Financial Services SpeedRead: 31 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: Press release: Rules and proposals to build up UK wholesale markets

On 26 July 2024, the FCA published a package of measures which are aimed at strengthening the UK's capital markets and position as a global financial centre. 

The package of proposals includes:

• Policy Statement: Payment Optionality for Investment Research (PS24/9) – sets out final rules aimed at providing asset managers with greater freedom in how they pay for investment research. Specifically, the rules introduce the option for asset managers to bundle payments for research and trade execution; 
• Consultation Paper: Consultation on the new Public Offers and Admissions to Trading Regulations regime (POATRs) (CP24/12) – relates to the proposed establishment of the POATRs that will replace the existing UK Prospectus Regulation and which seek to promote more efficient and effective capital raising for issuers, while also increasing opportunities for investors;
• Consultation Paper: Consultation on the new public offer platform regime (CP 24/13) – details the proposed rules relating to the new regulated activity of operating a public offer platform, which will provide an alternative route for companies to raise capital; and
• Consultation Paper: Consultation on the derivatives trading obligation and post-trade risk reduction services (CP24/14) – outlines proposals relating to the derivatives trading obligation that are aimed at improving the regulation of secondary markets, reducing systemic risk and avoiding disruption to firms trading over-the-counter derivatives.

Comments on the proposals relating to the POATRs and the public offer platform regime should be sent to the FCA by 18 October 2024, while comments on the proposals for the derivatives trading obligations consultation should be sent to the FCA by 30 September 2024.

2. ESMA: Public Statement: Transition to the new regime for post-trade transparency of OTC-transactions

On 22 July 2024, ESMA published a statement on the transition to the new regime for post-trade transparency of OTC-transactions, as previously introduced by the MiFIR review.

The statement aims to provide practical guidance to market participants. In particular, ESMA outlines its two-step approach, which has been agreed with by NCAs, for the implementation of the orderly transition to the Designated Publishing Entity (DPE) regime. This involves ESMA beginning to publish the DPE register on 29 September 2024 and the new DPE regime for post-trade transparency becoming fully operational on 3 February 2025.

Investment firms that intend to become DPEs are encouraged to register with their NCA and to provide the classes of financial instruments for which they wish to take up this function, as well as other identifying information requested by the NCAs.

3. ESMA: Report: Suspicious Transaction and Order Reports 

On 17 July 2024, ESMA published its report on Suspicious Transaction and Order Reports (STORs). 

The report aims at providing the market with a clear overview over the use of STORs in different jurisdictions across the EU and how this has evolved over time. ESMA concluded the following:

• the figures are rather consistent and no major changes have been detected compared to previous years; and
• the number of notifications received from NCAs is stable and other indicators, such as the type of reporting entities, the type of instrument and the types of violation which the notifications cover, point towards very similar results.

4. ESMA: Consultation Paper: Technical Standards specifying the criteria for establishing and assessing the effectiveness of investment firms’ order execution policies

On 16 July 2024, ESMA published a consultation paper on order execution policies, in line with its mandate under the Directive amending MiFID II (Updated MIFID), which was finalised along with Regulation amending MiFIR (Updated MiFIR) in March 2024 (see our briefing here). Updated MiFIR and Updated MiFID entered into force on 29 March 2024, with a deadline of 29 September 2025 for Member States to have published measures to transpose Updated MiFID.

The measures proposed by ESMA will result in amendments needing to be made to sections of existing policies, including specific instructions, monitoring and review of policy.

ESMA is suggesting that firms should pre-select the venues eligible for client order execution per class of financial instruments and per category of client. ESMA is also suggesting that firms should obtain the best result for their clients when executing client order based on own account deals. ESMA has also explicitly stated that some requirements under the best execution regime (e.g. monitoring and reviewing) can be carried out by third parties. 

The deadline for comments is 16 October 2024. ESMA expects to prepare the final report containing draft technical standards to be submitted to the EU Commission for endorsement by 29 December 2024.

For more information, please see our briefing here.

Banking and Prudential

5. PRA: Policy statement: Approach to rule permissions and waivers (PS12/24)

On 25 July 2024, the PRA published a policy statement containing its final statement of policy (SoP) on its approach to rule permissions, as well as its feedback to the responses received in respect of Consultation Paper 3/24 (CP 3/24), which set out the PRA's proposed approach to rule permissions made under section 138BA of FSMA. 

