Legal development

Financial Services SpeedRead: 15 December 2023 edition

15 December 2023

Financial Markets

1. FCA and BoE (PRA): Consultation paper: Operational resilience: Critical third parties to the UK financial sector

On 7 December 2023, the BoE (including the PRA) and FCA jointly published a consultation paper (PRA CP 26/23 and FCA CP 23/30) on operational resilience and critical third parties (CTPs) to the UK financial sector.

The consultation paper sets out proposed requirements and expectations for CTPs. The aim of these proposals is to manage potential risks to the stability of, or confidence in, the UK financial system that may arise due to a failure in, or disruption to, the services that a CTP provides to authorised persons, relevant service providers, and/or financial market infrastructure entities.

The proposals would create:

requirements for CTPs in the BoE Rulebook, PRA Rulebook and FCA Handbook;
a joint BoE/PRA/FCA supervisory statement setting out the regulators' expectations of how CTPs should comply with and interpret the proposed requirements in their rules; and
a joint BoE/PRA supervisory statement and FCA guidance on the regulators' policy and expectations on the use of skilled person reviews of CTPs as an oversight tool.

The regulators invite feedback on the proposals. The closing date for feedback is 15 March 2024 and responses are requested via email to CP26_23@bankofengland.co.uk.

2. FCA and PRA: Policy statement: Remuneration: Enhancing proportionality for small firms (PS 16/23)

On 5 December 2023, the FCA and PRA jointly published a policy statement (PS16/23) which provides feedback to responses to the PRA's consultation paper CP5/23 Remuneration: Enhancing proportionality for small firms and FCA's consultation paper CP23/11 Remuneration: Enhancing proportionality for small dual-regulated firms.

The policy statement also sets out the regulators' final policy. The final policy position has not change following CP 23/11. However, there have been some clarificatory changes to the FCA’s rules post-consultation regarding the application of proportionality to small firms in groups that include larger institutions.

The changes resulting from the policy statement came into force on 8 December 2023. The PRA Rulebook and FCA Handbook amendments apply to a firm's performance year starting on or after 8 December 2023. The PRA supervisory statement and FCA non-Handbook guidance changes also came into force on 8 December 2023.

Furthermore, the PRA published an updated supervisory statement (SS2/17) on 6 December 2023, which is intended to be read together with the relevant changes to the PRA Rulebook. The supervisory statement sets out expectations on how firms should comply with the requirements of the remuneration part of the PRA Rulebook. The updated version of the supervisory statement applies to remuneration awarded in respect of a performance year starting on or after 29 December 2020.

3. FCA: Consultation paper: Reforming the commodity derivatives regulatory framework (CP 23/27)

On 4 December 2023, the FCA published a consultation paper (CP 23/27) on its proposals to amend the commodity derivatives regulatory framework, which aims to mitigate the risk that large positions can cause disorderly pricing or settlement conditions.

The consultation is part of the Wholesale Markets Review, with the FCA using this opportunity to ensure the UK's commodity derivatives markets remain resilient under a variety of market conditions by introducing new requirements to strengthen the supervision of those markets.

The proposals set out by the consultation paper apply to trading venues in the UK which admit commodity derivatives to trading and persons (including commercial users and financial firms) who trade commodity derivatives in the UK. The FCA is consulting on the following key changes:

setting of position limits by trading venues;
applying position limits only to certain commodity derivatives contracts;
enhanced position management controls and reporting;
exemptions from position limits; and
new guidance on what constitutes ancillary activity.

The consultation closes on 16 February 2024 and responses can be submitted here.

4. European Commission: Consultation paper: Selection of a unique product identifier for public transparency in over-the-counter derivatives transactions

On 29 November 2023, the European Commission published a targeted consultation paper regarding the selection of a unique product identifier for public transparency in over-the-counter (OTC) derivatives transactions.

The consultation relates to the provisional agreement on the reform of the Markets in Financial Services Regulation (600/2014) (MiFIR), expected to be published in Q1 2024. The provisional agreement is intended to reform the scope of pre- and post-trade transparency reporting for OTC derivatives, including by specifying the classes of OTC derivatives which are subject to such reporting requirements to ESMA.

