Financial services update – 11 / 37 观点
Featured in this month's update:
On 17 February 2022, the BoE and FCA published the final report of the Artificial Intelligence Public-Private Forum following its launch in October 2020. The report focuses on the challenges and risks arising out of the use of AI in financial services. It aims to increase understanding of the use of AI in financial services and encourage further discussion among academics, practitioners and regulators about the best way to support its safe adoption in financial services. The key points of the report include:
On 10 February 2022, the BoE published an update for firms on the progress of the BoE and FCA joint transformation programme to transform data collection from the UK financial sector. In summary the BoE and FCA:
Additionally, a Town Hall was held on 15 February 2022, providing an update on the joint transformation programme and clarifying key messages from the 10 February 2022 update.
On 10 February 2022, the BoE published a speech by Andrew Bailey (BoE governor), which addressed the resilience of the global financial system to various shocks, as well as the international and domestic attempts to tackle problems following the COVID-19 pandemic. Bailey commented on Solvency II, noting that its transposition from EU law was not necessarily best suited to the UK as it was originally intended to cover 27 countries. He stated that there is a clear case for reform after a process of defining and setting expectations for safety and soundness and policyholder protection. In addition, Bailey discussed global regulatory fragmentation, the potential amendments to standards inherited from the EU, and the pay-off between the benefits and costs of resilience.
Bailey also welcomed the three-year extension of temporary equivalence for clearing houses by the EU, arguing that "maintaining a shared deep commitment to open markets and open financial systems with strong and appropriate regulatory standards and cooperation to support them." He also saw no reason why there needs to be a time limit to this equivalence." Please see 'Securities, investments, and markets' below for more detail.
On 7 February 2022, the three European Supervisory Authorities (the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority) published their response to the European Commission's call for advice on digital finance. Their response comes after an analysis of market developments and the risks and opportunities caused by digitalisation in finance. The ESAs' findings included the following:
The ESAs also noted that financial services and business models evolve rapidly with digitalisation and the use of innovative technologies, so there may be a need to re-evaluate the issues and risks as the technologies develop further in the future.
On 3 February 2022, the FCA shared its analysis of financial promotions data from January 2021 to 31 December 2021, resulting from action taken against authorised firms in breach of financial promotion rules and referrals and investigations into unregulated activity. The data includes, among other things, the key messages for both regulated and unregulated financial promotion activity, and the number of unauthorised reports the FCA received during the period.
Regarding authorised firms, in 2021 the FCA found retail investments and retail lending as the sectors with the highest amend/withdraw outcomes (77% of its interventions). In relation to illegal financial promotions by unauthorised persons, 2021 saw an increase of 10% of total reports received when compared with 2020.
On 16 February 2022, the FSB published a report examining developments and risks relating to three types of cryptoassets: stablecoins, unbacked cryptoassets (like Bitcoin), and decentralised finance. The FSB states that the scale, structural vulnerabilities and interconnectedness with traditional finance of the fast-evolving cryptoasset markets could become a threat to global financial stability.
In 2021, cryptoasset market capitalisation grew to US$2.6 trillion, a growth of 3.5 times. Despite institutional involvement in cryptoassets markets growing over the last year, cryptoassets remain only a small portion of the overall global financial system. The FSB's report indicated areas of ongoing vigilance, such as differing regulatory approaches which could lead to regulatory arbitrage; acceleration in adoption of cryptoassets for payments; and potentially increasing bank sector involvement in the cryptoasset eco-system, especially where activities give rise to balance sheet exposure to cryptoassets that are not captured by appropriate regulatory treatment.
The report also considers that financial stability risks may increase rapidly and require pre-emptive evaluation of possible policy responses. The FSB plans to undertake ongoing monitoring and sharing of information on supervisory and regulatory approaches to ensure implementation of its high-level recommendations for the oversight of 'global stablecoin' arrangements.
On 14 February 2022, the Committee of Advertising Practice (CAP) published guidance on how it intends the CAP code to apply to advertising cryptoassets. The CAP anticipates that the FCA's regulation of most cryptoassets will not take effect before 2023. Before the effective date, cryptoasset advertising must comply with the CAP Code. After the effective date, oversight of issues of responsibility across all forms of cryptoasset advertising will be retained by the ASA, including adverts for non-fungible tokens. The guidance outlines how the CAP code will apply to cryptoasset adverts, including that advertisers must:
On 8 February 2022, the European Parliament updated its procedure file relating to the proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT). The European Parliament will consider the proposal during is 23 to 24 March 2022 plenary session. The Regulation will enter into force 20 days after it is published in the Official Journal of the European Union and will apply nine months after the date it enters into force. The pilot regime outlines which DLT financial instruments can be traded and provides the conditions for obtaining permissions to operate a DLT market infrastructure. The regime also details the co-operation between DLT market operators, national competent authorities, and ESMA.
