Financial Services SpeedRead: 30 October 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. AFME: Guide: MiFIR and MiFID II Reforms in the EU and the UK

On 24 October 2024, the Association for Financial Markets in Europe (AFME) published a joint implementation guide with Linklaters (the Guide) for firms operating in wholesale secondary markets.

The Guide aims to assist firms to plan and budget for various upcoming regulatory reforms across the EU and the UK. This includes in relation to:

• Market Structure – details amendments relating to the revised definition of what constitutes a "systematic internaliser" and provides an overview of the new PISCES trading platform for unlisted shares in the UK;
• Transparency – covers changes to transparency requirements, which impact both pre-trade and post-trade requirements and apply in respect of equities, bonds and derivatives. The Guide also details the introduction of the Designated Publishing Entity and the Designated Reporter regimes in the EU and UK respectively;
• Market Data – outlines the enhanced requirements for trading venues to provide market data on a reasonable commercial basis in the EU;
• Consolidated-Tape Providers (CTP) – the Guide notes that both the EU and UK will have a single CTP per asset class, and that steps have been taken to incentivise the creation of CTPs which will produce consolidated CTP data streams from collated post-trade data;
• Investment Research – outlines the introduction of new rules in both the EU and UK relating to payment options for research and execution services, including in particular whether such payments can be bundled; and
• Execution of Client Orders – details the enhanced requirements for monitoring and reviewing order execution policies, as well as the requirement for firms to pre-select eligible venues for client order execution per class of financial instruments and client category.

The Guide will be periodically updated until the end of 2025 to account for further regulatory updates.

2. ESMA: Press release: ESMA updates guidance under the MiFIR Review

On 16 October 2024, ESMA published updates to its:

• Q&As relating to transparency and market structure (see footnote 1 of the webpage);
• Manual on post-trade transparency (ESMA74-2134169708-6870); and
• Opinion on the assessment of pre-trade transparency waivers for equity and non-equity instruments (ESMA70-155-6641).

These changes are to reflect the amendments to MiFIR introduced by the MiFIDII / MiFIR Review (see our briefing here).

Further Level 3 revisions will be undertaken in relation to any further updated rules / technical standards.

3. ESMA, EU Commission & ECB: Joint statement: Shortening the standard securities settlement cycle

On 15 October 2024, ESMA, together with the EU Commission's Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), and the European Central Bank's Directorate-General for Market Infrastructure and Payments (ECB-DG MIP), published a joint statement on the next steps to shortening the standard securities settlement cycle from T+2 to T+1.

According to the joint statement, this initiative is to enhance the efficiency and resilience of financial markets within the EU and align the EU's practices with similar initiatives being undertaken in other major markets, such as the United States.

The statement also highlights that the high level of interconnectedness between the EU capital markets and those in other jurisdictions in Europe requires a coordinated approach across Europe. On this basis, ESMA, DG FISMA and ECB-DG MIP considers it essential to expediate all technical work required to facilitate the potential transition to T+1 in the EU.

ESMA is preparing a final report on the proposed move to T+1 to share with the European Council and European Parliament in the coming months.

4. PRA: Consultation paper: Remainder of CRR Restatement of assimilated law (CP13/24)

On 15 October 2024, the PRA published a consultation paper (CP13/24) regarding the PRA's proposal to restate certain provisions in the assimilated Capital Requirements Regulation (CRR) in the PRA Rulebook and other policy material.

The PRA's proposals mainly involve the restatement of assimilated law into PRA rules and policy materials without change, so that requirements on firms, and the PRA's approach, remain the same. However, there are some instances where the PRA proposes to modify certain areas of policy, with the more substantive changes being to the securitisation requirements.

The PRA invites feedback on the proposals until 15 January 2025.

With some exceptions, the PRA proposes that the implementation date for the draft PRA rules set out in the consultation paper would be 1 January 2026.

Banking and Prudential

5. BoE (PRA): Consultation paper: Large Exposures Framework (CP14/24)

On 18 October, PRA published a consultation paper (CP14/24) outlining its proposals to implement the remaining Basel large exposures standards.

Some of the key proposals outlined include:

• removing the option for firms to use internal model methods to calculate exposure values to securities financing transactions, favouring instead the financial collateral comprehensive method;
• proposing a mandatory substitution approach to calculate the effect of the use of credit risk mitigation techniques; and
• removing the exemption from large exposures limits to firms' exposures to the UK's Deposit Guarantee Scheme.

The PRA invites feedback on the proposals. The consultation closes on 17 January 2025.

The PRA proposes for the reforms to take effect shortly after publication of the final policy statement, with the exception of the proposal to remove the possibility for firms to use internal model methods to calculate exposure values to securities financing transactions which would take effect on 1 January 2026.