The paper requests feedback on what the most suitable unique product identifier would be to comply with the incoming transparency requirements, and whether there are any "additional identifying reference data" to be considered in addition to the unique product identifier.

The target audience of the consultation are participants in the "in-scope" OTC derivatives value-chain, consisting of:

companies that use interest rate and credit derivatives to hedge interest rate and credit risk that arises in the course of their business;
investment firms and asset managers that use interest rate and credit derivatives to hedge investment portfolios;
investment firms that act as counterparties to the two categories above;
investment firms that invest in interest rate or credit derivatives; and
trading venues that offer trading in interest rate and credit derivatives, trade reconciliation service providers and central counterparty clearing houses that clear interest rate and credit derivatives.

Responses must be submitted via the online questionnaire by 9 January 2024.

5. HM Treasury: Draft Statutory Instruments: The Securitisation Regulations 2023, The Data Reporting Services Regulations 2023, and The Public Offers and Admissions to Trading Regulations 2023

On 28 November 2023, HM Treasury published the following three draft statutory instruments as part of its Smarter Regulatory Framework programme:

The Securitisation Regulations 2023, replacing the version of the EU Securitisation Regulation retained in UK law following Brexit, with limited changes to the draft published in July 2023;
The Data Reporting Services Regulations 2023, replacing the retained EU law in relation to data reporting service providers with a new framework tailored to the provision of such services in the UK; and
The Public Offers and Admissions to Trading Regulations 2023, replacing the retained EU law relating to the prospectus regime with a new UK framework for public offers and admissions to trading. For more information, please see our briefing here.

6. HM Treasury: Statutory Instrument: The Short Selling (Notification Threshold) Regulations 2023

On 27 November 2023, HM Treasury published a statutory instrument (SI 2023/1258) on the Short Selling (Notification Threshold) Regulations 2023.

This instrument amends the retained EU legislation on short selling and some aspects of credit default swaps, otherwise known as the Short Selling Regulation (SSR). This includes by increasing the notification threshold for net short positions to the FCA from 0.1% to 0.2%, easing the regulatory pressures on industry, while still providing the FCA with sufficient data such that it can continue to carry out its functions.

These regulations will come into force on 5 February 2024.

Banking and Prudential

7. European Commission: Commission Delegated Regulation: Regulatory technical standards on the conditions for identifying groups of connected clients

On 6 December 2023, the European Commission published the adopted delegated texts regarding draft regulatory technical standards (RTS) specifying in which circumstances the conditions for identifying groups of connected clients are met.

The aim of the draft RTS is to establish the circumstances where interconnections between clients by means of a control relationship and/or an economic dependency relationship create a single risk and hence a requirement to group those clients. Further, this draft RTS, together with the EBA Guidelines 2017/15 on connected clients, are intended to create the complete framework for the identification of groups of connected clients.

The Commission shall decide within three months of receiving the draft standards whether to endorse the drafts submitted.

8. PRA: Policy statement: The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements (PS 15/23)

On 5 December 2023, the PRA published a policy statement (PS 15/23) which provides feedback to responses to multiple consultation papers in relation to the Strong and Simple Framework.

The policy statement provides feedback on the following consultation papers:

The policy statement also contains the PRA's final policy, which includes amendments to the liquidity, reporting and disclosure sections of the PRA Rulebook.

Further, the PRA has decided to rename "Simpler-regime Firms" to "Small Domestic Deposit Takers" (SDDTs), and "Simpler-regime consolidation entities" to "SDDT consolidation entities".

The rules relating to the following will come into effect from 1 January 2024:

the definition of an SDDT;
the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities;
other changes to the glossary, application rules and definitions; and
the rules on disclosure.

The other rules set out in the policy statement, such as the liquidity rules, will take effect from 1 July 2024.

9. PRA: Consultation paper: Identification and management of step-in risk, shadow bank entities and groups of connected clients (CP 23/23)

On 4 December 2023, the PRA published a consultation paper (CP 23/23) on the identification and management of step-in risk, shadow banking entities and groups of connected clients.

