Financial services update – 4 / 47 观点
In this month's update:
On 27 July 2023, the FCA, PRA and Bank of England, published a much awaited policy statement (PS23/12) setting out details of a revised scheme for complaints about the regulators (Scheme). The policy statement follows the regulators' consultation paper in 2020 (CP20/11) (see our August 2020 update).
The key points to note about the Scheme, which applies from 1 November 2023, are:
On 26 July 2023, the FCA published the main findings from its third Financial Lives survey, which it conducted in May 2022. The surveys are undertaken roughly every two years and are designed to provide representative data about consumers' attitudes towards managing their money, their financial products and their experiences of engaging with the financial services industry. This data helps the FCA identify harm and respond to it. Please see our Fintech and digital assets and Consumer credit sections below for some of the key findings.
On 25 July 2023, the FCA announced that it is reviewing and updating authorisation application forms to make it quicker and easier for firms to apply to the FCA for authorisation and to help the FCA capture the information it needs. The first new form the FCA is releasing is Form A, which is used for Senior Management and Controlled Functions applications.
On 20 July 2023, the FCA published an updated version of its webpage on the perimeter report. The perimeter report provides detail on issues around the regulatory perimeter and sets out the FCA's response.
The revisions to the report reflect regulatory developments since the last time the perimeter report webpage was updated in March 2023, the most significant being the Financial Services and Markets Act 2023 (FSMA 2023). The report contains new or updated materials on issues including open banking, ESG data and rating providers, the financial promotions gateway and cryptoasset financial promotions.
On 20 July 2023, the FCA and the PSR published their annual reports and accounts for 2022/23. Reports on their strategies, impact, remits and net zero work were also published.
The FCA's annual report highlights its progress and key achievements in the first year of its three-year strategy, including:
Alongside the annual report the FCA published a number of related reports, including its Prescribed Persons Annual Report 2022/23, which lists whistleblowing disclosures made to the regulator, market cleanliness statistics for 2022/23 and operating services metrics for 2022/23.
The PSR's annual report provides an update on the progress of its programme of work during the period, including proposals for a digital pound, cryptoassets and maintaining free access to cash. The PSR has met all of the commitments set out in its 2022/23 annual plan but explains that the Board will continue to challenge and support the organisation to be bolder.
On 17 July 2023, the co-chairs of the Financial Services Regulatory Initiatives Forum (Forum) published an update on the Regulatory Initiatives Grid (Grid) following Royal Assent of FSMA 2023.
The Grid was last published in February 2023 and while a full update of the Grid is planned for Q4 of this year, given the significance of FSMA 2023 to the financial services regulatory landscape the update covers the most significant developments since the February 2023 Grid.
Points of interest in the update include:
On 14 July 2023, the FCA published its draft Rule Review Framework (Framework).
The Framework has been published in line with an obligation introduced by FSMA 2023 and, among other things, sets out:
Comments can be made on the Framework until 15 September 2023.
On 14 July 2023, the FCA published a new webpage providing information on the repeal and replacement of retained EU law (REUL) with FCA rules.
HM Treasury will repeal the firm-facing requirements in REUL and, where appropriate, the FCA will replace those provisions with rules. When the FCA replaces repealed REUL provisions in its Handbook, it will do so in line with the following five core principles:
The principles aim to support the FCA's overarching aim for the Handbook to enhance the overall user experience by making it clear, accessible and navigable, while reducing regulatory costs. More detail on each of the five principles can be found on the webpage.
The webpage provides links to key documents with a summary of the current position relating to legislation including the MiFID II Directive, Money Market Funds Regulation and Payment Accounts Regulations 2015.
On 14 July 2023, the FCA published a statement on its new secondary international competitiveness and growth objective. The new objective was introduced by FSMA 2023.
The statement explains how the FCA plans to report on its progress in facilitating the new objective in the future, including annual reporting on how the FCA is complying with the new secondary objective and the publication of reports providing greater detail on the FCA's embedding and advancement of the new objective in each of the first two years after commencement.
The statement also sets out the FCA's view of how its work to support the seven key drivers of productivity will support delivery of the secondary objective. The seven key drivers of productivity are set out in the FCA's 2023/24 Business Plan and include proportionate regulation, market stability and operational efficiency.
The statement also explains the FCA's approach to updating key processes and documents in light of its new objective, including a review of key documents and consulting on its updated Rule Review Framework (see above).
On 11 July 2023, the FCA published two webpages for principal firms with appointed representatives:
On 6 July 2023, in VB Consultants Ltd and others v Jacob Hopkins McKenzie Ltd and others  EWHC 1686 (Comm), the High Court considered, among other things, whether an authorised principal firm was responsible for certain activities carried on by its appointed representative under section 39 of the Financial Services and Markets Act 2000 (FSMA).
Between October 2015 and March 2019, the claimants invested almost £2 million in various investment schemes which were devised, managed and promoted through Jacob Hopkins McKenzie Ltd (JHM). The application for summary judgment concerned only the claimant's claims against the twelfth defendant, Kession Capital Ltd (KCL). JHM was not authorised by the FCA to carry on the regulated activities required in connection with the investment schemes but was an appointed representative of KCL. As part of the appointed representative agreement entered into between JHM and KCL, KCL accepted responsibility for all JHM's activities in carrying on the "relevant business" under the agreement.
Of particular interest in the judgment is the judge's consideration of exemption and liability. The judge noted that a claimant cannot use section 39 of FSMA to hold a firm liable for activities of representatives that are outside the scope of the business for which responsibility was assumed. However, the judge also noted that section 39 of FSMA is not to be read as encouraging or requiring the court to take an artificially narrow view, or to assist appointors to draft away responsibility for business that in commercial reality falls squarely within the contemplated appointment.
