Financial Services SpeedRead 12 April 2024 edition

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.

Financial Markets 

1.  FCA: Finalised Guidance: Financial Promotions on Social Media (FG24/1)

On 26 March 2024, the FCA published its finalised guidance on financial promotions on social media.

The guide follows feedback received on the FCA's consultation paper (GC23/2). 

While the finalised guidance does not provide any new obligations for firms, it re-affirms the FCA's existing financial promotion rules are technology agnostic and clarifies the FCA's expectations on firms and affiliate marketers, such as influencers. 

This includes the following expectations:

• Standalone compliance: financial promotions should be standalone compliant, meaning that each communication must comply with the rules individually. For promotions via a dynamic medium (such as Instagram stories), the FCA considers the promotion as a whole and takes a proportionate view based on the number of frames and where important information, including about risk, is displayed within the promotion.

• Prescribed risk warnings: Prescribed risk warnings should be clear to consumers on the face of the promotion. In addition, the FCA provides examples of what it considers to be prominent risk warnings across various social media channels and forms. The FCA also draws attention to social media features such as truncated text, noting risks can be truncated in such a way that ceases to comply with existing applicable rules.

• Consumer Duty: firms using social media for financial promotions must consider how their marketing strategies align with acting to deliver good outcomes for retail consumers, beyond ensuring that an individual promotion supports consumer understanding by providing balanced information about the risks and benefits in a way that is clear, fair and not misleading.

• Affiliate marketing: firms working with affiliate marketers, such as influencers, should take proactive responsibility for how their affiliates communicate financial promotions, including appropriate monitoring and oversight. Firms remain responsible for the compliance of every promotion they make or cause to be made.

2. FCA: Webpages: Approach to supervision, consumers and competition

On 19 March 2024, the FCA published three new webpages outlining its approach to (i) supervision, (ii) consumers and (iii) competition.

• Approach to supervision: this webpage sets out the FCA's approach to regulatory oversight of firms and individuals. Amongst other things, it covers:
  • the four overarching outcomes expected from regulated firms: (i) fair value; (ii) suitability and treatment; (iii) confidence and (iv) access;
  • the supervisory principles which form the basis of the FCA's supervisory approach; and
  • the FCA's decision making framework, comprising (i) identification of harm, (ii) diagnostic tools, (iii) remedy tools, and (iv) evaluation. 

• Approach to consumers: this webpage sets out how the FCA uses its powers and tools to protect consumers of financial services, in line with its consumer protection objective. Amongst other things, it covers:
  • how its operational objectives contribute to protecting consumers from harm;
  • consumer protection in the context of the four overarching outcomes (outlined above); and
  • the powers and tools used by the FCA to ensure consumers are protected, in particular the Consumer Duty, guidance on consumer vulnerability, access and financial inclusion, consumer communications and consumer redress. 

• Approach to competition: this webpage sets out how the FCA seeks to use its competition powers to identify potential harms and take action to protect consumers. Amongst other things, it covers:
  • the FCA's understanding of competition in the context of UK financial services markets;
  • the FCA's competition objectives and duty, and its role as a competition regulator;
  • how the FCA identifies potential harms and diagnoses the causes of harm;
  • the types of action the FCA may take to respond to competition problems.  

3. FCA : Webpage: Our approach to international firms

On 19 March 2024, the FCA published a new webpage with an updated version of its approach to international firms, outlining its expectations for international firms providing financial services in the UK, or preparing to apply for full UK authorisation. 

The webpage covers: 

• how the FCA will assess international firms against minimum standards when they apply for FCA authorisation and during ongoing supervision;
• the FCA's general expectations for international firms;
• how the FCA will consider an international firm's potential risks for harm, in particular retail harm, client asset harm and wholesale harm; and
• how those risks can be mitigated. 

Banking and Prudential

4. Official Journal of the EU: Legislation: Commission Delegated Regulation (EU) 2024/895 of 13 December amending Delegated Regulation (EU) 2015/63 as regards the calculation of eligible liabilities and the transitional regime

On 20 March 2024, Commission Delegated Regulation (EU) 2024/895 of 13 December 2023 amending Delegated Regulation (EU) 2015/63 was published in the Official Journal of the EU. 