The consultation paper sets out the PRA's proposed rules requiring Capital Requirements Regulation (CRR) firms that are not small domestic deposit takers (SDDTs) and CRR consolidation entities that are not SDDT consolidation entities to continually review their step-in risk (the risk that a bank provides financial support to an unconsolidated entity that is facing stress in the absence of any contractual obligations to provide such support).

The PRA's proposals would require firms to develop their own step-in risk policies and procedures and to report their assessment to their supervisor on proposed assessment templates. The proposals develop the work done by the Basel Committee on Banking Supervision regarding its guidelines on the identification and management of step-in risk.

In addition, the paper also lays out the PRA's proposals to transfer the European Banking Authority's guidelines on "limits on exposures to shadow banking entities" and on "connected clients" to PRA Rules and supervisory statements.

The PRA invites feedback on the proposals set out in the consultation paper. The consultation closes on 5 March 2024.

10. Bank of England: Consultation paper: Codes of practice for wholesale cash distribution market oversight

On 30 November 2023, the Bank of England (BoE) published a consultation paper on the codes of practice (CoPs) that it wishes to publish under the wholesale cash distribution oversight regime.

The proposed CoPs are briefly summarised as follows:

Information gathering: recognised firms will be required to provide information about the performance by the firms of their relevant functions and activities as specified in a wholesale cash oversight order. Such firms will be required to deal with the BoE in an open and cooperative way;
Third-party arrangements: firms will be required to carry out a materiality assessment in respect of all current and proposed arrangements with third party providers of products/goods or services relating to the firm's relevant wholesale cash distribution functions and activities. For those "material" arrangements, a due diligence and risk assessment will be required in relation to the risk of failure or disruption in supply from the supplier; and
Cash centre closure and market exit: recognised firms will be required to engage with the BoE at as early a stage as possible in the firm's strategic planning of a material change (i.e. the closure of a cash centre or market exit) and prior to a final decision being made. Firms will also be required to give customers and suppliers timely notice of their plans to aid an orderly transition of business activity.

Interested parties are requested to provide responses the consultation by 31 January 2024.

11. EBA: Consultation paper: Draft Regulatory Technical Standards on the conditions for assessing the materiality of extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors

On 29 November 2023, the EBA published a consultation on draft regulatory technical standards (RTS) on the conditions for assessing the materiality of extensions and changes to the use of alternative internal models and changes to the subset of the modellable risk factors under Article 325az(8) of the CRR, as amended by the CRR II.

The CRR allows institutions to calculate their own funds requirement for market risk using the alternative internal model approach, provided that permission to do this is granted by the institution's competent authorities. According to the CRR, material changes to the use of the internal model approach, the extension of the use of the internal model approach, and material changes to an institution's choice of the subset of modellable risk factors require separate permissions from competent authorities, whereas other extensions and changes to the use of the internal model approach will require notification to the competent authorities.

The proposed draft RTS:

follows the CRR differentiation between material extensions and changes, to be approved by the competent authorities, and non-material extensions and changes, which are to be notified to competent authorities four weeks in advance; and
proposes a combination of qualitative and quantitative conditions for the categorisation of model extensions and changes to the relevant categories/sub-categories.

The EBA invites comments to this consultation by 29 February 2024. A public hearing of the draft RTS will occur on 10 January 2024.

12. BIS (BCBS): Consultation Paper: Disclosure of climate-related financial risks

On 29 November 2023, the Basel Committee on Banking Supervision (the Committee) issued a public consultation paper on a Pillar 3 disclosure framework which aims to address climate-related financial risks in the banking sector. In particular, the paper analyses how a Pillar 3 disclosure framework for climate-related risks would further its mandate to strengthen the regulation, supervision and practices of banks that are exposed to physical and transitional climate risks. It also considers how the framework would complement the work of other international bodies, such as the International Sustainability Standards Board, and enhance financial stability.

The Committee is specifically considering the integration of both qualitative and quantitative disclosure requirements, and feedback from stakeholders will be used to determine which disclosure elements will be mandatory, and which will be subject to national discretion. The Committee notes that the development of a robust Pillar 3 framework will likely be an iterative process, and welcomes views on a potential implementation date of 1 January 2026.