In light of this, the judge held it necessary to consider both (i) how far an appointor, by limiting the scope of the appointment, can limit its liability, and (ii) the scenario if, having been appointed to conduct a particular category of business, the appointed representative steps outside that category in its narrow sense.
On 6 July 2023, the Bank of England published a communication to firms outlining the progress of the joint transformation programme for transforming data collection (TDC) from the UK financial sector. The programme is led by the BoE and the FCA.
The communication includes updates on the:
The results of the FCA's Financial Lives 2022 survey reveal an increase in those holding a current account with an e-money institution and an increase in those with an active current account with a digital bank.
The survey found that there has been a five-fold increase in the use of current accounts from e-money institutions since 2017 – from 1.3% (or 0.7m) in 2017 to 6.6% (or 3.5m) in 2022. In addition, far more adults held a current account with a digital bank in May 2022 than did so in 2017 – 11% had an active current account with a digital bank in 2022, compared with less than 0.5% in 2017.
There has also been an almost three-fold increase in the proportion of adults holding cryptoassets between February 2020 and May 2022: from 2.0% (1.0m) to 5.8% (3.1m).
On 20 July 2023, the House of Commons Treasury Committee published HM Treasury's response to the Committee's May 2023 report on regulating cryptoassets in which the Committee strongly recommended that the government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.
In its response, the Treasury welcomes the Committee's recommendation that a balanced approach should be taken to supporting the development of cryptoasset technologies, but firmly disagrees with the Committee's recommendation regarding regulation of unbacked cryptoassets as gambling. The Treasury reiterates the government's intention to regulate retail trading in unbacked cryptoassets as a financial service and notes that this approach aims to create the conditions for safe innovation and competition while managing risks, especially those to consumers.
In disagreeing with the Committee's recommendation, the Treasury also notes that the recommendation is contrary to globally agreed recommendations from international organisations and standard-setting bodies which are grounded in the principle of "same activity, same risk, same regulatory outcome" and that it would risk overlapping mandates between financial regulators and the Gambling Commission.
On 20 July 2023, the FCA published a press release announcing that, following two successful pilots, it intends to make its Digital Sandbox permanently available from 1 August 2023. This will open up the platform to an even broader range of innovative businesses, start-ups and data providers.
The Digital Sandbox is a testing environment that enables the FCA to support firms at the early stage of product development by enabling experimentation through proof of concepts, thereby fostering innovation and growth. To date, the platform has only been available temporarily to those participating in pilots and TechSprints.
Applications can be made to participate in the sandbox from 1 August 2023 across a range of themes, including a cross-sector theme. Applications will be assessed against criteria ensuring they are in scope, reflect genuine innovation, provide consumer benefit, and show a readiness to proceed. The approval process will take a maximum of four weeks.
On 17 July 2023, the FCA published a guidance consultation on financial promotions on social media (GC23/2).
The FCA is updating its existing guidance on social media and customer communications (FG15/4) to ensure that the FCA's expectations when communicating about financial products and services on social media are clear and reflect the current and future social media landscape.
The updated guidance aims to clarify the application of the FCA's existing rules and policies and explains how the FCA expects the prominence of required information to apply to different social media marketing channels. The guidance also highlights how the Consumer Duty will raise the FCA's expectations of firms communicating financial promotions on social media.
Additional guidance on the perimeter in relation to financial promotions on social media is also provided, with the aim of tackling harm occurring from unauthorised influencers communicating illegal financial promotions because they do not realise that they fall within the financial promotions perimeter. The guidance also seeks to tackle harm arising from influencers communicating approved financial promotions, particularly for firms approving communications for high-risk investments.
Comments can be made on the guidance consultation until 11 September 2023. The FCA intends to finalise the guidance later in 2023, at which point FG15/4 will be retired.
On 17 July 2023, the Financial Stability Board (FSB) published its global regulatory framework for cryptoasset activities.
The framework is composed of two sets of high-level recommendations for the regulation, supervision and oversight of cryptoasset activities and markets. The framework aims to promote comprehensiveness and international consistency of regulatory and supervisory approaches. The FSB has strengthened both sets of high-level recommendations to address risks associated with conflicts of interest, strengthen cross-border supervisory co-operation and ensure adequate safeguarding of client assets.
The final recommendations consider feedback from the FSB's October 2022 consultation and, in light of the events that took place in cryptoasset markets in 2022 and early 2023, reflect enhancements in key areas. The recommendations focus on addressing risks to financial stability and build on the three principles that informed the consultative framework, being:
In consultation with relevant international standard-setting bodies and organisations, the FSB will conduct a review of the implementation of the recommendations by the end of 2025. This review will inform whether amendments to the recommendations or development of implementation guidance may be necessary.
On 12 July 2023, the FCA published a speech on its emerging regulatory approach to artificial intelligence (AI) and Big Tech. The speech was given by the FCA's Chief Executive, Nikhil Rathi.
In the speech, Rathi notes that the FCA intends to issue a call for further input on the role of Big Tech firms as the gatekeepers of data in financial services and the implications of the ensuing data-sharing asymmetry between Big Tech firms and financial services firms.
Rathi warns that using AI risks affecting the integrity, price discovery, transparency and fairness of markets. Rathi highlights the FCA's expectation that firms accelerate investment in fraud prevention and operational and cyber resilience as AI is further adopted. Rathi also highlights the risks of AI hallucinations and the implications of poor quality, or historically biased, data sets used in AI.