6. BoE: Consultation paper: Amendments to the BoE's approach to setting a minimum requirement for own funds and eligible liabilities

On 15 October 2024, the BoE published a consultation paper on its amends to its approach to setting a minimum requirement for own funds and eligible liabilities (MREL SoP). The consultation paper outlines proposed changes to the current framework and discusses the rationale behind the proposed amendments. The complete proposed amendments are available here.

The proposals are grouped around three themes:

• restating, with modifications, certain CRR total loss-absorbing capacity provisions in the MREL SoP along with other related adjustments;
• updating the BoE's indicative thresholds for setting a stabilisation power preferred resolution strategy; and
• implementing revisions to reflect findings from the second assessment of the BoE's Resolvability Assessment Framework for major UK firms, published on 6 August, as well as other lessons learned from policy implementation.

The consultation paper also addresses the impact of these changes on different types of firms, including smaller banks and building societies.

Responses to the consultation are open until 15 January 2025.

HM Treasury has also published a policy update regarding this consultation paper.

Fund Management

No new entries.

Senior Managers and Governance

No new entries.

Financial Crime

No new entries.

Retail Services

7. FCA: Speech: Graeme Reynolds, Director of Competition: Vulnerability is not a buzzword

On 24 October 2024, the FCA published a speech delivered by a Director of Competition at the FCA, Graeme Reynolds, at the Personal Investment Management & Financial Advice Association's Wealth Vulnerability event. The speech focused on the importance of firms implementing procedures that support good outcomes for vulnerable clients.

Mr Reynolds emphasised that vulnerability is crucial for consumer protection, including in the wealth sector. Mr Reynold outlined the FCA's expectations in relation to recognising and approaching vulnerability. In brief, this involves:

• Identification: Implement processes to recognise clients needing more assistance or whose needs may not be met.
• Support and understanding: Understand why clients use the firm's products and services, clients' goals, and how the client journey supports them to be realised. Communication and promotions should also be clear and staff should be well trained and empathetic.
• Monitoring and evaluation: Firms must think pragmatically and proportionally about what a "good" client outcome is, including by using data to assess client outcomes and ensure they align with expectations.

8. FCA: Webpage: Multi-firm review of consumer credit firms and non-bank mortgage lenders

On 23 October 2024, the FCA published its key findings from its review into the financial resilience and risk-management of consumer credit firms and non-bank lenders (together, Firms).

The FCA highlights that the majority of Firms reviewed could enhance their risk governance and risk management in order to make better informed business decisions and be adequately prepared for the evolving economic environment.

The FCA also set out observed good practices and areas for improvement. For example, good practices identified from undertaking stress testing and considering wind down planning included firms taking advantage of natural hedging where both lending and funding could be fixed and matched for the duration to minimise interest rate risk. Conversely, an area for improvement included the need to have a robust framework to identify future funding needs or recognising potential liquidity stress situations.

The FCA recommends that Firms review its findings and implement any necessary changes.

9. FCA: Press release: Crack down on illegal finfluencers

On 22 October, the FCA published a press release announcing that its taking action against illegal "finfluencers."

The FCA stated that it is interviewing 20 finfluencers under caution and that it has also issued 38 alerts against social media accounts which may contain unlawful promotions.

The FCA has already taken action against nine individuals and finfluencers for promoting an unauthorised trading scheme. Please see our briefing here for further.

10. FCA: Press release: FCA fines Volkswagen Finance £5.4m over treatment of customers in financial difficulty

On 21 October 2024, the FCA published a final notice and press release detailing its £5,397,600 fine to Volkswagen Services (UK) Limited (Volkswagen Finance) for failing to treat its customers in financial difficulty fairly.

The FCA found that between 1 January 2017 and 31 July 2023, Volkswagen Finance breached Principle 3 (taking reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems), Principle 6 (that a firm must pay due regard to the interests of its customers and treat them fairly), and Principle 7 (that a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading) of the FCA's Principles for Businesses.

In particular, the FCA found that:

• Volkswagen Finance took cars away from vulnerable customers without considering other options and, as a result, people were put in a worse position, especially if they relied on their car to travel to work; and
• that Volkswagen Finance's failings were compounded by poor templated and automated communications.

At the time of the press release, Volkswagen Finance had paid £17.8m in redress to affected customers. Volkswagen Finance estimates that it will pay over £21.5m in redress payments.

11. FCA: Speech: Nick Hulme: It's good to be different: the new FCA supervisory strategy for the financial advice sector

On 11 October, the FCA published a speech delivered by Mr. Nick Hulme, head of department, advisers, wealth and pensions, consumer investments, at the "Consumer Duty Alliance" event regarding the FCA's new supervisory strategy for the financial advice sector.