Relevantly, in response to feedback received from industry, the PRA has made two amendments to the draft SoP that was set out in CP 3/24. These amendments clarify what the PRA expects to include in a subject-specific SoP, as well as the exceptional circumstances where it may be appropriate to grant a section 138BA permission for which the PRA has not set out a criteria despite the section 138A statutory tests not being met.

The SoP took effect on 25 July 2024.

6. EU Commission: Legislation: Amending the CRR to postpone application date of the own funds requirements for market risk

On 24 July 2024, the EU Commission adopted a Delegated Regulation which postpones by one year, until 1 January 2026, the date of application of the Fundamental Review of the Trading Book standards in the EU for banks’ calculation of own funds requirements for market risk.

The Delegated Regulation will enter into force on the day after its publication in the Official Journal of the EU. It applies from 1 January 2025.

7. HM Treasury: Response to Consultation: Enhancing the Special Resolution Regime

On 19 July 2024, HM Treasury published a summary of the responses it received to its earlier consultation entitled "Enhancing the Special Resolution Regime" which was published in January 2024. 

The consultation specifically sought views on the proposal for a new mechanism to facilitate the use of certain existing stabilisation powers to manage the failure of small banks and limit risks to public funds. The respondents were generally supportive of the proposals, including the proposal to recoup funds from the banking sector on an ex-post basis, noting this would ensure that capital is not held unproductively when it is not actually required.

Moreover, following consideration of the feedback received on the consultation, the Government has laid the Bank Resolution (Recapitalisation) Bill before Parliament. This Bill implements the proposals set out in the response document by:

• amending FSMA to expand the statutory functions of the Financial Services Compensation Scheme (FSCS), which will enable the FSCS to provide funds to the BoE to satisfy the costs relating to a bank failure, as well as to permit the FSCS to recover funds it has provided through levies on the wider banking sector;
• providing the BoE with the ability to require a bank under resolution to issue new shares, which will facilitate the BoE's use of the funds provided by the FSCS to satisfy the recapitalisation costs of a failed bank; and
• making a number of technical amendments to FSMA and the Banking Act 2009.

The Special Resolution Regime Code of Practice will also be updated to reflect that these proposals have taken effect, subject to consultation with the Banking Liaison Panel. The PRA and FCA will then also consult on any relevant updates to their respective rulebooks.

Fund Management

8. FCA: Policy Statement and updated webpage: Implementing the Overseas Funds Regime: Feedback to CP23/26 and Final Rules (PS24/7)

On 17 July 2024, the FCA published a policy statement (PS24/7) on implementing the Overseas Funds Regime (OFR). 

The policy statement sets out the FCA's response to the feedback it received to its consultation paper (CP23/26) which proposed rules and guidance necessary to implement the OFR. The policy statement also details the final rules and guidance that the FCA are introducing following the consultation. These include:

• setting out information required for an application for recognition;
• requiring OFR fund operators to notify the FCA of certain changes to the fund;
• introducing measures so that UK consumers are given a clear explanation about whether an OFR fund is covered by the Financial Ombudsman Service and Financial Services Compensation Scheme in relation to their investment decisions; and
• finalising rules and guidance for the FCA to make public statements about breaches of OFR regulatory requirements or suspend or revoke an OFR fund's recognition as a result of any breaches, if it is desirable to do so to protect the interests of UK participants or potential participants.

The new Handbook rules (as set out in Annex 1 of the Policy Statement) and guidance will come into force on 31 July 2024.

On 19 July 2024, the FCA also updated its webpage on OFR to include an overview of the operational impact for operators of temporary marketing permissions regime funds.

Senior Managers and Governance

9. European Central Bank: Consultation: Draft guide on governance and risk culture

On 24 July 2024, the European Central Bank (ECB) published a public consultation on the draft guide on governance and risk culture. 

The guide, which seeks to replace the 2016 Single Supervisory Mechanism statement on governance and risk appetite, aims to provide banks with a roadmap to a more effective internal governance and risk culture.

The proposed measures include:

• clarifying supervisors' expectations regarding how management bodies and committees should be composed and function;
• providing the roles and responsibilities of the internal control functions; and
• emphasising the importance of risk culture and outlining expectations regarding the risk appetite frameworks of banks.