In the speech, Rathi argues that the Consumer Duty and Senior Managers and Certification Regime provide frameworks that address many of the issues arising from AI.
In March 2023, the government announced that it would engage with regulators, including the FCA, to develop a regulatory sandbox for AI that would bring together regulators to support innovators directly and help them get their products to market (please see our May 2023 update). In the speech, Rathi notes the FCA's intention to open the upcoming AI sandbox to firms wanting to test the latest innovations.
On 20 July 2023, the EBA published a webpage on a public consultation on draft templates for collecting climate related data from EU banks. The EBA has published for consultation draft versions of the templates for data collection and template guidance containing definitions and rules to assist banks when compiling the templates.
The templates relate to one-off Fit-for-55 climate risk scenario analysis that the EBA will carry out together with ESMA and EIOPA. The templates aim to collect climate-related and financial information on credit risk, market risk and real estate risks. Banks are asked to report aggregated and counterparty level data as at December 2022.
The deadline for responses is 11 October 2023. The scenario analysis is expected to start by the end of 2023, with the publication of results envisaged by Q1 2025.
On 19 July 2023, the FRC issued a call for evidence to collect views to inform the proposed endorsement of the IFRS Sustainability Disclosure Standards (the Standards) in the UK. The first two Standards were issued by the ISSB in June 2023 (please see our July 2023 update). An associated press release and webpage were also published.
The call for evidence aims to identify views on whether the disclosures required by the Standards:
Responses to the call for evidence should be received by 11 October 2023.
On 14 July 2023, the House of Commons Treasury Committee published a press release announcing the launch of an inquiry into sexism in the City.
The inquiry will examine the barriers faced by women in financial services, the progress made in removing gender pay gaps and what role firms, the government and regulators should play in combatting sexual harassment and misogyny.
More information on the scope of the inquiry is provided in a related call for evidence. In addition, evidence is requested on matters including the impact of the Women in Finance Charter and other initiatives, the role of the government and regulators in acting as role models for good gender diversity practices and progress in removing the barriers to women entering and progressing their careers in the financial services industry.
Written evidence can be submitted to the Committee until 1 September 2023.
On 10 July 2023, the Lending Standards Board (LSB) published a report on business customers and green finance.
The report sets out that while demand for green or sustainability-linked products is growing, many SMEs still face barriers to access and as a result take-up by SMEs is low. Around 15 products were identified as currently being offered by firms to SMEs specifically for green purposes.
LSB argues that industry standards should be developed in order to combat the challenges faced by firms and SME customers in relation to providing and using green finance products. The standards would cover areas such as the use of terminology, product criteria and monitoring requirements.
In the report LSB explains that their Standards of Lending Practice (Standards) provide a framework to enable firms to consider how to support SME customers seeking green or sustainable finance to reduce their environmental impact.
LSB launched a review of the Standards in June 2023 (please see our July 2023 update). As part of the review, LSB will assess how its work on green finance can support the development of new guidance or changes to the Standards.
On 7 July 2023, the European Commission's Recommendation ((EU) 2023/1425) (Recommendation) on facilitating finance for the transition to a sustainable economy was published in the Official Journal of the European Union.
The Recommendation clarifies the concept of transition finance and provides guidance and examples for companies and the financial sector. The Recommendation's aim is to support transition finance in a trusted environment for investors by encouraging the voluntary use of sustainable finance tools and disclosures in ways that can ensure the credibility of transition investment opportunities.
On 6 July 2023, ESMA published a press release announcing the launch of a common supervisory action (CSA) with national competent authorities (NCAs) on sustainability-related disclosures and the integration of sustainability risks in the investment fund sector.
ESMA expects that the CSA will improve the comprehensibility of ESG disclosures across key segments of the sustainable finance value chain.
The CSA will run until Q3 2024 and will assess the compliance of asset managers with the relevant provisions in the Sustainable Finance Disclosure Regulation, the Taxonomy Regulation and the relevant implementing measures. The CSA will also gather information on greenwashing risks in the investment management sector and will identify further supervisory and regulatory intervention to address the issue.
On 5 July 2023, the ESG Data and Ratings Code of Conduct Working Group (DRWG), supported by IRSG and ICMA, published a consultation on a draft voluntary code of conduct for ESG ratings and data product providers. In an associated press release, the DRWG's steering committee states that it engaged with standard-setters in other jurisdictions to ensure international consistency.
The draft code enhances consistency, transparency and accountability in the financial services industry to ensure the market can have confidence in the integrity of ESG ratings and data products.
The draft code sets out the following best practice principles:
The consultation closes to responses on 5 October 2023. The DRWG intends to publish the final code at the end of 2023.
On 14 July 2023, the Payment Systems Regulator (PSR) published a response to its call for views on its first annual review of the specific direction issued to Link Scheme Holdings Ltd (LINK) on maintaining free-to-use (FTU) ATMs in the UK (SD12). In addition to the response, the PSR has published a document containing stakeholders' submissions.
The PSR has concluded that SD12 has worked well in ensuring that LINK continues to meet its commitment to meet users' needs and maintain a broad geographic spread of FTU ATMs. In light of this, the PSR has decided that SD12 should remain in place.
However, the following four areas for improvement have been identified:
The PSR is engaging with LINK on the feedback received from stakeholders and the findings of the review. In spring 2024 the PSR will undertake another review of SD12, at which point it will assess SD12's role in protecting free access to cash in the context of the changes made to the regulatory landscape by the Financial Services and Markets Act 2023.
The PSR will continue to work with the FCA as they assume the lead role in protecting access to cash in the long term, meanwhile the PSR retains its role regulating LINK.
