Financial services speedread 9 Feb edition

1. FCA: Analysis of financial promotions data (2022)

On 3 February 2023, the FCA published a press release and new webpage on its analysis of action taken in 2022 against authorised firms breaching financial promotion rules, and referrals and investigations into unregulated activity.

Throughout 2022, the FCA significantly increased its intervention activity against firms in response to poor compliance with financial promotion rules. The data published shows that despite a 24% decrease in total reports received compared to 2021, the FCA amended or withdrew 8,582 promotions (14 times more compared to 573 in 2021), and issued 1,882 alerts in 2022 (an increase of 34% from 1,410 in 2021) to unauthorised firms and individuals. A key theme was the rise of unauthorised "fin-fluencers" (influencers publicising financial services related content on social media platforms), and the corresponding risk of unlawful financial promotions.

The FCA has made significant improvements to the digital tools it uses to identify problem firms and individuals and misleading adverts, which has enabled it to work through a much higher number of cases compared with 2021. The FCA remains concerned with levels of compliance with the financial promotion rules, and social media, in particular, is a major regulatory focus.

2. ESMA: Final Report: ESMA’s Opinion on the Trading Venue Perimeter

On 2 February 2023, ESMA published a final report containing its final Opinion in relation to the trading venue perimeter under MiFID, providing guidance on when certain systems and facilities qualify as multilateral (and should seek authorisation as a trading venue). This follows the publication of a January 2022 consultation paper containing a draft Opinion, in which ESMA discussed the four elements under MiFID making up a multilateral system, as well as how to treat special cases (e.g. Order Management Systems/Executions Management Systems and Request for Quote Systems, as well as pre-arranged transactions where execution takes place on authorised trading venue).

ESMA has prepared the Opinion in response to continuous changes in financial markets, which has led to ambiguity in relation to the interpretation of certain elements of the definition of 'multilateral system'. The final report seeks to harmonise interpretations on, amongst others, new technology providers and request for quote systems that may, in some instances, operate de facto as multilateral systems.

For further details, please see our briefing here.

3. FCA: Webpage update on Onshoring and the Temporary Transitional Power

On 27 January 2023, the FCA updated its webpage on Onshoring and the Temporary Transitional Power (TTP). The updates made largely reflect the fact that the TTP, as laid out in Treasury legislation, expired on 31 December 2022. The FCA confirmed that, with certain exceptions (set out below), firms must now be fully compliant with UK onshored regulatory obligations.

In line with agreed timescales, the FCA have stopped using the TTP on 31 March 2022, except in relation to the Share Trading Obligation (STO) and Derivative Trading Obligation (DTO) in relation to which the relevant TTP Directions did not include a specified end date. The period during which the STO and DTO TTP Directions may continue to apply has been extended to 31 December 2024.

4. FCA and ESMA: Memorandum of Understanding (MoU) regarding EU critical benchmarks

On 25 January 2023, the FCA published the text of two MoUs it has entered into with ESMA on cooperation agreements relating to third-country benchmark administrators under the retained EU law version of the Benchmarks Regulation 2016 (EU) 2016/1011) (UK BMR), as follows:

• an MoU establishing a cooperation arrangement for the purposes of Article 30(4) of UK BMR, to provide ESMA and the FCA with an appropriate mechanism for the efficient exchange of information in relation to EU critical benchmarks and non-critical benchmarks provided by administrators of EU critical benchmarks supervised by ESMA; and
• an MoU concerning the recognition of UK benchmark administrators in the EU. The purpose of this MoU is: (i) to establish a cooperation arrangement under Article 32(5)(a) of the EU BMR for an efficient exchange of information; and (ii) to confirm that the effective exercise of ESMA's supervisory functions under the EU BMR is not prevented by UK law, regulation or administrative provisions, and that there are no limits on the FCA's ability to exercise the supervisory or investigatory powers awarded to it under the UK BMR in respect of UK benchmark administrators applying for recognition or recognised in the EU.

