Financial Services SpeedRead: 30 November 2023 edition
30 November 2023
30 November 2023
Welcome to the latest edition of the Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead in more detail.
On 22 November 2023, HM Treasury published a draft version of the Short Selling Regulations 2024 and an accompanying Policy Note. The draft regulations are part of HM Treasury's programme to deliver a Smarter Regulatory Framework for financial services by replacing retained EU law on short selling with a UK-specific framework.
The draft regulations set out the scope of the UK short selling regime, specifically the designated activity of short selling shares and related instruments. They also provide the FCA with powers to set out firm-facing short selling requirements in the FCA Handbook, as well as emergency intervention powers to require additional short-selling related information and restrict short selling in exceptional circumstances.
The Government welcomes any technical comments on the draft regulations by 10 January 2024.
The Policy Note clarifies that supervision and enforcement provisions in respect of all designated activities (including short selling) will be set out in a separate statutory instrument. This is expected to be published for technical checks in early 2024.
On 21 November 2023, the European Banking Authority (EBA) published its final draft regulatory technical standards (RTS) on the assessment methodology under which competent authorities verify an institution's compliance with the internal model approach (IMA) under Regulation (EU) No 575/2013 (CRR).
Under the CRR, an institution requires approval from its competent authority to use an IMA for calculating the own funds requirement for market risk. The draft RTS sets out a framework for competent authorities to use when assessing institutions' internal models for market risk.
The draft RTS covers three main areas:
On 17 November 2023, the FCA published a Final Notice addressed to NMC Health Plc (in Administration) (NMC) notifying that it has published a public censure against it for committing market abuse by misleading the market about its debt.
The FCA found that between at least 7 March 2019 to 27 February 2020, NMC had been operating dual sets of accounting records and materially under-reporting its levels of debt to the market. The FCA found that the financial statements disclosed publicly misled investors by understating NMC's debts by as much as USD 4 billion.
The Final Notice states that, had NMC not been placed into administration, the FCA would have imposed a substantial financial penalty. However, the FCA anticipates that no funds will be available after creditor claims have been met, leading the FCA to issue a censure instead.
On 13 November 2023, HM Treasury published a call for evidence seeking input from industry stakeholders on the pension fund clearing exemption under the UK European Market Infrastructure Regulation (UK EMIR).
Under the exemption, pension scheme arrangements and firms established to compensate scheme members are not required to clear derivatives contracts used to hedge risks which directly relate to their financial solvency. The exemption was introduced as a temporary measure to enable pension funds to provide cash collateral to central counterparties without having a negative impact on the retirement benefits of pensioners.
The call for evidence follows the most recent extension of the exemption to 18 June 2025. The responses to the call for evidence will inform the government's review of the exemption to determine a longer-term policy approach.
The call for evidence seeks input from pension funds and their asset managers on:
The call for evidence closes on 5 January 2024.
On 20 November 2023, the Bank of England published a press release which set the PRA's 2023 O-SII buffer rates for ring-fenced banks and large building societies, as per the Financial Policy Committee's framework.
The O-SII buffer rates set out in the publication will apply from 1 January 2025.
On 15 November 2023, the Basel Committee on Banking Supervision (BCBS) published a discussion paper providing a high-level assessment on the supervisory and financial stability implications of digital fraud on the global banking system.
The discussion paper notes that, while the ongoing digitalisation of finance can provide a number of benefits, it can also increase risks to bank soundness and financial stability. The BCBS is therefore seeking comments and feedback from interested stakeholders in order to better understand the status of digital fraud and potential mitigants.
The paper is structured around three broad sets of questions:
The BCBS welcomes responses to the questions posed in the discussion paper by 16 February 2024. Responses are to be submitted here.
On 15 November 2023, the PRA published a letter to Chief Financial Officers (CFOs) of PRA-regulated firms, setting out steps that firms should consider taking to mitigate risks relating to current or future arrangements with Deposit Aggregators (DAs).
The letter follows from a Dear CEO letter published jointly by the PRA and FCA in April 2021 which warned of the potential risks associated with the growing number of deposits being sourced via DAs.
The key points raised in the letter include:
On 13 November 2023, the PRA published a policy statement (PS 14/23) setting out feedback on the responses it received to its March 2023 consultation paper on the non-performing exposures capital deduction (CP 6/23) and amendments to the relevant parts of the PRA Rulebook.
In the consultation paper, the PRA proposed to remove the Common Equity Tier 1 (CET1) deduction requirement for non-performing exposures (NPEs) that are treated as insufficiently covered by firms' accounting provisions and related reporting requirements for UK CRR firms. Following feedback to the consultation paper, the PRA has also made changes to remove references to the NPE deduction requirement in reporting and disclosure instructions.