On 12 July 2023, the Supreme Court handed down its judgment in Philipp v Barclays Bank UK PLC. The court allowed the appeal and, in doing so, rejected the claim that the Quincecare duty would apply in instances of authorised push payment (APP) fraud where there is no agent involved and the customer directly gives a payment instruction to the bank.
In 2018, Mrs Philipp (P) fell victim to a fraud and was deceived by criminals into instructing Barclays Bank (the Bank) to transfer £700,000 in two payments from P's current account with the Bank to bank accounts in the United Arab Emirates. The instructions were carried out and the money was lost.
Whether victims of APP frauds should bear the loss themselves or whether banks which have made or received payments should be required to reimburse victims of such crimes is a question of social policy for regulators and government. The Financial Services and Markets Act 2023, which received Royal Assent in June 2023 (please see our July 2023 update), provides for a mandatory reimbursement scheme. However, this scheme does not extend to international payments and therefore would not have applied to this case in any event.
P argued that the Bank was responsible for the loss on the basis that the Bank owed her a duty under its contract with her or under common law not to carry out her payment instructions if, as alleged, it had reasonable grounds for believing she was being defrauded. Initially the High Court granted summary judgment in the Bank's favour, but the Court of Appeal subsequently allowed P's appeal. The Court of Appeal accepted P's argument that, in principle, a bank owes a duty of the kind alleged and that whether such a duty arose on the facts of the case was a question that could only be decided at trial.
The Bank appealed to the Supreme Court, which unanimously held that the Bank did not owe the alleged duty to P. Consequently, the Supreme Court restored the judge's order granting summary judgment in favour of the Bank but varied it to permit P to maintain an alternative claim based on the Bank's alleged failure to act promptly to try to recall the payments after the fraud was discovered.
In allowing the appeal, the Supreme Court described the conclusion reached by the Court of Appeal as inconsistent with the ordinary obligations owed by a bank to its customer. Provided the customer's account is in credit, the ordinary duty of the bank when instructed by its customer to make a payment from the account is to carry out the instruction and make the payment. The duty is strict and, unless otherwise agreed, the bank must execute the instructions and do so promptly. The Supreme Court highlighted that it is not for the bank to concern itself with the wisdom or risks of its customer's payment decisions.
The Supreme Court noted that the Court of Appeal derived the alleged duty by extrapolating the reasoning in Barclays Bank Plc v Quincecare Ltd. In this and other similar cases, the courts have held that a bank has a duty not to execute a payment instruction given by an agent of its customer without making inquiries if it has reasonable grounds for believing the agent is attempting to defraud the customer. The Supreme Court concluded that this reasoning does not apply to cases of the instant kind where there is no agent involved and the customer themselves gives a payment instruction to the bank. In this situation, the validity of the instruction is not in doubt and unless otherwise expressly agreed, the bank's duty is to execute the instruction. The Supreme Court noted that if the bank were to refuse or fail to do this, the bank would be in breach of duty.
On 11 July 2023, HM Treasury published a response to its consultation on information requirements in the Payment Accounts Regulations 2015 (PARs). The consultation was published in December 2022 as part of the Edinburgh Reforms (please see our January 2023 update).
Having considered the consultation responses, the government's view is that removing the requirements currently contained in the PARs which oblige UK payment service providers who offer payment accounts to provide their customers with certain documents related to their account fees will have a limited negative impact, and potential risks will be mitigated by other rules to which industry is subject. This change also aligns with the government's wider approach to deliver a smart regulatory framework, under which regulators take responsibility for setting detailed firm-facing requirements within a framework set by government and Parliament.
Accordingly, the government intends to revoke Part 2, Schedules 1 and 2 and the Binding Technical Standards of the PARs and hand over responsibility for detailed firm-facing customer information requirements to the FCA. The FCA is not currently planning to make rule changes in this area but will continue to hold firms to account on the standards that it sets through its supervision of firms.
The changes will be implemented through secondary legislation and will take effect on 1 January 2024.
The Review has been launched to report on how payments are likely to be made in the future and the action that needs to be taken to enable the UK to deliver world leading retail payment services. In making its recommendations, the Review will seek to answer what the most important customer retail payment journeys are both today and in the next 5 years, how the UK consumer experience for these journeys compares to other leading countries and how likely it is that the current plans and initiatives deliver world leading payment journeys for UK consumers.
The Review is being conducted on an independent basis and will aim to answer the questions posed in the Treasury's call for evidence.
The call for input closes on 1 September 2023, at which point the Review team will analyse the responses received and a report and recommendations will be given by the chair to the government.
On 7 July 2023, the Payment Systems Regulator (PSR) published a consultation paper (CP23/4) on the legal instruments that will implement its policy on the new reimbursement requirement within the Faster Payments system to fight authorised push payment (APP) fraud. The PSR covered the mandatory reimbursement policy for APP fraud in depth in its June 2023 policy statement (PS23/3) (please see our July 2023 update).
In the consultation paper, the PSR sets out the following draft instruments:
The consultation closes on 25 August 2023.
On 30 June 2023, the PSR invited views on a working paper that examines recent changes to scheme and processing fees, as well as how Mastercard and Visa approach fee changes (MR22/1.6).
This working paper forms part of the PSR's ongoing card scheme and processing fees market review. Through the review, the PSR is aiming to understand whether the supply of card scheme and processing services is working well, including how well competition is working.