On 11 February 2022, ESMA published its sustainable finance roadmap for 2022-24. The roadmap focuses on ESMA's three sustainable finance priorities: building national competent authorities' and ESMA's capacities in sustainable finance; addressing greenwashing and increasing transparency; and analysing and monitoring ESG markets and risks. Examples of how ESMA will address these priorities across multiple sectors include:
ESMA is due to begin a call for stakeholder candidates to join a new consultative working group, supporting ESMA's Co-ordination Network on Sustainability. ESMA will also ensure that the roadmap remains under review, including the three main priorities.
On 3 February 2022, ESMA launched a call for evidence on the market characteristics for ESG rating providers. This follows recent EU legislative initiatives which have increased financial market participants' requirements for information on entities' sustainability characteristics. ESMA believes that, without regulatory safeguards for these products, risks and issues reduce their potential benefits.
The call for evidence aims to obtain information on the market structure for ESG rating providers. It includes questions aimed at three groups: users of ESG ratings, ESG rating providers, and entities subject to the ESG rating providers' assessment. ESMA plans to provide the Commission with an overview of the market for ESG rating providers before the end of Q2 2022. ESMA invites all interested parties to respond by 11 March 2022.
On 14 February 2022, the FCA published a statement regarding the memorandum of understanding (MoU) entered into with the BoE, PRA, and Payment Systems Regulator on the framework used to co-operate with one another about payment systems in the UK. In 2021, in accordance with the legal requirement for authorities to review the MoU annually, the FCA undertook its sixth review of whether co-operation is working. The authorities concluded that the MoU is working well, and they have identified both initiatives that have been implemented and further opportunities to deepen co-operation, such as increasing sharing of information and data.
On 10 February 2022, the Payment Systems Regulator (PSR) released a policy statement on wider implementation of Confirmation of Payee (CoP), known as Phase 2. This follows the PSR's consultation in December 2021 on the further CoP implementation and its proposal that CoP should be rolled out to institutions that are reliant upon different reference information than in Phase 1. We covered this consultation in our January 2022 update. The PSR also confirmed that it will direct Pay.UK to ensure that Phase 1 is closed by 31 May 2022, meaning that all payment service providers (PSPs) will be using Phase 2. The PSR also published a new Specific Direction, which came into effect on 11 February 2022, which requires:
On 26 January 2022, the Payment Systems Regulator (PSR) published a consultation paper on initial remedies for the card-acquiring market review. In November 2021, the PSR published its market review and found that the supply of card-acquiring services does not work effectively for merchants with up to £50 million annual card turnover. The latest consultation paper outlines potential remedies to address the areas of concern highlighted in the market review, such as:
The PSR invites the industry to submit detailed specifications for potential remedies, as well as suggesting alternative proposals, ahead of the consultation closing on 6 April 2022. Later in 2022, the PSR plans to issue a provisional decision and draft remedies notice.
On 14 February 2022, the FCA released a statement on the changes made by four buy-now pay-later (BNPL) firms to the terms of their unregulated BNPL products. Under the Consumer Rights Act 2015 (CRA), the FCA used its powers to assess the fairness and transparency of the terms used by these firms, and believed the following terms may not meet the CRA's fairness and transparency requirements:
The four BNPL firms agreed to change their terms to address the above concerns, and three firms voluntarily offered to refund consumers who had been charged fixed late payment fees due after cancelling their entire order with a retailer (the fourth firm does not charge any such late payment fees). In the future, the government plans for unregulated BNPL products to fall under the regulatory remit of the FCA. We cover this topic in greater detail in our BNPL briefing.
On 7 February 2022, the European Parliament's Internal Market and Consumer Protection Committee (IMCO) shared a draft report on the European Commission's legislative proposal for a Directive on consumer credits to replace the Consumer Credit Directive (CCD II). The key elements of the explanatory statement to the report include the Rapporteur (Kateřina Konečná, who prepared the report) suggested a ban of personalised advertisements and an extension of the requirements on advertisements with information on the cost and consequences of missed payments.
Additionally, the Rapporteur stated that the EBA should develop a range of standardised environmentally sustainable consumer credit products, alongside stakeholders from the industry and consumer representatives. The Rapporteur also suggested consumers are provided with pre-contract information in the clearest possible way.
