Financial Services Speedread 13 October edition

No updates for this fortnight's edition of the FSS.

1. FCA publishes Wealth Management and Stockbroking Strategy Portfolio Letter

On 30 September 2021, the FCA released a DEAR CEO portfolio letter (dated 16 September 2021) with updates on its wealth management and stockbroking strategy, following its strategy letter from June 2019.

The FCA expects firms to undertake the following steps in relation to each of the below areas:

Fraud, investment scams and market abuse:

• ensure client portfolios are suitably managed in accordance with individual client risk profiles;
• if high-risk and/or unregulated investments form part of a client's portfolio, make sure this is fully justified by the client's risk profile and the firm's due diligence;
• ensure the client understands the FSCS consumer protection status and the associated risks of investments;
• ensure robust systems and controls are in place to mitigate risks of harm linked to financial crime; and
• make the FCA aware of any authorised or unauthorised firm or individual who could be involved in any wrongdoing;

Financial resilience and disorderly firm failure:

• have a good understanding of its regulatory capital and reporting requirements and undertake regular reviews;
• understand the proposed new Investment Firm Prudential Regime (IFPR);
• proactively notify the FCA if it identifies emerging liquidity or capital risks in its business;
• have a credible winddown plan which includes appropriate and timely triggers for implementation, a realistic timeframe and a cost estimate; and
• comply with any applicable CASS rules and regularly review client asset arrangements;

Costs and charges:

• have clear systems and processes in place for the collection, aggregation and review of all ex-ante and ex-post cost and charges disclosures data; and
• consider the ex-post cost and charges disclosures in value-for-money, treating customers fairly (TCF) and product governance reviews; and

Brexit:

• have considered the impact of Brexit on its business and its customers and taken any necessary actions. The FCA also expects firms to have considered the FCA's approach to using the Temporary Transitional Power (TTP).

2. FCA Consultation Paper: Proposed decisions on the use of LIBOR

On 29 September 2021, the FCA announced a number of arrangements as part of the LIBOR transition.

Firstly, the FCA published a consultation paper on its proposed decisions on the use of LIBOR. This consultation paper proposes:

• "tough legacy" parameters, which allow synthetic LIBOR to be used in all contracts in scope of the UK Benchmarks Regulation (UK BMR) (with the exception of cleared derivatives) up until at least the end of 2022; and
• subject to certain exceptions, a restriction on the use of new USD LIBOR for UK BMR in-scope contracts by UK supervised entities after 31 December 2021.

The consultation is due to close on 20 October 2021. A policy paper confirming the rules is expected thereafter.

As well as the consultation paper, on the same date the FCA officially designated one-month, three-month and six-month GBP LIBOR and JPY LIBOR as Article 23A benchmarks under the UK BMR. This will take effect from 00:01 on 1 January 2022.

The FCA has also confirmed it will continue to publish Article 23A benchmark rates on a non-representative, synthetic basis for at least the next 12 months.

For more information on these developments, please see our briefing here.

3. ESMA publishes final Algorithmic Trading report

On 29 September 2021, ESMA released its final report (dated 28 September 2021) on algorithmic trading (including high-frequency trading).

The final report drew on findings from ESMA's December 2020 consultation and includes ESMA's evaluation and recommendations.
ESMA welcomed the positive assessment of the current algorithmic trading regime and did not propose an extensive revision of the current framework.

The overall conclusion was that the current regulatory framework works well and delivers on its objectives.

However, ESMA recommended simplifying and clarifying specific areas to increase the framework's efficiency by either amending ESMA's technical standards or releasing additional guidance. These recommendations relate to:

• concerns around the concepts of "algorithmic trading" and "Direct Electronic Access";
• the authorisation regime for EU and non-EU firms establishing their algorithmic trading strategies on EU trading venues;
• organisational requirements for investment firms and trading venues such as self-assessment exercises; and
• other indirect MiFID II provisions such as tick sizes and market making, together with new issues such as speedbumps.

ESMA's report will help inform the European Commission when it submits a report to the European Parliament and the European Council on the same topic, as required under MiFID II.

4. ESMA publishes 2022 Annual Work Programme

On 28 September 2021, ESMA published its 2022 Annual Work Programme which sets out its priority areas of focus for the next year and will enable ESMA "to deliver on its mission to enhance investor protection and promote stable and orderly financial markets". The press release can be found here.