The PSR has looked at internal documents of Mastercard and Visa relating to fee changes to understand the factors taken into consideration when fees are set. The working paper explains the PSR's methodology and analysis of these documents, summarises the evidence reviewed and sets out the PSR's emerging thinking. The PSR has observed that the most commonly identified rationale for fee changes is that they reflect the "value" of the service to customers of the schemes, but in most cases the documents do not include any quantitative estimate of this value. The PSR also observed that while internal documents often mention competition or the need for a fee to be "competitive", competition does not appear to have been an impediment to implementing material increases to mandatory fees.
The PSR invites comments on the issues raised in the working paper by 11 August 2023. The PSR intends to publish its interim report on its market review by the end of 2023.
According to the results of the Financial Lives 2022 survey, the use of credit was high in 2022. Over four-fifths of adults (83% or 44.0m) held at least one credit or loan product in May 2022 or had done so at some point in the previous 12 months. This compares to 78% (39.6m) in 2017. There has been a decline in the use of high-cost credit. 5.2 million adults (10%) had a high-cost loan in May 2022 or had had one in the previous 12 months, down 2 percentage points from 2020 (12% or 6.2m).
For the first time, the survey asked about deferred payment credit (DPC) (commonly referred to as Buy Now, Pay Later, which is currently not regulated by the FCA). 8.8 million adults (17% of all adults) used DPC in the previous 12 months.
On 26 July 2023, the EBA released a consultation paper on draft guidelines on the establishment and maintenance of national lists or registers of credit servers pursuant to Directive (EU) 2021/2167 on credit services and credit purchasers, which is also referred to as the Non-Performing Loans Directive.
There will be an online public hearing on the draft guidelines on 3 October 2023. Responses to the consultation paper should be made by 26 October 2023.
On 14 July 2023, the FCA set out its supervisory approach to the disclosure requirement in MCOB 7.6.28R in light of the rules brought in recently to support the new mortgage charter (see our July 2023 update). The FCA is giving firms time to make their systems compliant where they are currently not able to provide the required disclosure, when giving effect to the new options that support the implementation of the mortgage charter. A firm that cannot fulfil its disclosure obligation should provide as much disclosure as possible in a durable medium. Firms that are not currently in a position to comply with the FCA's rules must remedy this as soon as possible and by the end of January 2024 at the latest.
The government will now carry out policy development to produce more detailed policy proposals, with a view to publishing a second consultation paper in 2024. Ahead of that, the government will speak to a range of stakeholders on the overall design of the new regime. Given the complexity of this area, it will take some time for CCA reform to be completed.
On 19 July 2023, the PRA published a consultation paper (CP14/23) on Pillar 3 remuneration disclosure relating to disclosure requirements for smaller banks and building societies.
In the consultation paper, the PRA proposes to reduce the disclosure requirements that apply to small remuneration firms, in particular the information to be disclosed using the UK REMA template. Small remuneration firms are:
The proposals aim to enhance the proportionality of Pillar 3 remuneration disclosure requirements and would result in changes to the Disclosure (CRR) Part of the PRA Rulebook as set out in the draft PRA Rulebook: CRR Firms: Simpler Remuneration Disclosures Instrument 2023.
The deadline for responses is 20 September 2023. The PRA intends to publish the final policy on remuneration disclosures as part of the strong and simple framework expected in Q4 2023.
On 12 July 2023, the Bank of England (BoE) published a document setting out the results of its 2022/23 annual cyclical scenario (ACS) stress test of UK banks and building societies. BoE also published an Annex setting out the individual bank results.
The BoE found that the major UK banks would be resilient to a severe stress scenario and that the UK banking system would be able to withstand the severe macroeconomic scenario and support households and businesses throughout the stress.
The BoE notes that the stress test scenario is more severe than the 2007/08 global financial crisis and is also substantially more severe than the current macroeconomic outlook. The severe stress scenario used included persistently higher inflation, increasing global interest rates, deep and simultaneous recessions in the UK and global economies causing materially higher unemployment, and sharp falls in asset prices.
On 18 July 2023, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a document on, among other things, the result of votes to adopt draft reports on the European Commission's legislative proposals for a Directive amending the Solvency II Directive and the Insurance Recovery and Resolution Directive (IRRD).
The draft reports contain draft European Parliament legislative resolutions, the texts of which set out suggested amendments to the proposals.
ECON also voted to enter into interinstitutional negotiations with the Council of the EU on the legislative proposals. The Council of the EU agreed its negotiating mandates on the amending Directive and the IRRD in June 2022 and December 2022 respectively.
On 17 July 2023, the FCA updated some of its webpages relating to the clearing obligation under UK EMIR.
The UK EMIR news webpage explains that the updates to the webpages follow the laying by HM Treasury before Parliament of regulations relating to the clearing obligation in April 2023. The regulations extend the:
UK firms currently benefiting from intragroup exemptions from (i) the clearing obligation, and (ii) margin requirements for uncleared derivative transactions with their third country group entities where no equivalence has been made in respect of the third country, may continue to benefit from those exemptions.
Further details on the clearing exemption for PSAs and intragroup exemptions from the clearing obligation and margin requirements are provided on the UK EMIR notifications and exemptions webpage. The margin requirements for uncleared derivatives webpage has also been updated to include a section on the TIGER.
On 13 July 2023, the European Securities and Markets Authority published an updated version of its Q&As on the EU Securitisation Regulation.
The update modifies some existing questions and addresses new questions relating to:
On 13 July 2023, the FCA published two engagement papers on the public offer platform and primary multilateral trading facilities as part of its series of engagement papers relating to the new regime for public offers and admissions to trading on UK public markets.
As part of the series the FCA has already published four engagement papers on admission to trading on a regulated market, further issuances of equity on regulated markets, protected forward-looking statements and non-equity securities (please see our June 2023 update).