The rule change to remove the NPE deduction requirement and modifications to reporting requirements came into effect on 14 November 2023.
On 16 November 2023, the FCA published the findings of its review into how Authorised Fund Managers (AFMs) are complying with existing regulatory requirements and expectations on the design, delivery and disclosure of environmental, social and governance (ESG) and sustainable investment funds. These findings have been released in advance of the FCA's final guidance on the Sustainability Disclosure Requirements (SDR) and investment labels regime, and are aimed at assisting AFMs in identifying where improvements may be needed to their approach.
The FCA's review assessed how 12 AFMs of varying sizes have implemented the "Guiding Principles" for investment funds with ESG or sustainability features set out in the FCA's Dear Chair letter to AFMs in July 2021.
The FCA identified evidence of some good practice across industry, including the development and use of appropriate ESG, sustainability scoring systems and benchmarks, as well as instances of AFMs conducting thorough due diligence on third party providers.
Areas for improvement identified by the FCA include the following:
The FCA expects AFMs to assess the design, delivery and disclosure of their funds to ensure they meet the FCA's expectations and are not conducting their operations in a way that harms retail customers. The FCA will continue to work with the AFMs included in their review to address their findings.
On 23 November 2023, the FCA published a speech by Emily Shepperd (Chief Operating Officer and Executive Director of Authorisations) on the need for firms to consider how their own culture can contribute towards driving better outcomes for consumers under the Consumer Duty.
Ms Shepperd highlighted how Diversity and Inclusion (D&I) can help to build a healthy, inclusive culture within firms. Ms Shepperd notes that the FCA's D&I proposals will help to drive beneficial changes, while emphasising the importance of the purpose of these proposals being well understood and the right policies and procedures being in place.
Firms are encouraged to review their processes and make necessary changes to ensure that employees have the means to perform at their best, as well as to give them the platform to contribute, challenge and add value to the firm.
On 20 November 2023, the FCA updated its webpage regarding recruiting, changing or terminating an appointed representative to include information on related approved persons applications.
The FCA states that it expects principal firms to carry out the necessary checks and due diligence before sending approved persons applications. The FCA sets out examples of good practice and areas for improvement in relation to due diligence and fitness and propriety disclosures.
On 20 November 2023, the FCA published a speech by Sheree Howard (Executive Director of Risk and Compliance Oversight) which discussed how firms can work towards having healthier cultures.
The speech discussed various ideas, including:
This speech highlights the FCA's focus on good risk management and the importance of D&I, as well as the need for firms to closely scrutinise their three lines of defence to ensure that they remain separate but cohesive.
On 17 November 2023, the Financial Action Task Force (FATF) published a revised version of its recommendations, including updates to recommendation 8 in relation to protecting non-profit organisations (NPOs) from terrorist financing abuse. FATF also published a best practices paper on combating the abuse of NPOs.
This updated guidance is intended to help countries, the non-profit sector and financial institutions understand how best to protect relevant NPOs from abuse for terrorist financing, without unduly disrupting or discouraging their legitimate activities.
In particular, the amendments to FATF recommendation 8:
The best practices paper sets out various examples of good practice in relation to (i) how countries can combat terrorist financing abuse of NPOs, (ii) how NPOs can protect themselves against terrorist financing abuse, and (iii) ensuring access of legitimate NPOs to financial services. The paper also includes examples of bad practices and specifically explains how not to implement the FATF recommendations.
On 22 November 2023, HM Treasury published the Autumn Statement for 2023.
The Government announced in the Autumn Statement that it intends to make certain changes to Individual Savings Accounts (ISAs), including:
On 22 November 2023, HM Treasury published a near-final draft statutory instrument, the Consumer Composite Investments (Designated Activities) Regulations 2024 (draft SI).
As part of HM Treasury's programme to deliver a Smarter Regulatory Framework for financial services, the draft SI will replace the retained EU law version of the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) and create a new UK retail disclosure framework for Consumer Composite Investments (CCIs). The government's approach to creating this framework is explained further in a Policy Note, which was published alongside the draft SI.
The new UK retail disclosure framework for CCIs will be delivered using the designated activities regime, as introduced by the Financial Services and Markets Act 2023.
The new regime provides that manufacturing, advising and offering a CCI to a UK retail investor are designated activities and therefore requires firms (regardless of their authorisation status) to provide disclosure to UK retail investors. The FCA will be given powers to make and enforce rules in respect of these designated activities.
The government invites technical feedback on the draft SI by 10 January 2024. The government has specified that it welcomes views on:
HM Treasury intends to legislate in 2024, alongside the FCA making new rules.
The Policy Note clarifies that the draft SI does not contain a number of supervision and enforcement provisions. These will be set out in a separate statutory instrument which will regulate certain common aspects of designated activities. This is expected to be published for technical checks in early 2024.