On 1 February 2022, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a draft opinion on the European Commission's legislative proposal for a Directive on consumer credits to replace the Consumer Credit Directive (CCD II). The draft opinion suggests additional measures to enhance further consumer protection, including that the type of consumers' data used to create personalised offers and assessments of creditworthiness should not include sensitive data, in accordance with the GDPR.
On 15 February 2022, the International Regulatory Strategy Group (IRSG) published a paper outlining its position on the third-country regime for banking services under the proposed amendments to the CRD IV Directive. The IRSG among other things considers that the EU proposals seem tougher than the regulations which govern cross-border market access into other important jurisdictions. The IRSG also considers that the new proposals signify a significant departure from the existing requirements. Due to the broad scope of the requirements, it will result in a fragmentation of markets and lead to creating problems for the EU firms which carry out core banking services.
Generally, the IRSG is supportive of the market access rules which enhance harmonisation across the EU but do not constrain access to international markets. The IRSG notes that there have been statements from the European Commission which imply it is open-minded to considering narrowing the scope of the market access restrictions.
On 15 February 2022, the FCA amended its webpage relating to general insurance value measures reporting, adding clarification on reporting for vehicle breakdown products and legal expenses. For all legal expenses and vehicle breakdown products, the FCA stated that firms are not required to report data for: average claims pay-out; total claims pay-out cost; and, the amount that the top 2% of claim pay-outs are above. Firms can now enter £0 into the reporting form cells for these metrics. The first reports to be made are for the period 1 July 2021 to 31 December 2021, which are to be submitted by 28 February 2022.
On 15 February 2022, the FCA published final guidance on its approach to reviewing insurance business transfers under FSMA, which, among other things:
We covered the consultation on the guidance in our August 2021 update.
On 8 February 2022, the Basel Committee on Banking Supervision (BCBS) published a speech by its Chair (Mr Hernández de Cos) on the implementation of the final Basel III reforms. His speech outlines concern about the European Commission's proposals for implementing the final Basel III reforms, set out in the CRR III Regulation, including:
The speech also highlighted concerns around the EU implementation of the output floor, with Mr Hernández de Cos calling for adjustments to be avoided as they are unfounded from financial stability or prudential grounds.
On 7 February 2022, the PRA released a consultation paper outlining changes to its rules and expectations regarding the definition of capital. The UK version of the Commission Delegated Regulation (EU) 241/2014 includes regulatory technical standards on own funds requirements for banks, building societies and PRA-designated investment firms (Own Funds RTS). In its latest consultation paper, the PRA provides proposals to transfer the remaining Own Funds RTS provisions to the Own Funds and Eligible Liabilities Part, revoking the Own Funds RTS.
The PRA also plans to amend its supervisory statement on the definition of capital, clarifying its expectations of firms around the quality of capital instruments. This includes updates on the use of side-agreements, for example. Furthermore, the PRA intends to amend the Own Funds and Eligible Liabilities to ensure it is in line with amendments made to the EU Capital Requirements Regulation, including updates to the general prior permission process. The deadline for responses to the consultation paper is 2 May 2022 and the PRA plans to implement the changes in September 2022.
On 9 February 2022, the FCA published a press release on finalising LIBOR transition, covering achievements thus far (in sterling markets) and remaining work. Following a meeting in January 2022, the Working Group on Sterling Risk-Free Reference Rates found that it had met its aim to catalyse a broad-based transition to SONIA across sterling markets for derivatives, loans, and bonds. The Working Group now intends to focus on new objectives. The FCA believes that more work is needed to finalise the LIBOR transition and support the continued active conversion of legacy sterling LIBOR-linked loans and bonds currently dependent on synthetic LIBOR. The FCA plans to obtain views in 2022 on retiring 1-month and 6-month synthetic sterling LIBOR at the end of 2022 and on when to retire 3-month sterling synthetic LIBOR.
On 9 February 2022, Commission Implementing Decision determining that the regulatory framework applying to central counterparties (CCPs) in the UK is equivalent to EMIR, for a limited time, was published in the Official Journal of the EU. The Commission Implementing Decision which currently specified the temporary equivalence of the regulatory framework for UK CCPs expires on 30 June 2022, and the new Implementing Decision will apply from 1 July 2022 and expire on 30 June 2025. The extension to June 2025 is designed to give the Commission sufficient time to amend the EU supervisory system for CCPs and encourage increased clearing capacity of EU CCPs.