5. FCA update to ancillary activities for commodity derivatives

On 24 January 2023, the FCA published an update on the market share test to be performed under UK Commission Delegated Regulation (EU) 2017/592 (UK RTS 20) in order to rely on the ancillary activities exemption for commodity derivatives. The exemption, set out in article 72J of the Financial Services and Markets Act (Regulated Activities) Order 2001 (RAO), applies to firms carrying on investment services and activities relating to commodity derivatives and emission allowances on an ancillary basis to their main business, allowing such firms to carry on these activities without FCA authorisation.

In March 2022, the FCA announced that firms did not need to perform the market share test to determine their eligibility for the exemption in 2022/23. This was followed in May 2022 by a statement in Handbook Notice 99 that firms could rely on figures relating to 2018, 2019 and 2020 as their numerator for the purposes of its remaining main business test calculations and use corresponding figures relating to 2019, 2020 and 2021.

HM Treasury has proposed a Statutory Instrument that will remove the quantitative aspects of the market share test. However, the FCA has acknowledged that these changes will not take effect until the end of this year .The FCA therefore announced that it will continue to apply the approach in Handbook Notice 99 in 2023/24, allowing firms to continue relying on the exemption where they were able to do so for 2022/23 based on trading relating to the previously published information in 2018 to 2020.

No updates for this edition of the FSS.

6. FCA portfolio letter on asset management supervision strategy

On 3 February 2023, the FCA published a portfolio letter which outlines the harms to consumers and/or markets which, in the FCA's view, are most likely to arise from asset managers' business models, and the FCA's supervisory strategy for asset management.

The FCA has identified the following supervisory priorities with respect to asset management:

• Product governance: the FCA is concerned that the quality and value of product offerings, or the quality of communications with customers, do not deliver good outcomes for consumers or meet their needs. The FCA will follow up on its 2021 Assessment of Value review findings, and will seek to identify outlier firms. Separately, a review will be conducted in 2024 to assess the embeddedness of the Consumer Duty within the asset management sector, with a focus on the price and value outcome.
• Environmental, Social and Governance (ESG) and Sustainable Investing: the FCA is concerned with inaccurate or misleading information about ESG and sustainable investing, and the negative impact this could have on the long-term integrity of the UK financial disclosure regime, as well as the likely harm to consumers' confidence to invest. The FCA will focus on the governance structures that oversee ESG and stewardship considerations, and will test whether firms deliver on the claims made in their communications with investors.
• Product Liquidity Management: the FCA has stated that open ended funds can have a liquidity mismatch between the terms at which investors can redeem and the time needed to liquidate fund assets to meet the redemption request. The FCA is working with the Bank of England and other regulators internationally to strengthen resilience of money market funds, funds with significant liquidity mismatches, and transmission of risk from the non-bank financial sector to the wider market. Separately, the FCA is in the process of completing a liquidity management multi-firm review.
• Investment in Operations and Resilience: the FCA noted that underinvestment in operations can lead to service disruption or failure, with consequential loss to investors and detriment to markets. To avoid this, firms are expected to have appropriate measures to understand the operational health of their business, and to be able to respond in a timely manner. The FCA confirmed that it will complete a range of proactive programmes to monitor and test asset managers' ability to meet these regulatory requirements. Specific asset management firms may be selected for further review in this regard.
• Financial Resilience: the FCA has increased its monitoring of asset managers' prudential health following the implementation of the Investment Firms Prudential Regime for in-scope asset managers. Given the impact of potential economic headwinds, firms should ensure that they have sufficient capital and liquidity to operate, and that their governance processes allow for prudential health to be regularly and adequately assessed. The FCA will continue to assess firms' prudential health using internal and external data sources, and will conduct targeted monitoring visits. Appropriate actions will be taken where necessary to minimise the potential harm from prudential failure.