Submissions on the proposals are due by 29 February 2024 and can be submitted here.

13. FCA: Consultation paper: Capital deduction for redress: personal investment firms

On 29 November 2023, the FCA published a consultation paper (CP 23/24) on its proposals to require personal investment firms (PIFs) to be more prudent and set aside capital for potential redress liabilities at an early stage.

The FCA is concerned that PIFs are causing consumers harm as a result of significant redress liabilities falling to the Financial Services Compensation Scheme (FSCS). The FCA wants to ensure that the firms that generate redress costs are better able to meet them without recourse to the FSCS.

In summary, the proposals would require PIFs:

to quantify an amount for their potential redress liabilities;
to set aside capital resources for potential redress liabilities through a new capital deduction; and
where potential redress liabilities fall below the PIF's capital requirements, to comply with an asset retention requirement.

The FCA proposes to incorporate these changes into Chapter 13 of the Interim Prudential Sourcebook for Investment Businesses, which contains the existing prudential regime for PIFs.

The consultation paper also includes a Discussion Chapter to look at broader improvements to the prudential regime for PIFs. Alongside the consultation, the FCA also published a Dear CEO letter which reminds firms that they must not seek to avoid potential redress liabilities.

The FCA asks PIFs and other interested parties to provide comments on the consultation paper by 20 March 2024, here.

14. FCA: Report: IFPR implementation observations: quantifying threshold requirements and managing financial resources

On 27 November 2023, the FCA published its final report on its multi-firm review into firms' progress in implementing the Investment Firms Prudential Regime (IFPR) in relation to the internal capital adequacy and risk assessment (ICARA) process and reporting under the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU). This follows on from the FCA's initial observations published in February 2023.

In conducting its review, the FCA focused on capital adequacy, liquidity adequacy, and wind-down planning under the ICARA process.

The FCA found that firms have made progress in understanding the requirements of the new regime. However, the FCA notes that there are still areas for improvement, including:

insufficient consideration of cashflows and liquidity stresses, which led to an inadequate assessment of liquid asset requirements;
internal intervention points were not structured in a way that would ensure that actions would be triggered in a timely manner to mitigate harm;
inadequate consideration of the impact of membership in a group with respect to wind-down assessments; and
significant failings in the application of capital models for operational risk.

The Annex to the final report sets out a list of good and poor practices that the FCA observed in the multi-firm review. Investment firms and their investment firm groups should ensure their ICARA processes reflect the good practices identified by the FCA.

Funds Management

15. HM Treasury and FCA: Policy note, draft statutory instrument for the Money Market Funds Regulations 2024 and consultation paper

On 6 December 2023, HM Treasury published a policy note and draft statutory instrument for the Money Market Funds Regulations 2024, and the FCA published a consultation paper (CP 23/28) regarding proposals to enhance the resilience of money market funds (MMFs) established, marketed or managed in the UK.

The draft instrument is intended to provide the replacement framework for the current retained EU law version of the Regulation on money market funds ((EU) 2017/1131) (UK MMFR). In its policy note, HM Treasury confirms that the majority of the legislative framework under the draft Money Market Funds Regulations 2024 will remain the same as under the MMFR, with certain limited reforms.
Detailed firm-facing requirements for MMFs will sit in the FCA’s Handbook. The FCA's consultation paper sets out the proposed rules and confirms that it seeks to make the following significant changes to the current framework:

a significant increase in the minimum proportion of highly liquid assets that all MMF types have to hold; this will ensure that MMFs have sufficient liquid assets to withstand significant withdrawals over a short period in severe but plausible market stresses; and
the removal of an existing regulatory requirement for important types of MMF which "links" the levels of liquid assets in those MMFs with the need for the MMF manager to impose or consider imposing tools that, if used, would reduce the ability of investors to get their money back without unanticipated delays or losses.

HM Treasury welcomes any technical comments on the draft statutory instrument by 24 January 2024, and the closing date for feedback on the FCA's consultation is 8 March 2024.