The consultation ends on 16 October 2024.

Financial Crime

10. FCA: Review Findings & Consultation: Treatment of PEPs 

On 18 July 2024, the FCA published its findings from its multi-firm review on the treatment of politically exposed persons (PEPs). The key findings included:

• some firms did not have effective arrangements in place to review PEPs and relatives and close associates (RCAs) to ensure the PEP classification remained appropriate after the PEP had left public office; 
• firms need to improve the clarity and detail of communications with PEPs and RCA customers so that customers can understand what they were being asked to do and why; and
• most firms reviewed needed to improve staff training, such as by using practical examples.

On the same date, the FCA also published a guidance consultation to amend its finalised guidance (FG17/6) on the treatment of PEPs. The proposed changes include:

• clarifying that firms should not treat non-executive board members of civil service departments as PEPs, because they do not have executive authority;
• allowing for alternative approaches to sign off for PEP relationships, provided that the Money Laundering Reporting Officer continues to have oversight of all PEP relationships in a firm; and
• reflecting the changes to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 by providing that firms should treat domestic PEPs as lower risk unless there are other risk factors apparent that are unrelated to their PEP status.

The consultation closes on 18 October 2024.

Retail Services

No new entries. 

Digital Finance and Fintech

11. FCA: Final Notice: FCA fines CB Payments Limited fined for enabling cryptoasset trading

On 25 July 2024, the FCA published its Final Notice issued to CB Payments Limited (CBPL) where it fined CBPL £3,503,546 for contravening its voluntary requirement by onboarding and/or providing e-money services to high risk customers. 

CBPL is part of the Coinbase Group, which operates a prominent cryptoasset trading platform. CBPL is an Authorised Electronic Money Institution, with permission to issue electronic money and to provide payment services. CBPL does not undertake cryptoasset transactions for customers but acts as a gateway for customers to trade cryptoassets via other entities within the Coinbase Group.  

In October 2020, the CBPL entered into a voluntary requirement which prevented CBPL from taking on new high-risk customers while it remediated its financial crime controls. Despite this, CBPL onboarded and/or provided e-money to 13,416 separate high-risk customers, with some customers being provided payment or e-money services on multiple occasions. CBPL also permitted approximately 31% of these customers to make 12,912 prohibited deposits with a total value of USD $24.9 million.

This enforcement action was made under the Electronic Money Regulations 2011 and it is the first time that the FCA has taken enforcement action using these powers. 

Payments

12. Payment Systems Regulator: Guidance: Securing compliance: Extensions and exemptions Guidance (PS24/4)

On 24 July 2024, the Payment Services Regulator (PSR) published guidance setting out how it will make decisions on whether to grant exemptions or extensions to a specific direction or requirement, following its May 2024 consultation paper (CP24/6). 

Some of the key factors include whether granting an exemption or extension would adversely impact payment systems users, the context of the specific direction and consideration of the burden that not granting the request would place on the regulated party. 

The guidance states that extensions and exemptions should only be granted in limited circumstances so as not to dilute the effectiveness of the PSR's interventions. Otherwise, regulated parties should take all steps to ensure compliance.

13. EU Commission: Q&As: Clarification of requirements of the Instant Payments Regulation

On 23 July 2024, the EU Commission published a set of Q&As to provide clarification on the requirements of the Instant Payments Regulation (IPR) and its implementation.

The EU Commission aims to facilitate the timely and consistent implementation of the IPR which sets out obligations for payment service providers and that must be complied with from 9 January 2025. 

The Q&A document collates the clarifications provided during two online workshops held by the Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union in April and May 2024.

14. PSR: Consultation paper: Draft guidance: Authorised push payment scams reimbursement requirement: Supporting the identification of APP scams and civil disputes

On 18 July 2024, the PSR published a consultation paper on draft guidance on the authorised push payment (APP) scams reimbursement requirement.

The guidance paper sets out factors that Payment Service Providers (PSPs) should consider in their assessment of whether an APP scam claim raised by a consumer is not reimbursable because it is classified as a private civil dispute and therefore does not meet the reimbursement requirement. This is applicable to claims relating to payments made via Faster Payments and CHAPS.

The PSR is accepting feedback until 8 August and aims to publish the final guidance in mid-September.

