Financial Services SpeedRead: 5 June 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. ESMA: Statement: Good practices in relation to pre-close calls

On 29 May 2024, the European Securities and Markets Authority (ESMA) published a statement outlining good practices for issuers in relation to "pre-close calls" in order to minimise the risk of such calls causing volatility in share markets.

In particular, ESMA notes that it considers that "pre-close calls" carry the risk of inadvertent unlawful disclosure of inside information, particularly given the lack of publicity of these events and the absence of records as to what was presented. ESMA has subsequently reminded issuers that public disclosure of inside information should only take place in accordance with the Market Abuse Regulation (MAR) and that  only non-inside information should be shared during these calls.

ESMA have also listed several good practices for issuers which it considers may help mitigate the risk of unlawful disclosure. This includes that issuers could:

• prior to a “pre-close call”, carry out a thorough assessment of the information they intend to disclose;
• publicly disclose upcoming “pre-close calls” with sufficient notice highlighting the details, date, place, topics to be discussed, and intended participants;
• make the material and documents used during “pre-close calls” simultaneously available on their website;
• record the “pre-close calls” and make the recordings available to national competent authorities (NCAs) upon request; and
• keep records of the information disclosed.

2. HM Treasury: Statutory Instrument: The Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024 (SI 2024/719)

On 29 May 2024, HM Treasury published the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) (Amendment) Order 2024 (SI 2024/719) (Order), along with an accompanying explanatory memorandum. This Order omits various proposed amendments to the RAO relating to the ancillary activities exemption, which gives firms trading commodity derivatives or emission allowances a possible exemption from the need to be authorised as an investment firm.

The decision to omit these amendments provides HM Treasury with time to consider and address various concerns raised by industry participants in response to the FCA's consultation on the commodity markets regime (see Consultation Paper 23/27: Reforming the commodity derivatives regulatory framework). This includes concerns raised in respect of the FCA's proposal for a principles-based approach to determining whether a firm requires authorisation for trading in commodity derivatives and emission allowances.

HM Treasury has indicated that it will work with the FCA and engage further with the market to deliver a regime that is aligned with the conclusions of its Wholesale Markets Review. In the meantime, firms may continue to rely on the existing "Ancillary Activities Test" to determine if they are eligible to use the ancillary activities regime.

3. FCA: New webpage: Operational resilience: Insights and observations for firms

On 28 May 2024, the FCA published a new webpage on firms' preparation for the March 2025 implementation date of its operational resilience rules, as set out in Policy Statement 21/3: Building operational resilience: Feedback to CP19/23 and final rules.

Of particular relevance, the FCA stresses the following:

• all firms are expected to be resilient and to provide services for their customers when needed;
• ahead of the March 2025 deadline, firms must ensure that they can remain within their impact tolerance in severe but plausible scenarios for any identified important business services, and have their plans approved by their board;
• scenario testing underpins the evidence for how firms will remain within impact tolerances and should be reviewed regularly as evidence of operational resilience;
• important business services, impact tolerances and mapping should be reviewed on at least an annual basis, or when there is a material change to the business or market operated in; and
• changes to important business services, impact tolerances and mapping should be clearly identified in firms' self-assessments, along with any rationale.

For more information on the FCA's webpage, please see our briefing here.

4.  ESMA: Final Report: On the 2023 Common Supervisory Action and Mystery Shopping Exercise on marketing 

On 27 May 2024, ESMA published its final report on the 2023 Common Supervisory Action (CSA) with NCAs and accompanying Mystery Shopping Exercise (MSE) on the application of marketing disclosures under MiFID.

The final report sets out ESMA's findings following its assessment of the content of firm's marketing communications and its request of NCAs to assess firms' organisation and procedures for marketing communications, including in respect of sustainability and the use of third parties. It identifies a number of key areas for improvement, such as:

• the need for marketing communications to be clearly identifiable and contain a balanced and clear presentation of both risks and benefits;
• the need for adequate approval and review processes for marketing communications;
• ensuring compliance with legal requirements on the part of distributors for all marketing communications;
• implementation of adequate record-keeping measures for all marketing material, including social media posts; and
• involvement of control functions and senior management in internal processes and procedures related to the development, design and oversight of marketing materials.