16. FCA: Consultation paper: Implementing the Overseas Funds Regime (CP 23/26)

On 4 December 2023, the FCA published a consultation on the implementation of the Overseas Funds Regime (OFR) into its Handbook and to enable recognition of overseas funds from HM Treasury-approved jurisdictions.

This consultation aims to operationalise the OFR so that overseas funds can apply to the FCA for recognition and know which FCA rules they will need to comply with.

Further, the FCA aim to clarify its intended use of its powers, including proposals for:

data it proposes to collect as part of the OFR application process and on an ongoing basis (if recognition is granted);
requirements for pre-sale disclosure, including about the limitations on Financial Ombudsman Service and Financial Services Compensation Scheme coverage for UK investors;
how the FCA plans to refuse applications for, or suspend or revoke a scheme's recognised status, where necessary;
the process for public censure; and
application and periodic fees applicable to OFR recognised schemes.

The FCA invites comments on the consultation paper by 12 February 2024.

Senior Managers and Governance

17. ESAs: Consultation paper: ESAs information system (JS 2023 77)

On 6 December 2023, the European Supervisory Authorities (ESAs) published a consultation paper on draft joint guidelines on the system for the exchange of information relevant to the assessment of the fitness and propriety of holders of qualifying holdings, directors and key function holders of financial institutions, and financial market participants by competent authorities.

The ESAs have developed a system which consists of a cross-sectorial database which has the aim of fostering a timely exchange of information between competent authorities. The guidelines explain how to use the ESAs' information system and exchange relevant data.

The ESAs' information system will hold information on persons who are subject to a fitness and proprietary assessment under EU sectoral provisions.

The deadline for responses is 15 January 2024. The ESAs aim to finalise the guidelines in early 2024.

Financial Crime

18. HM Treasury: Statutory Instrument: Updates to the list of high-risk third countries

On 4 December 2023, HM Treasury published an Advisory Notice announcing updates to the list of high-risk third countries made by the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No 2) Regulations 2023 (SI 2023/1306) which came into force on 5 December 2023.

Per the updated Advisory Notice, Bulgaria, Cameroon, Croatia, Nigeria, South Africa, and Vietnam have been newly classified as high-risk countries under the UK Money Laundering Regulations, while Albania, Cayman Islands, Jordan, and Panama have been removed from the list.

19. EBA: Final Report: Guidelines amending the Risk-Based Supervision Guidelines

On 27 November 2023, the European Banking Authority (EBA) published a final report amending the EBA's revised Risk-Based Supervision Guidelines (Guidelines EBA/GL/2021/16) to extend their scope to AML/CFT supervisors of crypto-asset service providers, as defined under MiCAR.

The new guidelines set clear expectations of the steps supervisors should take to identify and manage money laundering and terrorism financing risks in the sector, while ensuring a common supervisory approach to tackling these risks.

The amended guidelines also:

emphasise the importance of the cooperation of competent authorities, prudential supervisors and other stakeholders;
highlight the importance of a consistent approach when setting supervisory expectations;
provide guidance on the sources of information available to competent authorities;
set out how the competent authorities should determine the type of guidance needed, and effective communication of said guidance; and
stress the importance of staff training from the competent authorities.

The revised guidelines will apply from 30 December 2024. Competent authorities must report their compliance with these revised guidelines 2 months after the translations are published on the EBA website.

Retail Services

20. FCA/HM Treasury: Discussion paper: Advice Guidance Boundary Review, proposals for closing the advice gap

On 8 December 2023, the FCA and HM Treasury jointly published a discussion paper (DP 23/5) seeking feedback on the proposals set out in the Advice Guidance Boundary Review. The review is aimed at closing the gap between financial advice and other forms of support, with a view to building an advice and guidance framework which consumers can trust.

The discussion paper sets out three key proposals to help consumers make more informed investment and pensions decisions, including:

further clarifying when firms can give consumers support without giving regulated financial advice ('the boundary');
a new approach of targeted support which would allow firms to provide support tailored to groups of people in similar circumstances; and
a new form of simplified advice that makes it easier for firms to provide affordable personal recommendations to clients with more straightforward needs and smaller sums to invest.

