Financial Services SpeedRead: 20 October 2023 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. ESMA: Supervisory Briefing: Calibration of Circuit Breakers

On 12 October 2023, the European Securities and Markets Authority (ESMA) published a supervisory briefing on circuit breakers which provides a comprehensive overview of its supervisory expectations regarding the calibration of circuit breakers implemented by trading venues.

ESMA explains that circuit breakers are mechanisms used by trading venues to protect against market volatility, and are typically used to comply with MiFID II mandates that require trading venues to halt or restrict trading at times of extreme price fluctuation.
This publication, whilst non-binding, intends to reinforce convergence on circuit breaker calibration methodology, encouraging common understanding and enforcement among national competent authorities.

2. ESMA: Call for Evidence: Shortening the securities settlement cycle

On 5 October 2023, the European Securities and Markets Authority (ESMA) published a call for evidence on the potential consequences of shortening the securities settlement cycle. 

For context, in 2014, the Central Securities Depositories Regulation introduced to the EU a requirement for all transactions in transferable securities which are executed on trading venues to be settled by the second business day after the trading takes place (commonly referred to as a “T+2” settlement cycle).

The call for evidence is divided into four main separate sections:

• the impacts of a shorter settlement cycle on the operations of market players, trading, liquidity formation or access to financial markets;
• the costs and benefits of a shorter settlement cycle (both short-term and long-term);
• how and when any proposed shorter settlement cycle should be introduced; and
• the impacts on the EU's capital markets resulting from settlement cycle developments internationally.

ESMA is looking to assess the options available for a shortened settlement cycle, including T+1 or T+0. The call for evidence closes on 15 December 2023, following which ESMA will publish and submit a feedback report to the EU Commission. 

3. ESAs: Publication: Joint Committee 2024 Work Programme

On 4 October 2023, the Joint Committee of the European Supervisory Authorities (ESAs) published its annual work programme for 2024.

The programme highlights the ESAs' key work areas and deliverables for 2024, with its priorities being as follows:

• consumer and investor protection;
• retail financial services;
• retail investment products;
• micro-prudential analyses of cross-sectoral developments;
• digital operational resilience;
• financial conglomerates; and
• accounting and auditing.

4. EBA: Publication: Work Programme 2024

On 3 October 2023, the European Banking Authority (EBA) published its annual work programme for 2024, setting out the key strategic areas it will be working on in the coming year.
The EBA has identified five overarching areas of focus:

• implementing the Basel III reforms in the EU and enhancing the Single Rulebook;
• monitoring financial stability and sustainability in the context of increased interest rates and uncertainty;
  
• providing a data infrastructure at the service of stakeholders;
• developing oversight and supervisory capacity for the Digital Operational Resilience Act and Markets in Crypto Assets Regulation; and
• increasing attention on innovation and consumers while preparing the transition to new AML/CTF framework.

Banking and Prudential

5. PRA: Occasional Consultation Paper (CP22/23)

On 11 October 2023, the PRA published a consultation paper setting out its proposals to make minor amendments to the PRA rules. The changes would amend:

• the Depositor Protection Part of the PRA Rulebook, to allow the Financial Services Compensation Scheme to pay compensation to eligible depositors of insolvent deposit takers using electronic transfer; and
• the Senior Managers and Certification Regime Forms C and D, to add references to the FCA's new consumer duty conduct rule.

The PRA requests that responses are provided by 13 November 2023. The proposed implementation date for the new rules is December 2023.

Senior Managers and Governance

6. FCA: Decision Notice: James Edward Staley

On 12 October 2023, the FCA published a Decision Notice, fining the former CEO of Barclays, James Staley, £1,812,800 and prohibiting him from holding a senior management or significant influence function in the financial services industry. 

The FCA believes that Mr Staley recklessly misled the FCA and Barclays Board as to his relationship with Jeffrey Epstein, and acted with a lack of integrity. Specifically, in a letter from Barclays to the FCA, the FCA claim that there were two misleading statements about Mr Staley's relationship with Jeffery Epstein, which he failed to correct.