In order to produce the best consumer-outcome, the speech detailed that the FCA will continue to focus on an outcomes-based approach to regulation, rather than a prescriptive method. Mr Hulme also draws on the FCA's objective to help provide firms with flexibility around innovating their client-services, which in turn will allow them to find an approach that best suits their size and client-base more appropriately.

Additionally, the speech outlines the FCA's three main objectives of:

• Reducing and preventing serious harm: this considers retirement income, ongoing advice and capital deduction for redress: Polluter Pays;
• Testing and monitoring under the Consumer Duty: focuses on the FCA's "nurture and challenge" approach, which involves collaborating with firms in reviewing data relevant to the Consumer Duty's 4 main outcomes; and
• Conducting an Advice Guidance Boundary Review: this review is to ensure that clients get the help they want, when they need it and at an affordable cost.

Digital Finance and Fintech

12. EBA: Decision: Procedure for the classification of ARTs and EMTs as significant and supervisory arrangements under MiCAR

On 22 October 2024, the EBA published its decision (EBA/DC/558) on the procedure it will undertake for the "significance assessment" of asset-referenced tokens (ARTs) and e-money tokens (EMTs), for the purposes of the Markets in crypto-assets Regulation (MiCAR). The decision also addresses transfer of supervisory powers between the EBA and competent authorities, including the establishment of supervisory colleges for significant ARTs and significant EMTs.

In brief, the decision does the following:

• introduces a harmonised reporting calendar for NCAs, specifying the respective reference periods and remittance dates;
• clarifies reporting obligations for issuers of significant ARTs and significant EMTs, as well as the reporting of data relevant for the establishment of the supervisory colleges;
• stipulates how consultations will be carried out with related parties following significance assessments and decisions;
• sets out steps for transitioning and balancing supervision of significant ARTs and significant EMTs and information required accordingly; and
• provides templates to facilitate the implementation of the procedure.

For more on MiCA, please see our briefings here.

This Decision shall enter into force on the day following its adoption.

13. ESMA: Opinion: MiCA regulatory technical standards on the authorisations of cryptoasset service providers and notifications by certain financial entities to provide crypto-asset services

On 16 October 2024, ESMA published an opinion in response to the European Commission's proposal to amend the MiCAR Regulatory Technical Standards (RTS).

In its opinion, ESMA acknowledged the legal limitations raised by the Commission. However, ESMA also reiterated the objective of these RTS being to provide an entry point assessment for applicant crypto-asset service providers (CASPs) and financial entities intending to provide crypto-asset services within the EU, with a view to increasing the resilience of the crypto market and enhance investor protection. ESMA therefore recommended that the European Commission makes amendments to the Level 1 MiCAR text to address these limitations, including by:

• requiring CASPs and notifying entities to provide the results of an external cybersecurity audit; and
• in the context of an assessment of the good repute of members of management bodies and CASPs, including checks regarding the absence of penalties in areas other than commercial law, insolvency law, financial services law, anti-money laundering and counter terrorist financing, fraud or professional liability.

The opinion has been communicated to the Commission, the European Parliament and the European Council who may adopt or reject the proposed amendments.

Payments

14. HM Treasury: Consultation paper: Regulation of Buy-Now, Pay-Later: consultation on draft legislation

On 17 October 2024, HM Treasury published a consultation paper containing draft secondary legislation on the regulation of "Buy-Now, Pay-Later" (BNPL) products.

HM Treasury specifically proposes to bring BNPL companies within the scope of the FCA's regulation and supervisory powers, and apply the Consumer Credit Act to such persons. This is in turn intended to more appropriately and effectively protect BNPL customers.

In practice, it is expected that:

• the FCA will be able to mandate that BNPL companies have to ensure affordability of loan repayments;
• BNPL companies will be required to disclose information about BNPL agreements to their customers in a way that is clear, simple, and accessible, and tailored to the online setting; and
• BNPL customers will more easily be able to make claims, complaints, and get redress – and will have stronger rights to do so.

The FCA separately announced on the same day that it welcomed the consultation and proposal, stating that it has long called for these products to be brought into [the FCA's] remit. The FCA also indicated that a temporary permissions regime will be implemented to allow BNPL companies to continue to offer BNPL products and services whilst they apply for and await any authorisation required as a result of the products becoming regulated (e.g. for lending, or credit-broking, as appropriate).

Responses to the consultation are due by 11:59pm on 29 November 2024.

ESG

15. ESMA: Update: Implementation Timeline on Sustainable Finance

On 18 October 2024, ESMA published its updated sustainable finance implementation timeline.