The Public Offer Platform Engagement Paper (5) sets out the FCA's initial thinking about rules for the new regulated activity of operating a public offer platform. The FCA is aiming to create a framework that ensures that:
The Primary Multilateral Trading Facilities (MTFs) Engagement Paper (6) sets out the FCA's initial considerations on:
The deadline for responding to the questions raised by all of the engagement papers is 29 September 2023.
On 11 July 2023, HM Treasury published a consultation paper on proposals for a Digital Securities Sandbox (DSS).
The DSS will enable firms to set up and operate financial market infrastructures (FMIs) using innovative digital asset technology, perform the activities of a CSD and operate a trading venue all under a legislative and regulatory framework that has been temporarily modified to accommodate digital asset technology. The key features of the DSS are explained in Chapter 2 of the consultation paper.
The DSS will:
The DSS will be the first FMI sandbox established under powers granted by the Financial Services and Markets Act 2023 (FSMA 2023). FSMA 2023 empowers HM Treasury to make permanent changes to legislation to facilitate digital assets through secondary legislation.
The deadline for responses is 21 August 2023, although expressions of interest can be made after the deadline.
On 11 July 2023, HM Treasury published the response to its December 2022 consultation paper in which it set out its intention to repeal the retained EU law version of the PRIIPs Regulation (1286/2014) (UK PRIIPs Regulation) and sought views on a new framework for retail disclosure (please see our January 2023 update).
The response outlines the consultation proposals, summarises the responses received, sets out the government's vision for the new UK retail disclosure regime and provides further detail on the next steps to be taken to deliver the reforms.
There was strong agreement from all respondents regarding the description of the issues identified with the current UK PRIIPs Regulation set out in the consultation. The majority of stakeholders agreed with the government's proposed principles for the new regime. In particular, the importance of ensuring retail investors have access to clear and useful information was highlighted.
The government intends to proceed with its proposal to entirely remove all PRIIPs firm-facing retail disclosure requirements from legislation. The FCA will be empowered to deliver a new retail disclosure regime that is tailored and proportionate to the UK market. The government will publish a draft statutory instrument by 2024 to enable the FCA to deliver the new retail disclosure regime, following the repeal of the UK PRIIPs Regulation and related secondary legislation.
On 10 July 2023, HM Treasury published a report containing the outcomes of the UK Investment Research Review (IRR).
The IRR commenced in March 2023 and forms part of a series of government initiatives that aim to bolster the UK's capital markets.
HM Treasury recommend that a Research Platform is established to provide a central facility for the promotion, sourcing and dissemination of research. HM Treasury further recommends that the FCA rules governing how investment research is paid for are amended to allow clients and their managers greater choice. As part of this, any barriers that prevent UK buy-side firms from paying for investment research in other jurisdictions where payment on a bundled basis is standard practice in that jurisdiction should be removed.
Further recommendations include that the regulatory regime relating to investment research should be reviewed to make it more streamlined and efficient, and that the rules relating to investment research in the context of IPOs should be reviewed.
In response, the FCA has published a statement announcing that it will start engaging immediately with market participants on the IRR and has indicated that it intends to consult on an accelerated timetable on potential regulatory changes that could introduce more options on how to pay for investment research.
On 20 July 2023, the Council of the EU published a press release announcing that it has reached political agreement with the European Parliament on the proposed Directive amending the Alternative Investment Fund Managers Directive (AIFMD) and the UCITS Directive relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depository and custody services and loan origination by alternative investment funds.
The provisional agreement reviews the AIFMD and modernises the rules in the framework for UCITS. Agreement has also been reached on requirements relating to data sharing and co-operation between authorities, new measures to identify undue costs that could be charged to funds and passed on to their investors and rules to prevent potentially misleading names.
The political agreement is subject to the approval of the Council and Parliament before going through the formal adoption procedure. The agreed revised text of the legislative proposal has not yet been published.
On 6 July 2023, the FCA published a webpage summarising the findings and good practices identified from its multi-firm review of liquidity management frameworks. It has also published a related Dear CEO letter, which it has sent to firms in the asset management sector.
The review found that some of the 14 firms involved in the review demonstrated very high standards. However, there was a wide disparity in the quality of compliance with regulatory standards and depth of liquidity risk management expertise. The review found that most firms fell short in some aspects of their framework and a minority of firms had inadequate frameworks to manage liquidity risk effectively.
The FCA has grouped its findings and examples of good practices under the headings of governance, liquidity stress testing, redemption processes, liquidity management tools and valuation.
The FCA sets out its expectation that firms will review their liquidity management arrangements, consider the application of the findings and, with the Dear CEO letter, make any enhancements that may be necessary. The FCA notes that though the review mainly focussed on Authorised Fund Managers, they expect all asset managers and managers of alternative investment funds to consider the findings for their businesses too.
On 5 July 2023, the Financial Stability Board (FSB) published a consultation report on addressing structural vulnerabilities from liquidity mismatch in open-ended funds (OEFs).
The proposals outlined in the report are in response to the findings from the FSB's 2022 report assessing the effectiveness of its 2017 policy recommendations to address structural vulnerabilities from asset management activities.
The proposed revisions incorporate lessons learnt since 2017 and aim to enhance clarity and specificity on the intended policy outcomes to make the recommendations more effective from a financial stability perspective.
The proposals form part of the FSB's programme of work on non-bank financial intermediaries and should be read in conjunction with the IOSCO consultation report providing guidance on anti-dilution liquidity management tools.
Comments can be made on the proposals until 4 September 2023, following which the FSB will publish its final report.