Mr Staley has referred the Decision notice to the Upper Tribunal. The findings in the Decision Notice are therefore provisional.

Financial Crime

7. FCA: Press Release: £6 million fine issued to ADM Investor Services International Limited for inadequate AML systems and controls

On 2 October 2023, the FCA published a final notice and press release detailing its £6,470,600 fine to ADM Investor Services International Limited (ADMISI), an investment brokerage firm based in London, due to seriously inadequate AML systems and controls. 

The FCA posited that ADMISI's business presented a high money laundering risk, given its business model, its customers located in red-list jurisdictions, the involvement of the business with high-risk clients making up 32% of its profit generation, and the presence of 41 politically exposed persons as clients.

In 2014, the FCA flagged concerns with ADMISI regarding its insufficient AML systems. However, ADMISI failed to take action to correct these inadequacies and the FCA discovered during a further visit in 2016 that serious AML shortcomings persisted. In particular:

• the firm's AML customer risk assessment was basic and did not enable an assessment of financial crime risk;
• the firm did not conduct a firm-wide money laundering risk assessment;
• there was insufficient evidence of ongoing monitoring via periodic customer reviews; and 
• policies were outdated and did not keep up with current legislation.

Retail Services

8. FCA: Final Notice: FCA fines Equifax Ltd £11 million for role in one of the Largest Cyber-security breaches in history

On 13 October 2023, the FCA published a final notice detailing that it has fined Equifax Ltd (Equifax) £11,164,400 for its failure to manage and monitor the security of UK consumer data it had outsourced to its parent company based in the US. The FCA stated that the breach allowed hackers to access the personal data of 13.8 million UK consumers and exposed UK consumers to the risk of financial crime.

Although Equifax outsourced the processing of UK consumer data to Equifax Inc (its parent company in the US), Equifax did not treat this relationship as an outsourcing. The FCA provides that Equifax therefore failed to put in place an appropriate framework to monitor and manage the security of the UK consumer data it had outsourced for processing to Equifax Inc.

In particular, the FCA notes that Equifax was only informed about the hack six weeks after it was discovered by Equifax Inc, and five minutes before the parent company publicly announced the hack. The FCA states that this meant that Equifax could not effectively cope with subsequent complaints it received when the incident was announced and was delayed in contacting UK customers.

In the associated press release, the FCA stressed the need for regulated financial firms to have effective cyber security arrangements in place to protect personal data, and referenced firms' responsibilities under the Consumer Duty. 

9. FCA: Press Release: FCA censures London Capital & Finance plc 

On 11 October 2023, the FCA published a Final Notice detailing its censure of London Capital and Finance plc (LCF) for unfair and misleading financial promotions of minibonds. 

The FCA states that LCF used financial promotions to market minibonds to retail investors, finding the promotions misleading as they made minibonds seem more attractive than they were. In particular, the FCA considers that LCF failed to share with investors hidden charges and the high-risk and unsustainable nature of the lending being carried out. In addition, the FCA found that LCF falsely promoted the minibonds as ISA-compatible.

As LCF is insolvent and in administration, the FCA did not issue a fine.

10. Council of the EU: Press Release: Pending final approval of the CCD II

On 9 October 2023, the Council of the EU published a press release outlining that it had adopted the proposed Directive on consumer credits (CCD II), which aims to enhance the protection of European consumer credit applicants.

The CCD II will revise and repeal the 2008 Directive on consumer credit agreements and will:

• ensure credit information is clear and adapted to digital devices;
• establish stricter advertising rules and implement effective measures against overcharge;
• require lenders to assess whether consumers are able to repay their credit;
• expand the scope of the regime; and
• give consumers the right to terminate a credit agreement within 14 days and cancer survivors the right to be forgotten.

The CCD II is due to be published in the Official Journal and will enter into force on the twentieth day following its publication.

11. ESMA: Speech: Welcome speech at Joint ESAs consumer protection day 2023

On 9 October 2023, the European Securities and Markets Authority (ESMA) published a speech given by Verena Ross, Chair of ESMA, at the Joint European Supervisory Authority (ESA) Consumer Protection Day in Madrid. In the speech, Ms Ross spoke about the importance of financial education and the work that the ESAs have undertaken to improve protection in this area. This includes the development of interactive factsheets directed to consumers to educate them on the two key themes of inflation/rising interests rates and sustainable finance.