CEOs are instructed by the FCA to consider whether the risks of harm set out in the portfolio letter are present in their firms, and adopt strategies for mitigating them. In future supervisory engagement with in-scope firms, the FCA will consider whether firms' governing bodies and Senior Managers have taken appropriate action to ensure that consumers and markets are appropriately protected.

7. PRA Consultation Paper on the Senior Managers Regime forms

On 31 January 2023, the PRA published a Consultation Paper on its proposals to:

• remove a number of SMCR forms from the PRA Rulebook, meaning the PRA would not need to follow the statutory consultation process for rule changes; and
• extend the length of employment history required in the Long Form A from 5 years to 10 years (where applicable), in line with MiFID requirements.

The consultation will close to comments on 28 February 2023. The PRA proposes that the changes be implemented in May 2023.

8. FCA: Handbook Notice 106

On 26 January 2023, the FCA published its Handbook Notice No. 106, which details the amendments made to the FCA Handbook by the FCA Board. In particular, the Senior Management Arrangements, Systems and Controls Sourcebook (SYSC) has been amended to clarify the status of a "significant SYSC firm", in order to aid the identification of enhanced firms under SMCR. The amendments clarify that a "significant SYSC firm" only includes firms that would have been considered both significant IFPRU firms and IFPRU investment firms under the arrangements applied prior to the application of IFPR.

9. NCA: Suspicious Activity Reports Annual Report for 2022

On 24 January 2023, the National Crime Agency (NCA) published its Suspicious Activity Reports (SARs) Annual report for 2022. Notable points in the report include the following:

• a record 901,255 SARs were received and processed, representing a 21% increase on 2021;
• Defence Against Money Laundering (DAML) requests were refused for transactions totalling more than £305 million, a 120.6% increase on the £138.6 million denied in 2020-21; and
• 358 Defence Against Terrorist Finance (DATF) were received, a decrease of 16% compared to the previous year.

10. FCA: Press release: Supporting firms through the transition to implementing the Consumer Duty

On 3 February 2023, the FCA released a press release on the Consumer Duty implementation process for in-scope firms which provide or influence "products" to retail clients. The FCA will continue to support in-scope firms through a programme of engagement, which includes setting out its expectations under the Duty in letters and arranging a series of regional in-person events for specific groups of small and medium sized firms.

In the press release, the FCA also published a series of 'Dear CEO' letters addressed to firms in the following sectors:

• asset management, custody and fund services and alternatives;
• consumer investments;
•  life insurance;
• credit reference agencies and providers of credit information services;
• mainstream consumer credit lenders;
• mortgage lenders and administrators; and
• retail banks and building societies.

The Dear CEO letters include a reminder of the implementation timeline and key elements of the Consumer Duty specific to the particular sector, along with the FCA's expectations of how firms should embed the Consumer Duty and feedback from its recent review of firms' implementation plans. In particular, the FCA emphasises in each letter that the implementation of the Duty should be a "personal priority" of firms' CEOs/directors (as applicable), such that they should ensure that good customer outcomes are at the heart of firm's culture, and strategy and business objectives.

The FCA has confirmed that further Dear CEO letters will be published addressing credit unions, debt advice firms, debt purchasers, debt collectors and debt administrators, mortgage intermediaries, motor finance providers, payments services and e-money firms, retail finance providers and credit brokers.

11. FCA: Consultation Paper: Debt packagers: Feedback on CP21/30 and further consultation on new rules and perimeter guidance

On 2 February 2023, the FCA issued a consultation paper (CP 23/5) containing feedback in relation to its earlier consultation paper on debt packagers (CP21/30), as well as a further consultation on the proposed new rules and perimeter guidance.

Debt packagers are regulated providers of debt advice who refer customers on to other providers of debt solutions. They typically rely on income from referral fees paid by these other firms. The FCA has had concerns about the ability of debt packagers to manage the conflict of interest between the need to have regard to the best interests of customers (as FCA rules require), and the provision of advice which maximises revenue for such firms.