The closing date for feedback on the consultation is 28 February 2024.

21. FCA: Webpages: Preparing for the future of consumer investments

On 8 December 2023, the FCA published a webpage detailing the objectives of its incoming consumer investment policy initiatives. In particular, the FCA has highlighted the following characteristics it hopes to see in the consumer investments sector following the introduction of a more cohesive regulatory framework:

Accessible support: ensuring consumers make the right investment decisions, they should be able to get they help they want, when they need it, at an affordable cost;
Diverse products and services: nurturing a market where consumers have access to a wide range of investments across the risk spectrum with proportionate protections to help consumers find products that suit their risk tolerance;
Realistic approach to risk: supporting consumers to distinguish between legitimate investment risk and fraudulent products, and providing consumers with additional protection against such risks where necessary;
Useful information: providing access to information to help investors make good decisions, with this information being proportionate to the complexity of the investment and the decision; and
Appropriate protections: ensuring that investment products are made available, marketed, and sold to consumers in a way that allows them to make informed choices. In this regard, firms should proactively identify where there has been a failure on this part and consumers have suffered harm.

Separately, the FCA published the findings of its consumer investments data review for April 2022 to March 2023, with this document noting that the FCA, as part of its focus on preventing serious harm to consumers in this market, had:

stopped 1 in 5 new consumer investment firms who applied from entering the market;
published 1,716 consumer alerts about unauthorised firms or individuals; and
secured £4.9m in consumer redress from unauthorised investment business.

In addition to the data review, the FCA also published its two-year update on its consumer investments strategy, which includes a summary of the year 2 impact of the strategy and the key milestones for the FCA's incoming work over the next year. This includes a note that, to avoid double reporting, future reporting will be wrapping to the FCA's reporting against the FCA Strategy.

22. FCA: Consultation Paper: Access to Cash

On 7 December 2023, the FCA published a consultation paper (CP 23/29) on its proposals to support access to cash in an increasingly digital world. The proposed regime would require certain banks and building societies designated by the government to assess and fill any actual or potential gaps in cash access provision that significantly impact consumers and businesses. 

These proposals follow the government's request to seek to "ensure reasonable provision" of cash deposit and withdrawal services to personal and business current accounts. This will specifically be achieved by, amongst other things, requiring designated firms to:

develop a more comprehensive cash assessment process;
publish assessment outcomes and make processes transparent;
respond to a wider range of trigger events to undertake a cash assessment in a local area; and
meet set timeframes for delivery of additional cash access services identified by cash access assessments.

The FCA is seeking feedback on the proposals by 8 February 2024, with responses to be submitted via an online response form, email or post. The FCA plans to finalise the rules on access to cash in Q3 2024 along with a policy statement, and is consulting on a transitional period that would give designated entities more time to carry out cash access assessments.

23. ESAs: Q&A: PRIIPs Key Information Document (JC 2023 22)

On 5 December 2023, the European Supervisory Authorities (ESAs) published an updated set of consolidated questions and answers on the Package Retail and Insurance-based Investment Products (PRIIPs) Key Information Document.

The sections of the Q&As updated include the following:

general topics;
market risk assessment: product categories;
performance scenarios;
multi-option products (MOPs); and
investment funds.

24. FCA: New webpage: Expectations of firms offering fractional shares to retail investors

On 1 December 2023, the FCA published a new webpage discussing the expectations of firms offering fractional shares to retail investors, which follows the recent announcement by HM Treasury that it plans to allow certain fractional share contracts as ISA investments.

The FCA indicate that fractional shares are shares, despite the previous guidance from ESMA which suggested that these products are derivatives. Moreover, the FCA also appear to acknowledge that allowing access to fractional shares is positive for investors, noting it will enable them to access investments reflective of their risk appetite where they previously would not have been able to do so. The FCA has, however, also stressed that firms offering fractional shares need to act in good faith and avoid causing preventable consumer harm, while also considering whether these products are delivering good consumer outcomes in line with the Consumer Duty. Specifically, the webpage outlines several characteristics of fractional share models which firms should consider as potentially being able to impact consumer outcomes:

transferability;
execution;
fees and charges;
voting rights or other shareholder rights;
dividend income; and
ownership rights.

