbonisation targets, including intermediate targets, the level of ambition and how the target will be achieved.

Moreover, the ESAs propose further technical revisions to the SFDR Delegated Regulation by:

• improving the disclosures on how sustainable investments “do not significantly harm” the environment and society;
• simplifying pre-contractual and periodic disclosure templates for financial products; and
• making other technical adjustments concerning, among others, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options.

The deadline for comments on the consultation paper is 4 July 2023.

33. FCA: Dear CEO Letter: Implementing the Consumer Duty in the Contracts for Difference (CFD) portfolio

On 6 April 2023, the FCA published a Dear CEO Letter (dated 31 March 2023) to address the implementation of Consumer Duty in the Contracts for Difference (CFD) portfolio.

The letter is directed at firms whose primary business model is marketing and providing CFDs, spread bets or rolling spot foreign exchange to retail consumers. Annex 2 to the letter sets out key considerations for firms when embedding the duty, including:

• Governance of products and services. Firms should review their governance processes, make sure that target markets for CFDs are appropriate, and be especially vigilant where potentially vulnerable customers are included within their target markets.
• Price and value. Firms must be able to demonstrate that their products and services provide fair value to customers. The charges customers receive must be reasonable relative to the benefits they receive. Firms should consider the entire value chain or customer journey when revering the total costs of a product or service.
• Consumer understanding and communications. Firms should fully review their customer interactions and communications models, including how they advertise and market products to consumers. Given the high levels of losses experienced by retail consumers investing in CFDs, firms should refer to the FCA's published guidance on the consumer duty and test consumers' understanding where appropriate.
• Consumer support and service. Firms should consider if all consumer interactions, from initial onboarding onwards, provide an appropriate level of customer service, including for vulnerable customers. Firms should also consider if they are causing foreseeable harm if they encourage consumers to risk money they cannot afford to lose, including where they are pressured to top up margin to avoid the crystallisation of losses on open positions.

34. FOS: Feedback statement: Temporary changes to outcome reporting in business-specific complaints data

On 3 April 2023, the Financial Ombudsman Service (FOS) published its consultation feedback statement on proposed amendments to the way it reports business-specific complaints data.

This feedback specifically relates to the FOS consultation published on 6 March 2023 in relation to temporary changes to how the FOS recorded the outcomes of certain complaints that were proactively resolved by businesses. This led to around 100 financial businesses making nearly 7,000 offers to resolve complaints, which ultimately helped complainants get fair answers more quickly. As part of the consultation, the FOS had been considering the results and feedback from that initiative in order to assess whether it should take this forward on a more permanent basis.

As a result of the consultation and feedback received, the FOS has decided to proceed with a slightly modified initiative, which will see it report cases as "proactively settled" where certain criteria are met. The FOS notes that the key difference from the previous consultation and implementation is that this initiative only applies to new FOS cases. The FOS stated that this will be a trial for the 2023/24 financial year.