In CP 21/30, the FCA proposed new rules which would ban debt packagers from receiving remuneration from debt solution providers. In CP23/5, the FCA confirms that it is planning to make the rules as set out in CP21/31, with minor amendments. It states that a referral fee ban for debt packagers would bring about an appropriate degree of protection for consumers.

The FCA is also seeking views on proposed perimeter guidance to clarify the boundary of the regulated activity of debt counselling in relation to activities commonly carried out by unauthorised lead generators. The proposed perimeter guidance would clarify that passing consumers to a solution provider who only offers one solution could constitute the regulated activity of debt counselling, depending on the circumstances of the individual case.

The deadline for comments on the consultation is 2 March 2023.

12. FCA: Multi-firm review of firms' Consumer Duty Implementation Plans

On 25 January 2023, the FCA published its review of a selection of firms' Consumer Duty implementation plans (the Review). The Review focuses on larger 'fixed' firms with dedicated FCA Supervision teams who primarily operate in retail financial services markets, and accordingly have the greatest potential impact on consumers and markets.

In the Review, the FCA evaluates:

• governance and oversight of implementation work;
• deliverability of firms' plans and their ability to meet the implementation deadline;
• firms' understanding of and engagement with, third party providers, where firms are dependent on third parties to implement their plans;
• how plans address the substantive requirements of the Consumer Duty;
• firms' data strategies to ensure they will be able to identify, monitor, evidence and stand behind the customer outcome expectations; and
• firms' culture and people strategies to ensure that their business will be focused on delivering good outcomes for consumers and all staff under their responsibilities under the Consumer Duty.

The FCA states that firms have generally embraced and shown an understanding of the shift of focus to consumer outcomes, established extensive programmes of work to embed the Consumer Duty, and evidencing their engagement with the incoming requirements. However, the FCA has identified 3 areas of improvement which firms should focus on in the lead up to 2023, namely around prioritisation, embedding substantive requirements and working with other firms.

For further detail on the Review, please our briefing here.

13. EBA: Clarification of the application of strong customer authentication requirements to digital wallets

On 31 January 2023, the European Banking Authority (EBA) published three additional Q&As which provide clarification on the application of strong customer authentication (SCA) to digital wallets under the second Payment Service Directive (PSD2).

The three additional Q&As are summarised below:

• Question 5622 relates to whether SCA is required when a Payment Service Provider (PSP) issues a payment instrument or creates a token. The EBA's response suggests that SCA is required in such circumstances, because creating a token, based on the submitter's description, includes verification by the PSP that the payment service user (e.g. cardholder) is the rightful user of the payment card details and the device, and the association of the token with the device under Article 24 of the regulatory technical standards (RTS). A created token, representing a pre-existing and -issued payment instrument, can then be used to initiate payment transactions amounting to a digitised version of a payment instrument.
• Question 6145 relates to whether the authentication to unlock a mobile device counts as one of the elements of SCA when a payment service user is tokenising a card on an e-wallet solution such as Apple Pay. The EBA's response notes that unlocking of a mobile phone with biometrics (e.g. a fingerprint) or with a PIN/password should not be considered a valid SCA element for the purpose of adding a payment card to a digital wallet if the screen locking mechanism of the mobile device is not under the control of the issuer or if the payer has not been associated previously through an SCA with the credential used for unlocking the phone.
• Question 6464 addresses whether SCA is required for the replacement of a tokenized card happening in the background without any action by the payer in the following circumstances: (i) if the token is expired or updated (ii) if the replacement of the card and the new card has a different BIN/Account Range or different functionalities and (iii) if there have been technical and/ or configuration changes to the issuer's BIN configuration. The EBA's response indicates that the issuance of a new token, replacing a previously existing one, and binding it to a device/user would require the application of SCA.