On 16 November 2023, the FCA published guidance applicable to secondary credit brokers that supply a non-financial service but that introduce customers to third-party finance providers, or offer their own finance, as part of their main business. As a result of the FCA's guidance, these firms may be able to change their authorisation from Full Permission to Limited Permission, which could reduce their regulatory costs and obligations.
To be eligible for Limited Permission status, firms must meet certain criteria, such as:
Eligible firms can also claim a refund on some of the past regulatory fees they paid, with 8% interest. The process to change permission and claim a refund typically takes six months.
Firms can contact the FCA if they are unsure whether they are affected by the guidance.
On 15 November 2023, the FCA published an update on how firms can apply to become a consumer credit lender or hirer.
In particular, the FCA guidance includes:
The FCA reaffirms that firms will need to demonstrate that they can consistently deliver good outcomes for retail consumers in their application
The FCA also published an update relating to the supporting material that is required for applications by consumer credit, mortgage and other consumer finance firms. This includes guidance on how to prepare:
On 23 November 2023, the FCA published a press release relating to the authorisation of Buy Now Pay Later (BNPL) firms following the end of the FCA's Temporary Permissions Regime (TPR). The TPR allowed EEA firms to continue to operate in the UK without direct FCA authorisation during their transition to the full UK regulatory regime.
The FCA notes that it is assessing the last of the firms in the TPR for full authorisation, including some firms offering regulated lending products and unregulated BNPL products.
The FCA reiterates the importance of consumers being aware that many BNPL products remain unregulated. Exempt BNPL products are not currently in scope of FCA regulation. This means that firms which offer regulated lending products as well as unregulated BNPL products are not required to ensure that exempt BNPL products comply with FCA rules. Customers also have fewer rights and protections when using BNPL products compared to regulated lending products.
On 22 November 2023, HM Treasury published a report on the Future of Payments Review. The report considers how payments are likely to be made in the future and makes recommendations on the steps needed for the UK to successfully deliver world-leading retail payment services.
The report's main recommendation is for the Government to develop a national payments vision and payments strategy to bring clarity to its future desired outcomes and priorities for UK payments.
Other recommendations in the report include:
On 24 November 2023, the Investment Association published a report detailing the first phase of the Technology Working Group's (the Group) work on maximising the potential of innovative technologies for the UK asset management industry. The report focuses on the application of distributed ledger technology (DLT) to the infrastructure of UK investment funds.
The Group has developed a blueprint for implementing the tokenisation of UK investment funds, with the help of HM Treasury and the FCA. The blueprint recommends a staged approach to fund tokenisation. The first stage provides a baseline model that can be used within the existing regulatory framework and implemented immediately before moving to a more advanced model over time.
The FCA published a letter to the Group welcoming the report and providing clarity on its interpretation of certain FCA rules considered in the development of the proposed baseline approach. The FCA notes that it will keep its rules under review and work with the Government on any future changes required.
On 24 November 2023, the European Banking Authority (EBA) published a consultation paper on new guidelines for preventing the abuse of funds and certain crypto-assets transfers for money laundering and terrorist financing purposes.
These "travel-rule" guidelines specify the steps that payments services providers and crypto asset services providers should take to detect missing or incomplete information that accompanies transfers of funds or crypto-assets (as applicable). The guidelines also detail the procedures relevant firms should implement to manage any such transfers that lack the required information.
The consultation closes on 26 February 2024.
On 24 November 2023, the FCA published a Call for Input (CFI) seeking stakeholders' views on the impact of data asymmetry between Big Tech and financial services firms on competition in financial services markets. The CFI follows the FCA's October 2022 discussion paper (DP22/5) on the potential competition impacts of Big Tech entry and expansion in retail financial services.
The CFI seeks views on whether data asymmetry could lead to Big Tech firms gaining entrenched market power, as well as any potential benefits from using these firms' consumer data in financial services.
Areas the FCA is seeking input on include:
The FCA is seeking feedback on the questions set out in Annex 1 of the CFI by 22 January 2024. Responses can be submitted via email to BigTechCFI@fca.org.uk. The FCA plans to report back on the responses received in Q2 2024.
On 22 November 2023, HM Treasury published the response to its July 2023 consultation regarding the proposal to implement a Digital Securities Sandbox (DSS). The DSS is an initiative run by the Bank of England and FCA which aims to facilitate the adoption of digital asset technology in UK financial markets.
In light of the feedback received, the Government has noted that it will largely continue with its approach outlined in the consultation. The consultation response confirms that (amongst other things) the Government will:
Legislation implementing the DSS will be laid before Parliament in due course. The Bank of England and the FCA will set out the application process, guidance and rules for the DSS. The Government continues to welcome expressions of interest from those considering participating in the DSS, which should be submitted to email@example.com.