25. FCA: Statement: Communications in relation to PRIIPs and UCITS

On 30 November 2023, the FCA published a statement relating to concerns raised about the costs and charges disclosure in the packaged retail and insurance-based investment products (PRIIPs) Key Information Document (KID), the undertakings for collective investment in transferable securities (UCITS) Key Investor Information Document (KIID), and under MiFID II requirements.

These concerns specifically reflect the FCA's view that for listed closed-ended funds the required costs and charges disclosure may not result in representative cost information being published. Concerns have also been expressed with regards to how the costs that listed closed-ended funds are required to disclose are then aggregated into other products, such as multi-asset funds that may invest in them.

Until a long term solution is finalised, the statement notes that the FCA will allow funds to provide a factual breakdown of the component parts of their costs. This is intended to enable funds to provide additional context where they are concerned that the aggregate figure currently required by legislation does not accurately reflect ongoing costs. It is, however, noted that firms will need to consider their obligations under the Consumer Duty when presenting this information.

The statement notes that any further changes that are deemed necessary before the changes to the cost disclosure regime are legislated will be communicated in a fair and transparent way, and with reasonable notice.

26. Official Journal of the EU: Publication: Distance Marketing Directive II

On 28 November 2023, Directive (EU) 2023/2673 (DMD II) was published in the Official Journal of the EU, amending Directive 2011/83/EU as regards financial services contracts concluded at a distance, and repealing Directive 2002/65/EC.

DMD II transfers consumer protections in relation to financial services distance contracts to the Consumer Rights Directive. It requires that any distance contracts concluded via an online interface shall include a withdrawal function that permits the consumer to withdraw from the relevant contract. DMD II also introduces a right for a consumer to request human intervention where they interact with a trade through fully automated online interfaces (e.g. chatbots, robo-advice and other interactive tools).

The DMD II will come into force on 18 December 2023 and will apply from 19 June 2026. Member States must adopt and publish the laws, regulations and other provisions necessary to comply with the DMD II by 19 December 2025.

For more information on changes to the Consumer Credit framework, including the introduction of DMD II, please see our briefing here.

Digital Services and Fintech

27. ESAs: Public consultations: Second batch of policy products under the Digital Operational Resilience Act (DORA)

On 8 December 2023, the European Supervisory Bodies (ESAs) published a public consultation on the second batch of policy products under the Digital Operational Resilience Act (DORA). The policy products aim to operationalise the application of DORA in the financial sector.

The second batch of policy products includes:

Draft Regulatory Technical Standards (JC 2023 67) to specify the elements which a financial entity needs to determine and assess when subcontracting ICT services supporting critical or important functions;
Joint Guidelines (JC 2023 68) on the estimation of aggregated annual costs and losses caused by major ICT-related incidents;
Draft Regulatory Technical Standards (JC 2023 69) on the harmonisation of conditions enabling the conduct of the oversight activities;
Draft Regulatory Technical Standards (JC 2023 70) on the content of the notification and reports for major incidents and significant cyber threats and determining the time limits for reporting major incidents and Draft Implementing Technical Standards on the standard forms, templates and procedures for financial entities to report a major incident and to notify a significant cyber threat;
Draft Joint Guidelines (JC 2023 71) on the oversight cooperation and information exchange between the ESAs and the competent authorities; and
Draft Regulatory Technical Standards (JC 2023 72) specifying elements related to threat led penetration tests.

The ESAs are hosting an online public hearing on 23 January 2024 to present the consultation paper and address any questions raised. The public consultation on all mandates in the second batch of policy products will continue until 4 March 2024, with the deadline for submissions to the European Commission being 17 June 2024.

28. EBA: Consultation Paper: Draft Regulatory Technical Standards specifying the requirements for policies and procedures on conflicts of interest for issuers of asset-referenced tokens

On 7 December 2023, the European Banking Authority (EBA) published a consultation paper on draft regulatory technical standards (RTS) that set out the requirements for policies and procedures on conflicts of interest for issuers of asset-referenced tokens (ARTs) under the Markets in Crypto-Assets Regulation (MiCAR).