14. HM Treasury: Consultation and further Call for Evidence on regulatory approach to cryptoassets

On 1 February 2023, HM Treasury published a Consultation Paper and Call for Evidence in relation to the regulatory framework for cryptoassets in the UK. HM Treasury confirms that the UK is planning a phased approach to the regulation of cryptoassets, with this paper constituting the second phase in the regulatory process. The first phase has considered the regulation of so-called "digital settlement assets" (fiat-backed stablecoins used as payments) through the Financial Services and Markets Bill 2022-23 (see our briefing here).

HM Treasury intends to introduce a regulated activities regime adapted to the cryptoasset market, where such activities mirror or closely resemble regulated activities performed under the RAO, including:

• operating a cryptoasset trading venue;
• dealing in cryptoassets as principal or agent;
• arranging deals in cryptoassets and making arrangements with a view to transactions in cryptoassets; and

operating a cryptoasset lending platform.

The Consultation Paper sets out proposed requirements for a crypto market abuse regime and seeks views on whether:

• cryptoasset investment advice and cryptoasset portfolio management activities should be regulated;
• mining and validation activities in the UK should be regulated; and
• staking (excluding "layer 1 staking") should be considered alongside cryptoasset lending as an activity to be regulated (at a later stage).

The deadline for comments is 30 April 2023.

15. FCA: Feedback on applications for cryptoasset business registration

On 25 January 2023, the FCA published feedback in relation to good and poor quality registration applications made by cryptoasset businesses under the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692).

Since January 2020, the FCA has received over 300 applications for registration under the MLRs, and has determined over 229 of these, with 15% being approved.

The FCA reminds firms of its expectations of cryptoasset business registration applicants, including the following:

• Business Plans: applicants should not submit Business Plans that do not include forecasts or which provide unrealistic forecasts in relation to financials, staffing, marketing plans, customer breakdown or any other component. Applicants should also not submit Business Plans that focus only on the business model and commercial aspects without any description of its compliance oversight, risk mitigation and financial controls, especially for cryptoasset holdings;
• comprehensive description of products and services: an application should include a comprehensive and accurate description of the applicant’s products and services (e.g. cryptoasset token vetting policy);
• policies, systems and controls: applicants should have policies, systems and controls in place to appropriately manage and mitigate the risks identified in the business wide risk assessment (BWRA), and should adequately evidence their assessment of the strength of these controls; and
• risk assessment and management: applicants will need to show a thorough understanding of the risks from dealing in cryptoassets and design a BWRA that is tailored to its business model. The FCA will not approve an application where the applicant has an incorrect understanding of the risks associated with cryptoasset products.

The FCA advises applicants to be proactive and self-reliant, and be able to show that they can deal with a rapidly changing regulatory framework. Applicants are advised that websites and marketing material must not include languages that suggests that making an application for registration is a form of endorsement or recommendation by the FCA.

16. HM Treasury policy statement on an exemption for cryptoasset businesses approving own financial promotions

On 1 February 2023, HM Treasury published a policy statement setting out its proposal to introduce a temporary exemption to the financial promotion restriction under section 21 of FSMA. The exemption would enable cryptoasset businesses registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, but who are not otherwise FCA-authorised persons, to communicate their own financial promotions in relation to qualifying cryptoassets only (and not other controlled investments). This follows HM Treasury's January 2022 response to its consultation on bringing certain qualifying cryptoassets within the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529), which led to concerns that such businesses would not be able to communicate financial promotions on qualifying cryptoasset unlike other financial services firms that are authorised under FSMA.

Firms making use of this exemption will be subject to the same financial promotion rules as other firms issuing cryptoasset promotions. HM Treasury intends to confer powers on the FCA to enable it to respond flexibly to breaches of the financial promotion rules by registered cryptoasset businesses relying on the exemption.

HM Treasury will introduce legislation, which gives effect to the proposed cryptoasset financial promotions regime, including the temporary exemption discussed above. Due to the recent volatility in the cryptoasset markets and the pertinent consumer protection risks, the government will reduce the implementation period for the measure - beginning after the statutory instrument giving effect to it is made in Parliament – from 6 months to 4 months.

No updates for this edition of the FSS.

No updates for this edition of the FSS.