The amendments to Delegated Regulation (EU) 2015/63 include: 

• aligning with the definition of "eligible liabilities" and the calculation of the minimum requirement for own funds and eligible liabilities (MREL) under the Bank Recovery and Resolution Directive (BRRD), as amended by Directive (EU) 2019/879;
• amending the specific cases in which resolution authorities can waive individual entities from MREL at solo level and to instead require MREL at a consolidated level; and
• extending the period in which smaller institutions can contribute with a lump-sum to national resolution funds for one year until 31 December 2024. 

The regulation applies from 21 March 2024, with the exception of Article 1(3) and (4) which apply retroactively as of 1 December 2023.

Funds Management

5. Official Journal of the EU: Legislation: AIFMD II

On 26 March 2024, the Official Journal of the EU published Directive (EU) 2024/927 (AIFMD II) amending the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the UCITS Directive (2009/65/EU). 

AIFMD II makes several target changes to AIFMD and the UCITS Directive, reflecting the outcome of the AIFMD review. The changes include:

• amending the rules on delegation arrangements where an AIFM delegates risk or portfolio management to third country entities;
• new liquidity risk management requirements for open-ended funds;
• amending rules on investor transparency and supervisory reporting;
• allowing AIFs to appoint a depositary outside of the AIF's home member state in certain circumstances; and
• a new regulatory regime for loan origination funds.

The Directive will enter into force on 15 April 2024, from which member states will have until 16 April 2026 to implement the amendments into their national legislation.

For more information, see our briefing on AIFMD II here. 

6. FCA: Webpage: Alternative Investment Fund Manager (AIFM) hosting

On 25 March 2024, the FCA published a new webpage addressing the risks associated with the host model used by alternative investment fund managers (AIFMs) to manage alternative investment funds (AIFs). 

Under the host model, the AIFM employs staff on secondment from a third party to carry out both regulated and unregulated tasks, with secondees sometimes sourced from one of the AIFM's appointed representatives (ARs).

The FCA webpage does not provide any substantially new information, but synthesises its conclusions from a its previous supervisory work in 2019 and its 2023 review. The FCA has identified three main harms arising from the host model:

• a lack of oversight of seconded staff and potential conflicts of interest;
• insufficient involvement in investor due diligence, and
• inadequacies in capital adequacy calculations. 

The FCA states that it has taken action already against firms where it has seen harms arising from the host model and that it will continue to monitor these arrangements closely. It reminds AIFMs that they are responsible for the actions of their secondees and most have robust monitoring in place to review the actions of secondees. 

The FCA also reminds firms that where they are a principal for an AR, they must tell the FCA about proposed secondments when adding new ARs on Connect.

Senior Managers and Governance

No new entries. 

Financial Crime

No new entries. 

Retail Services

7. FCA: Dear CEO Letter: FCA strategy for Consumer Lending

On 20 March 2024, the FCA published a Dear CEO letter on its strategy for consumer lending, focusing on three portfolios in the consumer lending market: high-cost lending, mainstream consumer credit lending, and credit unions. 

The letter sets out the key risks of harm the FCA believes these portfolios may pose to their consumers and the markets in which they operate. This will shape the FCA's focus and engagement with the consumer lending market over the next two years. 

The FCA has identified three key focus areas to achieve their market-wide strategic objective to ensure the relevant markets function well. The Dear CEO letter sets out the consumer lending-specific harms under each focus area. These are:

• Promoting competition and positive change: The FCA sets out their expectations from firms with regard to providing consumers with access to affordable credit.
• Reducing and preventing serious harm: The FCA sets out a number of expectations for firms, including that they lend responsibly and sustainably, support consumers in financial difficulty, and handle complaints and redress requirements effectively.
• Setting and testing higher standards: The FCA states that they expect firms to have already implemented the FCA's Consumer Duty. They also set out a number of expected policy changes. The letter emphasises the continued commitment required from firms to ensuring good consumer outcomes, including through monitoring data and other sources of information. 