Within this publication, ESMA have highlighted five key workstreams which it will focus on over the next 12 months. These are:

1. cross-cutting themes in which ESMA will contribute the priorities of the EU in sustainable finance, capital markets union and innovation and digitalisation. In particular:

• sustainable finance: ESMA will continue to focus on ESG matters and developing methodologies to prevent greenwashing;
• Capital Markets Union: ESMA will continue to work on the European single access point (ESAP), retail investment strategy and initiatives to facilitate SME's access to public markets; and
• innovation and digitalisation: ESMA will help implement the Digital Operational Resilience Act (DORA), the Markets in Crypto Assets Regulation (MiCA) and the regulation on a pilot regime for market infrastructures based on distributed ledger technology;

1. Supervisory Convergence: ESMA will focus on its supervisory activities by assessing the results of the Union Strategic Supervisory Priorities. ESMA will undertake peer reviews on a variety of topics such as the supervision of Central Securities Depositaries, investment firms' cross border activities and NCAs' handling of Brexit-related relocations.
2. Risk Assessment: ESMA will work with NCAs and public authorities to strengthen its risk assessment procedures;
3. Single Rulebook: ESMA intends to continue contributing to the development of the single rulebook, and has highlighted MiFID II and MiFIR, PRIIPS, the Short Selling Regulation, CSDR and the Prospectus and Transparency Directives as key areas of focus; and
4. Direct Supervision : ESMA will continue to focus on Credit Rating Agencies and Securitisation and Trade Repositories (for which ESMA remains responsible), as well as critical benchmarks, Data Reporting Service Providers and Tier 2 CCPs.

5. Bank of England (PRA/FPC): Policy Statement: The UK leverage ratio framework (PS21/21)

On 8 October 2021, the FPC and PRA issued a Policy Statement (PS21/21) on changes to the UK leverage ratio framework. This follows the July 2021 Joint Consultation Paper (CP14/21) and the review of the UK leverage ratio framework by the PRA and FPC in light of revised international standards and international developments. The FPC and the PRA confirm that they will be adopting the proposals to:

• extend the scope of the framework to apply to each major UK bank, building society or designated investment firm, rather than only firms with retail deposits equal to or greater than £50 billion, as at present;
• introduce a single leverage exposure measure; and
• and reflect the deletion of the provisions in the UK Capital Requirements Regulation concerning the leverage and other relevant retained EU law.
  The changes are scheduled to enter into force from 1 January 2022, apart from those relating to the scope and the level of application of framework, which will enter into force on 1 January 2023.

6. PRA Consultation Paper: Trading Activity Wind-Down (CP20/21)

On 8 October 2021, the PRA issued a consultation paper on trading activity wind-down (CP20/21), which sets out the PRA draft text of a new supervisory statement on trading activity wind-down (TWD) (appendix 1) and a new Statement of Policy on TWD (appendix 2), as well as consequential amendments to its Supervisory Statement on recovery planning (SS9/17). The proposals follow a PRA review which revealed that many firms engaged in the largest and most complex trading activities would be unable to carry out an orderly wind-down of their trading activities in recovery and post-resolution restructuring. The PRA considers that a disorderly wind-down of trading activities can trigger the destruction of trading book asset value and impact firms’ resolvability.

The proposals set out in the consultation paper would apply to "TWD firms", being firms identified as "other systemically important institutions" (O-SII firms) that have the full or partial wind-down of their trading activities as a recovery and post resolution restructuring option (the TWD option) and whose preferred resolution strategy is bail-in led by the Bank of England. The proposals also apply to firms that are a material subsidiary of an overseas banking group for the purposes of setting the internal minimum requirement for own funds and eligible liabilities in the UK. The expectations of TWD firms proposed by the PRA would include a requirement to carry out stress scenario testing.

The deadline for responses is 21 January 2022, with the PRA expected to publish its final policy in the first half of 2022. The proposed implementation date for the proposals is January 2025.

No updates for this fortnight's edition of the FSS.

7. FCA publishes "Remote or hybrid working expectations for firms"

On 11 October 2021, the FCA set out its expectations on remote or hybrid working for firms. These expectations followed a speech delivered by Sheldon Mills, FCA Executive Director, Consumers and Competition, on 22 September, which focussed on the importance of measuring and assessing culture and the role of diversity and inclusion. Mr Mills noted that hybrid working offers both new opportunities and challenges for firms.
The FCA's expectations include guidelines for firms to follow in order to ensure they are able to fulfil their regulatory obligations whilst staff are working remotely.