15. FSB: Press Release: Consultation on recommendations related to data flows and regulation and supervision in cross-border payments

On 16 July 2024, the Financial Stability Board (FSB) published a press release announcing its two consultations on recommendations related to data flows and regulation and supervision in cross-border payments.

The first consultation paper provides recommendations to promote greater alignment and interoperability in data frameworks related to cross-border payments. The recommendations aim to address the identified frictions from data frameworks which pose significant challenges to improving the cost, speed, transparency and accessibility of cross-border payments in a secure way. These include:

• addressing uncertainty about how to balance regulatory and supervisory obligations;
• promoting alignment and interoperability of regulatory and data requirements;
• mitigating restrictions on the flow of data across borders; and
• reducing barriers to innovation.

The second consultation paper provides recommendations for regulating and supervising bank and non-bank payment service providers offering cross-border payment services. These recommendations aim to strengthen the consistency in the regulation and supervision of banks and non-banks in their provision of cross-border payment services in a way that is proportionate to the risks associated with such activities. The paper is sectioned into four key areas of focus:

• the role of banks and non-banks in cross-border payments;
• cross-border payment frictions and risks;
• principles for developing recommendations; and
• recommendations for improving alignment of PSP regulatory and supervisory regimes.

The deadline for feedback is 9 September 2024. 

ESG

16. ESAs: Q&A: Consolidated Q&A on SFDR

On 25 July 2024, the ESAs published an updated version of the consolidated Q&As on Sustainable Finance Disclosure Regulation.

The Consolidated Q&A has been updated to include responses to various questions, including how values in currencies other than EUR should be converted to EUR and if a sustainable investment pursuant to Article 2(17) SFDR can also be made by investing in another financial product, e.g. a UCITS fund.

17. ESMA: Opinion: Sustainable investments: Facilitating the investor journey: A holistic vision for the long term

On 24 July 2024, ESMA published an opinion on the EU Sustainable Finance Framework, setting out possible long-term improvements. 

ESMA acknowledges that while the EU Sustainable Finance Framework is well developed and includes safeguards against greenwashing, it considers that the Framework could further evolve to facilitate investors’ access to sustainable investments and support the effective functioning of the Sustainable Investment Value Chain.

The Opinion outlines several key recommendations for the EU Commission's consideration, including:

• EU Taxonomy: The EU taxonomy should become the sole, common reference point for the assessment of sustainability and should be embedded in all Sustainable Finance legislation. The EU Taxonomy should also be completed for all activities that can substantially contribute to environmental sustainability and a social taxonomy developed;
• Transition investments: A definition of transition investments should be incorporated into the Framework to provide legal clarity and support the creation of transition-related products;
• Financial Products: All financial products should disclose some minimum basic sustainability information, covering environmental and social characteristics;
• Product Categorisation: A product categorisation system should be introduced catering to sustainability and transition, based on a set of clear eligibility criteria and binding transparency obligations;
• ESG data products: ESG data products should be brought into the regulatory perimeter, the consistency of ESG metrics continue to be improved, reliability of estimates ensured; and
• Testing: Consumer and industry testing should be carried out before implementing policy solutions to ensure their feasibility and appropriateness for retail investors.

Other

18. ECB: Press release: Conclusion of cyber resilience stress test

On 26 July 2024, the ECB published a press release stating that it had concluded its cyber resilience stress test. 

The test considered how banks would respond to, and recover from, a severe but plausible cybersecurity incident. Overall, the test showed that banks have response and recovery frameworks in place but there is room for improvement. 

The results of the exercise will feed into the 2024 Supervisory Review and Evaluation Process, which assess banks' individual risk profiles.

19. ESAs: Final Report: Draft Regulatory Technical Standards specifying the elements which a financial entity needs to determine and assess when subcontracting ICT services supporting critical or important functions

On 26 July 2024, the ESAs published their final report on draft Regulatory Technical Standards (RTS) specifying how to determine and assess the conditions for subcontracting information and communication technology services that support critical or important functions under DORA. 

These standards aim to enhance the digital resilience of the EU financial sector by strengthening the financial entities’ ICT risk management over the use of subcontracting.

The ESAs will submit the Final Report to the EU Commission for adoption.