The FCA states that significant part of their supervisory activity over the next two years will be to test firms against the FCA's expectations, including the expectations set out in the letter. The FCA therefore advises firms to discuss the letter with their board or governing body, and be able to demonstrate the steps taken to address the risks covered in the letter. 

8. UK Regulators' Network (UKRN): Joint statement: Debt collection 

On 18 March 2024, the FCA, Ofgem, Ofwat and Ofcom published a joint statement on debt collection and consumer vulnerability, as well as their expectations on how firms should support vulnerable customers.

This letter, which follows an earlier joint letter from June 2023 on supporting consumers in financial difficulty, sets out the following outcomes which the regulators expect firms across their respective sectors to deliver: 

• ensuring an appropriate frequency of collections communications, reducing the frequency where communications are not delivering positive customer engagement or are causing harm;
• using a supportive tone in collections communications;
• ensuring that information regarding free debt advice is clear and prominent in collections communications, and customers are referred directly to debt advice organisations where appropriate; and
• making it as easy as possible for advisors from free debt advice organisations to contact firms, including ensuring that contact channels are sufficiently resourced.

The regulators have stated they will take robust action where firms fail to meet the standards expected of them.

Payments

9. Official Journal of the EU: Legislation: Regulation (EU) 2024/886 on  instant credit transfers in euro

On 19 March 2024, Regulation (EU) 2024/886 of the European Parliament and of the Council of 13 March 2024 (Instant Payments Regulation) was published in the Official Journal of the European Union. The Instant Payments Regulation amends Regulation (EU) No 260/2012 (SEPA Regulation), Regulation (EU) 2021/1230 (Cross-Border Payments Regulation), Directive 98/26/EC (Settlement Finality Directive) and Directive (EU) 2015/2366 (PSD2).

The Instant Payments Regulation requires payment service providers (PSPs) who offer credit transfers to make instant credit transfer services in euro readily available to customers, such that transfers can be made within 10 seconds, 24 hours a day within the same country and also to other EU member states. 

As part of the instant credit transfer framework, PSPs will be required to verify the match between IBAN account numbers and the beneficiary's name as soon as possible to alert the payer to possible mistakes or fraud before a transaction is made. 

The Instant Payments Regulation entered into force on 8 April 2024. PSPs in the eurozone will need to be able to receive instant credit transfers in euro by 9 January 2025, and to be able to send them by 9 October 2025. There is a longer transition period for PSPs located outside of the eurozone, who have until 9 January 2027 to be able to receive instant credit transfers in euro, and until 9 July 2027 to be able to send them.

Digital Services and Fintech

10. FCA and BoE: Joint Consultation Paper: Digital Securities Sandbox

On 3 April 2024, the FCA and BoE published a joint consultation paper (CP 24/5) setting out their proposals to implement and operate the Digital Securities Sandbox (DSS). The DSS will allow firms to use developing technology, including distributed ledger technology, in the issuance, trading and settlement of securities such as shares and bonds. 

The consultation paper outlines the regulators' overarching aims of facilitating innovation to promote a safe, sustainable and efficient financial system, protecting financial stability, and protecting market integrity and cleanliness. It sets out the regulators' joint proposed approach to implementing and operating the DSS, including:

• potential business models to be undertaken by firms in the DSS;
• details of the various stages of the DSS: initial application, testing, go-live, scaling and operating outside the DSS;
• how the regulators propose to use their rule-making powers to operate the DSS;
• the regulators' approach to managing financial stability and market integrity risks in the DSS;
• the regulators' approach to supervision in the DSS; and
• the BoE's proposed fee regime for the DSS.

The consultation paper also includes a draft guidance document for potential DSS applicants. 

The closing date for feedback on the consultation paper is 29 May 2024. The regulators propose to publish final guidance and open the DSS for applications during summer 2024.