The draft RTS aim to assist issuers of ARTs with managing conflicts of interest, and ensure convergence of requirements across the European Union. Specifically, the draft RTS:

requires issuers to focus on conflicts relating to the reserve of assets;
sets out specific provisions related to personal transactions;
specifies that the remuneration procedures, policies and arrangements of the issuer should not create conflicts of interest;
requires that the issuers' management bodies define and adopt the conflicts of interest policies and procedures; and
sets out the content of website disclosures which issuers of ARTs should make available to the public.

The EBA is consulting on the draft RTS for a period of three months. During this time, it will be hosting a virtual public hearing on 11 January 2024 to discuss the consultation and will also be seeking feedback until 7 March 2024.

ESG

29. ESAs: Report: Final Report on draft RTS on the review of PAI and financial product disclosures in the SFDR Delegated Regulation

On 4 December 2023, the three European Supervisory Authorities (ESAs) published their final report amending the draft Regulatory Technical Standards (RTS) to the Delegated Regulation supplementing the Sustainable Finance Disclosure Regulation (SFDR).

The ESAs propose:

adding new social indicators and a streamlined framework for the disclosure of principal adverse impacts of investment decisions on the environment and society;
including new product disclosures for "greenhouse gas emissions reduction" targets;
improving the disclosures on how sustainable investments "Do No Significant Harm" to the environment and society; and
simplifying the pre-contractual and periodic disclosure templates for financial products.

The ESAs also propose other technical adjustments in relation to derivatives, calculating sustainable investments, and financial products with underlying investment options.

The European Commission will consider whether to endorse the draft RTS within the next three months and, if endorsed, the draft RTS will be applied independently of the ongoing comprehensive assessment of SFDR announced by the European Commission in September 2023 and before changes resulting from that assessment are introduced.

30. Official Journal of the EU: Publication: Regulation (EU) 2023/2631 on European Green Bonds

On 30 November 2023, Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds (the EU Green Bonds Regulation) was published in the Official Journal of the European Union.

The EU Green Bonds Regulation aims to fulfil objectives under the Paris Agreement with respect to financial markets, and follows the announcement that environmentally sustainable bonds would be made available under the European Green Deal Investment Plan of 14 January 2020. Specifically, the EU Green Bonds Regulation:

sets out requirements that bond issuers must comply with in order to use the term "European green bond" or "EuGB" for their environmentally sustainable bonds;
establishes a registration system and supervisory framework for external reviewers of European green bonds; and
provides templates for optional disclosures for bonds marketed as environmentally sustainable and sustainability-linked bonds issued in the EU, to prevent greenwashing in the green bonds market in general.

The EU Green Bonds Regulation will enter into force on 20 December 2023, and issuers will be able to apply the regulation from 21 December 2023. However, certain provisions will apply from 21 June 2026.

31. FCA: Policy statement: Sustainability Disclosure Requirements and investment labels regime

On 28 November 2023, the FCA published a policy statement (PS 23/16) confirming new Sustainability Disclosure Requirements (SDRs) and an investment labels regime, in a bid to improve the trust and transparency of sustainable investment products and reduce greenwashing.

The new measures include:

an anti-greenwashing rule for all authorised firms to make sure sustainability-related claims are fair, clear and not misleading, and are consistent with the characteristics of the products to which they relate (coming into effect from 31 May 2024);
four product labels to help investors understand what their money is being used for, building on clear sustainability goals and criteria (coming into effect from 31 July 2024);
naming and marketing requirements to ensure the accurate description of the sustainability characteristics of in-scope investment products (coming into effect from 2 December 2024); and
further disclosure requirements on sustainable investment products (coming into effect from 2 December 2025 for firms with assets under management of more than £50 billion, with the rules extending to smaller firms with assets under management of more than £5 billion in 2026).

Separately, the FCA has also published a guidance consultation on the anti-greenwashing rule referenced above, which includes a request for feedback on the proposed guidance to help firms better understand the new rule and other existing, associated requirements. The closing date for feedback is 26 January 2024.

For more information on these new requirements, please see our briefing note here.