Both the CSA and MSE have also been used to gather evidence on the topic of greenwashing.

ESMA has noted that it will maintain communication with NCAs on this topic and liaise on their planned follow-up actions. ESMA will also assess whether there may be a use for supervisory convergence tools in helping build a stronger supervisory culture across the EU.

5. ESMA: Consultation Paper: Amendments to certain technical standards for commodity derivatives

On 23 May 2024, ESMA published a consultation paper relating to proposed changes to the rules for position management controls and position reporting, which are required following the publication in the Official Journal of Directive (EU) 2024/790 amending MiFID II, which made changes to a number of provisions relating to commodity derivatives.

The consultation makes various proposals in respect of the regulatory technical standards (RTS) on position management controls, the implementing technical standards (ITS) on position reporting, and on the provisions relating to position reporting in Commission Delegated Regulation (EU) 2017/565. This includes in respect of the extension of position management controls to emission allowances derivatives, the exclusion of emission allowances from position reporting, and the introduction of an additional weekly position report for trading venues where options are traded.

Comments on the proposals must be submitted by 21 August. After reviewing the feedback, ESMA will publish a final report towards the end of 2024.

6. ESMA: Consultation: MiFIR Consultation Package (CTPs and DRSPs)

On 23 May 2024, ESMA published a consultation package on draft technical standards relating to consolidated tape providers (CTPs) and data reporting service providers (DRSPs) under Regulation 2024/791, which amends MiFID to enhance data transparency, remove obstacles to the emergence of consolidated tapes, optimise the trading obligations and prohibit receiving payment for order flow.

The ESMA consultation package specifically seeks stakeholder feedback on the following draft technical standards:

• RTS on input and output data requirements for CTPs;
• RTS on the revenue redistribution scheme for the equity CTP;
• RTS on the synchronisation of business clocks;
• RTS and ITS on the authorisation and organisational requirements for DRSPs, including amending existing RTS 13 and the related ITS so they only apply to approved publication arrangements and approved reporting mechanisms, as well as introducing a new RTS and related ITS for the authorisation of CTPs.

The paper also seeks feedback on ESMA's initial reflections on the specification of the assessment criteria for the CTP selection procedure.

Feedback on the consultation package is due by 28 August 2024. ESMA has confirmed that it will then prepare a final report and submit the final technical standards to the European Commission by the legislative deadline of 29 December 2024. It will also publish a feedback statement on the specification of the assessment criteria for the CTP selection procedure by the end of 2024.

7.  ESMA: Consultation: MiFIR Review Consultation Package (Transparency, reasonable commercial basis and reference data)

On 21 May 2024, ESMA published a consultation package related to the review of RTS 2 on transparency for bonds, structured finance products and emission allowances, the draft RTS relating to the availability of information on a reasonable commercial basis, and the review of RTS 23 on the supply of reference data under MiFIR.

The proposals in the consultation package are aimed at enhancing the information available to stakeholders by improving, simplifying and further harmonising transparency in capital markets. In particular, ESMA specifically seeks feedback on the following topics:

• pre- and post-trade transparency requirements for non-equity instruments (bonds, structured finance products and emissions and allowances);
• the obligation to make pre-and post-trade data available on a reasonable commercial basis intended to guarantee that market data is available to data users in an accessible, fair, and non-discriminatory manner, as well as the cost-based nature of fees and the applicable reasonable margin; and
• the obligation to provide instrument reference data that is fit for both transaction reporting and transparency purposes, as well as the proposal to align this data with other relevant reporting frameworks and international standards.

Comments on the consultation package must be submitted by 28 August. Following its review of the feedback, ESMA will publish a final report and submit the draft technical standards to the European Commission by the end of Q4 2024. The response form can be found here.

8. FCA & PRA: Final Notices: CGML fined by FCA and PRA for failures in its trading systems and controls

On 17 May 2024, the FCA and PRA published final notices issued to Citigroup Global Markets Limited (CGML), fining it a total of £27.7 million and £33.8 million respectively in relation to failures in its trading systems and controls.