On 8 February 2022, the FCA published a speech by its Executive Director for Markets (Sarah Pritchard) on enhancing the UK's capital markets. The following points are of note:
On 2 February 2022, ESMA published a supervisory briefing outlining its expectation for firms that use tied agents under the MiFID II framework. Following the UK withdrawal from the EU, ESMA has monitored firms to determine whether they comply with EU-based clients is compliant with the MiFID II Directive requirements. ESMA noted that some investment firms, when using tied agents, are a potential source of circumventing the MiFID II framework, and it is important to identify its supervisory expectations of firms using tied agents to maintain standards. Its briefing, therefore, provides guidance on how to comply with MiFID II relating to tied agents, especially where agents are legal persons and where they have links to other entities, including those in third-countries.
On 21 February 2022, the European Court of Auditors published a special report on the EU's single market for investment funds. As the EU intends to create a single competitive market, the audit analyses whether the EU has managed to achieve this. The report found that the EU actions have created a single market for investment funds, however it has not yet achieved its intended outcomes as there are still limited cross-border activities and benefits for investors. Furthermore, systemic risks are unmonitored, and the effectiveness and consistency of fund supervision and investor protection is not sufficient. The European Court of Auditors has made recommendations for improvements but noted that minor revisions alone will not be enough to achieve a true single market.
On 10 February 2022, HM Treasury published its review of the UK funds regime, summarising the representations it received and outlining the government's intentions to take advantage of the opportunities it identified. The response document expands on the government's priorities and its proposals to ensure that the UK funds regime review delivers on its objectives. The government's regulatory priorities include:
On 4 February, ESMA published links to websites of the competent authorities where they share information on national laws, regulations, and administrative provisions relating to market requirements for alternative investment funds and undertakings for collective investment in transferable securities. It also shared the links to websites of competent authorities which publish lists of fees and charges for the levy for undertaking their duties in relation to cross-border activities of fund managers.
On 17 February 2022, the Upper Tribunal published its decision in the case of Gidiplus Limited v the FCA, in the first cryptoasset decision before the Upper Tribunal. In November 2021, the FCA gave a Decision Notice to Gidiplus refusing its application to be registered as a cryptoasset exchange provider under the MLRs. Gidiplus applied to suspend the effect of the FCA's Decision Notice (the Suspension Application), in the first FCA decision relating to a cryptoasset firm to be referred to the Upper Tribunal. The judgment concluded that the applicant had a case to answer, in relation to the risks of money laundering at the firm and the firm's director having mislead banks. Furthermore, the applicant's evidence did not demonstrate that the applicant had implemented a remediation plan, resulting in the Upper Tribunal not being satisfied that the applicant could be compliant in carrying out its business if the FCA's decision were to be suspended.
On 15 February 2022, the Office of the Complaints Commissioner shared a final report on the FCA's oversight of London Capital & Finance plc (LC&F). The report divided the 440 complaints into the following categories: dissatisfaction with the FCA's oversight; a request that the FCA should offer complainants an ex gratia compensatory payment for its regulatory failings in its oversight; and, dissatisfaction with aspects of the FCA's complaint handling process. The FCA has said it will provide its response to the report by 15 March 2022.
On 11 February 2022, the FCA published a press release detailing that former CFO and Finance Director of Redcentric Plc was found guilty of four charges concerning the making of false and misleading statements to the market. Redcentric, an IT service provider and AIM-listed company, issued false and misleading unaudited interim results in November 2015, followed by false and misleading unaudited final year results in June 2016, which overstated the company's cash position by £13.1 million and £12.2 million, respectively. The FCA estimated the losses impacted Redcentric's shareholders to be approximately £43 million. Of the other two defendants, another former Finance Director pleaded guilty to all charges at an earlier stage in the proceedings, and the former CEO was acquitted by the jury on all charges.
On 17 February 2022, the Joint Money Laundering Steering Group (JMLSG) published a revision to its syndicated lending guidance in Part II of its anti-money laundering and counter-terrorist financing guidance for financial services. This follows a consultation launched in December 2021 by JMLSG in relation to proposed insertions to cover completion of consumer due diligence by lenders. We covered the consultation in our January 2022 update. The amended guidance has been submitted to HM Treasury for approval.
On 2 February 2022, the Treasury Committee published its report on fraud, scams, and economic crime which included, among others, the following recommendations:
On 29 January 2022, the Office of Financial Sanctions Implementations (OFSI) published guidance on the issue of monetary penalties for breaches of financial sanctions, following an earlier version published in April 2021. The OFSI's guidance includes an overview of the process to determine the penalty level and an explanation of the Treasury's powers given by the Policing and Crime Act 2017. The revised guidance came into force on 28 January 2022.
The FCA divides skilled persons reports into categories referred to as "Lots". Of the 12 skilled persons reports it commissioned in Q3 2021/22 (October - December 2021), how many related to Lot E, Financial Crime?
The answer to last month's trivia: there are 10 standard pricing categories in the FCA's new authorisation application fee structure.