20. FCA: Policy statement: Access to Cash – Feedback to CP23/29 and final rules (PS24/8)

On 24 July 2024, the FCA published a policy statement setting out its final rules and guidance for the new regulatory regime which will support access to cash for consumers and businesses. 

The new regulatory regime will require certain banks and building societies to assess cash needs in the community and address gaps, or potential gaps, in cash access provision.  This is aimed at ensuring access to both notes and coins, as well as ensuring that access that is free of charge to consumers with personal current accounts. The new access to cash rules come into force on 18 September 2024.

In light of the new rules, the FCA has also updated its webpage on waivers and modifications to include information on waiver or modification requests relating to these rules. The webpage notes that any such waivers or modifications will be published by the FCA unless it is unnecessary to do so.

21. EBA: Final Report: EBA extends the existing Joint Committee Guidelines on complaints handling to credit servicers

On 24 July 2024, the EBA published its final report on EBA Guidelines amending the Joint Committee Guidelines on complaints handling for the securities and banking sectors.

The new guidelines extend the existing Joint Committee Guidelines to cover credit servicers, with the aim of establishing and maintaining effective and transparent procedures for complaints handling with regard to borrowers under the Directive on credit servicers and credit purchasers ((EU) 2021/2167).  

These Guidelines will be translated into the official EU languages and published on the EBA website. The deadline for competent authorities to report their compliance with these Guidelines is two months after the publication of the translations. The guidelines will apply three months after the entry into force of the Payment Services Regulation.

22. ESAs: News: One pager: Establishing the EU-SCICF

On 17 July 2024, the ESA published an a "one pager" stating that it will establish the EU Systemic Cyber Incident Coordination Framework (EU-SCICF), in the context of DORA, which will facilitate a financial sector response to cyber incidents which pose significant risk to financial stability. 

Under EU-SCICF, participating members will be alerted and will share information on potential systemic cyber incidents of threats. The EU-SCICF will serve as a forum for relevant authorities to communicate and coordinate on any needed action and on the use of tools to counter the crisis from a macroprudential perspective.

23. The King's Speech 2024: Oral statement to Parliament: Financial Services

On 17 July 2024, His Majesty King Charles III gave an oral statement to Parliament outlining the new Government's legislative programme. The new Government also separately published briefing notes on the key announcements made in the King's speech.

The briefing notes included:

• Bank Resolution (Recapitalisation Bill): This is intended to provide the BoE a more flexible toolkit to respond to the failure of small banks, including a new mechanism to use funds provided by the banking sector to cover certain costs associated with resolving a failing banking institution and achieving its sale in whole or in part; and
• Draft Audit Reform and Corporate Governance Bill: The draft bill is intended to replace the Financial Reporting Council with a new regulator, being the Audit, Reporting and Governance Authority (ARG). The ARG will form a platform for other changes, including removing unnecessary rules on smaller Public Interest Entities and the power to investigate and sanction company directors for serious failures in relation to their financial reporting and audit responsibilities.

24. EBA: Report: Review on the application of gender neutral remuneration policies

On Tuesday 16 July, the EBA published a report on the review of the application of gender neutral remuneration policies by institutions and investment firms. 

The report found that most institutions and a majority of investment firms have adopted remuneration policies that are explicitly gender-neutral. However, some entities had not yet enforced an explicitly gender-neutral remuneration policy. Further, the EBA observed that some entities did not conduct annual policy reviews, did not monitor whether the remuneration policy was applied in a gender-neutral way, did not calculate the gender pay gap or did not make such information publicly available.

The EBA concluded that, although many institutions and investment firms have faced little challenge when implementing gender-neutral remuneration policies, the level of transparency on gender-neutral remuneration and diversity metrics could be improved.

25. ESAs: Press Release: ESAs published second batch of policy products under DORA

On Wednesday 17 July,  the ESAs published the second (and final) batch of policy products under DORA. The package includes:

• RTS and implementing technical standards on the content, format, templates and timelines for reporting major ICT-related incidents and significant cyber threats;
• RTS on the harmonisation of conditions enabling the conduct of the oversight activities;
• RTS specifying the criteria for determining the composition of the joint examination team;
• RTS on threat-led penetration testing;.
• Guidelines on the estimation of aggregated costs/losses caused by major ICT-related incidents; and
• Guidelines on oversight cooperation.

For more information on the policy products, please see our briefing here.