The final notices state that, between April 2018 and May 2022, the PRA sent CGML repeated supervisory communications relating to the need to strengthen its trading controls. Despite these communications and the remediation that was undertaken, weaknesses in CGML's trading controls persisted. Ultimately, in May 2022, a CGML trader made an inputting error in an order management system when intending to sell a basket of US equities to the value of US$58 million, which resulted in a basket to the value of US$444 billion being created. The CGML controls managed to block US$255 billion of the basket progressing, though the remaining US$189 billion entered the market and US$1.4 billion worth of equities was sold across European exchanges before the order was cancelled.

The FCA and PRA each found that CGML's primary controls were absent or deficient, which ultimately contributed to this incident. In particular:

• there was no hard block that would have rejected the large erroneous basket of equities;
• the trader was able to manually override the pop-up alert without being required to scroll down and read all alerts within it; and
• CGML's real-time monitoring was ineffective meaning it was too slow to escalate internal alerts about the erroneous trades.

The FCA found that CGML had breached Principles 2 (skill, care and diligence) and 3 (management and control), as well as Article 7A.3.2R of MAR which required it to have in place effective systems and controls to ensure its trading systems prevent the sending of erroneous orders. The PRA separately determined that CGML breached the following rules:

• PRA Fundamental Rule 2 (a firm must conduct its business with due skill, care and diligence);
• PRA Fundamental Rule 5 (a firm must have effective risk strategies and risk management systems);
• PRA Fundamental Rule 6 (a firm must organise and control its affairs responsibly and effectively);
• Rule 2.1(2) Algorithmic Trading of the PRA Rulebook (a firm must have in place effective systems and risk controls, suitable to the business it operates, to ensure that its trading systems are subject to appropriate trading thresholds and limits
• Rule 2.1(3) Algorithmic Trading of the PRA Rulebook (a firm must have in place effective systems and risk controls, suitable to the business it operates, to prevent the sending of erroneous orders, or the systems otherwise functioning in a way that may create or contribute to a disorderly market); and
• Rule 2.2(2) Algorithmic Trading of the PRA Rulebook (a firm must ensure that its systems are fully tested and properly monitored to ensure they meet the requirements of Rule 2.1 Algorithmic Trading of the PRA Rulebook).

CGML did not dispute the above findings and agreed to settle, qualifying for a 30% discount on both fines.

Banking and Prudential

No new entries.

Fund Management

No new entries.

Senior Managers and Governance

No new entries.

Financial Crime

No new entries.

Retail Services

9. FCA: Final Notice: FCA fines HSBC £6.2 million over treatment of customers in financial difficulty

On 23 May 2024, the FCA published a final notice relating to the £6.2 million fine issued against HSBC due to its treatment of customers experiencing financial difficulty.

Between June 2017 and October 2018, HSBC breached Principles 3 and 6 of the FCA's Principles for Business due to its failure to:

• conduct appropriate affordability assessments and consider customer circumstances;
• apply forbearance to support customers in financial difficulty, or when it was applied, was not always appropriate; and
• proportionately issue default notices and final demands to arrear customers.

The FCA stated that the above failures were a result of HSBC having inadequate procedures , as well as weaknesses in policy and staff training. At least 1.5 million customers were identified as having suffered, or being at risk of suffering, detriment, and HSBC has consequently issued a total of £185 million in redress payments.

HSBC had previously notified the FCA in 2018 of issues it had with its handling of customers in financial difficulty, and has since invested £94 million to identify and resolve such issues. This was considered by the FCA when issuing its fine and, in conjunction with HSBC's agreement to settle the case, resulted in HSBC receiving a 30% discount.

Digital Finance and Fintech

10. Official Journal of the EU: Legislation: Commission Delegated Regulation (EU) 2024/1506, Commission Delegated Regulation (EU) 2024/1507, Commission Delegated Regulation (EU) 2024/1504 and Commission Delegated Regulation (EU) 2024/1503, each supplementing Regulation (EU) 2023/1114

On 30 May 2024, the following supplementary provisions to Commission Delegated Regulation (EU) 2023/1114 were published in the Official Journal of the EU:

• Commission Delegated Regulation (EU) 2024/1503: specifies the fees charged by the EBA to issuers of significant ARTs and issuers of significant e-money tokens. This includes establishing an annual supervisory fee to cover actual and estimated costs;
• Commission Delegated Regulation (EU) 2024/1504: specifies procedural rules for the exercise of the power to impose fines or periodic penalty payments by EBA on issuers of significant ARTs and issuers of significant e-money tokens;
• Commission Delegated Regulation (EU) 2024/1506: specifies certain criteria for classifying asset-referenced tokens (ARTs) and e-money tokens as significant. It will allow the EBA to determine whether the issuer of the relevant token is significant on an international scale outside the EU, and determines indicators it should use to do so;
• Commission Delegated Regulation (EU) 2024/1507: specifies the criteria and factors to be taken into account by ESMA, the EBA and competent authorities in relation to their intervention powers

The Delegated Regulations will enter into force on 19 June 2024.

Payments

11.  PSR: Interim Report: Market review of card scheme and processing fees

On 21 May 2024, the Payment Systems Regulator (PSR) published an interim report setting out its provisional findings on its market review of the card scheme and processing fees associated with Mastercard and Visa.

The report concluded that the supply of scheme and processing services is neither working well, nor in the interests of all services users. In particular, the report found that:

• Mastercard and Visa do not face effective competition when dealing with merchants and acquirers who process card payments on behalf of merchants;
• overall fee levels charged to acquirers by Mastercard and Visa over the past five years have increased by more than 30% in real terms;
• Mastercard and Visa's margins are higher than would be expected in competitive markets; and
• Mastercard and Visa do not consistently provide high-quality information sharing services to acquirers.

The PSR has consequently laid out a range of potential remedies which it considers may be able to resolve the above. This includes regulatory financial reporting in respect of the card schemes' UK activities, in order to provide the PSR with more detailed and accurate information of the profits the card schemes are earning from their UK businesses. The PSR has also proposed measures that would require card schemes to set out the reasoning and evidence justifying price increases, as well as for improving the quality of information available to acquirers and merchants.

Interested persons may submit feedback on the report until 30 July 2024. Once received, the PSR will consider all feedback and endeavours to publish a final report on scheme and processing fees in Q4 2024.

ESG

12. FCA: Updated webpage: Sustainable investment labels and anti-greenwashing

On 22 May 2024, the FCA published an updated webpage on sustainable investment labels and anti-greenwashing.

The updated webpage sets out examples of the types of activites or investments that funds using each of the investment labels may invest in. This includes:

• Sustainability Focus: activities to support the production of energy, for example, from solar, wind or hydrogen;
• Sustainability Improvers: investments in companies that are on a credible path to net zero by 2050, or are committed to improving social standards such as human rights;
• Sustainability Impact: renewable energy generation and social housing; and
• Sustainability Mixed Goals: a mixture of investments from the labels above.

The updated webpage also provides more background on the anti-greenwashing rule, which reinforces that sustainability-related claims must be fair, clear and not misleading.

For more information on the UK sustainability disclosure requirements and labelling regime, please see our briefing here.

Other

13. Council of the EU: Legislation: Commission Delegated Regulation (EU) 2024/1502 and Commission Delegated Regulation (EU) 2024/1505, each supplementing Commission Delegated Regulation (EU) 2022/2554

On 30 May 2024, the following supplementary provisions to Commission Delegated Regulation (EU) 2022/2554 (i.e. the Digital Operational Resilience Act) were published in the Official Journal of the EU:

• Commission Delegated Regulation (EU) 2024/1502: specifies the criteria for the designation of ICT third-party service providers as critical for financial entities; and
• Commission Delegated Regulation (EU) 2024/1505: determines the amount of the oversight fees to be charged by the Lead Overseer to critical ICT third-party service providers and the way in which those fees are to be paid.

Both regulations will enter into force on 19 June 2024.

14.  ESMA: Statement: Use of AI in retail investment services

On 30 May 2024, ESMA published a statement on the use of AI systems by investment firms and relevant MIFID considerations.

The statement aims to set out how firms using or planning to use AI technologies can comply with MIFID, particularly around the areas of organisational requirements, conduct of business requirements and the importance of prioritising clients' best interests. In this regard, this is designed to be a statement for investment firms in instances where AI tools are specifically developed/officially adopted by the firm or bank but also where firm staff use third party AI technologies (e.g. ChatGPT) with or without the direct approval of senior management.

For more information, please see our briefing here.