The expectations apply to existing firms, firms applying to be regulated, and firms proposing to submit further regulatory applications.
As a starting point, the FCA has stated that firms should be considering whether a lack of a centralised location or remote working substantively affects how the firm operates its business, and if so, whether such hybrid or remote working by the firm could affect the FCA's ability to satisfy its three operational objectives by damaging the integrity of markets, increasing the risk of financial crime, or reducing competition.
Firms must also have undertaken satisfactory planning in order to enable successful hybrid and remote working, and firms should consider whether their remote or hybrid working arrangements result in changes that the FCA need to be notified of, for example, a change in a firm's principal place of business.

The expectations are set out in full here.

8. Bank of England, PRA and FCA publish letter on '2021 CBEST Thematic Findings'

On 30 September 2021, the Bank of England, the PRA and the FCA released a letter to those individuals holding a senior management function (SMF) with responsibility for cyber in a relevant organisation on their thematic findings from their latest annual CBEST assessments.

CBEST offers a framework for intelligence-led penetration testing on a firm's security controls and abilities.

Together with the National Cyber Security Centre, the regulators have identified trends and findings based on over 400 findings from intelligence-led penetration tests carried out on 20 participating banks and insurers and the financial market infrastructure. Although the themes are not outlined in the letter, it is hoped that the thematic findings from this testing cycle will assist senior managers with responsibility for cyber with:

• identifying weaknesses which may address potential comparable weaknesses in their own firms;
• raising awareness in their own senior executive team; and
• informing their own risk and internal audit teams.

The regulators may use these findings to shape their future supervision and evaluation of firm engagement on cyber-attack issues.

No updates for this fortnight's edition of the FSS.

No updates for this fortnight's edition of the FSS.

9. Payment Systems Regulator (PSR) publishes response to review of consumer protections in interbank payments

On 11 October 2021, the PSR released its policy statement based on the findings from its call for views on consumer protection in interbank payments from February 2021.

The PSR also responded to these findings and set out its objectives to ensure the continued innovation of Faster Payments to benefit both consumers and businesses, including:

•  the payments industry to prioritise better coordination between Faster Payments participants to decrease immediate risk of payment fraud;

•  the payments industry to continue to communicate with customers about their protections;
• Faster Payments participants to recognise and share payment risk levels with other Faster Payment participants and act responsibly to reduce potential customer harm; and
• the PSR to continue to support Open Banking Implementation Entity, Pay.UK and Faster Payments participants to enhance prevention and compensation procedures.

The PSR did not rule out potential future intervention to implement further purchase protection, but did not indicating intervening in such manner at this time.

10. Government publishes response to 2020 Payments Landscape Review

On 11 October 2021, the UK government issued its response to the 2020 Payments Landscape Review.

The 68 responses from across the payments sector and the wider economy highlighted the UK's status at the forefront of innovation and technology in the payments sector, as well as its effective regulatory regime.

The government highlighted four priority areas and actions for the government, the regulators and the payments industry:

1. Strengthening consumer protections within Faster Payments: consumers will receive the correct level of protection when Faster Payments go wrong thanks to a New Payments Architecture.
2. Unlocking the future of Open Banking enabled payments safely and securely: instead of using a credit or debit card, customers will be able to pay for goods and services in shops and online directly from their account. This will generate competition and choice among the payments networks and provide opportunities for fintechs.
3. Improving cross-border payments: people and businesses will be able to make and receive cross-border payments in a seamless, quick and cheap way; and
4. Future-proofing the regulatory and legislative framework governing payments to ensure the payments framework:

• is agile and balanced;
• endorses and fosters innovation;
• allows technology to continually push improvements in payments;
• guarantees customer protection; and
• ensures robust payment networks.

11. PSR: Guidance on approach to monitoring and enforcing compliance with the Interchange Fee Regulation

On 29 September 2021, the PSR issued its revised guidance on the Interchange Fee Regulation. The guidance paper replaces the previous version published in 2020 includes key changes as a result of the end of the Brexit transition period and therefore the change in the regulatory framework applicable in the UK from the EU Interchange Fee Regulation to the UK Interchange Fee Regulation.

The paper can be accessed here.

No updates included for this fortnight's edition of the FSS.