On 29 June 2023, the FCA published a policy statement on broadening retail access to long-term asset funds (LTAFs) (PS23/7). The policy statement sets out final rules to give retail investors and more defined contribution pension schemes access to LTAFs.
The FCA launched a consultation on the changes in August 2022 and the policy statement contains the FCA's responses to the feedback received and confirmation of the changes to the rules. The final rules subject LTAFs to additional protections under the FCA's high risk investment framework and treat the LTAF as a restricted mass market investment. This is in-line with the FCA's approach for high-risk investments. The protections include risk warnings, customer assessments and restrictions on the amount that retail investors can invest.
The final rules are set out in the Long-Term Asset Fund (Amendment) Instrument 2023 and came into force on 3 July 2023.
In Chapter 4 of the policy statement, the FCA seeks views on whether the protections of the Financial Services Compensation Scheme should be available for LTAFs. Views should be given by 10 August 2023.
On 24 July 2023, the Prudential Regulation Authority (PRA) published a press release announcing that it has fined Credit Suisse International and Credit Suisse Securities (Europe) Ltd (the Firms) a record £87,082,000 for serious risk management and governance failures in connection with the Firms' exposure to Archegos Capital Management (Archegos). The final notice issued to the Firms was also published.
The Firms provided brokerage services and entered into equity total return swaps with Archegos. In March 2021 Archegos defaulted and around USD 5.1 billion of losses were booked to the Firms, resulting in significant financial and reputational damage for the Firms.
The PRA found that the Firms breached Fundamental Rules 2, 3, 5 and 6 of the PRA Rulebook due to various failures, including failing to instil a culture within the investment banking division that appropriately balanced the considerations of risk against commercial reward and failing to take sufficient steps to implement an effective risk management strategy in respect of Archegos' portfolio.
This is the PRA's highest fine to date and is the only instance where a PRA enforcement investigation has established breaches of four PRA Fundamental Rules. The Firms agreed to settle at an early stage of the PRA's investigation and therefore qualified for a discount. Were it not for this discount, the PRA would have imposed a financial penalty of £124,403,000 on the Firms.
On 19 July 2023, the FCA published its enforcement data metrics in Chapter 6 of the FCA's operating services metrics 2022/23.
The FCA's annual report and accounts for 2022/23, published on the same date, includes data on the use of skilled person reports. As set out in appendix 2, in the period the FCA used its powers under section 166 of the Financial Services and Markets Act 2000 in 47 cases. In four of those cases, the FCA appointed a skilled person firm. The sector where most skilled person reviews were commissioned was the retail investments sector, followed by the retail banking and payments sector and wholesale financial market sectors.
Appendix 3 of the report sets out data on the Regulatory Decision Committee's (RDC's) annual review. In the period the RDC made 39 decisions on cases, representing a large drop from 132 the previous year. This drop is reflective of the change in the RDC's remit which took effect in November 2021.
On 19 July 2023, the FCA published a press release announcing that it has commenced criminal proceedings against an individual for one count of fraud and three offences of breaching the Financial Services and Markets Act 2000.
The FCA alleges that the individual defrauded investors out of approximately £1.3 million through an unauthorised investment scheme, conspired to defraud by making a number of misrepresentations regarding the interest rates offered, trading activity and profits, and carried out regulated activities in the UK when they were not authorised by the FCA or an exempt person.
The case has been sent to Southwark Crown Court. The defendant will appear in court on 15 August 2023 for a plea and trial preparation hearing.
On 14 July 2023, the FCA published a press release announcing that two individuals had been sentenced for fraud and money laundering following a prosecution brought by the FCA.
The offences relate to a business called Collateral which offered peer-to-peer style investments on a website fraudulently claiming it was authorised and regulated by the FCA. The FCA notified the individuals and ordered that Collateral cease unauthorised business. After this, Collateral not only continued to receive instruments, but the individuals involved removed approximately £750,000 from the Collateral client accounts.
The individuals have been sentenced to 2.5 years and 5.5 years respectively and have both been disqualified as being company directors. The FCA has started confiscation proceedings to recover the financial benefit obtained by the defendants, and compensation proceedings to recover investor funds.
On 13 July 2023, the FCA published the final notice it has issued to Bastion Capital London Ltd (Bastion).
Bastion was a UK-based brokerage firm that entered liquidation in June 2019. The FCA fined Bastion £2,452,700 for breaching principle 3 of the Principles for Business by having inadequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering and for breaching principle 2 by not exercising due skill, care and diligence in applying its anti-money laundering policies and procedures and in failing to properly assess, monitor and mitigate the risk of financial crime. Both of these breaches related to business concerning the Solo Group. The Solo Group were four authorised entities that purported to provide clearing and settlement services as custodians to clients within a closed network.
Bastion agreed to resolve the matter and therefore qualified for a discount to the financial penalty. Were it not for this discount, the FCA would have imposed a financial penalty of £2,837,600 on Bastion.
On 26 June 2023, the Financial Action Task Force (FATF) published a document setting out the outcomes from its plenary meeting, which took place earlier that month.
At the meeting, the FATF reiterated that all jurisdictions should be vigilant to current and emerging risks from the circumvention of measures taken against the Russian Federation to protect the international financial system. The FATF also published an updated list of the jurisdictions under increased monitoring and an up-to-date list of the high-risk jurisdictions subject to a call for action.
The FATF's advancement of the work on preventing the misuse of non-profit organisations was also discussed at the meeting. The FATF also agreed to release potential revisions for public consultation and agreed on new projects, including a project to enhance money laundering investigations and prosecutions.