11. ESMA: Final Report: First package of draft technical standards  specifying certain requirements of MiCA

On 25 March 2024, ESMA published its final report on its first package of draft technical standards under the Markets in Crypto Assets Regulation (MiCA). The final report contains five of the six draft technical standards related to investor protection topics included in ESMA's July 2023 consultation paper. These relate to: 

• the information to be included in the application for authorisation as a crypto-asset service provider (CASP);
• the information to be included in the notification by certain financial entities of their intent to provide crypto-asset services;
• the information required for the assessment of intended acquisition of a qualifying holding in a CASP; and
• requirements, templates and procedures for complaints handing by CASPs. 

The final report on the technical standards on conflicts of interest for crypto-asset service providers will be published at a later stage. 

The draft technical standards contained in the final report have been submitted to the European Commission, who will determine whether they should be adopted within three months.

12. ESMA: Consultation Paper: Draft technical standards and guidelines specifying certain requirements of MiCA on detection and prevention of market abuse, investor protection and operational resilience 

On 25 March 2024, ESMA published its third consultation package under MiCA, which contains draft technical standards and guidelines specifying certain requirements on the detection and prevention of market abuse, investor protection and operational resilience.

Specifically, the consultation package seeks input on:

• draft RTS on appropriate arrangements, systems and procedures for detecting and reporting suspected market abuse in crypto-assets, including the template to be used for suspicious transaction and order reports;
• draft guidelines on certain aspects of the suitability requirements applicable to the provision of advice on crypto-assets and portfolio management of crypto-assets, as well as the format of the periodic statement for portfolio management activities under MiCA;
• draft guidelines on policies and procedures, including the rights of clients, for crypto-asset service providers providing transfer services; and
• draft guidelines on the maintenance of systems and security access protocols for offerors and persons seeking admission to trading of crypto-assets other than asset-referenced tokens and e-money tokens.

Comments on the consultation paper can be submitted until 25 June 2024 via the response form here. ESMA will publish a final report based on the feedback received, and submit the draft technical standards for approval by the European Commission by 30 December 2024.

ESG

No new entries. 

Other

13. HM Treasury: Policy paper: Critical Third Parties: Approach to Designation

On 21 March 2024, HMT published a policy paper outlining its approach to designating critical third parties (CTPs) to the UK financial services sector. 

The policy paper covers: 

• the criteria for designation used by HMT, which is set out in section 312L of FSMA. HMT expects to make designations mainly based on recommendations from the regulators;
• the designation process, which will involve HMT (i) considering recommendations from the regulators, (ii) asking the CTP and others for formal representations, (iii) communicating the decision to the CTP, and (iv) making the legal instrument (designation regulations) which give effect to the designation; and
• de-designation: the regulators will be able to submit recommendations to remove a CTP's designation, which will follow a similar process as for designation. 

14. FCA: Consultation Paper : Proposed amendments to FG21/4 - Guidance for insolvency practitioners on how to approach regulated firms (GC 24/1)

On 19 March 2024, the FCA published a consultation paper on proposed amendments to its 2021 guidance for insolvency practitioners on how to approach regulated firms (FG 21/4). 

The FCA's proposed amendments to the guidance include:

• setting out the FCA's expectation that insolvency practitioners conduct the affairs of the regulated firm in a way that is compatible with the Consumer Duty following failure;
• change to align with the FCA's July 2022 Compromises Guidance (FG22/4);
• reflecting changes to the PRA's rules to make FSCS protection available to customers of payment and e-money firms in certain circumstances where a credit institution holding their safeguarded funds fails;
• reflecting the FCA's understanding of the Court of Appeal decision In the Matter of Ipagoo LLP so that insolvency practitioners are aware of and understand the need to top-up the asset pool where there is a shortfall in safeguarded relevant funds; and
• new guidance to reflect the anticipated expansion of the Dormant Asset Scheme, advising insolvency practitioners to liaise with the authorised reclaim fund if the failed firm was a participant in the scheme.

The consultation closes on 30 April 2024. The FCA will review all responses and aims to publish the finalised guidance later this year.