Ms Ross also reaffirmed the need for joint action between the ESAs and national competent authorities to ensure that consumers have access to suitable educational materials, noting this will allow the pooling of resources and will ultimately be beneficial for consumers.

12. FCA: Notice of Undertaking: Wirex Limited

On 4 October 2023, the FCA published an undertaking given by Wirex Limited (Wirex) under the Consumer Rights Act 2015 regarding Wirex's commitment to make changes to its e-money contracts. 
The undertaking relates to the following three terms which the FCA considers to be unfair:

• a term excluding Wirex's liability as a result of account suspension;
• a term limiting compensation available to consumers; and
• a term excluding commitments that may be implied by law.

Wirex has agreed to remove all three terms from its contracts with consumers from 1 January 2024 and not use these terms in the future. 

13. FCA: Statement: End of implementation period for debt packager referral fee ban

On 2 October 2023, the FCA published a statement confirming that the implementation period for the debt packager referral fee ban had ceased.

The ban, which has applied to new debt packager firms and those restarting their debt packager businesses, including newly Appointed Representatives (ARs) from 2 June 2023, requires debt packager firms to ensure that they do not receive any commission, fee or other financial consideration from a debt solution provider for any referral or related service conducted after 2 October 2023.

The statement clarifies that any firms who act as principal to ARs and who would fall under the scope of the ban if they were an authorised person must take all reasonable steps to ensure these ARs also comply with the ban.

Payments

14. PSR: Policy Statement: Revised penalty statement

On 13 October 2023, the Payment Services Regulator (PSR) published an updated penalty statement which sets out the principles it will apply when deciding to exercise its powers to impose sanctions in respect of compliance failures.

The publication of this statement follows the PSR's consultation in March 2023 on proposed changes to its penalty statements and is intended to help firms better understand what to expect in the event of non-compliance and how financial penalties are decided and calculated. 

The updates include changing the way in which the PSR considers the duration of a compliance failure, as well as reinforcing the principle that penalties should disincentivise compliance failures. 

15. HM Treasury: Policy Statement: Reforms to payment service contract termination rules

On 2 October 2023, the Government published a policy statement on its plans to reform the rules on payment service contract terminations. Following on from a previous policy statement on the same topic published in July 2023, this policy statement is intended to provide additional clarity on the implementation of the reforms, clarify the Government's expectations for how the reforms should apply, and set out a timeline for when the Government intends to introduce legislation to underpin the reforms.

The new rules apply to providers of payment services, including payment accounts, and will enhance requirements relating to the process and conduct requirements placed on payment services providers in cases of framework termination. This includes increasing the notice period required for termination of a framework contract from two months to 90 days, as well as introducing a rule that providers must deliver clear and specific reasons for terminations (both subject to limited exceptions). 

The Government will enact the changes to the relevant regulations via secondary legislation through the powers granted in FSMA as soon as possible after the publication of the draft statutory instrument, which is expected by the end of 2023.

16. Payment Systems Regulator: Consultation: Proposed specific direction underpinning Faster Payments reimbursement rules

On 28 September 2023, the Payment Systems Regulator (PSR) published a consultation paper requesting input on a proposed specific direction which is intended to facilitate the faster payments reimbursement rules. 

The key function of the specific direction would be to implement an obligation on payment service providers (PSPs) to both adhere to the reimbursement rules and reimburse victims of authorised push payment scams subject to the PSR reimbursement requirement policy. It will also mandate the reporting of certain data by PSPs to Pay.UK, while requiring indirect access providers to notify the PSR of any indirect PSP customers they provide access to.

Relevantly, the draft specific direction falls into a group of three legal instruments which the PSR will use to activate the reimbursement requirement policy. The other two instruments regarding the specific direction and the specific requirement on the faster payments operator have already been consulted upon in July 2023. This specific direction proposal aims to address the concerns raised regarding clarity in the former consultations, indicating more clearly the scope of the proposal.