On 16 June 2023, the EBA published a report on money laundering (ML) and terrorist financing (TF) risks associated with payment institutions.
In 2022, the EBA carried out an assessment of ML and TF risks in the payments sector with the aim of better understanding the extent to which payment institutions' anti-money laundering (AML) and counter-terrorist financing (CTF) systems and controls are effective in tackling those risks and the effectiveness of current supervisory approaches to tackling ML and TF risk in payment institutions.
In the report, the EBA concludes that:
There is no common approach to the AML-CTF supervision of agent networks or of payment institutions with significant agent networks.
The EBA recommends that a more robust implementation by supervisors of the EBA's guidelines on risk factors and on risk-based supervision will assist in mitigating ML and TF risks. The EBA further recommends that legislative changes may be required to address issues concerning the AML and CTF assessment component of the authorisation of payment institutions, the consideration of ML and TF risks in the process of passporting notifications and the treatment by member states of agents of payment institutions in the cross-border context.
On 6 June 2023, the European Parliament published a press release announcing that it has reached political agreement with the Council of the EU on the proposed Directive amending Directive (EU) 2019/1153 regarding competent authorities' access to centralised bank account registries through the single access point.
The aim of the proposed Directive is to ensure more effective investigations into illicit finance by making it easier to retrieve data across borders from centralised bank registries. The proposed Directive mandates EU member states to ensure that the information from centralised registries is available through a single access point to be developed and operated by the European Commission.
The political agreement is subject to the approval of the Council and Parliament before going through the formal adoption procedure. The agreed revised text of the legislative proposal has not yet been published.
On 31 May 2023, the EBA published a consultation paper (EBA/CP/2023/11) on proposed changes to its guidelines on customer due diligence and the factors credit and financial institutions should consider when assessing money laundering (ML) and terrorist financing (TF) risks associated with business relationships and occasional transactions under Article 17 and 18(4) of the Fourth Money Laundering Directive (MLD4).
The EBA is proposing to extend the scope of the guidelines to cryptoasset service providers (CASPs), as CASPs are exposed to ML and TF risks which are increased due to the use of innovative technologies, instant transfers of cryptoassets across the world and services that contain privacy-enhancing features.
The new guidelines emphasise the need for secure remote onboarding tools to be used by credit and financial institutions, provide sector-specific guidance for CASPs, highlight risk factors that reflect specific features of cryptoassets and CASPs and provide guidance on mitigating measures CASPs should take where the risk is either increased or reduced.
The consultation closes on 31 August 2023.
On 28 July 2023, the Joint Money Laundering Steering Group (JMLSG) published proposed amendments to Sector 22 in Part II of its Guidance, which reflect the addition of a new Part 7A to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), which implements the travel rule for cryptoassets transfers in the UK. Comments on the amendments should be made by 25 August 2023.
On 13 July 2023, the EBA published its fourth opinion on the risks of money laundering (ML) and terrorist financing (TF) that are affecting the EU's financial sector.
Under the Fourth Money Laundering Directive (MLD4), the EBA is required to provide its opinion every two years. The EBA notes that since the EBA's third opinion was published in 2021, geopolitical events and technological advances have had a profound impact on the financial sector's exposure to financial crime risks and that new risks have also arisen from the laundering of proceeds from environmental crimes and cybercrimes.
The report also highlights that the TF risks identified in 2021 still exist, with new risks arising from the changed geopolitical situation and an increase in right-wing extremism and terrorism. The EBA notes that awareness of ML and TF risks has increased, with certain exceptions. The EBA flags that despite this, the AML and CTF systems and controls institutions have in place are not always effective, with transaction monitoring and suspicious transaction reporting being particularly weak.
On 11 July 2023, the EBA published a report setting out the findings of the third round of its implementation reviews of competent authorities' approaches to the anti-money laundering (AML) and countering the financing of terrorism (CFT) supervision of banks in the EU and EEA.
The EBA reviewed 12 competent authorities from nine EU/EEA member states that are responsible for the AML and CFT supervision of banks. The EBA's findings suggest that supervisors are making progress in the fight against money laundering and terrorist financing. In particular, the EBA found that most competent authorities had adequate enforcement powers and that more than half of all prudential supervisors were aware of their role in tackling risks, but a lack of formalised processes and limited targeted training meant opportunities for engagement between supervisors were sometimes missed.
Competent authorities should consider the EBA's findings and recommended actions and adjust their approach to supervision where necessary.
On 30 June 2023, HM Treasury published a consultation on reform of the anti-money laundering and counter-terrorism financing (AML/CTF) supervisory system. This is in line with a commitment in the Economic Crime Plan 2023-26.
Currently the AML/CTF supervisory system is made up of three statutory supervisors (the FCA, the Gambling Commission (GC) and HMRC) and 22 professional body supervisors (PBSs) who supervise the legal and accountancy sectors. The supervisors ensure that firms and individuals comply with the MLRs and take enforcement actions if the MLRs are breached.
The consultation provides further detail on the four possible models for future AML/CTF supervisory systems initially set out in a 2022 review of the UK's AML/CTF regulatory and supervisory regime. The consultation does not include a policy preference and instead invites respondents' views regarding the potential benefits and disbenefits of each potential reform model.
The consultation will close on 30 September 2023, following which HM Treasury intends to make a policy decision on the model for reform.
The answer to last month's question: when the UK's regime for cryptoasset financial promotions comes into force later this year, there will be four routes available to firms to lawfully communicate a financial promotion of cryptoassets.
According to the FCA's 2022/2023 Annual Report, the FCA opened 613 financial crime supervision cases in 2022/23. What is the percentage increase from the previous year?