On 16 November 2023, the European Commission opened a consultation on two draft delegated acts under Regulation (EU) 2022/2554 on digital operational resilience for the financial sector (DORA).
The draft delegated acts relate to:
The consultation period will close on 14 December 2023.
On 16 November 2023, the International Organization of Securities Commissions (IOSCO) published its final report detailing its policy recommendations for Crypto and Digital Asset (CDA) Markets.
The recommendations relate to the activities of crypto-asset service providers (CASPs) and have been designed to support greater consistency regarding regulatory frameworks and oversight, as well as to address market integrity and investor protection risks.
The Recommendations are principles-based and cover the following six key areas, consistent with IOSCO standards:
Whilst the recommendations are addressed to regulators, IOSCO encourages all CASPs and other cryptoasset market participants to carefully consider the expectations and outcomes set out in the recommendations.
On 22 November 2023, ESMA published three explanatory notes relating to the EU's Sustainable Finance framework, which are collectively aimed at assisting stakeholders with navigating this framework.
The first of these notes relates to the definition of sustainable investments and, in particular, explains how the concept of sustainability is reflected in the definition of "sustainable investments" in Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR) and the definition of "environmentally sustainable economic activities" introduced under Regulation (EU) 2020/852 (the Taxonomy Regulation).
The second ESMA note provides a detailed explanation of the application of the do no significant harm (DNSH) principle across the Sustainable Finance Framework. The note outlines what application of the DNSH principle entails in respect of each of the various pieces of legislation.
Finally, ESMA also released a note on the use of estimates which explains how the Taxonomy Regulation, the SFDR and Regulation (EU) 2016/1011 (Benchmarks Regulation) deal with the use of estimates and equivalent information for the calculation and disclosure of various ESG metrics or sustainability indicators by financial market participants.
On 21 November 2023, two delegated acts made under the Taxonomy Regulation were published in the Official Journal of the European Union (OJ).
Commission Delegated Regulation (EU) 2023/2485 of 27 June 2023 amends Delegated Regulation (EU) 2021/2139 (the Taxonomy Climate Delegated Act) by establishing additional technical screening criteria for determining the conditions under which certain economic activities qualify as contributing substantially to climate change objectives (including mitigation or adaptation). The delegated regulation also aims to help undertakings determine whether those activities cause no significant harm to any of the other environmental objectives set out in the Taxonomy Regulation.
Commission Delegated Regulation (EU) 2023/2486 of 27 June 2023 supplements the Taxonomy Regulation by establishing technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to the sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems. The delegated regulation also specifies criteria for determining whether the relevant economic activity causes no significant harm to any of the other environmental objectives. The delegated regulation also amends Commission Delegated Regulation (EU) 2021/2178 (the Taxonomy Disclosures Delegated Act) to ensure that it is disclosure requirements are consistent.
The new regulations will largely apply from 1 January 2024.
On 17 November 2023, the European Banking Authority (EBA) published the final templates to be used by participating EU banks when providing climate-related data as part of the EBA's one-off "Fit-for-55" climate scenario risk analysis.
The scenario analysis exercise aims to assess the financial sector's resilience and capacity to support the transition to a lower carbon economy under conditions of stress.
The templates will enable the EBA to gather climate-related and financial information on credit, market and real estate risks.
This will, in turn, allow it to assess concentration risk of large climate exposures, as well as providing information on the climate-related risks affecting the banking sector more broadly.
The EBA also published an accompanying guidance document that provides the banks with relevant definitions and technical rules to assist with populating the templates.
This data collection will commence on 1 December 2023 and be completed on 12 March 2024.
On 24 November 2023, the PRA and the FCA jointly published a consultation paper setting out their proposals to replace EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector.
The consultation paper sets out proposals for a new PRA supervisory statement and FCA guidance to replace the EU guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector (3L3 Guidelines), which have continued to be relevant to UK change in control transactions since the UK's withdrawal from the EU.
The proposed PRA supervisory statement and FCA guidance largely replicate the 3L3 Guidelines, with certain changes to align with the UK approach. They set out expectations and guidance on:
The consultation closes on 23 February 2024.
The PRA and FCA propose that the implementation date for the PRA supervisory statement and FCA guidance will be summer 2024.
On 21 November 2023, the FCA published a consultation paper setting out its proposed changes to the way in which it will raise fees from 2024/25. This includes:
The consultation paper applies to all FCA fee-payers, the levy-payers of the FOS and of the FSCS, and any businesses considering applying for FCA authorisation or registration.
The FCA invites comments on the questions contained in the consultation paper by 16 January 2024. The FCA will publish its feedback on the rule changes in March 2024.