The timeline covers developments in relation to a number of key pieces of ESG legislation, including SFDR, the Taxonomy Regulation, the Benchmarks Regulation and the European Green Bonds Regulation. Of particular importance, the following upcoming key dates are identified in the timeline:

• 21 November 2024 – application date for guidelines regarding funds' names which use ESG or sustainability related terms;
• 2025 – undertakings previously subject to NFRD to report under European Sustainability Reporting Standards;
• 1 January 2025 – non-financial undertakings and financial undertakings required to disclose KPIs on taxonomy-alignment under the Taxonomy Regulation;
• 21 May 2025 – end of transition period for funds existing prior to the application date whose names use ESG or sustainability related terms;
• March – June 2025 – consultation on the remaining technical standards relating to the EU Green Bond Regulation will take place; and
• Mid 2025 – possible publication of the European Commission's review of SFDR.

Other

16. FCA: Survey: Culture and non-financial misconduct survey

On 25 October 2024, the FCA published the results of its non-financial misconduct survey, which was aimed at it better understanding how firms record and manage allegations of non-financial misconduct.

The survey of over 1,000 investment banks, brokers, and wholesale insurance firms revealed an increase in allegations of non-financial misconduct between 2021 and 2023. Bullying and harassment (26%) and discrimination (23%) were the most common concerns, though a significant portion (41%) fell into the category of 'other' which the FCA considered was indicative of the difficulties firms face when categorising issues of personal misconduct. The survey also found that firms used various mechanisms to identify issues, with formal processes and whistleblowing being the most common.

The FCA stated that it hopes the findings will help firms benchmark their reporting processes and aid stakeholders from various sectors of the economy in assessing their workplace culture.

The full findings of the survey can be found here.

17. FSB: Letter: Maintaining financial stability amidst technological advancements

On 22 October 2024, the Financial Stability Board (FSB) published a letter to the G20 Finance Ministers and Central Bank Governors.

In the letter, the chair of the FSB calls for continued momentum in addressing financial system vulnerabilities associated with high debt levels and asset prices, the interaction of non-bank liquidity and leverage, and the connections between different asset funding markets.

Thee chair of the FSB also drew particular attention to:

• the potential of the tokenisation of assets to exacerbate vulnerabilities seen in traditional finance by creating complex and opaque, automated trading products; and
• the lack of comprehensive regulation of issuers of crypto-assets and service providers, especially in offshore jurisdictions, and the need to advance the implementation of the FSB's crypto-asset framework globally.

18. FSB: Consultation paper: Format for the reporting of operational incidents

On 17 October 2024, the FSB published a consultation paper on its proposed common format for financial firms' reporting of operational incidents, including cyber incidents.

The aim of the Format for Incident Reporting Exchange (FIRE) is to reduce fragmentation in incident reporting by providing a set of common information items for reporting incidents across jurisdictions. This is intended to promote convergence of reporting practices, as well as address the operational challenges posed by the need to report incidents to multiple authorities.

Authorities can choose the extent to which they implement FIRE, which will provide a degree of flexibility in reporting. This includes that authorities can choose not to include particular information items within their reporting requirements based on their circumstances and needs.

Responses to the consultation are due by 19 December 2024.

19. ESA: Proposals for further changes to the DORA implementing technical standards regarding registers of information

On 15 October 2024, the ESAs published an opinion on the draft implementing technical standards (ITS) regarding registers of information required to be kept under DORA following the European Commission's rejection of the ITS.

The European Commission rejected the ITS on the grounds that financial entities should be allowed the choice of identifying their ICT third-party service by using a Legal Entity Identifier or European Unique Identifier (EUID). In the opinion, ESAs stated that the introduction of the EUID would add unnecessary complexity and would have a negative impact on implementation of DORA.

If the European Commission proceeds with the introduction of the EUID, additional changes to the draft ITS would be required. The proposed changes can be found here.

20. HM Treasury: Joint Statement: UK-Switzerland Financial Dialogue

On 15 October 2024, HM Treasury published a joint statement with the Swiss State Secretariat for International Finance regarding the UK-Switzerland Financial Dialogue. The discussions focused on five key themes, being:

• Economic outlook and financial stability – this included discussions concerning liquidity requirements, as well as on increasing resilience and crisis preparedness for open bank resolution;
• The Berne Financial Services Agreement (BFSA) – the parties noted that their ambition is to complete implementation as soon as possible and by the end of 2025 at the latest, as well as for the BFSA to enter into force shortly afterwards. It was also noted that negotiations relating to a supervisory cooperation memorandum of understanding are in progress;
• Sustainable finance – common strategic priorities and approaches were discussed, including in relation to disclosures, transition plans, and transparency;
• Artificial intelligence – the parties shared insights on their respective approaches to AI, as well as current and future use cases within financial services. There was a particular emphasis placed on the need to understand the impact on financial markets and overall financial stability risks from AI; and
• Capital markets – the discussion outlined the UK Government's ambition to stimulate investment and innovation within the economy.

The UK and Swiss representatives agreed to reconvene in the second half of 2025.