The consultation will close at 17:00 on 19 October 2023. The PSR intends to publish, in final form, all three legal instruments by the end of 2023.

 Digital Services and Fintech

17. FCA: Statement: FCA restricts rebuildingsociety.com Ltd from approving cryptoasset financial promotions

On 10 October 2023, the FCA published a statement setting out the restrictions it has imposed on rebuildingsociety.com Ltd, the effect of which prevent the company from approving cryptoasset financial promotions and require it to withdraw existing approvals by 11 October 2023.

The statement also details what the restrictions mean for consumers who have invested in unregistered cryptoasset firms that have had their financial promotions approved by rebuildingsociety.com Ltd. In particular, it is noted that these persons may still receive communications from these firms that allow them to withdraw, transfer or sell their existing assets, though will not be able to receive communications relating to further engaging in investment activity.

18. FCA: Statement: FCA issues over 100 alerts in first day of new crypto marketing regime

On 9 October 2023, the FCA published a statement outlining the action it took on the first day of the new cryptoasset promotions regime, which now applies to all firms promoting cryptoassets to UK consumers. 

Specifically, the FCA confirmed that it issued a total of 146 alerts in the first 24 hours of the regime, while flagging that more firms will be added as it continues to identify any illegally communicated cryptoasset promotions and as firms fail to engage with the FCA constructively. 

The FCA also reminded consumers of the high-risk nature of cryptoassets and, in particular, warned them to avoid dealing with firms on the Warning List.

19. ASA: Press Release: FCA rules on promoting crypto-assets

On 6 October 2023, the Advertising Standards Authority (ASA) published a press release stating that from 8 October 2023, due to new rules introduced by the FCA, the ASA will no longer regulate technical claims in relation to advertisements for cryptoassets in non-broadcast media (e.g. advertisements on posters, emails or online banners).

The ASA notes that the FCA will be taking on this responsibility from this date, noting this is when the regulation of ads for qualifying cryptoassets will come within its remit. The ASA confirmed, however, that it will continue to regulate the "non-technical" aspects of ads relating to cryptoassets, including matters relating to offence, social responsibility, superiority claims, fear and distress, denigration and other such matters unrelated to the specific technicalities of the product in advertisement.

ASA will also remain the regulator for all broadcast media (i.e. Ofcom-regulated television and radio) for all finance-related advertisements, including cryptoassets advertisements.

20. ESMA: Consultation Paper: Technical Standards specifying certain requirements of Markets in Crypto Assets Regulation (MiCA)

On 5 October 2023, the European Securities and Markets Authority (ESMA) published its second consultation paper relating to the technical standards that will specify certain requirements set out the Markets in Crypto-Assets Regulation (MiCA). In particular, the consultation paper seeks feedback from stakeholders and market participants on how to implement the rules in MiCA which relate to:

• sustainability indicators for distributed ledgers;
• disclosures of inside information;
• technical requirements for white papers;
• trade transparency measures; and
• record-keeping and business continuity requirements for crypto-asset service providers.

ESMA is requesting that interested stakeholders submit response forms by 14 December 2023. ESMA will then use the feedback to produce a final report covering the feedback received as part of this consultation and the other two consultations (with one still due to take place in Q1 2024), as well as draft technical standards. The draft technical standards will then be provided to the EU Commission for endorsement by 30 June 2024. 

 ESG

21. EBA: Report: Environmental and social risks in the prudential framework

On 12 October 2023, the European Banking Authority (EBA) published a report on the impact of environmental and social risks in the prudential framework of credit institutions and investment firms. 

The report contains several recommendations (both short-term and long-term), the principal objective of which being to nurture a more sustainable economy, while also maintaining the resilience of the banking sector. Ultimately, the report advocates for risk-based targeted enhancements to accelerate the integration of environmental and social risks across the Pillar 1 framework. Additionally, the report outlines, amongst other things, the basis upon which EBA disagrees with the introduction of a 'green supporting' or a 'brown penalising' adjustment factor, noting this is because of the challenges associated with the design, calibration and integration of these factors within the existing Pillar 1 framework.

The EBA also signalled its intention to continue improving the integration of environmental and social risks amongst all pillars.

22. EU Commission: Speech: 'The Sustainability Finance Disclosure Regulation – what next?'

On 10 October 2023, the EU Commission published the opening speech given by Commissioner McGuinness at the DG FISMA event. In particular, Commissioner McGuinness discussed the status of sustainable finance, how the Sustainability Finance Disclosure Regulation (SFDR) fits into the EU sustainable finance framework, and the future of the SFDR. 

Some of the key points raised by the Commissioner included that the market is using the SFDR as a labelling scheme, rather than for transparency, its intended purpose. It was also highlighted that the lack of a definition for 'sustainable investment' and binding thresholds for advertising has led to uncertainty in terms of how the regime ought to be applied. This has in turn increased the risk of green-washing and mis-selling.

Commissioner McGuinness also encouraged attendees to respond to the consultations on the SFDR, which were launched on 14 September and close on 15 December.

23. Transition Plan Taskforce: Report: Disclosure Framework

On 10 October 2023, the Transition Plan Taskforce published its disclosure framework (TPT Framework) which provides a set of good practice recommendations for companies to assist in making robust and credible transition plan disclosures. 

In particular, the TPT Framework recommends clear disclosure of a firm's strategic ambition, being its objectives and priorities for responding and contributing to the transition towards a low-emission, climate resilient economy. It also proposes that entities should set out whether and how they are pursuing these objectives and priorities in a manner that captures opportunities, avoids adverse impacts for stakeholders and society, and safeguards the natural environment.

The TPT Framework is designed to align with the transition planning guidance developed by the Glasgow Financial Alliance for Net Zero and to be consistent with, and build on, the reporting standards developed by the International Sustainability Standards Board.

24. European Parliament: Report: Draft report on the proposal for a regulation on the transparency and integrity of ESG rating activities

On 6 October 2023, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a draft report on the EU Commission's proposal for a Regulation on the transparency and integrity of ESG rating activities.

The draft report contains a draft European Parliament legislative resolution which includes the suggested amendments to the proposed Regulation. The draft report is also accompanied by an explanatory statement that sets out ECON's views on the proposed Regulation and details how it proposes to introduce a set of common rules for essential actors in responsible investment. This includes that the Regulation intends to:

• introduce more stringent and instructive disclosure requirements;
• encourage competition among ESG rating providers;
• improve the reliability and transparency of ESG rating activities; and
• clarify the objectives of rating providers.

25. ESMA: Press release: Launch of Common Supervisory Action on MiFID II sustainability requirements

On 3 October 2023, the European Securities and Markets Authority (ESMA) published a press release announcing a Common Supervisory Action (CSA) with the national competent authorities (NCAs) in 2024 on the integration of sustainability into firms' suitability assessments and product governance procedures. 

The primary objective of the CSA will be to analyse the progress made by firms in the implementation of key sustainability requirements. In this regard, the CSA will include information on:

• how firms collect information on their clients' "sustainability preferences";

• which procedures firms have implemented to accurately categorise investment products with sustainability elements for the suitability assessment;

• how firms establish the suitability of an investment with regard to sustainability; and

• how firms identify any sustainability-related goals a product aligns with as part of the target market assessment.

ESMA and the NCAs will carry out the CSA during 2024, with a view to establishing consistent application of EU rules and further improving investor protections.

Other

On 4 October 2023, the FCA updated its webpage to reflect changes to the process for submitting application forms on the Connect platform. These changes are specifically aimed at making it easier for firms to apply for authorisations, as well as to help the FCA capture the information it needs.

The first updated form that is being launched on the Connect Platform is Form A which relates to Senior Management Function and Controlled Function applications. The enhancements made to this form include the addition of a helpful checklist of information to complete for applicants, improved data validation and pre-population, and the integration of the Statement of Responsibilities so this form does not need to be completed twice. 

Frequent users of Form A will be contacted by the FCA with the opportunity to test the new updated version. Participation in testing is voluntary.